Even with your own home, have you noticed that real estate prices have been a bit hectic? How do you build wealth with real estate? Not with your primary residence.
In this episode of the Finance For Physicians Podcast, Daniel Wrenne talks about real estate as an investment outside of your primary residence. You are building wealth with your home, but it is hard to realize that wealth.
Topics Discussed:
- Real Estate Market Prices: Massive increases in short periods of time
- Crazy Market: What are the reasons? Nobody really knows underlying causes
- Supply and Demand: Low supply and high demand drives up real estate prices
- Why is demand high? People still want to buy or invest in real estate
- Why is supply low? Cautious builders, lumber costs, lack of skilled labor, rules
- Real Estate Investing – Alternative approaches to make money:
- Appreciation: Own property that increases in value
- Rent: Own property that is rented out to others to generate income
- Loan: Charge interest on money loaned for real estate deals
- Ways to Own Real Estate: Short- or long-term rentals, flips, multi-units, raw land
- Real Estate Responsibilities: Do you want to be an investor or more involved?
- Why people write/talk about real estate: Hype, interest, and money to be made
- Big Benefits: Diversify, passive income, tax shelters, and better returns
- Downsides: Time, dealing with people, risks, returns, complexity, and alternatives
- Purpose: Why do you want to invest in real estate and build a portfolio?
Links:
Real Estate Investment Trust (REIT)
Transcription:
00:00:08
What’s up guys? Hope you’re having a great day. Today, I’m going to talk about real estate. I am sure you’ve heard and seen maybe even in your own home how real estate prices have been a little bit hectically lately. We’re going to talk a little bit about this, but today I mainly wanted to focus on real estate as an investment. How do you build wealth with real estate as an investment? I think with your primary residence, this is really not the right approach. Your primary residence is a place that you live and it’s more of a lifestyle decision than it is a wealth building decision.
00:01:02
Lately, real estate prices have been a little hectic and so it might feel like you are building wealth in your home. You are actually building wealth, but it’s difficult to realize that wealth. We’re going to focus on investing in real estate, outside of your primary residence. This crazy real estate market has been really interesting to watch. As we record this, I think the latest numbers are definitely double-digit percentage increases in the United States and in some markets, it’s been quite a bit higher than that. We’ve seen a lot of our clients in our planning firm see massive increases in their real estate in short periods of time. This is definitely a big market factor right now.
00:01:56
It has reminded me a lot of the price increases we saw in 2005 through 2007. I think the underlying causes then we’re different. The first question that typically comes to mind is, what is causing all this? We’ll talk about that in a second. This is going to be a podcast dedicated to people that have some interest in investing outside of their primary residence in real estate. If you’re not interested at all in investing in real estate, outside of your primary residence, you probably ought to skip this show. It’s not going to be for you. On the other hand, if you have any level of curiosity about investing outside of your home, or maybe you’re kind of in the early stages of that, I think this is going to be really beneficial for you.
00:02:47
Odds are, you’re going to get pitched a real estate opportunity soon, or maybe a lot of you have already seen that happen. Maybe a lot of you are already in on real estate deals. The key though is to have some of these baseline planning concepts down so that you’re getting started on the right foot and going in with eyes wide open. That’s really what we’re going to focus on today. Before I get into that, I wanted to go back to the question I threw out earlier and discuss what might be causing these big price increases. Just a quick little disclaimer, it’s important to say nobody really knows. People love to talk about what’s causing these sorts of things, but at the end of the day, nobody really knows for sure.
00:03:41
Take the 2008 downturn for example, everybody loves to talk about how they saw it coming or knew what was causing it then. But nobody in 2006 and 2007 was talking about all the reasons, maybe they were hitting on one or two, but people just didn’t see all that coming. It was a shock and some of those things were flying under the radar. At the end of the day, nobody really knows all of the underlying causes that are affecting this sort of thing, so take all this with a grain of salt. Now it’s good to be educated and keep a pulse on what’s happening. I’m definitely not a real estate expert, but I know what’s happening in the industry, and I know what people are saying.
00:04:24
If you look at the price increases that we’ve seen, what’s driving that? For starters, supply and demand is always going to drive prices in real estate. Right now, real estate supply is ultra-low and demand is high. When that happens, when supply is low and demand is high, that’s always going to result in prices going up. When you have one house for sale and the entire big old neighborhood, that’s low supply and you have 20 people that want to get into the neighborhood, high demand, that results in competitive price bidding and the price goes up. Suddenly, you get people agreeing to prices above market, and it just drives those prices up. That’s really what’s happening.
00:05:18
Why is demand high? Why is supply low? The most common reasons I’m hearing that demand is high is first because all these people still want to buy their first home. The factors that are in play are making it even a little bit easier to buy their first home. I think a lot of people say there’s even more than normal people wanting to buy their first home with the millennials being in their prime home buying season of life. Plus, I think especially with COVID, and people being locked down, there’s more people than normal looking for a vacation home or getaway property. People that can afford it are definitely pulling the trigger on vacation homes. Then you’ve got the people that live in the big city that through COVID wanted to get out of the city and move to the suburbs and they’re moving because of COVID. Then you still have all these people wanting to invest in real estate.
00:06:19
On top of this, you have really low interest rates and there’s this stimulus money that a lot of people received. People see the stimulus money and they see the low interest rates and they’re thinking maybe now is the best time ever to buy a home. Especially those with solid incomes, like physicians. Physicians are certainly still buying homes. So a lot of people are buying. And then supply is very, very low. I think we’re currently seeing record low number of houses on the market. Why is supply low? That’s the other big factor.
00:06:57
I think the first reason you see is home builders are cautious, because they’re a big part of supply. If there’s a ton of new homes being built, that’s going to help add to supply, but home builders are cautious. I think the main reason is because they still remember 2008 and a lot of home builders really got in trouble in 2008 because they were being too aggressive and taking too much risk. So they seem to have pulled back the reins a little. Also lumber prices are super high and skilled labor is difficult to find. So that makes it difficult for a home builder. On top of that, you have local regulations in different cities or municipalities that builders have to deal with. It tends to be pretty restrictive and it’s difficult to find land or lots.
00:07:52
When you do find it, you have to follow all these rules and it’s just not as conducive as it could be for builders that want to really increase the number of new constructions. Also contributing to the low supply, people are locking in low interest rates on their mortgages, in their existing homes, the established people, gen X and baby boomers. Many are holding onto their homes. They’ve locked in at low interest rates, they don’t really want to do anything until everything settles down with COVID and they don’t really have to move, and they have a really good interest rate now, so they’re kind of just chilling out. These factors collectively result in a low supply of houses available to be purchased.
00:08:38
The net effect of that is prices will go up. On top of this, which is what we’re really going to focus on today, you have real estate investing. This seems to always be a hot topic, but it seems like it’s becoming an even hotter topic especially in physician circles. The idea is to invest in real estate as an alternative investment or on the side, or to get passive income. That’s really what we’re going to focus on today. How do you make money? If we start to look at that subset of real estate and investing in real estate to try to strictly make money. How do you do that? Well, if we boil it down to the most basic level, there’s really three ways to make money in real estate investments.
00:09:26
The first would be to own property that increases in value, so appreciation, it goes up in value as you own it. The second would be to own property that is rented out to others that generates an income stream. The third would be to loan money for real estate deals and charge interest on that money, so you just earn interest. Those are the three core ways to make money in real estate. Really, if you compare that to other things, it’s a lot like investing in any company or any investment for that matter. For example, you can be an owner in a company, a publicly traded company is the easiest example because anybody can do it. You can buy stock in a publicly traded company and hopefully the stock price increases in value, and you see appreciation. Maybe you also get dividends on top of that, which is income. Or you can lend to a company in the form of bonds and earn interest on that bond. At the end of the day, it functions a lot like any other business investment.
00:10:36
What are some of the actual ways to own real estate? Well, there’s really a ton of different ways, but I’ll hit on the core or most popular ways that we see. You’ve got long-term rentals; I think most people know what that is. You buy homes, maybe single-family homes in a certain area, and you rent them out for a long period of time to renters and that’s how you do it. This has become a lot more popular with the VRBO and Airbnb as short-term rentals, that’s more like a hotel business model. You’re buying real estate properties and renting them out for short-term periods of time, similarly to a hotel. The market is people on vacation or in an area for a shorter period of time.
00:11:25
The typical long-term rental lease is like a year or more. Then the typical short-term deal or lease is a few days to maybe a few weeks. Typically, the rates for those are higher, but there’s a lot more volume coming in and out, it’s much more like a hotel. Then you have flips. I’m sure you’ve seen TV shows with the flips. You buy a place that ‘s a fixer upper or maybe needs a little bit of cosmetic help and you put in the work and then you sell it usually for not a long period of time. Or you can just invest in apartments like multiunit deals or even hotels themselves. You’ve got commercial properties, you can buy office spaces, industrial spaces, any sort of commercial deal. You could even buy raw land, that’s another section of real estate.
00:12:20
You can buy and hold land, you can lease it out. You can develop land. There are all kinds of ways to invest in real estate and own it. There are also ways to lend money for real estate deals. You can loan money to an individual or a business for a deal that they’re trying to make. You can buy real estate bonds or bond funds that are effectively the same, but pooled investments. Or you can do peer-to-peer lending, that’s a different way to essentially loan money for a deal. The peer-to-peer process is pooling of the money for a real estate deal, but it functions like you get an interest payment for that loan.
00:13:12
Before we go too far into what all this looks like, I think the first question you should be thinking about is do you want to be strictly an investor, as in you have no responsibility outside of writing the checks? Or do you want to be more involved? Do you want to get your hands dirty? Do you want to put your own personal touch on it? Do you want to be the boss, the manager, operator, that kind of thing? I’ll throw out some examples to kind of help you see what those different things might look like. We’ll start with the least involved real estate investor, and then go more involved as we go along. If you look at the least involved real estate investor, the best example that comes to mind would be just buying or investing in a real estate investment fund, they call it a REIT.
00:14:09
You can invest in a mutual fund or some sort of fund like that is ultimately just going to buy real estate for you and you have zero responsibility other than to put the money into the fund. A lot of you probably already own this sort of asset, and you might not even realize it. Financial advisors, financial planners like in our firm, our clients are investing in real estate through this channel. A lot of them don’t realize it until they see the underlying assets. A lot of work retirement plans also incorporate real estate into their platform of investment options. Really this is the least involved route because you’re strictly only writing the check and acting as the investor.
00:14:59
Now you can definitely get a lot more involved in real estate deals. Maybe you’re finding other people’s deals to invest in, but maybe you’re not totally involved. Crowdfunding is a good example. You still have to search for good deals and pick it, but you’re not literally picking the property and hiring the people and firing and calling the shots and managing it. You’re just looking for the deal really in the crowdfunding situation. That’s where you’ve got a lot of different pooled investment options. Another example is you got your buddy that has a real estate deal and he’s looking for investors. That’s probably something you have even seen come up in your own situation. The example I’m talking about is when they’re like, “Listen, I’m going to handle everything all I need you to do is write a check and be an investor.”
00:15:56
The involvement part is you have to still do the due diligence on your buddy’s deal. You need to check it out and understand how likely it is to succeed and understand the risks and that sort of thing. But at the end of the day, your buddy is responsible for managing it and running it. Then you have syndications. That’s another example of private deals that you can invest in. Same idea, your responsibility still would be ideally to screen the deals, understand the deals and pick the best deal. From there, you’re handing it off to whatever company is managing the actual investments. These examples you’re definitely a little bit more responsible. You need to understand what you’re doing and understand how it works and be able to screen them, but you’re not really running a business necessarily.
00:16:48
The last example, this is more what I would call the most involved example. This is really running a real estate business. Maybe it’s a really small business, but at the end of the day, you’re much more responsible. You’re creating your own deals or partnering with others to do a deal and you’re fully or substantially responsible for managing them. At the end of the day you’re the one that makes the call, you’re getting your hands dirty. Examples of this are short-term rentals, long-term rentals, flipping a house or managing a loan to an individual, if you loan an individual money for a real estate deal. All these examples, you are responsible. You can hire help, but at the end of the day, you make the calls and are responsible for running them.
00:17:40
I think most people that are talking about investing in real estate, they tend to be talking about the last two examples, the getting your hands dirty type. More getting into whether it’s just investing in another person’s deal, you’re somewhat involved, but not completely involved. Or you’re fully involved in essentially creating a real estate business. That’s typically what you hear about when people are saying invest in real estate. Those deals typically have much greater return potential. They definitely are very popular. I hear people talking about them all the time. There are all kinds of physicians building substantial wealth and these sorts of deals and they’re great. There are always trade-offs, of course, and when you read about it and hear about it in general, a lot of times you only hear the benefits. That’s just common, especially if you’re Googling random articles.
00:18:34
I think it’s important to really understand the behind the scenes of why that’s happening. Why are all these people writing about real estate wanting to talk about real estate? I think the biggest reason there’s so much hype or interest around real estate is there’s just a ton of money in real estate. There’s a lot of money to be made. There’s also a lot of incentive to write about it and talk about it. There are all sorts of gurus. There’s always been gurus and real estate, some of them put out great stuff and know their stuff, sometimes they don’t. But they all have some level of incentive, and it can vary by situation. Maybe they want you to invest in their real estate deal or click through to their partner companies that ultimately pay them behind the scenes. Maybe they want you to buy their course or use their recommended real estate service providers that also pay them behind the scenes.
00:19:39
They also have an incentive to have you continue reading and so that’s going to often require staying interested in real estate and eventually getting into real estate. I think this is important to keep in mind because there’s all these incentives and conflicts of interest and that doesn’t make these people bad, and most of the time they are good and smart people, but I think it’s helpful to understand that they’re out there and they’re all over the place. You’ll go into reading the content more eyes wide open, if you understand that. It’s like in medicine, you all do a much better job at revealing your conflicts and that’s helpful because you can understand where the biases are. For example, I have a conflict right now, I run a financial planning firm for physicians and that’s my day job. We have a financial incentive to convert you, the listener, into clients for our planning firm.
00:20:34
I’m definitely going to be biased when it comes to things like hiring a financial planner. That’s just the way it is. By understanding these conflicts, I think it helps you be a more educated and smarter investor. There are all kinds of people talking about real estate and I think this gets the interest going and like anything, some do well, others don’t. Like anything as well, when you hear about it from other people, you really tend to only hear the good stories. People are hesitant to share about their failures. Maybe you’re not reading about it, but maybe you’re hearing about it from a colleague or a friend or something. You also have to remember a lot of times you’re not hearing the whole story.
00:21:19
That’s just the way people work, they tend to talk about their wins. Not everybody, but most of the time they tend to talk about the best deal, and they leave out the train wreck. You tend to be getting a filtered version when you’re hearing from buddies. I’m not trying to be Debbie Downer here, I just think it’s something you got to know about before you get in so that you can, like I said, be educated as you start to invest. The big benefits that people tend to share about when they talk or write about real estate investing, number one would be diversification. It’s a different type of investment than the traditional investment, and it allows you to diversify. That’s a common thing. Passive income, that’s probably the next most common thing people talk about is passive income. It’s a way to earn money while you sleep. We’re going to talk about that more.
00:22:13
That’s usually what the idea or concept is that people share. Sounds appealing right? Real estate has unique tax shelters that you can’t find elsewhere. That’s a common point that the industry tends to make. Better returns, that’s pretty much always, especially when somebody is really selling and has a real conflict, they’re going to push those returns. These always sound pretty good on the surface. If that was the whole story, then you might as well invest all your money. It’s a home run. But like I said, there’s always downsides and we’re going to talk more about what’s missing from that and understand the behind the scenes so that you can see both sides. There’s always pros and cons.
00:23:00
The pros are easier to find. You can Google it, there are a million articles about all those benefits of real estate. The negatives, the downsides, the other side of the coin, that’s really what I wanted to talk about because that’s not as commonly discussed. Let’s talk about the downsides and these will correspond to some of those common benefits that I just mentioned as well. The biggest thing that people don’t talk about when they’re looking at real estate investing, number one would be time. Going back to what I was saying before, passive income allows you to earn money while you sleep. That is in most cases a lie, at best it’s a little bit misleading. With real estate, anybody that I know that has been successful with it has put in a lot of time. It takes a lot of time, especially the more active you are with the investment.
00:23:57
Those sorts of deals like short-term rentals, long-term rentals, flips, when you’re responsible for it, that’s especially the case. You should expect to put in a lot of time starting a business. You’ve got to really think of it like a business, it just is going to take a lot of time. Passive income is a little bit misleading. Earning money when you sleep definitely implies you’re not spending any time. It just happens automatically. Maybe you can get closer to that point, but I don’t think you can really ever get to a point where there’s no time requirement whatsoever.
00:24:40
If there is no time requirement, you have outsourced everything, so that is a whole separate deal in itself. It will require more costs, but there’s still going to be time like managing those people that you outsource to. That’s a huge misconception. There is a lot of time required to start it, to get into it, especially the further you go down that list of things I was sharing. If you’re not spending any time on it, that’s a problem in itself.
00:25:04
The second big thing is responsibility. Same thing, the further down that list you go, the more responsibility you have. If you are getting into buying individual single family long-term rentals, for example, people are challenging to deal with but you have to deal with people. You have to find a tenant, or you have to find candidates to potentially rent, and you have to screen them. You have to have a process for screening them. You have to have a lease for them to sign. You have to ultimately select the right tenant and you have to deal with them, you have to interact with them in some capacity
00:25:50
Then you have to hire people to fix the house, manage the property or list the property. If you have help with that, there’s inevitably going to be people, service providers that you’re going to have to work with and these people can be challenging. People in general are challenging, we are not built all the same. That adds a whole element of challenge there in itself is dealing with the people. People typically will look out for their own interests first, especially when you’re talking about average, most people are going to look out for their own interests first. As a result of that and other reasons, it’s really hard to find solid people, it’s much easier to find people that will take advantage of you.
00:26:35
The big thing is you have to have thick skin. You might say a property manager can do it for you, but at the end of the day, even if you outsource that kind of stuff to a property manager, you have to have thick skin enough to be able to fire them, ask them to lower their pricing or ask them why they’re not getting the job done. That all falls on you, which is responsibility. That’s not even getting into the legal responsibility, the business planning responsibility, you’re the one that’s going to have to create the plan, select the deal that you purchase. If you’re getting into short term rentals, you have to have the property in itself. You have to find the property, buy the property, get the financing down, pull the trigger, make sure you get it leased or fixed up if you need to do that. That’s a lot of responsibility.
00:27:30
Then once the money starts coming in and you have to manage it, you have to deal with bookkeeping and taxes and all that stuff. If they don’t pay, you have to deal with collections or foreclosures. There are a million responsibilities you tend to not think about on the front end, but that’s part of the deal. It varies by the type of real estate you’re doing, but it’s typically going to be there. Another big thing that gets missed is the risks of real estate. Real estate values, I think most people know this now because 2008 was not that long ago, real estate values can go down. Doesn’t matter what real estate it is, doesn’t matter if your market is great right now.
00:28:14
In 2008, most real estate went down to some extent, some went down way larger, we saw way larger drops in some areas than in other areas. At the end of the day, real estate values can go down and sometimes by a lot, especially real estate that’s leveraged. If you’re leveraging real estate, that means you have debt on it. If you have a mortgage on real estate, essentially, you only own outright a smaller percentage of the total investment. The problem with that is when values go down, you get a much larger percentage drop in your equity portion, it’s much easier for you to go upside down. That’s what they go upside down is when the value has dropped below what the mortgage balance is, and so you essentially have to pay to get out of the house.
00:29:04
That’s where you can see massive swings and returns for you. There’s definitely risk in real estate, but it depends on what you’re investing in. Something like a single-family home, for example, this is within the risk situation. A lot of people think of diversification in real estate, but in reality, it’s actually more concentration than diversification. Especially if you’re doing something like one area, one type of real estate, like single family homes in Lexington, Kentucky, that’s where I live. If you’re just buying single family homes in Lexington, Kentucky, that’s not diversification that’s concentration and is less diversified. It’s not bad, it’s just not diversified. With investing a lot of people consider real estate their safe money.
00:29:56
Sometimes that’s the case, for example, if you don’t have any mortgages on your real estate, so it’s not leveraged and you have a lower risk type of real estate, then maybe it is a fairly safe investment. But a lot of times it’s actually much riskier than people consider it. The other big thing that people miss is returns on real estate. This is more of an overstated thing, especially with private real estate. You can find a REIT, a Real Estate Investment Trust, they have to report their returns and it’s very straightforward and transparent, but we’re mainly talking about active real estate deals. Private real estate is kind of like the wild West of investing. When you’re talking to people about their experience, owning long-term rentals, for example, people throw all kinds of numbers out.
00:30:47
There’s no way to verify that. There’s no real standard to measure that against. People love to talk a big game, so it’s difficult to know what’s actually happening with other people and get a pulse on the actual experience of other investors. You can find some data on it, but it’s difficult to find data on the returns on those types of investments and people definitely tend to overstate those numbers, especially if you’re getting pitched a deal. I would just be shocked if they didn’t show awesome returns. What else are they going to do, they’re trying to convince you to invest in it and they’re also optimistic about it. People are going to show solid return numbers and if they don’t then there’s no point investing.
00:31:42
The other big thing is people show a return on investment that does not incorporate the time that they spent. That’s a big one that we see. For example, let’s say you have a short-term rental and you do not have a property manager, you do not have a cleaning company, basically, you do everything yourself. You’re the one that advertises it, you even put a signup out in front of the house. You’re the one that advertises it to get the tenants in there. You’re the one that goes and meets them, gives them the key, and shows them around. You’re the one that deals with the problems as they come up and goes and fixes something if it pops up, when they’re there. You’re the one that is going to clean the place after they leave and manage the money as it comes in, keep the books, basically, you’re doing all of it yourself.
00:32:35
That time component is a big deal. If you’re a short-term rental where someone doesn’t do that to a short-term rental where somebody does do all that, a lot of times they’re going to calculate their returns the same way. If I’m an outside investor, I’m going to want to know what that time component is because that’s definitely a huge part of the equation. Another big factor we see missing from this is complexity. Especially with some of these real estate deals that other people are pitching, they tend to be extremely complicated. Things like syndications, a lot of times are super complicated, it takes a lot of time to understand them and so you want to be careful with them. You need to understand it before you invest into something, if you don’t understand it don’t invest.
00:33:32
When you deal with complex stuff, it just adds additional time and even risks for missing things, so that’s got to be considered too. The last big thing we see missing is alternatives. A lot of times people are not thinking about alternatives to real estate as a business. At the end of the day, it really is just a lot like running any other business, especially with the more involved real estate like buying and owning short-term rentals, long-term rentals, flips, that’s a real estate business. You’ve got to look at it like you’re a business owner. When you start to look at it like a business, you’re like, if I can do this business, I could do any other business. You call the shots, you make the deals, you’re responsible for it, you make the business plan.
00:34:26
The biggest error I see is that people aren’t thinking like the business owner, they’re thinking, I just want to make money while I sleep. The right way to do it, though, is you have to treat it like a business for it to work. Once you see it like this, you might decide there’s a different type of business that you want to start. Like any business, real estate has all kinds of potential, you can make your real estate business ultra-successful. Any business that you are dedicated to and put in the effort and do it right, is going to see very big returns, much greater than a passive investment that you’re not getting your hands dirty with. Any business that runs well will see solid long-term returns, but you might have a different type of business.
00:35:14
You can think of anything like you could start a medical device company or create a new service, create an app and sell it. There are all kinds of things, anything, the sky’s the limit, but that’s in the same category as investing in real estate. It’s best to approach it with eyes wide open and have good expectations and understand not only the perks, but really what’s the other side of the coin.
00:35:44
As we wrap up here, if we’re trying to boil all this down and you’re doing it the right way, so you understand all the pros and cons, and say you’ve decided to go down a certain path, before you get too far down the road, I would really hone-in on the purpose. Maybe you’ve already thought about this, but if you haven’t, you want to have a good answer for why. What’s your why? Why do you want to invest in real estate? Especially if it’s a more active real estate. Why do you want to build a portfolio of long-term rentals?
00:36:20
Common answers we see are build wealth, passive income, tax benefits. Sometimes people will say, I want to have a place to vacation, but also make some money. Those are just surface level examples. What I would say is ask yourself a follow up question. Why is that an important thing? Why are you looking to build passive income? A lot of times, when you peel back the layers, it’s I want to work my way out of medicine or have an alternative option to work in or an alternative income source. Or maybe I have a passion for building a real estate business. Or maybe I want to fund my goals of being able to retire earlier or fund education. Those are typically the underlying reasons that people have.
00:37:08
It’s good to iron those reasons out first and understand those, because let’s say your reason is you want to have a place to vacation and have a good investment as well. That’s a very tricky balance to strike and I would proceed with extra caution there because each one has conflicting reasons that tend to conflict with each other. The ideal vacation place, a lot of times, is not the ideal investment property. Now, sometimes you can strike a balance and do pretty well, but it’s more difficult.
00:37:52
Also, it’s something sometimes people will trick themselves into deciding it’s a great investment and really, it’s just a lifestyle decision and they’re going to use it a lot and not rent it out very much and not treat it like a business. So, it’s better to just say it how it is. If it’s a lifestyle decision, it’s all good. Have a vacation home, but don’t buy it as an investment and then allow yourself to do it much sooner than you would have otherwise, because it was an investment. It’s better just to say it how it is or pick one or the other makes it a little easier. You don’t have to do that, but it gets tricky when you combine those two together. Understanding that purpose is going to be beneficial.
00:38:35
One of the best reasons, if you do have a passion or you’re excited about it and you want to change how things are done, or you want to be like a landlord that does a good job for tenants and has a good relationship or builds a different type of real estate. Those are some of the best reasons for doing it. Building wealth is okay, but when you can find some passion and solid reasoning behind it, that’s where you can hit a home run. There’s a ton of ways to build wealth. Real estate is really crowded and competitive, like a lot of industries. Life is short and your time is valuable, if you want to make sure you’re making a good decision, it’s best to try to go in for the right reasons and really think about your time, it’s extremely valuable. If you’re going to do something like this, you need to have a very good reason for doing it.
00:39:35
Start with your why, understand your purpose. If you want to go down a more active path, you want to learn about that type of real estate first, at least the basics. You don’t need to learn, go to college, become an expert. Maybe take a course, read a book, follow a blog, make sure you understand the conflicts, especially if you’re dealing in the private world. Create a business plan. That’s going to help you iron out the goals, timelines, and financing and return potential risks. Ideally you set concrete action items as a follow-up to this planning process. Then really, it’s just about going out and executing.
00:40:16
Don’t expect perfection. It’s almost better to expect imperfection and learn from the mistakes. That’s really how you get better at things like this. You go out and you make mistakes. Hopefully they’re small and you can learn from them and hopefully you can learn from other people’s mistakes. At the end of the day, you’re going to make mistakes and it’s not going to be perfect. Over time track your returns, so that you can compare it to other investments so that you know how well it’s doing relative. Don’t forget to incorporate your time into this. Tracking time would be the best case scenario. As you start to see the time you spend, you want to think of it as dollars per hour and are you good with this hourly rate. If you’re tracking time and returns, ideally you see solid numbers and you’re satisfied and you’re happy and you keep the property and you stick to the course. Other times it’s bad. You see that your rate that you’re essentially earning per hour or the return on the investment is pretty lousy, and that pushes you in another direction.
00:41:34
Ideally you have a pulse and that requires some sort of a tracking or KPI. I hope all this has been helpful. The intent of this was to hit on the high points of real estate investing, talk about some of the things you probably don’t read about as often, look at the downsides, as well as some of the positives. If you want to get into the weeds more and let us know, depending on what direction we go, we can find an expert to come on and join me and we can really dig into some of the more specific areas of real estate. I hope it’s been helpful. Let us know if you’d like to dig in more. I hope you have a great rest of your day, and we’ll see you next time.
