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?