Why Every Investor Should Treat Real Estate Like a Business, Not a Hobby
When my father first began investing in real estate, it didn't go particularly well. As he recounts it, he made pretty much every mistake in the book: buying too high, not doing enough due diligence, not screening well enough, etc.
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One of the big mistakes he told me about was seeing real estate as a hobby. At the time, he was a campus pastor and simply bought, fixed and rented houses on the side. He would sign rental agreements with the tenants on site or even at his own home. After all, where was he to go? He didn't have an office or anything; he was just getting started.
The relationship he formed with his tenants devolved into something closer to friendship than that of landlord and tenant. So when they couldn't make their rent payments, it became much more difficult to enforce the lease. "Come on buddy, just give me an extra month" and whatnot became common utterances and daily hassles.
A Business, Not a Hobby
Eventually, my dad came to the conclusion that he was treating real estate as a hobby instead of a business. Even though he was just getting started and it wasn’t his main profession, real estate had to be seen in a professional light. The willy-nilly, seat-of-his-pants approach would not fly any longer. At least it wouldn’t if he wanted to keep his head on straight.
The first thing he did was to start signing lease agreements at the Wendy’s down the way from his home. The Wendy’s served as his de facto office. He stopped listening to the constant barrage of sob stories and systematized his approach by putting in a policy to deal with late payments.
This did two things:
- It defined the line between personal and professional and thereby removed the incentive for tenants to try to pull the heart strings.
- It put policies in place to fall back on instead of constantly having to make gut decisions. Constantly making decisions is literally exhausting and can result in decision fatigue. It is also difficult to remember every decision and thereby can create confusion and can even get you in trouble with fair housing if you treat two tenants differently.
The first point is critical just to keep one's sanity. One tenant can drive a landlord up the wall if that landlord keeps giving that tenant chances. I've heard of many property managers burning out, often for this reason. One guru type even told me the average length a property manager went before burning out was a mere two years. I don't know if that's true, but from my experience, it certainly sounds plausible. One can only beg a tenant to pay rent so many times before beginning to daydream about the greener pastures of a different profession.
And while the situations will be different, the same types of things can happen throughout a real estate investor’s business, be they a landlord, flipper or wholesaler.
The second point is also critical. It’s a lot easier to tell someone “no” when you can point to a policy than just to say “no” because… well, because. The reason for this is that many such requests are often small things that don’t matter that much by themselves. So you come off as (and perhaps feel) cruel to say “no” with no reason (or at least none that you can remember off the top of your head). So instead of having no reason, the policy can be the reason. Remember, the simple act of making decisions can drain your willpower. So why waste such an important thing on small, repetitive decisions when you can just point to a policy?
Furthermore, having policies will be more effective. Maybe you get a good feeling from a prospective tenant, and that makes you want to forgive that eviction they just had. These types of things rarely turn out well. It’s best to just stick to a consistent policy.
Putting Systems in Place
In addition, as with any business, but especially real estate, approaching it in a haphazard way will lead to all sorts of other problems. Treating real estate like a business means approaching real estate systematically. It involves learning from mistakes and adjusting your systems to avoid such mistakes in the future. If you are a flipper and you analyze property A one way and property B another, you will undoubtedly miss things, make mistakes and cost yourself a lot of money. If you are a wholesaler, you may not lose money, but you will waste a lot of time pushing bad deals at other investors. Or perhaps you will leave money on the table by pricing those properties too low.
And of course, if you are a landlord and don’t treat real estate like a business, it is just a matter of time before tenants put you in the loony bin.
A haphazard approach will cost you in every area of real estate, be it acquisition, marketing, negotiation, rehabbing, selling, financing, accounting, leasing, collections or maintenance. A systematic, business-like approach that separates the personal from the professional is essential. And this goes for both part time investors and full time investors.
Fishing is a hobby. Real estate is a business. So make sure to treat real estate like the business it is.
Investors: Do you treat your real estate endeavors as a hobby or a business? What systems have you implemented to make your business more professional?
Leave a comment below!