Is Your Real Estate a Business?
People get into real estate for a variety of reasons. Consistently, though, I see these break down into one of two major categories:
People with excess investable cash that they don’t want to put into the stock market or other forms of securities.
People who are looking to produce extra cash flow or income in order to increase their standard of living or to be able to retire earlier.
What real estate looks like in each of these scenarios is very different.
Real Estate as an Asset Class
For many people, real estate is a way to generate a return on cash outside of pouring more money into normal retirement assets. They believe stocks are overvalued, they have enough exposure to the overall market, or they just want to do something different. However, they aren’t willing or they aren’t in position to spend a ton of time on real estate -- they want their income to be truly passive.
This can be a poor formula for directly investing in real estate. Turnkey, ready-to-rent properties tend to be priced at a level where they don’t generate positive cash flow right away. Also, for people making more than $150,000 a year, tax law makes it difficult to utilize a net rental loss against other sources of income if they aren’t constantly working on real estate.
If you’re willing to hold properties for an extended period of time, it can make sense to own individual properties, but this is generally a play for appreciation, not for immediate cash on cash return. Otherwise, it can make sense to invest in real estate by other means. Investing in high quality syndications is a common approach because this leverages your money and willingness to take risks by taking advantage of an experienced real estate operator’s talents and ability to create a high-quality deal.
Real Estate as a Business
There are two main types of people who need to look at real estate as a business, not much different from opening a food truck or a drop shipping company.
People who need real estate to provide their primary source of income right away.
People who are looking for real estate to allow them to quit their job or to retire early.
The second group, in particular, often misses something regarding real estate.
If you own the real estate yourself, it’s never truly passive.
There’s no rental management company, general contractor, mentor, coach, or guru who will care about your properties as much as you do. They can (and almost always eventually will) slack off, find bad tenants, over-repair, under-repair, or otherwise not be good stewards of your properties and your money. Anyone you pay to help in your real estate endeavor (including me!) needs to be continually monitored and accountable for getting results.
Also, keep in mind that if you go into real estate as a side venture to your day job, you will be competing against people who eat and breathe real estate all day, every day. This doesn’t mean that you can’t make money in real estate, not at all. But, money won’t come automatically, and it won’t come without time, thought, and constant studying of the industry and of your financial results.
If you’re looking for real estate to change your life, treat it like a business and you’ll get much better results.