What Real Estate Investors Can Learn from Facebook’s Long Term Mindset
Facebook needs little introduction, of course. While I have a profile and use it from time to time, I can’t say I’m a huge fan of the platform. It seems to be a mess of banalities, group think, superficial quotes, or almost invariably inaccurate political memes — overall, a major waste of time. Indeed, a study by the employment law firm Peninsula found that in Britain, Facebook and other social media platforms cost 233 million hours of productivity and a total of 130 million pounds yearly. I would suspect the costs for the United States are even more pronounced.
(There are, of course, exceptions, such as BiggerPockets’ Facebook page.)
That being said, I’ve found plenty to admire in Facebook’s business model. Not all, of course. Buying WhatsApp for $19 billion dollars when it had a revenue (not profit) of probably somewhere around $50 million annually seems to me to be insane. But the purchase of Instagram for only $1 billion was a goldmine.
A Long Term Outlook
What I want to focus on is Facebook’s — and Mark Zuckerberg’s — long term outlook. It is somewhat ironic that the company that’s better than any other at distracting its users is great itself when it comes to having a long term mindset.
As many may recall from the film The Social Network, Zuckerberg’s early partner Eduardo Saverlin was dead set on monetizing the website right from the get go. Facebook technically began in February of 2004, but early on, it had almost no ads.
Even by 2008, Zuckerberg noted, “I don’t think social networks can be monetized in the same way that search did […] In three years from now we have to figure out what the optimum model is. But that is not our primary focus today.” It didn’t turn a positive cash flow until September of 2009.
Facebook’s competitor’s like Myspace and other such sites were, as Lara O’Reily put it, “pressured to make profit from the site […] whereas Facebook’s investors were ready to take on early losses in order to invest for the future.”
Thus, Myspace became littered with ads and spam, while Facebook remained clean of most of that fluff, building brand loyalty. Facebook went “wherever the market wanted it,” with what Adam Hartung calls “white space management.” In other words, Facebook took the long game approach.
Facebook took this same approach when it came to its disastrous IPO. Part of the problem with that IPO, other than Facebook downgrading its earning projections shortly before, was that, as it noted in its SEC filing for an IPO, Facebook did not “directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven.”
Indeed, Facebook had prioritized going mobile over everything, including the short term item of the IPO. A bad IPO is something that Facebook could recover from, but being beaten by its competitors to mobile apps and the like could be catastrophic.
As Mark Zuckerberg described,
“I told all of our product teams, when they come in for reviews: ‘Come in with mobile. If you come in and try to show me a desktop product, I’m going to kick you out. You have to come in and show me a mobile product.'”
As Matthew Ingram put it, Facebook was “all about focusing on the user, and being prepared to cannibalize [its]own business” to do so.
Facebook has been all about long term thinking.
The Deferral of Gratification
Facebook shows that company’s benefit from the same thing that individuals do — namely, the deferral of gratification. In one of the most famous studies ever done, the Stanford marshmallow experiment, children were given the choice to eat one marshmallow now or hold out for fifteen minutes to get two. Most, not surprisingly, failed.
Years later, the researchers caught up with the kids to see how they had done. Here is how James Clear describes the results:
“The children who were willing to delay gratification and waited to receive the second marshmallow ended up having higher SAT scores, lower levels of substance abuse, lower likelihood of obesity, better responses to stress, better social skills as reported by their parents, and generally better scores in a range of other life measures.”
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Indeed, the deferral of gratification, or prioritizing the long term over the short term, is as important for individual success as it was for Facebook.
What Real Estate Investors Can Learn from Facebook
Real estate investment is, as I’ve described before, the ultimate get-rich-slow scheme. And it’s best to approach it that way.
The first thing to note is that real estate investors, even successful ones, are often cash poor, especially to start. This is because so much of their money is tied up in properties. So it’s important to live a modest lifestyle and spend in a thrifty manner on any other indulgences. This is, after all, how many successful entrepreneurs got started. As an article at Yahoo observes,
“Warren Buffett, despite having the money to purchase anything he wants, lives a modest lifestyle […] [and] Facebook founder Mark Zuckerberg famously drove an entry-level Acura even though he was worth more than $7 billion.”
The next thing is to think of your business in a long term way. As I noted last week about Southwest, it is important to grow at a sustained and reasonable pace. Don’t try to get there all at once by going overboard with too many or too risky of investments.
And if you are doing buy and hold, make sure to use decent materials. The cheapest supply lines, faucets, and the like will give out in a year or so. Don’t save up front just to pay more in the long term. Buy once, cry once.
I would add to address issues that could become long term problems. More specifically, trim tree branches that overhang your properties, remove dead trees, fix the grading, and shore up foundation walls that have started to creep in and the like.
Finally, I would make the case to consider buy and hold as part of your investment strategy. Don’t get me wrong, flipping is great. And it’s a great way to raise money for buy and hold as well. But when it comes to the long term, holding real estate is where the real wealth is. Flipping and wholesaling can generate a lot of cash flow, but holding real estate gives you properties that will appreciate and pay down principal over time.
You don’t necessarily need to start with buy and hold, but I would highly recommend you aim to get there. Either way, approach your business with a long term mindset.
Investors: What do you think of Facebook’s approach to growing its business? Do you stick to a long-term strategy with your real estate portfolio?
Let me know with a comment!