Have you ever heard of the space time continuum? It’s a very hard to imagine way of viewing the universe used by physicists like Einstein. The idea is that in addition to the 3 dimensions of space that we are all familiar with, there is a 4th dimension of time.
Most physicists believe time can only be traveled forwards though. You can’t go back in time like you can move forward in space, then head back to where you were.
Believe it or not, this thinking just might be relevant to investing.
Money-Time-Risk-Return Investment Continuum
Let’s create our own continuum for investments that includes money, time, risk, and return.
Mo Money Mo Problems
Having more money is a good thing (I like money). But it can become a burden at some point – good thing most of us will never have to worry deal with it!
If you are investing $1, what kind of options do you have to invest and what are the returns? Pretty much just putting it in the bank with a lousy interest rate. If you are investing $1k you have different options with greater returns. $100k even more options with greater returns. $1M even better. Then at some point, say at $1B, it gets worse there are few places you can put all that money to work. Of course, you could get a financial advisor to help you make better investments. But, sometimes, even these brokers and financial professionals can make errors in investment recommendations, which can cause you huge financial losses. Fortunately, you can approach a securities lawyer from the likes of The Law Offices of Robert Wayne Pearce to seek the deserved compensation in the event that you face any financial losses made by the financial professionals.
Time is Money
You could put $1B to work just like the investor with $1M, just do it a thousand times. That takes a lot of time and effort.
The average investor can usually put in more time to find a better return. This might mean researching and finding a way to invest in small private companies or doing your own real estate deals. However, there also automated trading apps in markets like cryptocurrency, such as these Bitcoin Up Erfahrungen, for example. This will save you time as you don’t have to do the investing yourself. On a similar note, more and more people tend to see cryptocurrencies as a good investment. These days, people choose to buy cryptocurrencies, like Bitcoin, Ethereum, and even Dogecoin, with the hope that their value can rise in the future, leading to them being able to cash them out later (visit https://www.coin.cloud/blog/how-to-cash-out-dogecoin for information on how to sell cryptocurrencies.)
High Risk, High Reward
Riskier investments should have a greater expected return, otherwise why would anyone take on that risk?
Lending money to a stable company like Walmart might return 3% and a “who knows if it will survive” company like Yelp might return 11% (with a small chance you get zero, so expected return of something a little lower). This is generally true across all assets: stocks, bonds, real estate, peer to peer lending, etc.
Let’s Graph It!
For a given investment, what is the money, time, risk, and expected return? If you were to graph all possible investments in 4 dimensions, you would be able to visualize the best return for money, time, and risk.
Too bad that’s hard and this is just a thought exercise. If you are thinking in terms of all these dimensions, what is the best investment for you?
Finding Your Advantage
I bet you don’t have a hundred million dollars to invest, where you can push people around and name your terms.
I bet you aren’t an expert at understanding risk, able to notice the flaws in the models of Wall Street.
But you do have time. If we had the 4-dimensional graph, I would imagine there is a sizable bump in expected return by devoting 1 hour a week to your investments.
If you could take your investments from a 8% expected return to 20%, would that be worth an hour a week to you? This is why I chose rental property investing.
Revisiting Space-Time and “Time is Money”
Remember when I said at the beginning that within the space-time continuum, time only travels forwards? You can’t go back in time.
People generally accept the statement that time is money. Time can be easily turned into money, but the opposite isn’t really true. It is much harder to turn money into time. Just look at the richest people in the world – they are running around more stressed out than the rest of us, not sitting on a beach!
With rental property investing there are always more responsibilities you can take on for a greater return. Landlord work, handyman work, increased effort sourcing deals, more aggressive negotiations to only purchase at extreme discounts.
For extra effort might push your return from 20% to 25% with another 1 hour a week per property. Unfortunately it doesn’t scale that well at 5+ properties. Since it is hard to turn money into time, I jump at the chance to pay for someone else to handle those responsibilities.
That’s why I chose turnkey rental properties. I get the benefits of much higher returns through rental property investing, but still fairly low effort.
Managing Risk
Some people have bad experiences with turnkey rental property investing and will be happy to share their nightmare story with you. It is an industry with hundreds of small operations fixing up and selling houses to investors – and many suck.
I could navigate this on my own, but there is certainly a little risk involved. Instead I think it is smart to go through a reputable national marketer like Norada or Jason Hartman. They both have a decade long reputation to maintain and much more experience vetting turnkey providers than me.
The purchase price might be ever so slightly higher than I could find on my own, but I view this as a trade-off between the money and risk dimensions.
Is Rental Property Investing the Perfect Money-Time-Risk-Return for You?
Everyone is different and will come to their own conclusions. For example, maybe spending an hour a week to go from 8% return to 20% return isn’t worth it in your mind. Or maybe you aren’t comfortable with the risk of being directly in charge of your own investments.
For me, rental property investing represents the sweet spot of the theoretical money-time-risk-return continuum. What do you think?
Photo: Etahos
Graph: Jon Waterschoot
I prefer a close rental. I can do my own management and maintenance and then I can exponentially increase my cash flow.
Absolutely, everyone has their preferred sweet spot.
On the money-time-risk-return scale, doing your own management and maintenance is less money and risk (of someone else messing it up), but is an investment of your time. So exponential returns if you just evaluate it just with money dimension, but harder to quantify with time.
It definitely makes sense if you have the time and enjoy doing it!
Agreed, choosing whether to manage yourself or hiring a property manager definitely depends on the person and how much effort the person is willing to spend. I’m in the manage yourself boat.
On a typical month, all the manager is doing is collecting rent. To keep the math simple, rent = $1000/month, manager fee = 10%. That’s paying $100 for collecting a rent check.
Now of course, the property manager also takes care of other things like finding tenants (marketing, screening, etc) and has a list of contractors available for maintenance.
Tenant screening happens once every year or 2. I like to screen my own tenants.
As for maintenance, I’m assuming the owner isn’t handy and doesn’t do the repairs himself like No Nonsense Landlord. The maintenance costs are passed on to the owner so the benefit of a property manager is that he/she should be able to offer lower rates than if you seek out a contractor yourself. The frequency of repairs is difficult to predict so this will largely depend on the conditions of the unit. On a typical year, I see about 1 or 2 minor upkeep jobs so for me, the cheaper rates a property manager may be able to get doesn’t offset the management fees.
Good points. There are definitely people managing rentals from thousands of miles away. I have considered it too with much the same thinking you just laid out – am I wasting $100 a month?
What keeps me from trying it is viewing it as a part time job. If someone approached me with these responsibilities and told me I could make $1200 a year by doing it, would I take the job? Nope. I think my time right now could be better spent elsewhere. But I’ll keep evaluating, maybe it will make sense for me in the future.
Are any of your properties too far away to take care of everything yourself in person?
Not too far, the farthest is ~1hr away. For that property, I collect rent online. For maintenance, I made friends with a super of a nearby building who helps me with the repairs. I ship parts directly to him. Win win for both of us since I get the repairs done cheaper than hiring a contractor. He picks up some extra cash and isn’t going out of his way since he’s in the area anyway.
Great move – establishing trusting relationships is huge in real estate. There are many opportunities for win-win arrangements, which is exactly what you created.
I guess it’s like in every other investment in which if you don’t have the expertise, you have to seek help outside, and that may cost you (sometimes more, and sometimes way more).
Exactly. Better to pay it up front than to assume you know everything and risk losing way more.
I hate to pile on here, but I also think owning and managing myself is the better way to go, too. I’m pretty handy so I can fix a lot of things myself without having to hire it out, and I find that if it’s above my pay grade, I can still find someone to do the fix for about the same price as a property manager would find. If you have a huge rental property (like 20+ apartments) that is professionally managed, sometimes you can catch a break by having the management company’s repair guys come out and do a minor fix at a reduced rate, but if it’s plumbing or electrical or something more serious, I’ve found that they just hire it out like I would have to do, only they’re less concerned about finding the best price on a contractor because it’s not coming out of their pocket.
The one advantage that I see for the turnkey rentals is that you can get into cheaper markets, so you can get your investment going for a smaller down payment. In Orange County, California, it’s impossible to find a low down payment option that will have a positive cash flow. If you live in an expensive area, and you want to manage a property close by, you have to have a good chunk of money set aside to even get your foot in the door.
There are tons of pros and cons going both directions, which could fill a whole article and then some.
Great thoughts! The cheaper priced areas is definitely true.
If I did happen to lived near my investments, I would probably manage them like you and No Nonsense Landlord. I just don’t want people to think that is a requirement in order to invest in rental properties!
I’m also going to put in a vote for self-management, but with a twist: I contract out all maintenance to a local on-call repair company. It took me a while to find this solution, but it works wonders! Tenants call the maintenance company directly with any repair issues so I never take those calls (they offer a 24/7 hotline). The maintenance company assesses the problem and just fixes it if it’s under our agreed-upon “do not exceed” amount, but for bigger jobs they call me with a quote which I can then approve or shop around. Best of all, I only pay for actual work done so there is no monthly charge – i.e. if there are no repairs that month, then no invoice is due. I find this cuts down on 90% of the worst dirty-work of self-management. I would highly suggest to check your local market for a solution like this if interested in self-management!
That’s a great idea, didn’t know that existed! If I were to search for it in a specific city, is the term “on-call repair company” what I’d be looking for? Are there any other names they go by?
Self-management from afar just seems to be getting easier and easier with all these tools. Maybe I’ll try it someday …
How would you handle showing a place to potential tenants, giving keys, etc?
That is something that would have to be worked out. There are more ‘on demand’ property management arrangements that are flat fee rather than percent of income received. For example showing the property to a perspective tenant might cost $25. There are becoming better resources to manage this too, I just heard about one called https://www.hemlane.com