Remember the “we are the 99%” slogan? It was everywhere just a few short years ago.
It’s about income inequality. The richest 1% of people, with 25% of the income and 40% of the assets, making decisions through the financial crisis that hurt 99% of the people. A lack of regulation leading to the mess, bailing out banks, quantitative easing, and more.
The Occupy movement peaked in 2011, but Bernie Sanders (and Donald Trump to a lesser extent) showed it is a powerful message that won’t be going away any time soon.
Movements are difficult for me to wrap my head around – What do you think you are accomplishing by living in a tent in the park?
Maybe I’m just too rational, but I do know extreme income inequality is unequivocally bad for the average person. Taken to an extreme, it leads to a class system – haves and have-nots, with little mobility between classes with little or no chance of the average person coming into riches or developing beyond their class.
Things are getting worse. The rich are getting richer.
What if we are responsible? What if the actions of the 99% are the reason the 1% keep getting richer?Tweet this
Voting with Your Money
We have been told our votes put people in charge to act on our behalf. Wouldn’t that be great, but unfortunately it isn’t true.
In today’s world, the economy is king. Every elected official, no matter how powerful, bends to the will of the economy.
Do you think the president is going to make a decision based on your vote or the fact that a bank failure will kill jobs?
Do you think your opinion is more important than the dairy lobby’s opinion, who represent the interests of far more people?
Your real power lies in how you spend your money and your ability to make noise. We have seen a small vocal minority get recognized because of how much noise they make, but I’m not the type to join a movement any time soon.
Let’s take a closer look at voting with your money.
The Hypocritical Environmentalist
“I care about global warming, I am an environmentalist! I can’t believe the government isn’t doing something about this! Rabble, rabble, rabble!”
But what about:
- Amazon Prime delivering you packages multiple times per week in unnecessarily huge boxes?
- Flying your family somewhere for a long weekend?
- Eating red meat often enough to average over an ounce a day?
It is easy to have a disconnect between your view of yourself and your actions.
No judging, me too. It is natural to not dwell on the actions that contradict your view of yourself. If it does pop into our heads, we brush it off with ease. It’s called cognitive dissonance.
Perhaps your indignation about the lack of government action should be directed towards your locus of control. What changes can you make to your life, and how can your actions influence others around you to do the same?
Do you think there will continue to be hourly flights to Cancun if they are only half full? Nope. It is a business, they won’t lose money just for fun.
You are one small part of the economic system that is causing the issue.
Tiny Impact, Why Bother?
Small changes in behavior don’t have much impact on their own. So why bother?
You have more impact on your close friends and family than you think. Simply talking about your change in action (without forcing your beliefs on them like a teenage vegan) has the potential to change their behavior.
That’s where the multiplier comes in. Now your neighbor Carl is a disciple spreading the gospel of your cause. He knows other people, has a different family, and impacts those around him.
With any luck, the impact becomes exponential.
Back To the Rich Getting Richer
We took a detour looking at hypocritical environmentalist, but let’s look at something causing the rich to get richer.
We complain about Wall Street, we complain about corruption, we complain about CEO pay. Yet there is a mental disconnect with our actions.
Wall Street has that power because of the money. Why do they have so much money?
First, they are huge companies with huge revenues. You can switch from Walmart to your local grocer, paying a little bit more, but circulating more money in your town rather than the pocket of a CEO. That is a tough action to take as you are often sacrificing something (like paying higher prices or less selection). I want to explore another area that is win-win.
You are an investor in Wall Street. You are propping up stock prices with your retirement savings.
We all do it actually. Somehow it became the default way to save for retirement. “We have this mutual fund – give us your money and we will take care of the rest. Perfectly safe, nothing to see here.”
Some of us do index funds, but it is all the same. There is a fund fee, transaction fees, high frequency traders get their cut, and the money that actually makes it through that fee funnel boosts the power of the corporation. Empowering Wall Street every step of the way.
Why do we all do this? We believe it is in our own best interest and don’t know about any alternatives.
Some of it is effective marketing: telling us we can expect solid returns. Some of it is corporate trickery: 401k plans at work with limited options. Some of it is government intervention: tax breaks that influence our behavior.
But what options do we have?
Controlling Your Own Investments
An investment is giving money or other assets to earn a greater amount in the future.
This fundamental concept is obfuscated in the stock market. We don’t know why we get a greater return, we just hope it does. And it usually works out. Sounds a little like gambling – but that’s why we do index funds, to remove some of the risk.
What if you didn’t shotgun your money around Wall Street, and actually took your money to Main Street?Tweet this
What would that look like? Peer to peer investing, investing in local businesses, starting your own business.
Wait a minute – starting your own business is investing? Yes – you are investing both your money and your effort.
If you are willing to put your own effort in, whether identifying a non-default investment or creating your own, you have the potential for greater returns. If you do the same as everyone else, you can expect the same result as everyone else.
Of course, starting your own business isn’t easy but there are so many resources out there willing to help. If you are planning to start your own business, there are a few elements you need to consider. There will be a lot of paperwork involved, from any licenses or permits that may be needed to staffing capabilities and even finding appropriate premises. Not to mention, you’ll need various marketing campaigns and a well-designed website which is easy for visitors to use. However, resources like those on https://victoriousseo.com/services/off-page-seo/ will prove very useful when it comes to being visible online and reaching the desired target market. With their advanced SEO tactics, the webpage would be visible in no time. Plus, bringing on board other professional gives you the time to focus on what’s important for the business and push it into the direction you want, rather than taking on a workload that is too big.
Does that sound too difficult? What would you even do and is it worth it?
The Easiest Local Business
Investing in rental properties is the easiest way to become a local business person.
Just about everything involved with the rental is local – the tenant, the property manager, the handyman, the taxes, and more. Sometimes the mortgage and insurance too. I would always recommend using local businesses if you want to get into property. I spent ages looking at local property management companies and finally found the perfect one. The same applies to local electricians and insurers.
What makes rental properties an easy business? Everyone understands it and as long as people are living, they need a place to live. There is cashflow along the way, not just a black box of asset appreciation. It is a proven model.
There are an incredible number of ways you can be a rental property investor. You can invest a lot of your effort-asset, or practically zero.
Me? I pay for someone else to do most the work and consider my rental portfolio fairly passive (1-2 hours a month). And my properties aren’t even local – they are on the other side of the country. I believe I can earn a 20% yearly return, and I’m well ahead of pace so far.
Even though the properties aren’t local to me, I am still investing in small local businesses, not Wall Street. Someone found the deal on the house and referred it to a flipper rehab company. The rehab company used a team of contractors to fix it up. The title company does the transaction. The property management company is anywhere from a 1 to 100 person business. If anything breaks, then an experienced handyman or plumber (for example, Alpharetta plumbers) gets a call immediately. In such instances, they might be able to offer better assistance!
Each step along the way, a local business gets its cut. With index funds, Wall Street gets its cut at every step. Who would you rather support?
In the end, I achieve a much greater return by putting in a little bit of effort.
Is it Worth It?
That is for you to decide. It is hard doing something against the crowd. There are common objections that pop up, like it being too risky.
Is it really riskier? For a comparison you have to understand the risk of the default approach. Everyone with paper assets that can see their value disappear over night. No control in the decisions of the company. Huge exposure to lawsuits that drain profits. Not even producing cashflow, just hoping the stock price goes up. Do we believe there is no risk because everyone is doing it?
Understanding the investment and having complete control keeps the risk in check. Diversification is still important. It is possible with different markets and property types.
Hopefully rental properties can be your gate-way drug into more local business down the line. Maybe you want to take on responsibility and cut costs by managing the rehab yourself. Or starting a small property management company. Or even something outside of real estate entirely!
Start with the easiest business and go from there.
You have the power to stop the rich from getting richer.
I want to hear what you think.
What holds more power – your vote or how you spend your money? Do you agree changing the default way to save for retirement would remove some of the power from Wall Street? Would it halt the rich getting richer?
Do you agree rental properties are an easy local business to invest in? What are your objections? Too risky? Too much work?
That’s a lot of food for thought, Brian! It’s certainly an interesting question whether our vote or our spending is more powerful. One one hand, I think my vote is more powerful because it empowers my elected official to fight on my behalf. And on the other hand, my dollar certainly affects the economy and subsequently policy, etc. But, since you asked, I’m gonna still have to go with my vote. It may seem inconsequential at times, but I truly believe it makes a difference.
I don’t think rental properties are easy, but they are certainly worth the effort required to make a sound investment.
Easy has to be relative to something. Certainly not easy compared to an index fund. But evaluated as a business? Extremely easy. The business model is well defined and just about every aspect can be outsourced to someone else (handyman, property manager, etc).
You have experience starting your own company – are rentals easy relative to that? Can you think of an easier business to run?
Real estate is definitely easier to manage once it’s up and running!
I agree with everything you have detailed here.
Stock market investing and voting are both like hoping a property will appreciate once you buy it, where proper rental investing leads to guaranteed investment returns.
This may be why you observe a lot of engineers taking to rental investing. It’s easy for them to see how the numbers work out.
That’s true, great connection! This is definitely related to the last article about engineers being interested in REI.
Hopefully more people come to realize rentals have a far more guaranteed return!
Wow! Great post, Brian. I agree with Michael, there is definitely a lot to chew on here. From the beginning, I love the fact you are causing us to take pause and evaluate our actions and the consequences, both good and bad, of said actions. I think a lot of people could stand to benefit from this line of thinking. I also got a laugh out of your “teenage vegan” reference. Haha. My wife and I are exclusively plant-based, but not the least bit preachy. We take a “You do you, I’ll do me” approach.
As we’ve chatted about in the past, I am a big fan of the rental property model and even had a goal to pick up our first before turning 30, which I did late last year. Unfortunately, we were not able to make it happen before that (arbitrary) goal date. I do plan on investing in RE when the funds permit. On the other hand, our retirement funds (Roth IRAs and Rollover 401(k)) are all indexed. I am also a fan of the index fund strategy and think it definitely has its place.
Thank you for the (very well-written) thought-provoking article, Brian. Have a great weekend.
Thanks for adding your thoughts. I am also in index funds too, but think it should be one part, not the only way.
Glad to hear you got the first rental, it should get easier from there! Sometimes arbitrary goals help get things moving.
I’m actually a vegetarian myself, which might have something to do with me being allowed of making fun of them!
Oops … I just read my comment again. I apologize for the poor wording. I DID turn 30 late last year, I DID NOT purchase a rental. Haha. Hopefully sooner rather than later I can move investing in RE from the “did not” to the “did” column.
Oh got it. Hopefully soon. What is causing the delay – down payment? Free time? More education?
E) All of the above.
I have read fairly extensively about investing in rental real estate and feel pretty comfortable there. Also, I have heard of free time before, but what exactly is it? 😉
Primarily, the down payment, especially if attempting to invest here in So. Cal. I had previously thought of investing out-of-state but was frightened by the notion. I need to read up some more on your strategy. Investing out-of-state could definitely open up some possibilities.
There is never a good time, just have to find the time somewhere!
Let me know how I can help with the out of state research. I actually think it is less risky because the rents will be much higher compared to the purchase price. That gives you more cushion in case things go wrong.
I definitely boycott retail stores that don’t align with my values. I have no idea how much it really impacts them but I feel good knowing that I’m not helping agendas that I disagree with.
I would love to get more involved in real estate. My biggest issue is pricing seems way higher that I feel comfortable investing in right now. So I am on the sideline waiting until things cool off.
Great to hear you are voting with your money!
In my area prices will always be higher than I am comfortable with, which is why I invest in low cost cities like Memphis and Atlanta. I think this gives the best of both worlds – cashflow and passive!
I haven’t been to your website in a few months – it looks like things have exploded! Congrats! Have you kept to the 3 times a week posting schedule and do you think that is a big part of your success? What else?
Great article! The financial crisis really got me delving into the problems of our society. One of the things I did back then was stop investing in the stock market and start doing investing that I controlled. I didn’t buy any real estate, though I spent countless hours educating myself about it all.
Well, I did peer to peer lending and precious metals too. Not so long ago I was swayed by nearly everyone else in the personal finance world to once again put my money into stocks. It seemed no one else in the world wanted to starve the bankers of our combined trillions of retirement dollars.
Oh well, I tried.
That’s great you took the time to think about it! There is no reason you can’t do all of them. Even putting 10% in P2P, 10% in precious metals, 10% REI – it adds up to a significant chunk out of the hands of Wall Street.
Brian –
Great article. I really enjoyed it. I loved the idea that the 99% is actually responsible for the success of the 1%. It’s easier to say we’re victims, than to say the poor choices we’re collectively making has resulted in the other guy getting richer.
I’m always surprised that folks will put their trust in the stock market where they have zero control and will shy away from real estate where they can control various aspects such as property upgrades, lease rates, length of lease, tenant improvements, credit checks, personal guarantees, etc.
I think too many people are saving for retirement when they should be investing for their future. Those are two radically different concepts.
Thanks for reading Colin.
It is so easy to be a victim. Perhaps people even seek out the stock market because then they can place the blame somewhere else.
I like that – saving for retirement is different than investing for your future. I think Rich Dad Poor Dad hits on this pretty hard. Saying the rich don’t save money, savings is for suckers. Gets you out of thinking you can get there just by cutting costs rather than growing.
You covered so much in this article, it’s almost impossible to comment on all of it.
I might be that hypocritical environmentalist. I’m the only person I know who recycles Styrofoam and we compost regularly. If I see a plastic bag on the ground, I’ll chase it around in the wind nab it and recycle it. We’re on year 3 of our solar panels and they are great.
However, we also have two SUVs and eat plenty of red meat. I obviously don’t do everything I can. However, that doesn’t mean that I can’t be upset about government decisions that make more impact than I could in a million lifetimes. In terms of voting with your money, the government has trillions of votes per year, so my vote doesn’t matter much, which is a point that made well in the article.
In my real estate investing experience, getting into the game requires some help from Wall Street itself… the very banks that are the core of Wall Street. If I were paying cash for the properties, that would be different. However, in that scenario, I’d have to come up with at least a $100,000 to get started and that’s forfeiting years of tax advantaged retirement account savings (unless we get in to the self-directed IRA mess).
In that scenario you are working with almost no diversification. A well-diversified international stock portfolio doesn’t get sunk Enron or Herbalife get sued. It’s very unlikely that every company is going to go to zero.
At the end of the day, I have to shrug a bit and say, “It is what it is.” I have two mortgages with Wells Fargo and they saved me thousands and thousands by being the only company that would approve a HARP on each of them. If I tried to be perfect, I’d probably have no money at all.
I’m the hypocritical environmentalist too. Which is why I felt ok making fun of them. About once a month I go around the neighborhood picking up a huge bag of trash.
That’s a good point. Real estate investing still has a mortgage which involves Wall Street. Limited exposure, but not zero exposure. One of mine got sold to Wells Fargo, but that is the one I’m refinancing now. I even do my regular banking there just because it is easy. Adding to the issue, but “it is what it is”!
There’s a great episode of Adam Ruins Everything about hypocritical environmentalism called Going Green. It’s on YouTube now, but since it’s owned by a network, the video might not be legitimate. Not too many know about Adam Ruins Everything, but it’s kind of like John Oliver acted out.
I agree real estate investing might have limited exposure to Wall Street, but I think it has a great connection. We can go back to 2008 sub-prime collapse. Lehman Brothers didn’t survive it. It took government bail outs to get through it. The companies that were the hardest hit by the real estate collapse were Wall Street financial services companies… not McDonalds, Wal-Mart, or DollarTree.
If you are a wise investor, you might have done well. Still, it was hard to invest in that kind of real estate bubble. I feel there’s significant evidence to show it was created directly by Wall Street. Mortgage interest rates themselves are affected greatly by Wall Street.
There can be limited exposure to Wall Street, but there can also be a lot more than people think, in my opinion.
Thanks for the tip, I haven’t heard of Adam Ruins Everything!
I agree. A lot of the issues were created by Wall Street. I would argue the rates and ease of qualifying were artificially low, encouraged by the government. Still the rates / risk for banks would not make sense without government backing.
As a near-poor renter who has seen a lot of local NIMBYism and excessive housing regulation, I see NIMBY homeowners and their respective municipalities as the greater culprits here.
Landlords today have to operate in highly regulated and restrictive environments. At the same time, today’s apparently increasing concentration of ownership – a natural consequence of excessive regulation – and professionalization of property management pose hazards to renters. (Larger holdings facilitate higher rents and more rigid management.)
I think we need more real estate investors, not fewer, and I believe today’s crowdfunding platforms offer excellent opportunities for average people to invest in their own neighborhoods.
Glad to hear you think rental investors are doing good! I agree with you – as the barriers to entry become easier, more people will do it. This is everything from crowdfunding, research tools, and landlording software.
Hi Brian,
I’m a new subscriber. I found your article intriguing and well balanced. I live in California and have some equity built into some rental(s).
The situation here is I cannot charge rent for 1% of value for the most part. I can approach .0066% so it’s slim pickings. However, I would love to pick up another property or two.
My questions and challenge is would you still buy a high-priced property and rent it , (for above mentioned ratios, and actually rents could cover all expenses but no cash flow) or would you wait for prices to go lower, ? Or search a new RE Market? such as Out of California? What about if your properties tank 20% …
thanks,
Thanks for subscribing, great to have you here!
No I would not recommend rentals in California or another high priced market. If you can’t get 1%, you can’t really cover ALL expenses. Once you factor in tenant turnover (which involves a short vacancy, a bunch of small touch ups, and likely paying someone to find a new tenant) and big ticket items (new roof, HVAC, etc), you’ll find it doesn’t really break even on cash flow.
Timing an expensive market is something people think they can do, maybe they are right, but plenty have been wrong. I think of it as an unnecessary risk. There are great returns to be had in way more stable markets.
So yes, I would say look outside of CA. If the market drops 20% (which still might not be the ‘bottom’), you can certainly adjust your strategy. I still feel CA would be an unnecessary gamble (how far can it fall when the cost of replacement is still 50% lower?), but will look at more moderate markets like Dallas or Atlanta.
Thanks Brian.
Yes, we’ve been holding off purchasing new rentals. We got lucky and picked up most of them in 2009, and 2010 when the market was still digesting all the foreclosures, so with today’s rental rates we cover all expenses because our cost was so low.
Carlos
That is great! Calling it luck is wise – I’d be careful thinking you can reliably get that timing perfect again in the future.
It is probably a large portion of your net worth tied up in equity in a concentrated area. I also like the idea of a 1031 exchange into another market with better cash flow and more gently crashes. So many different ways you can go!