Mindset

Why Are So Many Rental Property Investors Engineers?

March 26, 2017

I’ve connected with many rental property investors since launching Rental Mindset. Why are so many rental property investors engineers?

As I think about the dozens of rental property investors I’ve met in the last year, I’ve noticed many are engineers.

Examining data, patterns will start to emerge. Are those patterns telling of some information or just random chance?

What does it say about the traits of someone who self-selects those two groups? Are there any conclusions we can make about who will be a successful real estate investor?

Be careful examining two independent variables

Science starts with a simple observation about the world, a hypothesis for why things are the way they are, then trying to design an experiment that isolates just one variable.

It doesn’t stop with a just an observation because …

Correlation does not imply causation

For example, bet you didn’t know the marriage rate in Wyoming moves in step with the domestically produced passenger cars sold in the United States.

Graph: Tyler Vigen

It is easy to form a hypothesis about why those independent events are linked: “Well when you get married you start a new life together and will often get new things – a new house, furniture, and even cars. And Wyoming is the most American state, so most the cars they buy are American made.”

Similar stats could also be applicable to other states and cities. People buying a new house or renting one might look for movers mechanicsburg pa, for services such as junk removal, storage facility, or interstate movement. In addition, relocating families may also require lots of new supplies.

Humans are really good at rationalizing. Perhaps we should be more like this guy:

Comic: xkcd

The truth is often somewhere in the middle.

Engineers and Rental Investors

Digging into this, my first thought is to visualize how big each of the Venn diagram circles are. Are there more engineers or rental property owners?

There are a lot of engineers out there. This says 19.6 million in the United States with a bachelors degree in science and engineering.

There are a ton of rental properties in the US. 43 million households rent (source), with 76% of those being 1 to 4 units (source), with 92.5% owned by individual investors (same as last source). This says there are 22.8 million landlords in the United States. (So the average is to own 1.3 units? That doesn’t sound like very many. I’m above average!)

Wow, so those two categories are extremely similar sizes. Roughly 20 million people in the United States, 8% of the adult population.

How Much Overlap?

This is where things get tricky. I don’t know that we are going to come up with an accurate answer, but let’s dig in.

If the two variables (rental investor and engineer) are not related at all, we would expect that 8% of engineers own rental properties and 8% of rental property owners are engineers.

It has to be way more than that.

I would guess 50% of rental investors are engineers. However, since the two groups are the same size, would I state that 50% of engineers own rental properties? No way.

Unfortunately I don’t know if the census data allows for doing an AND on two different variables like this. That would be ideal.

If we really cared, we would poll a statistically significant portion of those groups and extrapolate.

Unfortunately this is as far as we’ll go for now.

Overlap in Traits

My anecdotal evidence talking to dozens of rental property investors points me towards that 50% estimate.

Simply listing the characteristics of an engineer and a rental property investor also point us towards significant overlap. The stereotype of both are nearly identical.

Both are good with numbers, logical, and prefer tangible things they can touch (as compared to options trading or theoretical physics).

How many people are good with numbers? Comfortable with math? I bet shockingly low. That trait alone is likely highly correlated with engineers and rental investors.

What about you?

Help me gather a bit more data.

I know what it is like to be an internet lurker, but this time, actually leave a comment!

Do you have any rental properties? How about an engineering background (even if not employed as an engineer)? What would you estimate is the overlap between rental property investors and engineers?

Photo: Kevan

How Many Battery Packs Would You Buy? A Thought Experiment

March 8, 2017

The screams slash through the air like a papercut. You rip your eyes from your iPhone and quickly assess the situation.

A cable car is barreling down a San Francisco hill with no brakes. “This is going to end poorly” you think to yourself.

The intersection where you are standing is clear, but the next block is crowded with pedestrians. Some will be able to get out of the way, you estimate five will be crushed. There might even be a car or two in the runaway cable car’s way and the owner might not have a reliable repair shop to contact (similar to the ones who do auto repair in Lakewood) or even insurance per se!

And that’s when you notice it – a lever that turns the track. If you pull it, the cable car will make a right turn at the intersection, before reaching the crowd.

The good news is this is route has fewer people in the way. The bad – one person will surely die – an elderly man is directly on the track and his many years have taken a toll on his reflexes.

You must act now – do you pull the lever?

Photo: McGeddon

Duh, no brainer. Obvi. Kill him!

Right?

You save five from likely death, and just doom one to certain death! Simple math: 1 But would that make you a murderer?

TWIST
The lever is gone. In it’s place is a 300 pound man.

If you use your judo skills to fling him under the wheels of the cable car at the intersection, it will come to a stop and not hurtle into the crowd.

Do you do it? Does that change your thoughts on if it is murder?

Fake Situation, Real Takeaways

I love thought experiments (this one is the classic Trolley Problem).

They are unadulterated with the complexities and realities of our world. They exist just in your imagination, but often have profound takeaways for real life.

Did the twist above change how you feel about the situation? Did it change your behavior?

If you are creative enough, you can always find a twist where two logical and ethical people will diverge.

How about in reverse though? What if you and I disagree on something – how can I convince you my side is correct?

What if I invent a thought experiment that boils the complexities of our argument down to the most important components, without the complexities of real world optics? Fake situation, but hopefully you will have real takeaways.

The World of Rubidium Batteries

Imagine a parallel universe where solar is the only allowed source of power. There are giant solar power plants that provide cheap energy, but not necessarily when you need it. That said, it’s pretty easy to find a solar battery supplier so I guess it’s not too much of an issue.

If it is a cloudy day, you don’t get much energy from the power company. If it is night, you get zero which is one of the downsides to solar power.

You can’t just go somewhere to purchase energy at these times, you have to store it yourself. You can check out websites such as Rooftop Solar to look at the proper and safe way to store these.

In this world, there are only one realistic way to store energy – rubidium battery packs. And it will remain this way for all of time.

Governments and large corporations own a very small portion of the rubidium battery packs and it will remain this way. The battery packs are owned by regular people.

Half of the population own their own battery pack, which they share with their family. The rest rent a battery pack.

The Economics of the Battery Packs

The supply of rubidium is fairly fixed. Rubidium is difficult to mine – with labor and manufacturing costs, new battery packs trickle onto the market (and when the economy is going poorly, zero new packs are created at all). Luckily there is a huge pile of rubidium already mined and produced into battery packs. Just enough to meet the initial demand.

It costs $100k to buy a rubidium battery pack.

Who has that kind of money laying around? To encourage ownership, the government provides artificially low guaranteed loans, allowing you to put just 20% down for a 30 year loan at 5% interest.

They rent for $1k a month. After the loan payment, servicing the battery regularly, paying insurance, and other expenses that crop up – the owner pockets $100 a month.

Running the numbers – if you put $20k down, you can expect a 6% cash return per year. But wait there’s more…

The Value of the Packs Over Time

There is a little math involved, but it is important to understand. Don’t gloss over this section!

Since the supply of the battery packs is tied so closely to the demand, the price tracks fairly closely to inflation at 3%.

So next year the packs will cost $103k. It doesn’t always work out exactly – there are ups and downs with the economy, but over several decades, it will average 3% a year.

The result is neutral for the battery pack owners who paid for it upfront – compared to inflation the battery packs neither gain nor lose value over time.

But those who finance get some nice value upside.

The loan balance is decreasing at the same time.

How did the loan holder do compared to inflation? We have to convert his initial down payment to the value of the dollar in the current year.

$20k 10 years from now is $27k. So in +10 year dollars you have a pack worth $134k, put a down payment equivalent to $27k, and owe a loan balance of $65k. You made $42k. I like converting back to the original year dollars to understand it better, so you made $31k
15 years from now: $156k (current value) – $31k (down payment equivalent) – $54k (loan balance) = $71k. In original dollars: $45k
30 years from now: $243k (current value) – $49k (down payment equivalent) – $0 (loan balance) = $194k. In original dollars: $80k

That is serious money just through the combination of the renter slowly paying down the loan for you, the value keeping track with inflation, and the loan balance not tracking with inflation.

Financing is the Way to Go

If you pay upfront for the rubidium battery pack, you make a 6% return per year. Pretty solid.

If you finance it at 20% down, your return varies slightly upon how long you keep the battery pack, but it is roughly $3k extra per year. On a down payment of $20k, this is a 15% return + the 6% cash return = 21%!

Which would you prefer, a 6% or 21% yearly return?

How many battery packs would you buy? Share / Tweet this

The Common Complaints

I have to have renters for all the battery packs, what a pain. Is a small inconvenience worth it for a 21% yearly return?

Only 6% of the return is in cash, the other 15% is just a paper asset value I don’t get to spend. Sounds like this would be a benefit for you because saving isn’t your natural tendency.

The estimate of the expenses of owning a battery pack are off, insurance costs more.Ok so drop the numbers a little, still way better than any other investment options.

What if the renter abuses the battery, it costs more to repair, and is a huge nightmare? Or what if they stop paying? Or what if ? You have some serious mental barriers, it is frankly amazing you are capable of getting out of bed in the morning.

Don’t these complaints seem petty?

Back to the Real World

I set up this rubidium battery scenario to hit upon the basic math of investing in rental properties. Everyone has their own preconceived notions about real estate investing – hopefully this thought experiment helped you cut through some of the malarkey.

I want you to understand the benefits of investing in rental properties before you decide it is too hard.

One more nugget of math to show you it is worth struggling through any road blocks to figure it out.

Say you plan to retire in 30 years. $20k invested in the stock market with an 8% return per year, gives you $200k.

Put that $20k in rental properties at a 21% yearly return, you have $6 million. There is definitely work reinvesting the profits, which you can’t do continuously, so let’s adjust. If you lower the estimate down to $2 million, it is literally still 10x better than the alternative.

How many speed bumps would you fight over for a ten time better result? Share / Tweet this

Would you let petty complaints hold you back? How many batteries would you buy?

Photo: Thomas Hawk

Rental Property Umbrella Insurance – Am I in La La Land?

January 25, 2017

“Oh he’s off in La La Land.”

Before the movie La La Land became all the rage, the term La La Land didn’t mean Hollywood.

Merriam-Webster – la-la land: a euphoric dreamlike mental state detached from the harsher realities of life

Is this explained in the movie? I haven’t seen it. I just figured since the movie is so hot right now, tying an otherwise humdrum article to a beloved movie, by the transitive property of linguistics, you will love this article.

Am I in La La Land when it comes to my umbrella insurance policy?

Wait, What is Umbrella Insurance?

Let’s rewind a bit. Actually, let’s just point you somewhere else:

At the end of part 2 I was waiting to receive the fine print in the mail to see exactly what is covered.

Let’s pick up there.

The Fine Print

Part III – Exclusions

…

5. Business pursuits or business property of an insured unless covered by primary insurance described in the declarations. Our coverage is no broader than the primary insurance except for our liability limit.

Well that is pretty vague. Awesome. Now what?

A few more phone calls helped put my mind at ease. I do not believe my rental properties will be interpreted as a business property.

Two reasons. They are single family homes, not multi-unit businesses. And I have 4 or fewer, not a huge operation I run.

It isn’t exactly spelled out in the document though. Lawyers can argue anything they want – often laws or documents are created with enough wiggle room where they have creative license to interpret as they see fit.

At some point it comes down to trust. Do I trust that Geico will cover me in the event something goes wrong, not try to find some loophole? Yes.

However it isn’t a blind trust. I made sure I am following the intended use of the umbrella policy and verified the best I can.

Not Done Yet…

Umbrella insurance kicks in after your primary insurance. There are required limits for your coverage that are quite high.

I already upped my auto coverage, which was incredibly cheap.

However, I have to make sure I have $300k on my renters insurance (for where I live) and my homeowners insurance for both my rental properties.

Something tells me I don’t have nearly that much coverage…

How much is it going to cost to increase my limits?

The good news is this will provide an excuse to get quotes from a few different insurance providers. My rates have creeped up over the years and I’ve been too lazy to look into alternatives. Now is the time!

If possible, it might help to have the same insurance provider for both houses. They are in different states though, which could complicate matters. If anyone has a recommendation, please let me know!

Permission to be Blunt

What do you think … am I off in La La Land with my belief in my umbrella insurance coverage? Is it offering me the protection I hope it does?

Photo: Frank Kehren

Defend Your Money – My Decision to Get an Umbrella Insurance Policy

November 30, 2016

Defense wins championships.

Does everything have to be a sports analogy with you?

Sports is life.

Deep Brian, real deep.

Offense is exciting, it is what everyone wants to do. No kid dreams about the clock ticking down in the NBA finals, just a few precious seconds left, if only you can come up with one more defensive stop.

If defense is the forgotten half of the equation in sports, what is it for investors?

Protecting Yourself

As you rise up in the world, you have more to lose. I plan to one day be there, so better start planning now.

There are all kinds of different ways to limit your risk. Diversification. Savings. Profit margin on your rental properties.

Everyone should do those.

For rental properties there are other risks like the pipes exploding and flooding the house, or a tornado ripping off the roof.

Everyone should have a strong homeowners insurance policy.

But what else?

What Slips Through the Cracks?

Most lawsuits. Plus damages over what your standard policy covers.

The tenant’s dog gets out of the backyard because your fence isn’t good enough. It mauls a neighbor who sues you for loss of work damages of hundreds of thousands.
The water heater is turned too high and gives first degree burns, which results in a lawsuit.
That crack in the sidewalk the tenant complained about actually leads to them falling and hurting their back. Boom lawsuit.

These are worse case, horror scenarios that you hear as excuses for not getting involved in rental properties. They are one in a million type things that likely won’t happen, but it still isn’t a good idea to bet your entire financial future on it.

Yet most people don’t realize they are already at risk in their personal life. Do they just sit inside all the time?

Remember this commercial?

It seems kind of silly, but is just another example of a gap in your personal coverage.

But it doesn’t even have to be a gap, it could be covered the damage goes beyond your limits. Like causing a 10 car pileup or running into a particularly expensive building.

A couple more examples from the best intro article I have found:

Your daughter gets into a fight at school and punches another girl, breaking her nose. The girl’s parents sue you.
You send sandwiches to your son’s school for a field trip lunch. Several students become sickened with food poisoning and their parents sue you.
Your teenager throws a party at your house while you’re out of town. Someone brings alcohol to the party, and one of the party guests gets arrested for driving under the influence on the way home. You get sued.

Somehow the worst case, horror scenarios for children don’t stop people from having them. Just for rental properties.

An Umbrella Policy

This is where the umbrella policy comes in. It acts as an umbrella over all your various insurances in your life. Homeowners, car insurance, you name it. If you do enough research and choose the right policy, you might even one that reimburses you for a quick car maintenance, or some major repair work around your house.

You can think of it as a catch all.

Of course there are things that are excluded and tons of fine print. For example, if you do the act intentionally. Or if the damage is caused by war.

It isn’t perfect, but the good news is it is affordable. Talking with Michael at Financially Alert and doing some initial research online, about $25 a month will provide $1,000,000 in coverage.

Wouldn’t an LLC For Rental Properties Do the Same Thing?

Many rental property investors hold their properties in LLCs. This is another way to limit your personal risk – rather than the tenant suing you, they would actually be suing the LLC. Worse case scenario is you lose the LLC.

So some people do complicated multiple LLCs with 2-3 properties in each. What a headache.

Furthermore, in California this is a horrible option because each LLC is $800 a year. Ouch.

In my mind, this is putting the cart ahead of the horse. If you live outside of California and setting up this structure doesn’t dissuade you from actually getting started with rental properties, good for you. But it doesn’t make sense for my current situation.

Starting the Research

I’ll admit I don’t know a lot about umbrella policies right now, but I am going to start learning. One of my friends suggested that I should take a look at selectquote insurance or other similar ones to learn about various policies. Anyhow, I have the goal of taking an insurance policy by next month.

I’m curious to hear from the community – Do you have an umbrella policy? If you do, can you do, please share any recommendations. If not, does this article change your mind?

Photo: Ben