Mindset

You ever hear that story about boiling a frog?

It goes, if you put a frog in a pot of boiling water, it will jump out. But if you put a frog in cold water and slowly heat it to boiling, the frog will stay in the water and die.

Wow, morbid opener Brian – everything ok?

The point is you don’t notice changes that happen slowly, but they accumulate over time. Don’t ask “is this situation much worse than yesterday?” Instead step back and view it objectively.

Instead of killing a frog, let’s build a positive example.

Inheriting Rental Properties

We are looking for a situation where if you suddenly get something great, you jump out like the frog. But if you slowly build up to something great, you stay in.

There has to be a negative aspect to it that forces you to jump out. At first glace, you don’t know how great it is and only see the negatives.

Imagine inheriting a portfolio of 20 rental properties with zero real estate investing knowledge or experience.

You know there is $550k in equity and there is an investor who will give you $500k for all of them as a package. No hassle even selling them individually. No need to learn how to manage rentals and do repairs. Besides, you are retiring soon and that $500k will give you a nice cushion for your 4% withdrawal rate.

So you get out as quickly as possible. You sell the whole portfolio.

Slowly Gifted Rentals

Instead imagine you are gifted a rental property. You know it has almost $20k in equity, but if you sell it, that won’t have much of an impact on your life.

So you decide to keep it and continue renting it out. It is kind of a hassle and there is a lot you don’t know, but a property manager does most the work and you can always get advice later if you run into a sticky situation.

Then next year you are gifted another rental property. Ok, not too different, you barely spend any time worrying about the first property.

Then the next year you are gifted another. And the following another. And so on for 12 years.

As you build up these years of experience, you understand the value of the monthly cash flow and accumulation of equity. So even though it ends up taking more of your time as you progress towards 12 gifted properties, you keep with it.

12? Don’t you mean 20?

We want to end up with an identical situation to 20 properties with $550k in equity. If you were gifted properties for 20 straight years, you would have way more equity than that.

Instead, you are gifted 12 properties over 12 years. At that point you know you won’t receive any more gifts, but if you reach 20 properties you can retire on the cash flow.

So you refinance (or 1031 exchange) the first 8 properties into 8 more. Now you have 20 properties with $550k in equity.

The end condition is identical, but you understand it much better with 12 years of experience. You know it is some work, but the benefits are worth it. So you keep the rental portfolio, retire on the cash flow, and keep building equity wealth for years to come.

Accumulating Good is Better than Sudden Great

Each individual property you received barely pushed the needle for your net worth. It was merely good.

Gifted $500k at once? That is great. Life changing.

Yet you would take a different action because you don’t realize how great it is. The thought of managing 20 rentals and learning everything at once is overwhelming – you jumped out.

Stringing together good results, year after year, is better than getting rich quick.

Most likely you won’t be gifted properties, but you can build it up on your own. Maybe you won’t be able to get one rental per year at the beginning, but each one you add makes a difference.

What do you think – is accumulating good results better than a sudden great result?

“I’m not scared, I just don’t want to do it” says the kid at the top of the water slide. Ya sure …

Do you pull the same thing now as an adult?

“I don’t have a fear of public speaking, I’d just rather not do it.” Uh huh. What other things are you avoiding because of a hidden fear?

Believe it or not, talking on the phone is a common fear that is key to overcome for passive rental property investing.

Why Would Anyone Be Scared of the Phone?

According to Cell Phone Deal statistics, 47 percent of Americans say that they can’t live without their phones. In spite of these statistics, many people are still afraid when it comes to attending phone calls. Some of these people might have a telephone phobia or something similar, but what about the others?

When it comes to phone calls, how do we all react? We don’t do it enough. The few phone calls we have are with our mothers and conference calls at work. Who wants more of those? (Mom, of course I want to talk more often I’m just making a point that other people don’t want to…)

We would much rather text for personal communication or email for work communication.

This might be because we are afraid of sounding dumb. The live aspect of the phone call with an immediate response includes more pressure – what if I say something stupid? What if I don’t know how to reply? What if I forget my next question?

Can’t I Just Send an Email and Get the Same Results?

Phone calls have several advantages. First, you can tailor the conversation specific to your situation. Phone calls are called synchronous communication, where emails (more on that below) are called asynchronous communication, both give you a result but they are different outcomes. To understand this better, websites like Loom can offer further insight into the pros and cons of these communicative devices in a more detailed way.

If you send an email with multiple paragraphs including the complete background of your unique situation, do you think anyone is going to read it, or just skim it? Are they going to craft a reply specific for you, or copy and paste from a template?

On the phone, there is a greater bandwidth. You can provide background information and address your concerns much faster, with the guarantee that someone is paying attention.

It is also much better for tough conversations, like interviewing or negotiating. Can you effectively interview someone over email and decide to trust them with your business? If you ask for a better price over email, how easy is it for them to just send a perfectly crafted reply turning you down?

What Does This Have to Do With Rental Property Investing?

Our goal is passive income, which means others do a lot of the work for you. There will be many people on your team: lenders, turnkey rehab companies, property managers, insurance providers, and more.

There is a lot to know and asking experts your specific questions is the fastest way to learn.

There are several difficult conversations, like interviewing property managers to decide who you trust. Or negotiating the repair work with the turnkey company. It’s not effective to have these conversations over email, you will have to get on the phone!

Examine Your Behavior

Often the only way you know if you are scared of something is to observe your behavior. Most likely talking on the phone doesn’t give you an anxiety attack, but notice your actions. If it does give you an anxiety attack, you may want to research into ways that can help reduce that worry. Resources such as Mankind Dispensary may be the right pathway to take, but as always, discussing this with your primary healthcare physician before doing anything is paramount.

Do you put off a phone call you need to make for days or weeks? When you do finally make the call, are you as short as possible, often realizing after you hang up you had another thing you wanted to discuss?

Have you asked tough questions over the phone? Are you comfortable with silence or do you just keep rambling on?

This is a skill that will improve with practice. You don’t even have to apply it to rental property investing immediately – Ramit Sethi has a bunch of word for word scripts you can use to negotiate your phone bill and car insurance.

Ultimately, there is no denying that switching your telephone service provider can save you a significant amount of money. For example, a friend of mine recently switched to a satellite internet bundle that includes both telephone and internet services. Quite often these types of packages are more affordable than opting for services from different providers. Moreover, with satellite telephone and internet bundles rising in popularity, it is well worth researching whether making the switch could help you to secure a more affordable deal.

Start with the Right Mindset

First realize how irrational this fear is and commit to facing it head on. Set the goal of improving through practice, not perfection on day one.

With rental property investing, you can start with “throw away” leads so don’t worry about sounding dumb. If you mess up you never have to talk to them again. For example, how many hundreds or thousands of lenders are out there that work with investors? Practice first with one you aren’t likely to go with anyways.

It might help to write out the exact questions you want to ask ahead of time. Add to your script as you learn new questions to ask.

If you really don’t know where to start, talk with one of the national marketers of turnkey properties who have investment counselors. They are more than willing to talk about the entire investing process in the hopes you will purchase through them. I asked so many beginner questions in 2011, I am amazed how much time they spent with me. If you want to connect with the same counselors I work with, let me know.

With a little effort you will quickly improve. You’ll no longer procrastinate your phone calls and be able to learn much faster by asking experts your exact questions. You’ll be able to evaluate the differences between multiple providers and pick the best one for you.

Have you noticed you are hesitant to pick up the phone now that email and texting are our primary digital communication? What real estate phone calls have you learned from the most?

Cats are curious creatures.

Scaredy-cat is an expression because sometimes cats are afraid and timid. Yet other times they are bold adventurers, climbing to the highest highs and roaming far beyond their home, exposing them to many dangers for just for the sake of exploration.

Human behavior isn’t as far from animal behavior as we like to think. We live in a structured environment and don’t have the danger of predators or starvation. But rather than a blissful existence, we make up all kinds of fears that are irrational in comparison.

These fears won’t kill us, but they will hold us back.

The Greatest Fear

One of the most common fears in America is public speaking at 28.4% of the population. How exactly is that going to hurt you?

There are no physical dangers so we naturally imagine social fears. For example, fear of embarrassment in front of a large crowd. Some people tackle this by taking public speaking classes to help with their nerves or they may look at using CBD gummies UK products, for example, so they can calm themselves down before getting on stage.

From that same study, 37.4% are afraid of running out of money. I would bet that the proportion holds regardless of income. So roughly 37% of people who make $30k have money fears and 37% of people who make $100k have money fears. Same with $250k. Maybe it’s irrational, but that doesn’t make it false.

There are a ton of these little human quirks from made up fears. For example, losing $100 is over twice as painful than gaining $100 is positive – our behaviors reflect this loss aversion even if logically it doesn’t make sense (see also prospect theory).

Can you identify areas in your life where your fears are causing you to behave irrationally?

Side Note: My favorite book on behavioral economics is Predictably Irrational. If you read it and come away believing in the Efficient Market Hypothesis, please never visit this website again.

Facing Uncertainty

Anyone can make a decision with perfect information. Yet this rarely happens in real life – you can’t be certain how the decision will turn out until after you make it.

Visualize this as a hike through the woods to the top of a mountain. When you start, there is just one path, but quickly it branches into several options. There is more than one way to reach the top, but some paths will not get you there. Should you even start on this journey?

The best decision makers realize their blind spots and forge ahead keeping them in mind. As new information comes in, like the path turns and starts going back down the mountain, they can adjust their plan. They know there is uncertainty, but it doesn’t hold them back. They are confident in their abilities to pull in new information as they go and that they will reach the goal even if the original plan isn’t perfect.

This is uncomfortable. We would much rather know exactly what the entire journey would look like before taking the first step.

It is a learned skill to be able to push your comfort zone.

How can you take action even when you face uncertainty? When do you have enough information to get started on the path? How can you keep learning along the way?

Adjust Your Mindset

Many reading this are overachievers, like myself. This group has a greater tendency to be control freaks – we want to be in charge and handle everything ourselves because we can do it better than anyone else.

We have high expectations and aren’t used to failing. The idea of starting on a path without complete certainty how it will wind through the woods to the top can make an overachiever feel powerless. So we take less risks and stick to things we know well.

Let’s tweak your mindset. View the journey as an opportunity to grow. All the uncertainty that exists is something that you will learn along the way. An opportunity for a power-up.

Yes, the first journey is uncomfortable and scary. But the next time you want to go to the top of a mountain, you can draw from your experience and it will be much easier.

Combat the fear of the individual journey by taking a step back and looking at a lifetime of journeys. Whether you succeed or fail this time, you will be better equipped for journeys the rest of your life.

Applying This Mindset to Rental Properties

There is an incredible amount to know about investing in rental properties. Mortgages, contracts, property management, taxes, cities, neighborhoods, schools, crime, demographics, legal entities, insurance, capital expenditures, rehab, and on and on.

You don’t have to be an expert in order to take the first step on your journey.

The first time you purchase a rental, shoot for the most conservative path possible. You might not have the upside that an expert investor will have on his or her deal, but you will learn a lot.

For me this was purchasing turnkey, where someone else does the purchasing of the distressed property and rehab work. Rather than seeking out this company directly, I went through a national marketer who vets the turnkey companies and provides education along the way in the form of an investment counselor.

Is this the perfect way to go? No, but I protected my downside and got started on a conservative path. I’ve learned a lot so far and can one day apply my experience on more advanced paths.

If you haven’t purchased a rental before, how are you going to take action in the face of uncertainty?

If you have purchased your first rental property, how did you make that first step attainable?

Have you ever heard of someone wearing a tin foil hat to protect them from mind control, radiation, or aliens sucking out their brains?

Yes, this is a real thing that some wackos believe. I love a good conspiracy theory, but stop short of actually believing them. (My favorite is the Denver Airport Conspiracy Theory – I try to watch it whenever I am flying through there, makes travel fun.)

I hope you aren’t wearing any tin foil right now. If you are, you can get a stylish upgrade with this Kickstarter campaign.

But are there other areas in your life where you have an irrational fear? Is it holding you back?

Fear of Managing

The biggest misconception about rental property investing is that you have to be a landlord and it takes a lot of work. People are frightened of this.

Good news – you can pay a property manager to do most the work for you! You don’t have to be a landlord, you just have to manage the manager.

Yet this is still scary to some people. What if they do a bad job? What if they charge too much for expenses? What if I have to fire them? What if what if?

Yes, there is a bit of a learning curve. I am not very far along this curve myself and things are working out fine. As I get more experience I’m sure I will improve my skills at identifying a great property manager and learn better ways to work with them. It’s ok to not know everything before getting started.

Gosh that still sounds annoying, why would anyone want to do that? Simply because the benefits outweigh the effort.

Before saying “this isn’t for me”, shouldn’t you know the results you are passing up? Can you make a 20% to 30% return elsewhere without any effort? Is a little bit of your time worth these amplified returns? Absolutely.

This effort required is actually a benefit – it keeps the masses away! Do you think the opportunity would be there for you or me if Wall Street could high frequency trade rental properties? Take advantage of this.

Everyone Hates Taxes

What if your tax bill went up from $20k to $25k? Would you be upset?

How about if it was because your income went from $80k to $100k? Still mad?

Can the irrational fear of paying more in taxes actually hold you back from earning more? Yes, it certainly can, which is why many people often consult tax advisors (perhaps they search for them by looking up keywords like tax consultants near me). It is true that most people are oblivious to the tax deductions they are eligible for. That is why taking the help of tax advisors can help them to save taxes and ensure that they are done correctly.

Anyway, coming back to the topic, I was discussing how crazy this is (the matter of tax) with my friend who does estate planning (the kind you can see on this website). Here is what he said:

Agreed, although my recent experience has been that this is a big mental barrier. I have several clients who have received ridiculous offers for their properties but have difficulty accepting the capital gains. It’s a great problem to have because it means the investment did well, but there’s a mental barrier that taxes are bad (which they are, but not if it means you had a huge gain). It’s not rational, but a couple of the clients have been extremely rational people, including the world’s most stereotypical engineer.

How it Applies to Real Estate Investing

When you invest in rental properties there are all sorts of tax advantages. Obviously consult an expert, not a random dude on the internet, but here is a quick explanation of how it works with capital gains.

A capital gain is when the price of your asset goes up. With a stock, if you buy at $20 and sell at $30 a couple years later, you have a capital gain of $10. You will pay taxes on that profit.

Same with real estate. Except there are some tax breaks you can take advantage of.

First, you can sell a property and buy a new one while paying no taxes with a 1031 exchange. So you can trade up and go from high effort properties like low-cost C neighborhoods to a class A duplex that requires less work. However, make sure to do your share of research into things like what a duplex is and how investing in it could be fruitful for you.

But all this time the potential capital gains are growing. That means you made money and if you sell, you will have to pay taxes on it.

Or another option is to not sell and hand it off to the next generation – they won’t have to pay all those years of capital gains. It goes away as the buy price “steps-up” to the price upon death.

Yet these potential capital gains taxes hold some people back from investing in real estate! Unfortunately for some, they have back taxes that are unable to pay off to get on the real estate ladder, as they may have made some wrong choices a while ago, stopping them today. You can learn more about how to deal with these back taxes by checking out websites such as taxrise.com and reading their articles on this area.

Is Your Fear Irrational?

Is a potential issue down the road holding you back from ever getting started on your journey?

The thing you need to ask yourself is – when I reach this obstacle, will I be able to figure out a way to solve it? Notice this is different than asking if you can solve the obstacle today.

You will learn a lot on your journey and be able to consult experts when the time comes. You don’t have to know everything right this second.

I encourage you to get moving on a conservative path to start your learning journey. Hit the bunny slopes first and gain valuable experience. Don’t look at an advanced obstacle far down the line and let it stop you from ever getting started.