Think big! Accumulate hundreds or even thousands of units. Use economies of scale. Syndicate. Benefit from maximum leverage. In other words: Go big or go home.
Aren’t these the messages we hear so often here on BiggerPockets? Aren’t the biggest and the best the ones with the most cash flow, the most flips, and the most rental units?
Well, I’m here to tell you that bigger is not always better. In fact, in this article and my new book, The Small and Mighty Real Estate Investor, I plan to show you that smaller and simpler is actually better for many of you.
I’m trying to start a new movement. I hope some of you will join me. The motto is “go small or go home.” And the hero is called the small and mighty real estate investor.
Big Isn’t Bad
Life is too complex to say big is bad and small is good. We all have different motivations, don’t we? You aren’t wrong if you have big, large-scale real estate aspirations.
I would say it’s only wrong if you think big is the only way to live a rich, amazing life. There are other, simpler investing options that don’t get enough publicity because, well, they’re too simple.
You don’t have to get big to accomplish incredible financial and life goals. Small-scale real estate investing with even a few properties can do that, too. These mini-real estate models can give you plenty of money, plenty of free time, and plenty of flexibility. And they can help you avoid a lot of hassle and risk that comes with growing a big business. Isn’t that what most of us wanted in the first place?
Unfortunately, smaller real estate investing does have its downsides. You may not get famous with a best-selling book. And I’m sorry to tell you that you probably won’t get an HGTV show contract. But as a consolation prize, you CAN get a life of financial security, simplicity, and freedom that most people only dream of.
To begin exploring my point, let’s look at an interesting story of three BiggerPockets investors.**
A Story of Three Real Estate Investors
One summer, three real estate investing couples travel together to Europe. These investors originally met as beginner investors on the BiggerPockets Forums. They liked each other and helped each other grow. Along the way, they became friends.
Fifteen years later, they each have experienced success with their real estate, and they want to enjoy the fruits of their efforts. They spend 14 days visiting the Mediterranean coast. First, they explore ancient sites in Italy while enjoying amazing food and wine. Then, they continue with a high-quality, Mediterranean cruise to explore stops in Croatia, Greece, and even BiggerPockets author Erion Shehaj’s beautiful native country of Albania.
Could these investors afford a nice trip like this?
The Financial Scoreboard
Couple No. 1, Liz and Tom, are in their 50s. They live, invest in, and self-manage their properties in Missouri. Over the last 15 years, they’ve bought 10 single-family houses, one by one, in good neighborhoods.
Liz and Tom searched hard to buy these houses as fixer-uppers below value, and they used the BRRRR technique to recoup most of their cash on each deal. Then they used the debt snowball technique to pay off their mortgages early. Their houses now produce $7,000 per month, or $84,000 per year, in positive cash flow.
Couple No. 2, Tiffany and Darius, are in their early 40s. They live in New York, and they invest in North Carolina using a property manager. Fifteen years after starting, they now own one 50-unit apartment building.
Tiffany and Darius began with smaller properties and then used 1031 tax-free exchanges to trade up to bigger units until they had enough equity for a down payment on the 50-unit building. They have a solid, fixed-interest, 25-year mortgage on the building, and the property produces $10,000 per month, or $120,000 per year, in positive cash flow.
Couple No. 3, Mike and Lauren, are in their late 40s. They live in Nevada and own properties all over the country. Fifteen years after starting, they now own 500 units!
Mike and Lauren began with their own rentals, but because of their ability to put together great deals, they also began syndicating deals by pooling money from others. As the general partner, they have become multimillionaires, and their portion of the rental income equals $60,000 per month, or over $700,000 per year! Their portfolio produces the most money out of the three couples.
It’s clear to see that all three couples can easily afford to pay for this nice European vacation. This is exactly why all of them began investing in the first place.
But the story gets a little more interesting as they approach the end of the trip.
Let’s Extend the Trip!
By the end of this trip, all three couples have had a fabulous time. It’s been so great, in fact, that couple No. 1 (Liz and Tom) propose that they all stay a few weeks longer to explore more.
Liz and Tom’s rentals are all full of self-reliant tenants who automatically deposit their rent each month. The tenants can email or leave a voicemail with any maintenance emergencies, but this rarely happens. And with no debt or immediate plans to buy more properties, their business schedule is amazingly flexible.
Couple No. 2 (Tiffany and Darius) check their calendars. They have a few community and church functions, but those could be put off. Their property manager is competent and in control of day-to-day issues at the 50-unit apartment building. And because no major financing or remodel projects are looming, they happily agree to stay on as well.
However, couple No. 3 (Mike and Lauren) has challenges. They want to stay and can easily afford the expense of extending the trip. But there are projects looming back at home.
Remodeling contractors are waiting for their guidance on recent value-add apartment purchases. A new property manager needs to be found to replace an underperforming one. Their corporate bookkeeper and administrator need help. And some of their equity investors want to meet with them to discuss some past and future projects.
As a result, Mike and Lauren regretfully need to decline the vacation extension.
The Myth of the Passive Big Business
Mike and Lauren do not have a bad business. In fact, it is financially the most successful business of the three investors. But here are the questions I always ask the Mikes and Laurens of the world:
- Did your investment business meet your true goals?
- Are you spending your time doing what’s most important to you?
- Would alternative approaches have met your goals just as well, with less hassle and risk along the way?
It’s possible that Mike and Lauren are happy with their current situation. If so, I’m happy for them. But my experience has shown that many people in their situation are less than happy. Their extra money has come at a cost.
And I’m sure I’ll get examples in the comments about Shark Tank hosts, famous entrepreneurs, and BP Podcast guests who’ve built big businesses that also check all the goals off the list. It’s fine to provide successful examples.
But the bottom line is, what are your goals? And what’s the best way to achieve them? Are you a Shark Tank host, or are you a regular person trying to free yourself from the 9-to-5 grind so that you can live an extraordinary life?
I know a lot of entrepreneurs and real estate investors. The ones with the most money have big businesses. If that’s your No.1 metric, go for it. But the ones I know with the most free time, the most flexibility, and the least stress have smaller, simpler businesses and portfolios. And interestingly, I don’t see these smaller investors worrying that they have a smaller net worth than the big investors. It seems they’re too busy enjoying life!
Can You Control Frankenstein?
So far, it might seem that I’ve beaten up on the big real estate investing model. But I’ll readily admit that it’s not impossible for you, as the owner of a bigger business, to have it all. You can create systems and teams of people that both produce a lot of money AND allow you to be relatively passive and flexible. It does happen.
But very importantly, it’s a lot harder and more time-intensive to manage a bigger, more complicated business. There are more people involved, more moving parts, and more things to pay attention to.
I think of it like Frankenstein’s monster. Without extreme focus, a business can become a scary, out-of-control creature that takes on a life of its own. And yes, it can even get hungry and eat your money, your free time, and your life!
The Frankenstein business monster becomes the most scary during the business’s growth spurts. Look at this graph of a business life cycle, for example:
The growth spurts of this graph are the steep inclines. These are the danger zones. This is when you, the business owner, are most susceptible to cash crunches, dramatic market changes (i.e, the 2008-2010 Great Recession), personnel problems, and even personal burnout.
These danger zones are where the Frankenstein monster rears his ugly head. You can win against the monster. But just be prepared for a battle.
Finding Your Business and Investing Sweet Spot
You, as an entrepreneur, have to decide where on the business lifecycle graph you want to end up. You have a virtually endless choice of plateaus that you could aim for. The sky is the limit in our economic system. But again, your choice will depend on your personal financial goals.
And your choice will also depend on your willingness to take on the risk and hassle of the perilous climb up to higher economic ground. The reward at the top better is worth the sacrifice of the climb (and the fights with the Frankenstein monster)! Unfortunately, plenty of people have arrived at the top of the financial mountain to realize they lost everything they really wanted along the way.
The key is to find your personal business sweet spot. As you’ll see in the graph below, I’ve marked two different sweet spots. One is smaller (fewer assets, fewer employees/team members, less money), and the other is bigger (more assets, more employees/team members, more money).
Both sweet spots are beautiful, level plateaus where you’ve increased income while also gaining efficiency that frees up your personal time and reduces hassle. The bigger sweet spot has more money earned. But nothing comes without a cost. You must make the choice if bigger is worth it for you.
And that choice may come down to the concept of “enough.”
The Fulfillment Curve & a Place Called “Enough”
One of my favorite personal finance books is Your Money or Your Life by Vicki Robin and Joe Dominguez. In the book, they share a graph called the fulfillment curve. Here’s my drawing of what that looks like:
While the authors shared this as a personal finance concept, it also applies to the real estate investing business. As you move up the curve, you pass milestones like survival, comfort, and even small luxuries that make life sweeter. But you finally arrive at a place called “enough,” the peak of the fulfillment curve. In terms of happiness, it doesn’t get much better than this.
But as you continue moving past the peak of the curve, each subsequent amount of money you earn and spend has diminishing returns on your personal happiness. This occurs because the extra you earn, spend, and accumulate carries with it clutter, complexity, stress, and hassle.
The place called “enough” is different for each one of us. But it’s vitally important as a real estate investor to learn what it is for you. The main point here is that smaller, simpler businesses can take many of us to this place called “enough.” And going past the peak of the fulfillment curve by getting bigger and more complex just clutters our lives.
“But I Enjoy Growing and Staying Busy!”
By this point, I’m sure some of you are with me, and others are completely turned off. That’s what I expected. But some of you may still be on the fence. Perhaps you know you’ve got enough financially, but you’re thinking something like this:
But I like working. I enjoy being busy. If I weren’t continually buying more deals and building a bigger business, I don’t know what I’d do with myself. I’d rather stick with a pattern that satisfies me than risk an unknown void in my life. What if I get bored?
I feel your pain. I’m a model member of the club for the recovering Type-A, job-identifying, workaholics anonymous.
The truth is that, of course, work is fulfilling. It really can provide a wonderful sense of purpose, growth, and challenge. I personally enjoy it, too. And there’s no reason to give up that outlet in your life if you like it.
But would your “work” projects be different if you knew you had enough financially? Would that allow you to negotiate a different approach to work, your investing, and your schedule? You could even keep doing the same basic activities, but you’d do it completely on your terms.
Sometimes this leap requires a little bit of imagination.
What Do You Want to Be When You Grow Up?
You’ve been hard at work for years. Even if you just graduated from college, you’ve still been through years of schooling, which conditions you to constantly perform and check off endless to-do lists.
I’ve found for myself that this hardworking, 9-to-5 grind for many years causes me to lose something. That something is the creativity and imagination of a child. It’s that inner force that caused you to stare off into space as a kid and say, “I want to do [insert your passion] when I grow up!” Adulthood has a way of squashing dreams with the hammer of practicality (under the disguise of money).
In 2009, my wife and I took a sabbatical trip for four months to Spain and South America. During the trip, I finally got a glimpse into my own forgotten imagination. Six weeks in, my uptight, ambitious self finally let go a little bit. It happened after spending several magical hours just sitting with my wife and watching the bay of a Mediterranean fishing village in Cadaques, Spain.
We first watched a sunset, then the arrival of a beautiful star-filled sky, and finally the biggest shooting star we’d ever seen streaking in green across half the sky! During the entire experience, I could physically feel myself relax as a big knot untied itself in my chest.
There weren’t any specific epiphanies at that moment. But I was stunned as I realized how one-tracked and focused my life was. Without that trip, that space, and that slowing down, I may have talked myself into thinking I needed to continue growing and pushing for another couple of decades. It was like I had woken up to brand new, child-like possibilities.
Go Small, and Do What Matters in Your Life
The story I just shared was my specific experience. But I’m convinced that we all can regain our own unique imaginations if we just give ourselves the space. And to create that kind of space, it helps to have a particular kind of real estate investment business. It’s big enough to give you enough financially. But it’s also small enough to give you free time and space to think, to explore, and to do what matters in your life.
What matters. That’s an interesting concept.
On my personal website, I wrote something called the “Money-Life Manifesto” that talks about what really matters to me. Everyone’s life priorities are different, but perhaps this excerpt from my manifesto will resonate with you:
- Sleep more. Relax in the morning. Sit in a rocking chair.
- Learn something new. Be impractical. Explore.
- Visit amazing places. Go on adventures. Hike trails. Ride a bike again.
- Unplug from the matrix. Do work you love. Buck the system. Say “shove it” to the man.
- Raise your own kids. Play silly games. Help with homework. Spoil your grandchildren.
- Plant a garden. Grow your own food. Eat healthy. Exercise.
- Slow down.
- BREATHE.
- Pursue your passions. Volunteer. Listen to people. Make an impact.
- Advance your cause. Create your art. Write your story.
- Get OFF the 9-5 treadmill.
- STOP selling out!
- DO what matters!
Henry David Thoreau once wrote one must “live deliberately.” Our businesses should work the same way—because real estate investing isn’t just about real estate, is it? It’s about what matters to you.
I wish you the best of luck in your real estate journey to discover what’s enough financially, to find your investing sweet spot, and to start doing more of what matters, whatever that means for you.
I’d love to hear your thoughts in the comments section below.
*I heard a variation of the “three real estate investor” story at a seminar at least 10 years ago. I think it was the late Jack Miller who told it. If someone knows differently, please help me give the correct credit.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.