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Wednesday, September 30, 2020

L2: Becoming a Landlord

Landlords grow rich in their sleep. – John Stuart Mill

The above quote is insightful and should wake up most people who compare real estate to other investments. If you are a seasoned investor, when you come across the quote above for the first time, it hits you hard. This is because you would have experienced already how difficult it is to multiply money. Of course, savvy investors do succeed but they can very rarely reach a stage ever where they can say that they can sleep peacefully and their investments would continue to grow in value and the income from those investments would go up steadily. However, with real estate, this has been done for decades by many upper-middle-class families where a significant portion of their retirement income, comes from steady rentals of a second property and they have no perception of risk of the capital value of the property going down. Given this context, if you consider yourself smart, do you not feel confident that you would be able to outperform both on growth in capital value as well as yield while sleeping peacefully at night?

This in many ways is the appeal of real estate investing – it is a true form of passive income. It’s common in rental agreements to have an escalation clause that will guarantee you 6% growth in income per year and also see simultaneous growth in the capital value of such properties. Let’s face it, it would be very difficult to make such income with such safety of the value of the asset outside of the real estate.

Why is this so?

To internalize this you must understand that in real estate, you are investing most of your capital in the asset. In other businesses, you are investing your capital in the equity shares of a business where a large portion of your capital will be consumed by operating expenses. These operating expenses may either go into the creation of Intellectual property or else into driving a sales funnel. Both of these have results that are uncertain and if the outcome is not worthwhile -something you may get to know only post 12-24 months – then you would have destroyed capital itself. A few such mistakes can cause your entire nest egg or savings to get depleted while the same few deals done in Real Estate will pretty much immediately generate steady income and give you greater and greater financial stability and an ability to take bigger risks by buying more.

As such, if you were to deliberate on what strategy you would choose to multiply your net worth, what would you choose? To work hard every day with a future where you will continue to work every day or to work hard to get to a place where you grow richer as you sleep.

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