Do You Want A Job Or An Investment?
Posted on September 12, 2008
Filed Under Mentoring |
If you cruise the various boards and blogs one almost continual discussion deals with whether you should manage your own properties and do your own repairs. Assuming, of course, you are capable of doing them.
You will see wild claims from both sides of that argument about which approach is better and how the other side just doesn’t understand the drivers behind one position of the other.
You will see things like you have to work “on” your real estate investing instead of “in” it. You will see things like you are throwing money away if you don’t do it yourself and at the same time you will see some claim you throwing away money if you do the work yourself.
You will see things like, “Property managers are the most overpaid people in the world” often times from people who should know better considering their experience claims.
This perennial argument is all so confusing to someone new to the investing game. They are afraid of making a mistake in the first place and then you have various experts claiming exact polar opposites on a very key point. It is enough to make a newbie throw their hands up in the air and scream, “Enough! If the people currently investing can’t figure this out, how in the world can I?”
It is confusing because often these views that appear in conflict are being bandied about by experts talking past each other.
Recently, on a forum, I read the following…
I think this thread has really highlighted the differences between two different models for REI. I’ll call them the “Investor model” and the “Owner model”.
Here are some observations, do with them what you will.
Investors seem to approach REI as an asset class, like stock, bonds, mutual funds or hard money lending. The end is achieving their personal investment goals. Investors strive to maintain liquidity and tend to withdraw profits often so that they can “reinvest” that capital in other assets that may or may not be in the same asset class. Capital appreciation and cash flow both factored into their calculations of return. They see the beauty of REI as the ability to influence their return on investment directly through active management, much like Warren Buffet only invests in companies in large enough volume to get a say in how they are run. Therefore, Investors are less likely to do their own maintenance because they’ve run the numbers and already factored in the cost of outsourcing repair work.
Owners seem to look at REI as a career path or alternate income stream, like a small business owner. The see their properties as their livelihood and are constantly trying to minimize their expenses. Owners tend to value cash flow over capital gains (for rentals) because their intent is to live off of the income produced by their properties. Owners are less likely to invest in other asset classes, even if greater returns were likely because they are hesitant to give up control of their livelihood. Owners are more likely to do their own repairs because it reduces their expenses (thus increasing net cash flow), increases job satisfaction and possibly reduces their risk.
I’m new at this but those are my observations.
He may be new but, “ntokb3″ nailed it. I wanted to give “him” proper recognition but in a private message he asked I just use his screen name.
Whether he wants to take proper public credit or not does not change the wisdom of his observation.
So many people want to jump into real estate to replace their job and incorrectly call themselves “investors”. I am not saying there is anything wrong with this approach either way. Just that this is another area where the terminology has been so compromised that real rational discussion is difficult.
One of the fundamental questions a newbie must answer is whether they want to be an investor or an owner/landlord. There is no right or wrong answer to that question. But, many of the decisions they make down the road are dependent on that one fundamental question.
“But, what if I want to do both?” That is a question many of you may be asking and to be honest I don’t think you can over the long term.
Here’s why. If you do both, you will eventually push yourself one way or the other. It is almost impossible to “invest” in real estate and retain micro control by doing everything yourself. Conversely, the fastest way to reach critical mass to replace an income is to do everything and save the money. You will be pulled in two directions and sooner or later you will gravitate to one or the other.
You may want to do both, but the complexities will prevent it.
Many start out doing everything themselves because it is cheaper. Then later when someone comes along and says they could make as much or more money by contracting out some or all of the management and maintenance they struggle with the concept. They think they “know” how much they are saving by doing it all themselves and they think they “know” how much it would cost to hire it out.
Some make the conceptual leap and transform their landlording business into a real investing business. Some don’t want to do that. They are content where they are. That is fine. But, for those who are tired of pulling stuffed toys out of toilets don’t let anyone tell you it can’t be hired out and still be profitable. The people telling you that may not know how to do it but just because you don’t know how to design, build and fly an airplane does not mean you couldn’t learn.
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