In the June Issue
- Pairing Net Worth and Income Goals
- Setting Short Term Goals
- How to Build Your Plan and Take Action!
Investing with Purpose: Setting Goals Along the Path to Success
We’ve often heard it said that if you don’t know where you’re going, you’ll never know when you get there.
This basic bit of wisdom applies to all facets of life, and it’s particularly relevant when it comes to investing in investing.
Unlike the person who has no plan, if you have a vision and a direction, establish and document your goals, and plot them out as you go along, you’ll have a clear sense of your destination and can always make adjustments to your course as you navigate.
In my experience, having a vision and a mission is the first step on the path to success, but it’s just a start.
This month we’re going to look at how to build an investment vision along with some steps to make it a reality; as a result, you’ll not only have an idea of where you’re headed, but some key strategies to help you get there.
Goals Are Moving Targets: “Ready, Fire, Re-Aim”
Once you’ve determined your vision, the second step on the path to success is to set goals, both short-term and long-term.
When I worked in the corporate world, we set annual goals, but people never really stopped to reflect if we were moving in the right direction, that is, other than whether or not a bonus was paid. To me, that lack of reflection rendered goal setting useless.
Now that I run a small business, we do set goals, and it turns out that they help from the standpoint that we reflect back to see if we’re moving towards our objectives. If not, since we take the time to reflect, we can make adjustments.
What qualifies as a long-term goal? It could be 3, 5, or 10+ years, but it’s typically a future objective and not something that drives our immediate behavior. However, it gives us a directional move, and short-term goals and decisions in the now help us drive towards long-term goals.
It’s the vision and mission that help us set long-term goals, and then short-term goals generally are the steps towards them.
However, a lot of people set goals and then fail to act. That’s called a dream. There’s nothing wrong living in a dream, but if you have a dream and you set goals, without taking action, nothing happens.
In this spirit, the most important thing is to take action and not get bogged down by the sense that you need to be perfect. That’s where making adjustments come in.
With long-term goals, we’re constantly re-aiming because we’ll most certainly miss the targets at times. I like to think of it as a “ready, fire, re-aim” rather than “ready, aim, fire.”
As long as we’re vigilant and observant of what we’re doing, we’ll be able to re-aim and make corrections on our path to success.
Make Sure to Have a “Big Why”
Many of us have our own vision of financial freedom that involves a certain lifestyle we’re keen to lead. For some, this includes an image of making an impact on society, or perhaps even being of service to others. It might also involve setting up a trust fund for your children. Long-term goals vary from person to person, but it’s important to have what I call the “Big Why,” a greater purpose, where you ask yourself “why am I here”? What do you want your life to amount to?
This question helps you define your mission. So be sure to set goals around your long-term vision.
What’s a Smart Financial Goal Look Like?
A clear-cut goal may be to achieve a net-worth of $10 million by December 31, 2025, just six years from now. By the definition set above, this qualifies as a long-term goal. We also know it’s measurable and specific (amount, date, and time frame). But is it realistic? Is it a smart goal? Let’s assume it is based on your current financial situation, education, abilities, and knowledge.
Whenever you set goals, they should always be in the smart format. That is, they need to be specific, measurable, achievable, realistic, and timely.
In general finance, the two big goals that are worth consideration revolve around net worth and income goals. As we’ll see below, they often go hand in hand.
Pairing Net Worth and Income Goals
Let’s say you want to have a net-worth of $10 million and also generate $500,000 annually in passive income. This would be a fairly conservative, comfortable goal at 5% of your net-worth and one which would not necessarily be dependent on market conditions.
Short-Term Goal Example
A short-term goal in this case would be to grow your net-worth by 15%. If your current net-worth is $1 million then that would entail growing it to $1,150,000 a year later–again, a one-year short-term goal on the net-worth side, manageable and doable.
Income Goal Example
Here, you might decide that you want to increase your passive income from 5% to 7%. If you’ve been earning $50,000 in passive income, your short-term goal would be to increase that to 7% on the $1,150,000 for a total of $80,500–your cashflow amount based on your goal.
Align Goals with Risk ToleranceIf you’re a risk-averse investor, you’ll want to make sure you invest in deals with which you’re comfortable; in other words, don’t get so aggressive that you can’t sleep at night. Also, be sure to invest with people you know and trust with a proven track record. Someone with a lower degree of risk tolerance, for example, wouldn’t be well-served by investing with a complete stranger. At the very least, you’ll be able to communicate with people you know. As I said above, don’t expect perfection, but with good communication, you’ll have predictable outcomes.
Building Your Plan: Time to Take ActionAfter you’ve set your goals, the next step is to take action, and the plan is the roadmap to get you there. The basic question to help you build a plan on a high level is “How much capital am I willing to deploy and what is my time frame?” At this stage in the process, you’ll need to select your investment quadrant. As you’ve read in previous newsletters, all investment products–stocks & bonds, mutual funds, alternative investments–fall conceptually into the four quadrants. In my business, I apply them to real estate projects, but they’re certainly applicable to any type of investment. How so? The quadrants help us think about risk level and anticipate the amount of return as well as help conceptualize short-term goals around long-term objectives.
Conservative Investing: A Sample Portfolio Allocation and Projected ROIBased on the quadrants’ outline above, generally speaking, if you’re a conservative investor, or at least if you’re a moderately risk-tolerant investor, you should consider putting the bulk of your money in investment grade projects– quadrants 1 & 2–and then determine how much you’re willing, if at all, to allocate to speculative projects. In order to avoid being too invested in speculative quadrants (which again lie outside of the comfort zone of our theoretically conservative investor), you’ll need to track them to understand which portions are either investment or speculative grade (quadrants 3 & 4). For example, let’s say you have a portfolio valued at $1.5 million and that you’ve decided to deploy your capital it into five total projects; four of them are non-speculative while the fifth is somewhat speculative in nature.
Project 1:$500,000 goes into this fund. You’ve done your due diligence on what projected annual cash distributions should be. You can also project annual appreciation based on projected project IRR and you calculated a 2% loss reserve (RAR) based on the offering documents. For example, you’re expecting 12% annualized return and for cashflow to be 8%. The remainder, 4%, is appreciation. You now know, based on your calculations, that you should expect $40,000 a year on your $500,000 investment (8% x $500,000). You would also calculate appreciation to be $20,000 a year, and then you place this in the quadrant which helps you to visualize and understand where your investments are going.
Project 2:You’ve also invested in a first-lien mortgage into which you put $200,000, and it’s generating a 10% yield. There’s no appreciation involved here since it’s debt, but if the borrower pays on time, you’ll get your interest. This yield produces $20,000.
Project 3:Next, let’s look at a growth project; you’ve put $200,000 into a syndication and the project has a bit of cashflow to start with; you’re writing out projected cashflow for each year which you anticipate could change by year two or three. As the project evolves, after some value adds, lease-ups or rent increases, the cashflow projection could raise from 4% to 7%. You’re also projecting that there may be some appreciation. Let’s say as your writing this project out, you take into consideration that there may be more appreciation involved than cashflow. As it turns out, this pushes the project into a speculative quadrant (three or four). At this stage, although there’s nothing wrong with a project of this sort, you’ll need to be careful not to deploy any more of your portfolio into potentially speculative projects. Remember, your risk tolerance is low-to-moderate and you’ve determined that no more than 20% of your fund will go into speculative quadrants.
Project 4:The next project you choose to invest in is a known performing notes fund, conservative in nature. Initially, it has no cashflow, but it’s expecting fairly strong appreciation. Cashflow is zero; projected appreciation is 15%. You know from experience that as these projects are foreclosed and the properties sold, appreciation turns into cashflow. You’re tracking growth and see that after the first year there is the potential for less growth but steadier cashflow. This one falls into quadrant two because it has good downside protection as a first-lien loan.
Project 5:Here, you’ve bought a commercial building with partners or perhaps you bought it as a single partner and put $300,000 down. With this investment, you got a several thousand-dollar mortgage and your cash-from-cash is 6%. In the projection, I’m assuming the 6% after allocation based on repair services, capital expenses, etc. Word to the wise: sometimes a wonderful performing project comes along, and they simply don’t pan out. You’re promised 6%, but it winds up being 2%. Here, I’ve actually projected 10% but allocated 4% for CapEx, other vacancies, and some reserves. Let’s just say that this project is generating 6% net cash-from-cash and a projected leveraged appreciation of 6% per year. You write that out in the cashflow column as well as the appreciation column to continue to track it.
Overview of Portfolio:You now have a holistic view of your totals with $1.5 million deployed over five projects. Although there isn’t a great degree of diversification, your investments are more diversified than they’re concentrated. Some of the funds have their own diversification, one is speculative, while others are non-speculative. In terms of our discussion in the beginning, the investments look reasonable and specific. There is a total of $88,000 in cashflow and $103,000 in projected growth. It has an average annual return of $191,000. After you divide by investment capital, you have a total projected return annualized on your investment. You’ve done your homework, made your projections, and have scrutinized the short-term and long-term outcomes.
Some Final Thoughts on Investing with a Purpose: Individual Deals vs. FundsYou should always consider the difference between investing in individual deals or funds.
Individual Deals: Pluses & MinusesIndividual deals could be syndications, assets, buildings, or a house that you buy and rent out. Or you can invest in a syndication that’s buying a self-storage facility or buying a multi-family unit with a value-add strategy. Individual deals have risk concentration and low liquidity. It’s more difficult to take your money out of these project unless there is a liquidity event. Furthermore, you’re typically at the mercy of the sponsor in individual deals. These types of deals also have a liability risk if you’re buying a property and signing on a mortgage. It’s worth taking into consideration that funds are idle in the sense that if you put money in a deal and it comes back the money isn’t actively working.
The Benefit of FundsAs a fund manager, I prefer diversified funds. Tempo Opportunity Fund is a diversified fund which allows us to spread the risk around. If a fund has good liquidity, you can redeem your units and achieve liquidity much more quickly. In terms of liability, you either have zero or what amounts to very limited liability. Whereas individual deals have the sticking point of funds that are idle, that’s not the case with funds as an investment category because the money is always working. When you invest in an individual deal, if you’re buying a property for example, the amount of money you’re required to have to buy the asset is the amount of money you have to have, whereas in a fund, you have more flexibility in terms of the amount you can invest. You could then reinvest redistributions or add more money. Finally, you also need to be aware of UBIT, unrelated business income tax, or more specifically, UDFI, unrelated debt finance income tax, when dealing with individual deals and funds. In summary, having a plan and short-term goals is crucial in order to arrive at your ultimate destination. It’s true in all phases of life and, certainly, when it comes to investing. Rather than investing blindly and hoping things will just work out in the end, it’s key to develop some goals and strategies around where you hope to be in five, ten, or fifteen years. It’s never too late to get started. That is unless your vision for the future turns out to be nothing more than a dream all along. With no vision, no goals, a lack of planning and the ability to make adjustments, you won’t be able to identify when you get there. You’re basically turning your future into a huge risk. If I can help you get started investing with a real purpose and can help you establish some goals, then please feel free to contact us.
Thanks for reading!
CEO, TF Management Group LLC
This newsletter and its contents are not an attempt to sell securities, nor to sell anything at all, nor provide legal, nor tax accounting, nor any other advice. The presenter is a private lending and real estate fund management business, and the information represented herein are purely for educational purposes and represents the opinions of the presented. Prior to making any investment or legal decision you should seek professional opinions from a licensed attorney, and a financial advisor.
TF Management Group LLC (TFMG) is an investment fund management company that specializes in both short-term debt financing for real estate “fix and flip” projects, and long-term “value-add” equity deals.
Click here for your free copy of Mike Zlotnik’s new book “How to Choose a Smart Real Estate Investment Fund”.