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Within the next 90 days, I will be buying real estate. Now, before you cancel your subscription and accuse me of abandoning my commodity post – hear me out.
First off, I'm not selling any of my commodity holdings in order to finance my real estate purchase.
Secondly… I'm not investing in real estate either.
It's important that you understand the specific and useful definition of the word "invest."
Because most people get the first step of investing wrong mostly because they don't properly define what an investment really is or how investing works.
Why? Well, they look at the desired end result (making money) and they try to shoehorn a variety of assets into that model. But of course, not all assets make good investments.
You've probably heard people use the word in expressions like, "I bought this heavy duty truck because it's a better investment than the standard grade."
Or, "Buying a good riding mower is an important investment for a homeowner with a big lawn."
But of course, no one expects to profit when they buy a car or a lawn mower. And this type of misuse of the word can be dangerous to your real investments.
We all saw it happen with real estate a few years ago. People psychologically morphed houses into investments – forgetting that houses are not especially suited to creating value, throwing off cash flow, paying a dividend – or capable of doing anything much beyond providing a place to live, sleep, eat, bathe, etc.
Be careful with how you look at different assets. Don't just look for the intended result – and figure out a "loophole" that will make it come true.
Most people should invest in simple businesses that have low or no debt, a high level of profitability and a tendency to pay out dividends.
These types of businesses are easy to understand and they tend to be good investments because they provide goods and services that other people want.
Real estate doesn't fit into that definition very well unless you're a professional landlord, or you invest in a business that manages real estate in some profitable way.
So when I say I'm buying real estate, I mean my wife and I plan on buying a house. Not because we think the value of the house will skyrocket in the coming years, or because we plan on refurbishing houses and flipping them for a living…
But because we need a place to live, and we like it up here in Vermont.