I am on top of the investing world!
Things are going right, I am so smart. No luck involved.
Detect any sarcasm there? Just testing your sarcasi-sensor.
I just finished my cash out refinance on my first rental property. $34k was wired into my checking account and it felt so good.
See: Cash Out Refinance on a Rental Property – My Actual Numbers
Less than 6 years ago I only put $20k into the property. Now I got that back, plus some, and still have the asset (including 25% equity). Whammy!
But I’m not letting myself get too excited about it. With high highs come low lows.
Don’t Wrap Your Identity in Results
Results aren’t always in your control.
Yes, I made a good decision on that property. In 2011 there was talk of a “double dip” recession or “lost decade” of returns.
Without some of the government intervention, it is quite likely those things would have happened. Did I control that? No way.
If I’m being honest, I’m only responsible for a tiny portion of the result. Most of the returns were thanks to things outside of my control.
I have two choices: either think I am a genius who can easily repeat my success, or acknowledge I got a bit lucky.
The problem with taking credit for things outside of your control? When there is bad luck, you think you are a loser.
Don’t pump up your ego too much on the highs, it will make the lows hurt much more.
You control the process. Continue to execute a good process and let the results take care of themselves.
How am I approaching my process?
Keep Buying, I’m Not Capable of Perfect Timing
If I got lucky on timing, maybe I should wait for the next crash and do it again?
If only it were that easy.
That is taking credit for the perfect timing before. I don’t think I (or you) can reliably do it.
Instead I’m going to keep methodically adding to my portfolio. Properties right at the 1% rule with enough cash flow to keep me in the game for decades.
I have to be mentally tough to ride out the lows. If I take credit for something outside of my control right now, odds are I will blame myself when the market hits a downturn.
The next property I buy, the first six years will not go as the one in 2011. That’s ok.
It might go up for 3 years before the market cycle dips down. Or it might begin later this year. Either way, I’m going to hold it for a decade plus, riding out the whole cycle, so it doesn’t matter that much. I just have to not panic or stop buying because things aren’t going well.
See: How to Visualize the Real Estate Cycle
Looking Forward
I’m not going to maintain a 31% yearly return forever. I believe it will likely settle around 20-25% after a whole cycle. That is good enough!
I’ll keep reporting my return calculations every six months.
I’m also thinking about doing a monthly update of everything I did in the month for my rental portfolio. A time log. I haven’t done this because I barely spend any time on it. But that’s the point – rental property can be pretty passive! Would you be interested in this?
I’m going to start looking into putting that cash out refi money to work with a new rental property. The deals aren’t as good as when I last bought 3 years ago, but I’m sure I’ll be able to find something that makes sense!
I want to hear from you:
How do you keep perspective when you find success you aren’t 100% responsible for?
How do you keep plugging away when things aren’t going well?
I decided a long time ago that the only two things I could control is how much I earn and how much I save/spend.
That’s why I don’t spend much time on the blog talking about investment or investment returns. I did try a quarterly update on my portfolio, but that go boring, and it really didn’t represent the whole picture…and to your point, my returns from one quarter or one year to the next, really don’t matter much in the long run.
I have several different forms of automated investments, that is what keeps me focused on process.
Deciding you can earn more money is a huge step most people never make. It is also one of those things where the process really should be the focus. Building a side business might show no results for quite a while, just keep plugging away. Same goes for putting in extra work in your day job. You won’t see the returns day 1, but keep it up and you’ll get that promotion / raise.
Sounds like we have a different outlook on investing. It is an area where I do believe I have some control, especially once I understood rental properties a bit better.
Having the opportunity for higher returns in investing is all about having an advantage. There are several that keep these single-family homes and sub-$200k multifamily a great deal for small timers like me. Mainly they are too much work for sophisticated funds to get involved, otherwise they would. Its a blessing I’m only investing a small amount of money, willing to put in a few hours of work, and have the patience to wait a couple decades.
I don’t think I disagree that you can have some control in your investing returns, but rather I believe that I have much more edge in increasing my income, which at this point has a much bigger overall impact that trying to figure out how to gain edge in my investments.
To me it’s about saving the largest nest egg possible in the shortest period of time. I could had focused much more on the investing side of the equation, but it would had taken much longer to acquire the net worth that I have today.
At some point the gains I can get from increasing my income will slow, and then I will shift to spending more time on trying to optimize gains.
But I am not there yet.
You are absolutely crushing it on the income side, so it is definitely working!
Did someone say “optimizing gains”? Where can I roll up for that party!?
I’m with you when it comes to keep investing. I know the focus of this is in rental properties, but I can’t help thinking of the stock market. The CAPE ratio is very high for US stocks right now, but I’m not pulling out of the market. I’m simply shifting to a more conservative portfolio than I would typically hold.
In real estate investment terms, it might be equivalent to buying properties in a different location where the value is better.
If my math is correct, I think that if you were able to get a consistent 20% return you’d turn your initial $20,000 into $4,747,526 in 30 years. Also a consistent 25% return you’d turn that $20,000 into $16,155,870 in the same 30 years.
At 4% inflation you’d need $64,867 to have the buying power of that $20,000. Inflation almost becomes a round-off error. What if you could add a new $20,000 from savings every few years?
I’m rooting for you!
True – there is always a way to translate the thinking into the stock market, which most people think they understand better…
That 30 year outlook sounds pretty good to me! Unfortunately I don’t think it will exactly happen that way. My strategy will have to change as I have more to invest. If you are just investing a couple hundred thousand dollars, these single family homes are wonderful. More and you would have to devote more time or switch to multi-family. Perhaps own some outright. Or stop because I have enough.
I think most people probably do understand the stock market better… or at least the parts of it that they need to know. If you were to pick-up a Money or a Kiplinger’s how much of it is devoted to stock investing vs. real estate investing? I can’t even remember the last time they had a real estate investing article. People also tend to have easier exposure to the stock market through 401ks. I feel that you can read a lot about real estate investing, but at the end of the day, you have to just jump in.
There’s also a local aspect to real estate investing. A share of Vanguards Total Market Index (VTI) is the same nationwide. Real estate investing in my area is different than investing in yours. I think we can have the same conversation about VTI, but it is difficult to have the same one about our rental properties.
If you are able to get a 20-25% return, I think you could probably hire people profitably to manage what you do (a level higher than a property manager). Plus it seems you have some connections in place to identify new properties. I suppose that’s a fun “problem” to think about ;-).
Good point. I just meant that being able to discuss the stock market and the mechanics can give a false sense of understanding what makes it tick. So in terms of understanding how to profit from it, they are no better off.