Why You'd Rather Be a Passive Investor Than an Operator
One question I hear a lot is “Should I just go out and buy an apartment complex, and hire a property management company?” - vs. being a passive investor with me. This is a question I love answering!
So to answer; while there are definitely some people who should be an operator, the majority of people should stick with being a passive investor. Why, and what determines who should go out on their own as an operator and who should choose the road of the passive investor? That's a pretty easy fork in the road, and I'll explain...
Most people who invest with me have already achieved a high degree of success: they're doing well in their careers, are high earners, executive-level, business owners, physicians, etc. who already have plenty of earned income. They also have reached a point in their lives where they have families and other interests, hobbies, and things they want to spend their free time enjoying. My pro tip: you should not be a landlord if you want to have hobbies on the weekend and spend time with your family!
That's right, what many enthusiastic investors don't realize is that buying real estate and trying to do it yourself is a second job. We're also talking about the type of second job that can drain a lot of energy and time out of your life.
I know from experience: I am an operator and this is my full-time job. This is what I breathe, eat, and live. I started small, using my own money to fail small and “pay that tuition” (losing money – but my own money). By starting this way, as I grew and deals got bigger, my chances of making mistakes were much lower because I'd already learned the hard way. Let me tell you; those early years were some of the hardest years of my adult life: I was working seven days a week, over my now-healthy weight, and because I didn't have enough staff initially, I lost time as a dad and a husband.
Now, I was willing to go through that trial by fire to build the company and scale it, and now have the ability to devote time to my major priorities, like my family and being healthy. Anyone who has the drive to go through the struggle and pain can definitely reap the benefits, but it's not an easy road.
For investors who already have a great income stream, the key is to live below your income, and funnel as much of your income as possible into income-producing assets. I'm not talking about stocks or bonds, when you're speculating and betting on the price to go up; but business, and real estate – income-producing assets. You're already pretty good at your profession by the time you reach me; taking on a second profession isn't the way to go. Taking income from your day job, and funneling it into assets that generate more income, you can grow a pretty big wealth bucket. It's a much better formula to true wealth and financial freedom than trying to take on a second job and being a small landlord.
You're already doing well by the time you get to me! Being an active investor is taking on a second career that takes thousands of hours to get good at it. You'll pay that “tuition” along the way, and yes – that means money. I've figured that I'm in the 40,000 hour-range of practicing real estate. It doesn't happen overnight. You already have an income stream that you can funnel passively into other investments; business, private equity, real estate – that generates income. By partnering with sponsors who are really good at what they do, you'll greatly reduce your risk in losing capital: rule one, don't lose capital!
Some people think they'll just buy a property and hire a property management company. If only it were that easy; unfortunately, you're missing a key component – asset management. My 80-employee firm has 20 people at the corporate office who are on the asset management team: accounting, compliance, construction, and those who oversee the property managers. A joke in the industry is that “Life would be easy if we could just hire a property manager and they'd do their job well.” Although there are some companies who do a good job, too often it's not the case. You'll also never find anyone who is willing to put in the time, extra effort, and work when things aren't going well as the owner. That's why we built our own asset management team: to oversee that infrastructure of property managers and maintenance technicians in the field. Also to manage the budget, and look through the owner's eyes - so our goals are being met. If they're not being met, we can figure out how to pivot, redirect, and alter the plan to get closer to the owner's goals.
The bottom line: Most of you should stay passive for a lot of reasons, especially if you have a life (family, hobbies, travel) and why there's a big difference between buying a small property and hiring a manager compared to what we do and the value we add.
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