by Ali Boone
You say you are investing in real estate, but I’d bet on the fact that you are actually working in real estate. In fact, most people who think they are investing in real estate are actually working in real estate instead. I can hear you right now: “Wait, what? No, no… I’m investing in real estate.”
There are several (or more) ways to be involved in real estate investing. Especially when you are just starting out, it can be really tough to sift through where to even get started because of how many choices there are of what you can do as a real estate investor. The good news is that all the choices are good. Whether you flip, buy rental properties, wholesale, do notes… whatever it is you end up doing, they are all good options and can all be very profitable. That’s the joy of real estate investing — there is something for everyone!
Now, the trick is figuring out what method to try your hand at. There are a lot of considerations in figuring out which area of real estate investing you will be the best at, and more importantly, which area you enjoy the most. For a more in depth explanation of some different facets of real estate investing, check out this article. If you read that article, you’ll see “Involvement Level” listed as one of the considerations for each method. That consideration is what I’m going to expand on here.
Alternatively, maybe you are already a long-time investor. This article may just help with some clarity, which can be good, whether you use it for general awareness or in assisting you to make a change. Or if you’ve been frustrated with any of your investing lately, maybe this will help explain something that is possibly contributing to the situation.
Investing vs. Working
If I look up “invest” and “work” on dictionary.com, I get the following definitions:
- Invest: to put money to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation
- Work: exertion or effort directed to produce or accomplish something; labor; toil
Straight investing is putting your money into something and getting returns on it (hopefully positive ones!). So your money is what brings in the return, not you. Working, on the other hand, means you (not your money) puts forth an effort into something in order to get a return.
If I break these concepts down into even simpler terms, I come up with:
- Invest: your money is the means to the profit
- Work: your effort is the means to the profit
I’ll go ahead and tell you right now, there is no means of investing that doesn’t require at least a tiny bit of work on your part. It’s impossible, unless you are literally just handing your money to someone blindly, and they are investing it for you — you never ask questions, and you get returns on it. But for the most part, every method of investing requires at least some work on your part, even if it means signing your name to something, keeping an eye on something, or even just figuring out what it is in the first place you want to get involved in. All of that is work. That’s okay, and just assume that to be the default level of work required with any investment option. However, once you start specifying different types of investments, you need to realize they all involve a different level of work on your part to make each one successful.
Now, are you ready to apply this?
Different Methods of Investing and How Much Work They Require
I’m going to jump right in and show you a few different methods of investing and the differences in how much work is required for each via a fancy-dancy graph. I think seeing the breakdowns more visually will help put this into perspective a little nicer, and then under the graph I will expand on each one. Hopefully doing that will help you see more clearly how investing and working tie in together. And again, the amount of work noted is the amount of work required to make the overall investment happen.
Ready, set, bam! (note: percentages are estimates)
If you’ve read many of my articles, you know I don’t support calling wholesaling a method of investment at all. I only refer to it as one because it is so highly talked about amongst real estate investors — just about every newbie investor has considered doing it at some point or another, and for whatever reason, the majority of people do think it is a method of investing.
But the reality is: wholesaling is 100% work. It is a job. What people don’t realize is that if you decide to wholesale, it is simply taking on a new job in order to gain capital that you can then use to invest (that part being the reason people consider it to be a method of investing — because it is almost always because someone wants to get into real estate investing, but doesn’t have the capital to get started).
There is nothing wrong with taking on wholesaling, and it is an amazing way to learn the ins and outs of investing, but there are a ton of other “businesses” you can start if you are just wanting to build capital. But without going on a rant about why I don’t think wholesaling is a method of investing, just understand that success in wholesaling is 100% dependent on the effort that you put in. Your money does nothing for you in this method (unless you are doing some varied version of wholesaling; then you might use some of your own money).
Basic wholesaling = not your money. It’s all you.
This is one of the most interesting balances of investing and working. It can actually be a little tricky to comprehend, but I’ll wait to explain why and just keep it simple here.
You all know how flipping works: you buy a property, you rehab it, and you sell it to someone else for higher than the amount you paid for it + what you spent on the rehab, and that is your profit. To successfully flip a property, you have to invest two things — money and work. The return on a flip is dependent on both of those things happening. Money is invested at the onset of the project, as well as throughout, and work is what gets the house rehabbed.
Rental Properties, With You as the Landlord
Rental properties technically bring in income with no work required on your part. Income from rental properties (in theory) comes in monthly, regardless of whether you did any work or not — whereas with flipping, for example, no income happens without putting work into it. Here, work is technically not required.
However, things do still have to happen in order for a rental property to continue functioning correctly, so that does bring in a little work (more like work to make sure it keeps working, not work required to bring in current income). Things like finding tenants, collecting payments, handling maintenance requests, and keeping the house intact. Those are ongoing tasks associated with properly managing any rental property. Those activities are work. Meaning, they can’t be done by putting money into them; they have to be done by putting your effort into them. As you’ll see on the graph, this workload isn’t huge, but it exists, and it can definitely take some time (especially 3 a.m. maintenance calls!).
If you landlord your own rental properties, these tasks are on you.
Rental Properties, Using a Property Manager
There is a way around you having to do the work of being a landlord, and that is by hiring a property manager. For a fee, a property manager will do all of these things for you. Property managers, aside from being helpful by taking that workload off of you, are also likely better versed on how to do these tasks better than you might be yourself. Maybe you have experience landlording and/or it’s a natural thing for you, but for a lot of people it isn’t. So having the option to outsource that work is great.
The downside to hiring property managers is that the majority of them out there really aren’t good, but that doesn’t mean there aren’t good ones out there, and it just takes a little time on your part to learn how to differentiate between the good and the bad managers. So having managers does require a small amount of work on your part (hence the graph) just in managing the manager, so to speak, but it is very minimal.
As you can see with the graph, methods of real estate investing vary in the degrees of how much work is required — from 100% work required to close to 0% required. And you can find methods everywhere in between.
Now, I can already hear some of you saying, “Wait a minute, I wholesale and flip and landlord, but I hire people to do most of the work for me so I really don’t spend much time at all doing work myself, and I’m still successful at it!” Well, first of all, that is excellent. My dream would be to be so knowledgeable in areas like wholesaling and flipping that I am able to do those, but only as the overseer, while other people do the work for me. That is one of the smartest moves anyone can make, not only just in real estate investing but with anything in life: outsourcing.
It’s wise to get other people to do your work so you free yourself up time-wise while you are still receiving income, which is what ultimately gives you freedom in life. If you have figured out how to do this, seriously, there is nothing better. But realize (and it doesn’t matter at all, but just understand) that you have created a business at that point. You are the boss, you have proxies doing all the work for you, and you receive the income. So you have succeeded, most definitely, but don’t confuse that version of wholesaling or flipping with straight investing — because it’s actually a business.
Taxation of Investments vs. Working
To further encourage all of this, you can always look at the tax implications of each method. Seeing those will further encourage this idea of investing versus work because the IRS categorizes all income as either active income or passive income. Active income means, just as it suggests, effort had to go into making that income (i.e. work). Passive income means, technically, no work is required in order to receive that income (i.e. investment).
Wholesaling and flipping income will always be taxed as active income. Rental property income is taxed as passive income. Why does it matter? Because the tax implications of each are extremely different. Passive income brings in a tremendous level of tax benefits to the investor. Active income is just the same as how you get taxed with your W-2 job.
Taxation of each method of real estate investing is something every investor should at least understand and be aware of, but it will doubtfully be a deciding factor when you choose what kind of investing you want to do. More of the point of bringing it up is to say that even the IRS thinks a lot of investing methods require work!
What Does it Matter?
It doesn’t. Well, I mean, it does. It does matter in the sense of you deciding on your goals as an investor and choosing how to meet those properly. Most people don’t realize how much of real estate investing is a job (finding motivated sellers, rehabbing a property, managing a property, etc.). Like I said, there is nothing wrong with that — unless you are unaware of it and it goes against your goals.
For example, one of my goals is total lifestyle design. I don’t want to spend one minute working for my money if I don’t have to, so my ultimate goal is passive income. That’s my only goal! So it wouldn’t make sense for me to flip properties or wholesale because that would require me to work. I went the route of buying rental properties and using a property manager to run them because that is about as passive as you can get in buying real property (versus buying notes or stocks). And I love it! So it does matter in the sense of you deciding on your goals and what methods of investing best fit those.
Just realize (and this is the part that really doesn’t matter if you don’t care) that the income you receive from flipping a house, for example, isn’t all profit received from just investing. A lot of it likely is, but some of that income is compensation for the effort you put into working on that investment. It’s like getting paid to do a normal job — your time is worth X amount of money per hour, so you get compensated that amount for the hours you put in. That is the same here. You put work into flipping a house, so part of that income is just like hourly pay from any other job.
If you landlord a rental property in order to avoid the 10% monthly fee of using a property manager (let’s say it’s $100), that $100 you are saving is really just the same as compensating you for the time that you put in to do the work to keep that property functioning correctly. Some months you may not put in any work (yay!), but other months you will put in a good bit of time, so you have to weigh if “earning $100/month” is worth that time. Would you accept a regular job that pays you that amount for the amount of time you spend on it? Maybe, maybe not. Just be sure you are looking at it in perspective.
How about you? Where do you fall in the spectrum?
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