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Your investment goals, desires, and values determine the amount of risk that you are willing to take in your investment future. In this episode, Steven discusses the differences between growth and security to help you determine what investments you should be looking at based on your current investment cycle.
- Growth and Security are on opposite sides of the investment spectrum. Growth can provide higher profit but at greater risk, whereas Security is less risk however usually lesser returns on profit.
- Typically, the more money that somebody has, the more that they’re focused on preservation, and they move down the risk scale.
- If you’re later in the investment cycle, you have to know what your personal preferences and values are, and then make some selections into assets that are going to deliver you the kind of returns you’re looking for.
- If you’re much earlier in the investment cycle, and you have a much longer investment window, then you may want to be investing a much larger percentage of your portfolio in those higher risk assets.
- It is important to diversify between the different styles or strategies that you have.
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Steven Pesavento 00:00
Welcome back to the Investor Mindset podcast. I'm your host, Steve Pesaventio. And each week we share mindset tips and real estate investing strategies to help you take your business and your investment portfolio to the next level. Today, I want to talk about something I want to riff on this concept of growth versus security. So let's get into it.
Steven Pesavento 00:24
This is the Investor Mindset podcasts and I'm Steven Pesavento. For as long as I can remember, I've been obsessed with understanding how we can think better, how we can be better, and how we can do better. And each episode we explore lessons on motivation and mindset for the most successful real estate investors and entrepreneurs in the nation.
Steven Pesavento 00:49
Before we dive in today's episode, I want to remind you about how to get involved investing in the same types of commercial real estate that I personally invest in, you can do so through VonFinch Capital, where we go out and buy operate, manage in partnership with you, large commercial multifamily properties and other real estate investments. So you can do that by heading over to Vonfinch.com/invest. To get involved, head over to Vonfinch.com/invest. And schedule some time with me or a member of our team. So that we can dive in and be a value to you helping you understand how to build the portfolio that you're looking for, to get towards those goals that are most important to you, and to be able to support you on creating something truly greater for you and yours. So head over to Vonfinch.com/invest. And I look forward to seeing you inside the capital network.
Steven Pesavento 01:49
All right, so we're gonna dive into a topic today I'm gonna riff on talking about the importance of the difference between growth versus security. So I'm too far ends of the spectrum, we have growth on one end, we have security on the other, and through selecting the right types of deals that match your individual investment desires, your individual investment values, your individual investment goals, all along the lines of what your individual investment risks are. So your risk profile, what are you comfortable with, we need to determine which are the right deals for you. They're on opposite side of the spectrum, high risk, high reward meaning high likelihood of or high potential of a total loss, or partial loss of your investment, but a very high return multiple, we might see return multiples, doubling your money, tripling quadrupling your money or more, this side of the spectrum can be a lot more risky. And many people would see that side of the spectrum, the far end of the growth spectrum to be almost like gambling, putting in $1, hoping to make five back hoping to make 10 back but having a high likelihood that you could crap out and not make any money. Now there's the other side of the spectrum, which is extreme low risk. And in the non real estate world, you might look at bonds, bonds are going to have a very set interest rate. In the real estate world, that's going to be very low risk, low leverage debt or debt like instruments in real estate that are going to provide you some consistent monthly income, and that you're going to have a large, very large amount of equity that's backing up that loan. So the risk is extremely low, unless the market was gonna go down by more than 60% which is not impossible, but extremely extremely, extremely unlikely. The likelihood that you would then be able to repossess that property, sell it and be able to get your money out is extremely high. But on the far end of that you may be making a percent or 2% 3% 4% a couple of percent depending on the asset and the vehicle that you're actually going to be investing in. So VonFinch doesn't operate on either of those spectrums. Steven Pesavento as an individual doesn't invest in either of those spectrums. Sure, maybe a little bit of bonds to hold a in the portfolio. Very, very small amount. My focus is truly on a moderate to moderate high risk perspective for my own personal portfolio for Vonfinch's portfolio for the investment deals that we like to put out for investors. I tend to be on the moderate or low, moderate side of the growth trajectory.
Steven Pesavento 04:58
So what does that actually We mean, and why is it important to understand the difference between these styles of investments, because when we go all the way over to the foreign to the growth we're gambling. But as we inch closer and closer away, we have different types of opportunities which might go from land development, raw land development, that's unentitled to raw land development that is entitled to investing specifically in the development of a building to heavy value add to light value add to no value add, which is often called core Core Plus depending on what that strategy that specific asset is. And that is typically where VonFinch is spending most of our focus is going from, you know, as low as returns of maybe 8% to 12%. annualized, you might see that within a purely preferred equity fund, where the payout is with strict preferred return. And the strategy is investing that money in a preferred return sense. And VonFinch has focused majority of its time, effort energy, in that value, add heavy value, add space, we've done a couple of deals that are in the Core Plus space or value add or Core Plus, with a value add component, that is a phenomenal place to be because it's lower on the risk profile. But yeah, you're able to squeeze out some additional returns, because you're able to add value with additional units or renovation or splitting units or something like this. Why it's important, it's important because oftentimes, when I'm speaking with very sophisticated investors, and very sophisticated financial operators, people who maybe do this for a living, but then are investing their own cash, or working with family offices and their investment professionals, those folks are heavily focused on this rescale their understanding where they're comfortable and where they're not.
Steven Pesavento 07:04
Typically, what you'll find is the more money that somebody has, the more that they're focused on preservation, and they move down the risk scale, maybe in that six to 8% kind of target range. Now, it's quite possible that you could be looking at a deal that has a six to 8% return yet, it really should be higher up on that risk scale, how would you know, well, you know, based on is their current cashflow? What is the business plan? How likelihood is that business plan to succeed? If the business plan is not executed? Where is the income coming from? Are you still able to preserve your current investment? And what's the structure? Are you structured in a preferred position? Are you structured with a large amount of GP equity that's ahead of you in the stack, these are different ways that you can reduce risk while still increasing return, which is, you know, in part and parcel, why the preferred, the preferred fund, or the individual preferred investments can make sense as a part, not a whole as a part of many people's portfolios. What I might suggest for many people is that they've got a small sliver in something that's lower risk, maybe a debt like instrument, maybe that is a preferred equity type instrument that has a good amount of equity that's ahead of them. And then for people who are extremely conservative, they're going to have a much larger bucket of those types of assets or individual investments or investment dollars into a fund that is then investing in individual assets. Or you're going to see a scenario where maybe you're more focused on growth, and the slice of your pie that's invested in those very low risk investments is much smaller. And you're balancing between the higher risk land development that has a higher return profile, and you're balancing with the value add strategy that has a great return profile, but it's kind of in that the middle of that risk scale, per se.
Steven Pesavento 09:08
So these are the things that you want to consider is how comfortable are you with the thought of losing your principal? And how much of a return is it worth in order to create a gain if you risk your principal, so I believe and have seen over time, that many of the strategies that we've done thus far are creating value where we're renovating, increasing rents where we're repositioning these properties, they tend to be in the middle you know, the 50 to 60 65% of the risk scale, while the preferred equity is probably in the 20 five to 3525 to 40% rescale. And so what's important is to understand what your comfort level is, and where you're at in your investment cycle. If you're later in the investment cycle, you want to be focused very much so on being more conservative, and being conservative doesn't mean that you're not investing in value added doesn't mean that you're not putting some dollars into development deals. What it does mean is that you have to know what your personal preferences and values are, and then make some selections into assets that are going to deliver you the kind of returns you're looking for. And if you're much younger, and you have a much longer investment window, then maybe you're investing a much larger percentage of your portfolio in those types of risk assets. So I wanted to talk about this because I've been having a lot of really great conversations with folks. And what I've noticed is that everybody wants the highest return possible. Personally, I'm a big growth focus guy, personally, professionally from an investing standpoint. But I've also personally lost money in real estate, I've bought in deals, and I've paid off my investors and I've personally lost, right, I've personally taken the loss instead of passing that on to investors. Most people won't do that, you know, I was gracious enough to be willing to do it because I felt culpable and responsible. And I was learning it was early in my career many years ago. But after going through that experience, and going through the rate changes that happened back in 2018. And the real estate market really froze for a number of months, and we had so many assets that were cycling on and off the market that that really put a scare in me. It really reminded me as I went to many of these mentors that had been through many cycles, and I was reminded about the importance of having good portfolio diversification, not necessarily just an asset class, because I think multifamily overall is a much needed piece of real estate. And there's a huge lack and there's so many tailwinds that are really pushing multifamily in a strong direction, I don't have any qualms or concerns about multifamily as a whole Sure, if the market changes, there may be fluctuations in prices, but I believe all of our assets will weather the storm quite well. With that said, it is important to diversify between the different styles or strategies that you have. If you're 100%, high growth 100% focused on development, and the whole market freezes and banks stop loaning money, then you're in kind of a bad spot. Now, if you've got a couple of those, but you've got a couple cash flowing, lower risk type assets, you can balance those out, and you can still kind of meet those portfolio goals that you're really looking for.
Steven Pesavento 12:48
So what I'm really driving towards the end of the day is I'm not here to prescribe anybody a specific antidote to the problem. Or the challenge of choosing what are the right investments. But it really does come down to is knowing what your risk profile is, knowing what your goals are, and then creating a smart strategy around it. This is why it can be so valuable to schedule some time with me or a member of our team for a real estate advisory call so that we can help support you in understanding what is the best fit for your personal portfolio. Every individual is different, and helping you understand what type of investments to look for who and what those investments could or should look like, and really helping to truly be a trusted adviser in you and your family's investment journey. If you are interested in doing that, and you're an accredited investor, head over to Vonfinch.com/invest. And you can schedule a time with me or a member of our team. And we'll be there to answer your questions. Get to know you personally really understand what your situation is. And if we think we can help, we'll let you know. And if we can't, we'll point you in the direction of someone who can. So thanks so much for listening. We'll see on the next episode
Steven Pesavento 14:14
Thank you for listening to the investor mindset podcast. If you liked what you heard, make sure to rate review, subscribe and share with a friend. Head over to the investormindset.com to join the insider club where we share tools and strategies from the top investors and entrepreneurs and how to take it to the next level.
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The Investor Mindset Podcast & President VonFinch Capital
Steven Pesavento has always been obsessed with understanding how we can think better, how we can be better and how we can do better. He is an active real estate investor who curates Commercial Real Estate Investments for clients.
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