Real Estate Investing: More Than Just a Business?

by FI Fighter on May 9, 2014

in Real Estate Thoughts

hawaii-32

I’ve been investing in rental property since 2012. Over time, I’ve expanded my network and gotten to know other real estate investors, many much more successful than myself. So, it’s only natural that I try and pick the brains of these people to expand my own knowledge base.

Survey Says…

In general, I’ve met some wonderful people and learned a lot. One common question I often ask investors is, “What is the most important thing you’ve learned through your years of REI?

Not surprisingly, many will often reply saying: Treat REI as a business!

To that, I respond (internally): YAWN!

YAWN… Really??? Yes, really… No, I’m not trying to be condescending or rude. And no, I don’t think I’m a better investor than these people. Far from it! I just think that “treating REI as a business” is a really boring and dull (generic) reply… It’s a typical short-sighted investor answer we give when we forget that money isn’t the main objective in life.

The Journey to Early FI

This is Year 3 of my journey to early financial independence. I realized some time ago (2011) that going down the road of conformity was not the right answer for me. Quite frankly, I think there’s much more that life has to offer than simply going through the motions and working 9-5 until 65… or later.

Since I’ve decided to chase after my dreams and true desires, I’ve accepted the fact that I probably won’t be a “success” in life. From society’s vantage point, success is simply measured in terms of one’s monetary wealth. The more money you have, the better the person you are, right?!? Sadly, most adults don’t know any better than this… Why else would we revere so many wealthy idiots?

Anyway, my views on life are probably not universally accepted by most. In my mind, we are all operating on borrowed time… That is, we don’t actually ever own anything because nothing lasts forever. We come into this world with NOTHING and leave with NOTHING… All we really own are the memories and experiences created from t = 0 to t= final.

But it’s not like I approach life like it’s all doom and gloom. Actually, because life itself is so fragile, I’ve made a conscious decision to do my absolute best to MAXIMIZE what very little (and precious) time I have on this world as much as possible. This means cherishing: people, experiences, and the blessings of everyday life. I’m a glass is overflowing type of guy… Give me sunshine, good company (positive energy), and some free time, and I’ll make the most of it. I no longer sweat the small stuff and minor details that don’t amount to anything.

Life is beautiful! Just having the opportunity to chase early FI already puts me in a most enviable position. When you really stop and think about it, how many people out there in this world even have the luxury to pursue their dreams? If your earned income allows for more than just your basic necessities, you’re well, well ahead of the curve. I’m learning to stop desiring so much, and trying to appreciate everything I’ve got for a change!

Back to REI

So, with all that being said, you’ll understand why I approach REI the way that I do. I’m not all about the Benjamins… In fact, if my real estate “business” ever did decide to IPO, and you were a shareholder, I assure you that you would not be pleased with my results. Being CEO, CFO, and in charge of all important decisions, you would demand that I be terminated effective immediately and replaced with someone with even a little bit of competence in what they were doing.

I don’t really look at my rental properties as being a part of a business. Yes, of course each property is designed to earn money and not lose money… How else would early FI be possible? But I really couldn’t care less about maximizing ROI, or trying to squeeze out every last drop that I can get.

I am relying on my real estate investments to buy me my freedom. I want to be financially free so that I can pursue life with reckless abandon. That’s my main objective, and I always make sure to keep my endgame in mind.

All the money grubbing that can follow and consume other investors… It’s not worth my time. It’s not worth my efforts. And that’s not what I want out of my life.

Besides, if you really do believe in treating REI as a business, then where exactly do you draw the line? Does EVERY single REI decision you make have to be in the best interest of your cash flow? Seriously? We all know greed knows no bounds, so when would enough ever even be ENOUGH?

If we venture down that path, I don’t know that we would ever feel like we have enough… And that’s kind of sad… For instance, what if you found yourself involved in the following hypothetical scenarios and you were already a big-time, successful investor?

  • Husband and wife are getting a divorce. They’ve decided to divide up their assets and sell the house. The eldest son desperately wants to buy the house so that it can remain in the family. You are the winning bid by a hair. Do you concede a property you don’t even really need, or are you still all about the ROI (the home has tremendous upside potential both as a flip and buy-and-hold!)?
  • Your fabulous tenant of five years is going through some hardships and missed rent payment this month. You know that market rents have risen significantly since she signed her lease, and you are certain you can easily find a qualified tenant to take her spot. Do you give her the benefit of the doubt to straighten up her situation, or do you give her the boot knowing your ROI will thank you for it?
  • You are selling one of your rentals to capture some massive appreciation gains. The highest offer is from a young punk who is paying all cash (mommy and daddy’s cash). You don’t know him well, but from the time you met him, you got a pretty bad vibe. The second highest offer is from a family who desperately wants to move in to this neighborhood so that their kids can attend the nationally ranked high school. The youngest has aspirations to go to med school. However, their credit situation isn’t the greatest, and although they have been pre-approved by the lender, it is not a slam dunk that they will be able to close escrow. Do you take the all cash offer that is basically guaranteed, or do you go with the higher risk, lower return option?

Why I Invest…

Why do I invest in rental properties then? Well, I also invest in stocks, but with owning stocks, I’ll never have any direct control or power over the decisions being made. Being a shareholder is great because I don’t have to do anything and I still earn passive income (dividends). However, as a small shareholder, I play a most passive role, and other people direct the company. But hey, if it’s all about business, then there’s absolutely nothing wrong with that. I invest in stocks for this reason… I’m glad they don’t allow me the chance to make a stupid decision. :)

But I do also want to have something a little more than that with my investments. As an owner of rental properties, I’m the landlord (boss). I call the shots and I get to steer the ship, so to speak. That means I’m allowed to make “dumb” financial decisions… Even with a PM in place, they still work for me and have to do as I say. For what I’m chasing after with rental properties, this is exactly the type of arrangement I’m looking for.

Here’s why I’m playing the REI game, outside of just earning semi-passive income for early FI:

  • Provide quality housing. I take great pride in my properties and each one has been rehabbed to be turnkey ready prior to renting out. I want to provide a nice place to live at an affordable price for all of my tenants. I’m no slumlord here… I feel great joy in seeing families move into one of my properties and turning it into their own “home”.
  • Have a direct influence on other people’s lives (hopefully a positive one). This goes beyond the first point of simply providing a quality home to live in. Again, I’m not all about the ROI. If I have a tenant who is experiencing some hardships, but usually pays rent on time and is taking great care of the place, I will cut them some slack. A late payment every now and then is fine. I’m not so cutthroat… I don’t even like to raise rents. Further, I like to reward great tenants. At the end of the year, I’ve made it a custom to hand out gift cards… Usually one for dining out with the family, and the other for Christmas gifts for the kids. I’ve received some warm responses so far, so I want to continue to do this. It feels good! And it’ll be even more fun this year since I have more tenants now… I get to make an even bigger impact. Imagine if I owned 100 units? When I really stop to think about it, a lot of my tenants have it rough… In some cases, they deposit over 1/2 of their monthly paycheck to me! These folks are helping me to buy my financial freedom… If nothing more, I want to be the best landlord they’ve ever had… I’ve had plenty of terrible landlords in my day, so I know what that’s like. Be the change that you want to see in this world… even if it ends up costing you 1% or 2% on your ROI.
  • Help others on the journey to early FI. As a byproduct of REI, I’m able to network and connect with other investors and early FI enthusiasts. Since I own five properties and seven units now, I’m no longer a complete novice to REI. In fact, many other readers, bloggers, and meet-up investors have wanted to network with me. Many to learn about out-of-state turnkey investing. Others to get some ideas on how to invest locally in the Bay Area. Whatever the reason, I’m always glad to connect and lend a helping hand. :) Going back to my philosophy on life, I want to MAXIMIZE my time and experiences on this earth. A large portion of that involves the human experience. Making friends and enjoying a good laugh is way more rewarding (and memorable) than being one of those “If I teach you, I screw myself over” type of people. Life is too short for such nonsense! Karma is very real. From my own experience, any good you do in this world, you will be rewarded 1000x over. Whether it’s returned to you, your spouse, your kid, your grandkid, etc., the world has a way of balancing things out.

Summary

I’m a lousy businessman, and frankly I don’t care. I invest in real estate primarily to help me reach early FI (hopefully sometime next year!). Beyond that, there are many other good reasons why I invest in rental properties: I want to provide quality housing to tenants, make a positive difference in this world, and help others become financially free.

So what if my ROI suffers a little bit? It can’t always be about: money, money, money and more money. You hear so many people talking about wanting to make the world a better place… Or to leave the world a little better than you found it. Well, actions speak louder than words. And I’m going to do my best to step up to that challenge. So, what is the most important thing I’ve learned through my years of REI? No matter how far you get, or however high you climb, NEVER forget who you are and what you really want out of your life.

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{ 31 comments… read them below or add one }

FFdividendNo Gravatar May 9, 2014 at 11:17 am

Great post. I leave you with this.

“Money is numbers and numbers never end. If it takes money to be happy, your search for happiness will never end.”
~BOB MARLEY

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FI FighterNo Gravatar May 9, 2014 at 11:24 am

FFdividend,

That’s perfect! Love the quote!

Cheers!

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Mr. FrugalwoodsNo Gravatar May 9, 2014 at 11:44 am

“Be the change that you want to see in this world… even if it ends up costing you 1% or 2% on your ROI.”

Wow, well said. One of the reasons I want to be financially independent is to avoid feeling forced into making decisions I don’t agree with in order to make ends meet.

You own the money, the money shouldn’t own you.

I’m sure there will be some who will say you are a sucker for being a nice landlord… and maybe you will be to 1% of your tenants. But if you marginally improve the lives of the other 99% then it’s worth it.

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FI FighterNo Gravatar May 11, 2014 at 10:24 am

Mr. Frugalwoods,

I agree with you on that — you should own the money and control it, not the other way around.

Yes, I wouldn’t be surprised to find other investors who wouldn’t agree with my approach. I believe what I’m doing can work… but there’s also a fine line from helping someone and being a complete pushover. I’m not saying I have it figured out just yet, but I will fine tune this until I can optimize it.

In the end, even if a few tenants take advantage of me, but I can reach out and help many more, it would still be worth it. :)

Cheers!

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mrsfinancialfreedomNo Gravatar May 9, 2014 at 12:20 pm

Well said!

A common mistake people make when you tell them you want to be financially independent is that you want to make as much money as you can and keep on making more and more money. But for most people wanting financial independence, it’s not.

Saving, investing and making money is just the game you have to play to get to the end. The end being freedom hence needing to become financially independent.

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FI FighterNo Gravatar May 11, 2014 at 10:27 am

mrsfinancialfreedom,

Yes, exactly! Financial independence requires investing, or money, but money isn’t the main objective… just a means to get to FI.

There are of course those who will chase after every penny, but that’s not my objective. And it shouldn’t have to be for anyone also chasing FI or getting into REI.

Oftentimes, I think a lot of newbies will just follow the veterans and try to imitate their actions/thoughts. If you do this with REI, chances are very high you’ll be running into those who only treat it like a business.

I’m just trying to say that there are other paths as well… You don’t have to be the cold-hearted businessperson, if you don’t want to be.

All the best!

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MartinNo Gravatar May 9, 2014 at 10:40 pm

I have been following your blog and your journey probably from the very beginning (I think it was when you were closing your first property), and I am happy for you. It is very interesting watching your business growing, seeing pictures from your new acquired property and how your income grows over time.

And I admire it. For me, it is uncomprehending how you manage all mortgages, cash flows, etc. and I do not understand it and it scares me to death. That’s why I always ask myself a question “How is he doing it? I only have one mortgage and it is killing me, how can you have 5 of them as of now?”

I think you are doing the right thing treating your investing as a business. I think it is a must if you want to succeed. It is the same as with investing into stocks. You must treat it as a business and not just a hobby, otherwise you are doomed to lose.

As for me, I also want my investing to be a business (that’s why I am starting a hedge fund) and one day be able to have it as my one and only one full time job.

Great job with your investing!

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FI FighterNo Gravatar May 11, 2014 at 10:29 am

Martin,

Thanks for the support and encouragement! All the best to you and I hope your investments (business) succeed and help you buy your freedom someday soon.

Take care!

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Jason @ Islands of InvestingNo Gravatar May 10, 2014 at 3:23 am

This is pretty inspiring stuff! And I just love that you reward your tenants with gifts! The world definitely needs more of this.

The reason we invest and work hard towards early retirement is usually to make us happier and enjoy life more. And when you make a great impact on someone’s life, that’s an amazing feeling, and a huge part of making life awesome. Reaching FI is really an opportunity to do more of this, instead of being stuck with a full time job that might not be so rewarding, and where you might not have the energy, time or money to make the world a better place.

It can be a difficult balance while you’re so focused on chasing FI, but you seem to be nailing it so far. Keep up the great work!

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FI FighterNo Gravatar May 11, 2014 at 10:32 am

Jason,

Absolutely, it really is a great feeling being able to help someone out. When I experience stuff like that, it makes me want to focus more of it in my own life… Landlording and REI makes a lot of that possible.

Yes, I can’t wait to get to early FI b/c I really do believe that it will open up even more doors to do good. Whether it’s helping/volunteering my time, or networking with other investors and helping others get to early FI.

It’s definitely not an easy balance, as it can be challenging trying to juggle multiple things at the same time. That’s why I have to keep focused so that I can stay the course. There’s still a lot of work that needs to be done…

Best wishes!

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YoungNo Gravatar May 10, 2014 at 4:20 am

You’re the hardest working person I know and You know already how to spend money. You appreciate your tenants unlike other blood sucking landlords. I really hope that everything works out for you. You don’t own a rental property in states I like to live in retirement, but who knows in the future. I will keep reading.

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FI FighterNo Gravatar May 11, 2014 at 10:34 am

Young,

Thanks for the support! I’m doing my best to balance making money, while also appreciating my tenants and other people, in general.

Life is great — focus on the good stuff and the rest comes easy.

Take care!

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Roadmap2RetireNo Gravatar May 10, 2014 at 8:47 am

I LOVED reading this post, FIFighter. Im glad to see that people like you can be a positive change in this world. Theres no time and place being a mean landlord (within reason) just so that you can get a few more pennies out of people. I admire the work you are doing and hope to be a landlord :)

regards
R2R

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FI FighterNo Gravatar May 11, 2014 at 10:37 am

R2R,

Thanks! Glad you enjoyed this post. :)

Yeah, I think landlording can be mutually beneficial for both landlord and tenant. As long as my tenants are treating me with respect and holding up their end of things, I have no problems meeting them half way. I am more than willing to even concede a bit more b/c I realize what it is they are doing for me. They are buying me my financial freedom by not only providing me with cash flow, but they are also paying down my mortgage (and all other expenses).

As landlords, let’s not forget about those who are helping us make our dreams possible!

All the best!

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Dave @ The New York BudgetNo Gravatar May 10, 2014 at 8:06 pm

This actually might be my favorite post of yours yet! It’s a little crazy how similar our philosophies are.

If you ask the question, “why do you invest in real estate”, there are so many people out there that simply answer “to make money”. They haven’t thought past that to what they want money to do for them and to help them do for others. Therefore, they don’t know how much money is enough and instead of providing freedom for them, it actually takes freedom away.

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FI FighterNo Gravatar May 11, 2014 at 10:40 am

Dave,

Haha, yeah we are like totally aligned when it comes to early FI… and how awesome Hawaii is :)

Definitely… the “to make money” can go on for perpetuity. When would you have enough? $5k/month? $10k, $20k, $100k?

At some point, the focus needs to shift away from $$$, and more onto other things. I’m not even FI yet, and I could definitely use a lot more passive income, but I’ve already decided to shift my focus a little bit. I actually started doing this with Rental Property #1, but I’m in better position to do more now… As I build up more passive income, I’m only going to want to do more good…

Take care!

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TraderNo Gravatar May 11, 2014 at 6:18 am

Once I had a landlord just like you. He didn’t gave me any gift be he was always there to solve problems at home and never charged me a dime. When I left I give him less than a month of warning but he accepted. Fortunately the apartment was rented again with me still in it. I was glad this happened and I and the landlord are still friends.

Definitely, it’s not all just about the money!!!

Cheers

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FI FighterNo Gravatar May 11, 2014 at 10:43 am

Trader,

That’s great! It isn’t that common to find awesome landlords out there, but they do exist and I’m glad you’ve had some positive experiences.

No, it should not be all about the money!

Best wishes!

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AnyNo Gravatar May 11, 2014 at 8:06 am

This is such a great post. It really inspires me to remember money should not be the sole reason for every judgment. We need more people like you in the world!

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FI FighterNo Gravatar May 11, 2014 at 10:47 am

Anny,

Thanks! Glad you enjoyed the post.

It isn’t always easy, but money shouldn’t be the main focus at all times. Hopefully, by increasing passive income, it can become increasingly less important for someone as they move forward through life.

All the best!

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No Nonsense LandlordNo Gravatar May 11, 2014 at 9:25 am

It’s not all about money, but when you have a business, it needs to be. Would you be making the same decision if you were overseas, and might not have enough money to live on?

It’s OK to throw some money towards some philanthropic cause, but know that is what you are doing. Know that your mortgage company will not be participating. Know that your retirement plans may have to be delayed by that much.

I evicted a woman with state 4 terminal breast cancer that would not pay rent, and had not paid the previous owner of the building.

You need to set your priorities. And make sure you know your goals. If you delay your goal due to a different circumstance, then it is your priorities that have changed.

Do not feel sorry for people, many people make their own life difficult by continually making bad decisions. Let the Government help them, that is why we pay taxes.

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FI FighterNo Gravatar May 11, 2014 at 10:54 am

Eric,

That’s tough to answer right now as I don’t quite know what my situation will be like when I’m overseas. If all things go to plan and I have excess cash flow coming in each month (after all expenses and reserves), then I would still like to be able to give back some to the tenants.

Of course, it’s always possible that things don’t go to plan and I find myself barely scraping by post-FI… or not having enough to make ends meet. If that were to happen, I may very well end up back in a cubicle working for corporate again (I hope not!).

But all that is unknown and far off into the future… For now, I’m in a good position to impact change, so I’m just going to do what I can now. Tomorrow will happen when it does and I’ll adjust, deal with it then.

I know my goals and priorities in life. I don’t like to operate in fixed terms, or absolutes. Plans change all the time, and adjustments are constantly being made in life… I don’t have all the answers, but I do know that chasing $$$ isn’t my objective.

Each tenant situation is unique as well, so it’s hard to generalize… I don’t help/reward everybody, but I definitely want to reach out and help those who are outstanding tenants.

All the best!

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No Nonsense LandlordNo Gravatar May 11, 2014 at 9:39 am

“even if it ends up costing you 1% or 2% on your ROI.”

Another note. If your ROI is 10%, and you give up 1% or 2%, that is 10% or 20% of your ROI. You are better to maximize the ROI, and donate the money to a good tax-deductible cause, rather than give up the revenue.

Who knows, if you do not run it like a business, the IRS could rule the RE venture as a hobby, or make you pay taxes on phantom income. Imagine paying taxes on income you gave to a tenant, and they didn’t have to pay the taxes but got the benefit of the income.

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FI FighterNo Gravatar May 11, 2014 at 11:02 am

Eric,

There probably is an optimal way to structure everything so that your tax hit is minimized, and you’re still able to donate the money to your cause…

I’ll probably need to discuss this more with my tax guy, but for now, I’ve just been focusing on doing what I want to do…

When I donate, I do it to do it… optimizing taxes hasn’t been the focus.

Cheers!

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Financial independenceNo Gravatar May 12, 2014 at 6:45 am

I would not necessarily agree with you 100%. Society does not only measure success in monetary terms, but rather impact you could make on life.
Financial independence gives you freedom and time to do it, either personnaly or throught giving some of the money.

We could leave kids behind or our dreams. Its what has happened is the padt – literature, architecture from the past is not the best but somebody decided to invest in it and it stayed with us a little bit longer.

I keep pondering about investing in the real estate for the last couple of years, but could not get math working over 30-50 years cycle, it seemingly does not add up for some odd reason:
http://www.niterainbow.com/2014/03/buying-vs-renting.html

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FI FighterNo Gravatar May 13, 2014 at 9:35 am

FI,

That’s great that you have that outlook on life… I guess I’ve just been hanging out with too many salesman lately, as all I hear around them is $$$.

Maybe I’m more skeptical, but hopefully I am wrong and the great majority of society does overlook the importance of money, and instead focuses on other things, like helping other people out.

Thanks for the link, I’ll check it out!

Cheers!

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JasonNo Gravatar May 12, 2014 at 4:46 pm

Hi there FIF

I’m just curious as to what prompted this type of article. It doesn’t seem in the same vein as the rest of this blog; it’s a little defensive.

I guess I don’t agree with everything you’ve said here, but maybe it’s a function of age too. After 40, there’s incredible pressure to make investments perform at the highest level.

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FI FighterNo Gravatar May 13, 2014 at 9:40 am

Jason,

Yeah, maybe you’re right and the tone is a little off on this one… Hmm, it could be due to the fact that I’ve been hanging out with more real estate investors lately… many super successful, and all I got out of them was money, money, money.

I guess I was a little put off by the fact that some people can be so wealthy, and still want nothing more except more wealth…

I agree that as you get older your investments need to be more stable. You don’t have as much margin for error, so it needs to work out. In this article, I wasn’t targeting those who are working towards building up their FI income stream… More talking about those who already have it well off, but still chase the dollar signs relentlessly with disregard to just about everything else…

All the best!

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JasonNo Gravatar May 13, 2014 at 11:11 am

I know that perplexed feeling. I’m always stunned when I hear about people who seem ludicrously well-set financially, and yet they are still out there swinging for the fences. If that were me, even the world’s best scientists with the finest equipment would not be able to measure the speed at which I’d retire.

I did recently come from an REI conference in Memphis where there were some bigger investors. I didn’t see as much about growth-at-all-costs, but I think that the conference was more geared toward the “soon-to-be-retired”. So, the discussions tended to be laid back and all about end-game. Definitely more my style. Maybe I should start attending early retirement conferences (if there is such a thing) I’ve been in a funk for a while and something like that may give me inspiration.

One thing I have found is that wholesalers and rehabbers tend to be geared toward growth. It’s understandable, though – they’re business owners, not investors. And, surprisingly, according to what I’ve heard, many of them DON’T do buy-and-hold. I guess when you’re normal deal nets 5 to 6 figures, a few hundred dollars a month does not seem worth it.

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theFIREstarterNo Gravatar May 15, 2014 at 12:54 am

Spot on with this one FIF!

You don’t want to be acting all like the large corporation you are working for, solely out for profit. That would be hypocritical. Good for you for calling out the older/wealthier RE Investors mindset.

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ArseneNo Gravatar May 15, 2014 at 6:04 pm

I wanted some advice from you on a property I am looking to purchase. Let me know if you can help me.

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