Real Estate: Building a System vs. Buying a Job

Why do you buy or desire to buy rental properties?  If you have never asked yourself this question, please take a minute to do so now.  Why?  Well because the answer to this question should determine how you go about the process of acquiring properties and building your business.

As I see it there are two main schools of thought on ownership of property.

1.  Buy properties and manage them yourself so that eventually you can quit your day job and be a full time property investor/manager.

2.  Buy properties and create a system whereby additional properties can simply be added into the system with no more work on your part.

 It’s the classic difference between working ON your business and working IN your business.  If you are creating a system you are working ON your business, whereas if you are mowing the grass at your 4-unit, you are working IN your business.

I want to be sure to clarify here that I’m not making a value judgement on either of these two choices.  Every person has different strengths and weaknesses that position them to be better at one of the two of these.  Furthermore, you can be VERY successful by following EITHER of these paths.  The point is that it’s worth considering early on so that you can hone the correct skills as you add to your portfolio.

You have probably guessed at this point that I’m more of a “system” guy.  I currently own 8 rental houses (a total of 13 units) and spend no more than 2 hours a week dealing with them.  They are fully managed by a very skilled company that takes care of everything from maintenance to evictions to paying utilities.  I still pay property taxes, mortgages, and do my own bookkeeping (which I would recommend to anyone getting starting in this business).  Occasionally my wife or I will work on a house (eg. maintenance, cleaning, upgrading, etc.) but that is generally a choice we make for other reasons rather than out of necessity.

The downside of this approach is that property management is costly and our net income and cash flow are both lower than what they would be if we did the work ourselves.  The upside is that our time is completely freed up to do other things, like having a W2 job and raising a kid (and soon to be kids) for instance.

If I was more gifted in the art of home repairs and had a passion for that type of work, then moving over to managing these properties myself would be a very attractive option.  I would be able to work for myself on my own terms and have the freedom to run things the way I see fit.  The upside of doing it yourself of course is that you also get to keep more of your revenue and gain and refine your skills in managing tenants, home repairs, general contracting, and management.  The combination of being able to BOTH acquire properties AND  manage and maintain them is almost a sure way to great wealth.

So what’s the point?  The point is that if you’re just getting started in the rental business, start to think about which direction you want to take.  If you know for certain that you will not want to always manage your own properties, then start to hone your skills at hiring property managers and outsourcing other aspects of the business.  This by the way is no easy task and is a skill in and of itself.  (I have hired and fired four different property management companies since I started).  If your skills lie in physically maintaining the houses, then buy a truck, get all the tools you need and fix those properties in your spare time.  If you’re good at it, you won’t need to keep your day job for too much longer.

The temptation for the “build a system” folks like myself comes in when you have a single property and figure that you will manage this one but once you get a few more, then you’ll find a property manager.  The problem is that once you have one or two, the next 4 come much easier, faster, and possibly not just one at a time.  But …. if you don’t have a system in place you won’t be poised to take advantage of a great opportunity.  This exact thing happened to me when I was at 4 rental properties.  An investor approached me about selling me 5 of his properties.  At the time I was managing my 4 myself (while working a W2 job) and realized that getting another 5 meant I would have to quit my job and move into full time property management!  That would have been my ticket out of the rat race IF that was the direction I wanted to go.  However, I ended up passing on the 5 properties at the time because I wasn’t ready to make the leap and didn’t have a system in place to deal with 5 more.  It was a missed opportunity because my I didn’t have a system.

If you’re on a career track that you enjoy and want to continue, look at real estate as a side business.  Even though your margins will be less, you will still be making money in 6 different ways as long as your rentals are cash flow positive.  Build a system that will allow you to buy a house or two per year with little ongoing effort once the house is bought.

If you are someone that is good at fixing stuff and have the patience to deal with renters, then hone your skills, work weekends and nights on the properties, keep your expenses low, and make the switch to a full-time property investor / manager when the numbers work.

As always, if you have questions or comments about this, leave them below or drop me a note.

P.S.  I should note that the phrase “buying a job” comes from economic theories of capital and labor.  Capital owns the means of production and hires labor to operate it.  When you buy rental properties, you are moving into the realm of capital whereby you own something that produces income and you can choose to operate it yourself OR hire someone else to operate it for you.  Many people that are self-employed buy themselves jobs (eg. owners of franchises, specialized equipment, or rental properties) but do not create a system based on this capital that allows them to leverage their resources and often end up working even more than they would have as a W2 employee.  I will probably get into this more in a future post.

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