A few years ago, I had an interesting conversation with a real estate investor. She was just getting started building a real estate portfolio to create a passive income stream. After we spent quite a bit of time on tactical “how” questions, the conversation turned to questions about strategy and vision.
That’s when she hit me with the classic job interview question: Where do you see your business in five to 10 years?
My answer was not what she expected.
“That’s a good question, but it’s the wrong question to ask. I don’t plan for the growth of my business and then fit the rest of my life around it. I plan for the kind of life I want to live and then build my business around it. “
Often in life, we don’t take the wrong path because we don’t know the answers to the questions we face. It’s because we correctly answer the wrong questions.
What’s the End Goal of Your Investing?
It’s the same with real estate investing. So often we get caught up in the “investing game” that we completely forget its purpose. The human mind loves participating in games, keeping score, competing with others, catching up and overtaking competitors, and so on.
If you’re an analytical type, you might track the metrics of performance for your portfolio.
- How are we doing cash flow wise and what’s our cash on cash returns?
- Is our net worth growing year over year?
- What’s our return on the equity we have in our portfolio?
Tracking important metrics is generally a good idea that has the additional benefit of making you feel like a good steward of your money. But that’s where the game metaphor can backfire on us. Our brains have a tendency to optimize and maximize what we focus our attention on. As a result, we start optimizing and maximizing the metrics we’re tracking: the returns.
While I’m a big believer in the usefulness of tracking your numbers, I think it’s the correct answer to the wrong question. I believe that the main purpose of real estate investing is to help you underwrite a good life, not to maximize returns.
Think about it this way: If you build a “real estate empire” that keeps you chained to the location of your properties, is that any different than that current job you hate? If what you really want is the time flexibility to travel like a local (as opposed to a tourist), wouldn’t a smaller portfolio you better? If you are shooting for a life free of financial stress, does a multimillion dollar debt load serve that purpose—or would you be better off with fewer paid off properties?
These seem like philosophical musings, but they have real-life implications because the questions you ask impact the decisions you make and the direction you take.
Let’s look at a simple case study to illustrate the point.
Imagine a real estate investor with a real estate portfolio worth $800,000 and corresponding liabilities (mortgages) on those assets of $300,000. As she considers her options over the next five to seven years, she could either a) focus all her efforts on paying off her mortgages or b) cash out part of her equity and re-leverage it to acquire more assets.
What’s the right call? It depends on the question she’s asking herself. If the question is, “How do I maximize my investment returns,” then she should choose to cash out and re-leverage. Unless you have made some very poor purchasing decisions, leveraged returns should always outpace un-leveraged returns. But if instead her question is, “What will help me create the passive income I need without the management strings that will keep me from traveling a good part of the year,” then she should choose to pay off the debt.
So many real estate investors I meet operate as though they’re a portfolio manager at some financial firm whose performance on the job depends on the returns they deliver and how those returns stack up against competitors and benchmarks. You might not know this, but you don’t have to operate that way. You have a choice.
You can decide to operate as if you are a life architect hired to build the life of your dreams for yourself and your family. Then, once that vision has been set, you use the appropriate strategies, assets, portfolios and returns as tools that underwrite that life.
Related: Investing NOW So You Can Have the Lifestyle You Want LATER? You’re Doing it Wrong.
We should own investments that help us underwrite the life we want to build instead of allowing the pursuit of those investments to own us.
At first glance it might seem like a subtle difference, but in fact it’s a significant mindset shift—a single decision that impacts all the decisions that follow.
How do you gear your investing towards the lifestyle you want? What success metrics do you track?