How to Skyrocket Your Real Estate Returns by Ditching the Investor Mindset!
If you have had a chance to invest for retirement or just generally dabbled in the stock market, you have probably been well trained in thinking like a retail investor. In financial markets, you can generally buy and sell your assets with great ease. In fact, the primary objective for most investors is capital appreciation—as they say in the world of crypto, "number go up." For many of us, thinking like an investor means adopting a mindset focused on gains without effort, in other words, without caring what companies are in the index, how they may be performing, or what their management teams are doing.
Most people know that index funds and many other similar assets are essentially a macroeconomic bet on America. Standard & Poor's adds and removes companies without you having to worry about which companies you are invested in. As an investor, this is generally ideal. You have a day job and lots of other responsibilities—you don't have time to research stocks. So you are probably well trained in keeping your hands off, and that is precisely the source of the problem.
Investing in real estate is not the same. If you want to be hands-off with real estate, buy REITs and MLPs in your investment account. You can only really be hands-off if someone else is minding the store. Like all businesses, real estate is a hands-on endeavor. Sure, there are long stretches when nothing breaks down, there are no tenant complaints, or needed repairs, but when the proverbial shit hits the fan, you may need to shell out tens of thousands of dollars. That's the first big mistake many real estate investors make—they think their investment will be more like their retirement account when in reality it is more like running a small store.
Owners face much more volatility in the finances of their investment. That means more exceptionally bad days but also many more exceptionally good ones. The lows are lower and the highs are higher. Overall, the only reason to ride this roller coaster is the reward at the end. In other words, if your deals don't do significantly better than your index fund benchmark, you are wasting your time. Taking risk is never easy, so you should only do it if you are getting paid to take that risk. In other words, if you can earn 5% on your cash in a money market account and 10-12% annually on an index fund, why bother with all the extra headache if you are not getting paid way more?
If you are buying an index fund or investing in bonds, the performance of your investment is completely outside of your control. When you select the real estate investment and operate it, the performance of the investment is nearly 100% in your control. Having control means having responsibility and liability. If you are making the decisions, you are making the mistakes. So you get financially rewarded for good decisions and financially punished for bad ones. Hiring managers to operate your property can eat up as much as 10% of your gross revenue, which brings me to the basis upon which I make my work decisions—if my vendor gets paid more per hour of labor than I do at my day job, I take that work on myself.
I am happy to pay for services and vendors when they know more than me and require a lot more skill than I have. For example, learning how to flush and vent your heating system to prep for winter takes an hour, Actually, flushing the boiler can be a two-hour chore that saves you a $400 plumber's bill. Simply put, I have never made anywhere near $200 per hour working for anyone else, but I could earn $200 per hour in savings by learning how to do specific repairs and maintenance. In fact, the city of New York, through the Department of Housing, Preservation, and Development, offers courses for homeowners and landlords on the basics of plumbing, electrical, exterminating, and understanding the code. Even better, these classes are free!
Using a simple rule that compared my day job hourly rate to what vendors charged me, I realized there were lots of places where a little effort saved a ton of money. It started with taking out the trash and cleaning the hallways. When I spoke to multiple vendors, I was presented with a price of about $300 per month. These chores would take about two hours per week, and I had another building not far away. As a professional with an advanced degree, I would rather not be taking out the trash or cleaning the hallways, but saving $150 per hour is equivalent to a $300K annualized income. In other words, I get paid more to take out the trash and clean the hallways than my graduate-degree-required day job paid.
In the big picture, when you actually start to calculate how much money you can save and compare that to the number of hours required, it quickly becomes a no-brainer. As an example, unlike the plumber, you do not need an admin to answer the phones, you do not need to maintain workers' comp insurance, insurance for the plumber's van, rent a garage, or any of the million other expenses outside of the actual labor. By doing the work yourself, you remove vast amounts of cost overhead that simply do not apply to you. I have done chores that have saved more than $500 for a single hour of work.
In today's world of infinite tutorial content on the likes of YouTube and AIs that can answer nearly every basic question, the power to learn how to do these chores yourself is relatively straightforward. With access to all these tools on your phone, you can literally be learning how to fix a toilet while sitting on it watching a tutorial.
On the journey from investor to owner, the path is not for the faint-hearted. The allure of real estate investment lies not just in the potential for financial gain but in the profound sense of control and responsibility it offers. Unlike the passive nature of stock market investments, real estate demands active engagement, a willingness to learn, and a readiness to tackle challenges head-on.
The essence of thinking like an owner is embracing the highs and lows with equal fervor. It's about recognizing that every decision, every repair, and every tenant interaction is a step towards building something tangible and lasting. The rewards of this approach are not merely financial; they are deeply personal and fulfilling. The satisfaction of seeing a property thrive under your stewardship, the pride in overcoming obstacles, and the joy of creating a space that others can call home are unparalleled.
As you navigate the complexities of real estate investment, remember that the journey is as important as the destination. Embrace the challenges, celebrate the victories, and never lose sight of the bigger picture. By thinking like an owner, you are not just investing in property; you are investing in yourself and your future.
So take the plunge, roll up your sleeves, and dive into the world of real estate with passion and purpose. The road may be arduous, but the rewards are worth every effort. After all, the greatest achievements are born from the greatest challenges.
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