Why Every Investor Should Treat Real Estate Like a Business, Not a Hobby

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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.

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.

Related: The Ultimate Practice to Improve All Facets of Your Real Estate Business in 2015

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.

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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:

  1. It defined the line between personal and professional and thereby removed the incentive for tenants to try to pull the heart strings.
  2. 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?

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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!

About Author

Andrew Syrios

Andrew Syrios is a real estate investor in Kansas City and a partner in Stewardship Properties along with his brother and father. Their company owns just over 500 units in four states.

6 Comments

  1. Gordon Cuffe

    You are a 100% correct. I remember my second tenant that I rented to. He looked at the house and said he gets a guaranteed check from the state every month so I said great he seems cool” and I rented the house to him. He paid rent for one year until the checks stop coming in. I found out that he was a drug dealer who went to jail that month so that is why he stopped paying rent. I was quite a learning process evicting his wife and kids. It was also quite a process putting the house back together because for some reason drug dealers don’t take care of houses.

  2. When you get your policies in place, then you still have to be strong about enforcing them.
    I have tenants tell me that I don’t need to give them a notice on the tenth of the month, because they are going to pay me that Friday. If I fall for it, then they do not pay and I just lost a week until I can evict. Don’t waver from following your procedure for any reason.

    Now that I am wiser, I just smile and say “Great, I will leave this notice with you and you can just throw it away after you pay the rent”. The same goes for filing for eviction. I tell the tenant that I can always cancel the eviction if they pay the rent plus my filing fee, but I have no choice but to file since they have not paid as agreed. Ironically, my tenants are more likely to pay their back rent if I file than if I don’t. It puts me at the top of their list of creditors to pay when they get money!

  3. eric m.

    Great post, Andrew. I’m currently reading a book called “The Power of Habits” which speaks to the point you made about having policies in place and being able to fall back on them instead of personal seat-of-the-pant decisions.

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