Think Different: Why Real Estate Isn’t for Everyone
It’s Time for Property Managers to Lead with Honesty, Not Hype
I wrote quickly about this on a LinkedIn post last week, but this was a subject that I thought needed more depth, so thankfully I’ve got this long-form newsletter for that purpose! For those who don’t want to jump over to LinkedIn, the short version is that my property management company had a distraught client last week who was contemplating suicide because the stress of repair costs on his property was driving him to severe anxiety and depression. I had to intervene, recommend that he contact the suicide hotline, and try to calm him down so that we could take care of his legal obligations to repair the property. In the end, my main takeaway was simple: not everyone should be a landlord.
All too often, PM company owners look at things only through their own lens, seeing the wealth building potential of real estate and thinking that this is a path to riches for literally everyone who is willing to take the plunge. But entrepreneurs and business owners tend to have a blind spot and not realize that everyone else isn’t like them. A study in the Journal of Innovation and Entrepreneurship suggests that somewhere less than 30% of the population possesses both the personality fit and the emotional resilience to be a business owner (and yes, being a landlord is being a business owner).
A survey undertaken by Founders Report discovered that 88% of entrepreneurs struggle with at least one mental health issue. Zipdo published a comprehensive summary of available statistics and found, among other things, that 52% of entrepreneurs experience burnout at least once a year, and 65% feel overwhelmed on a regular basis. So even the people who do choose to go down the path of business ownership aren’t all that well suited for it. It’s a tough game to play. And few have the genetics and psychology to be able to weather the bad patches. So why are you pressuring people to go down that path? Trust me, there’s plenty of available rental properties out there to manage without you putting undue pressure on a school teacher with clinical anxiety to buy another rental property.
I believe those of us in the industry have a moral and ethical obligation to be honest with people about the risks, emotional ups and downs, and frustrations about being a landlord, and we should learn to recognize the signs that someone isn’t a good fit for it and steer them in the direction of selling their property if needed.
The “Everyone Should Be a Landlord” Fallacy
It’s all over LinkedIn and other social media. Every property manager or real estate agent who focuses on investment property is constantly telling everyone they can reach that real estate is the ultimate wealth-building tool. And don’t get me wrong, this is an easily defensible position if looked at purely from a financial standpoint. Real estate makes up the vast majority of the average family’s net worth in America. And we’ve all seen the statistics on how many wealthy people made their first million in real estate. Real estate is a great wealth building tool.
But the thing is, that doesn't mean that everyone should invest in it. Or at least not beyond their own family home. Because the reality is that real estate investing is never actually passive. We all try to make it as passive as possible for our owner clients, but ultimately it’s never going to be as simple as just dumping their money into an index fund. Index funds don’t need HVAC system replacements, and you never have to evict someone from your holdings in the SPY ETF. That’s true passive investing. Real estate will never be that. And while you can handle those stressors, both financial and emotional, many other people cannot.
Obviously I’ve been investing in real estate for a long time now. I bought my first house when I was only 20 years old and making less than $30k. I owned that house until just recently, and it was a good (but not great) investment. But the thing is, I have much higher risk tolerance than 90% of the population. Evicting someone isn’t going to cost me any sleep, and I’ve had the cash reserves to handle unexpected repairs.
On the other hand, let’s look at my parents. My father is very much like me, and he’s invested in rental properties for many years. My mother, though, does not handle it well. If someone isn’t paying the rent, or a large repair bill comes in, she panics. Her anxiety kicks into high gear, and it doesn’t even matter that she and my father have a net worth of several million dollars and could literally rebuild the entire house from the ground up with cash. Her brain just doesn’t process things that logically. People are different. And we need to recognize that.
People who have high anxiety, or low risk tolerance, need to be steered to investments that are more fitting for their personality. Index funds, treasuries, CDs, high yield money market funds, etc. are all fine investments for someone who needs a truly passive investment vehicle that will not cause their anxiety to spike. And you, as the real estate expert, should be the person to let them know that they are going down the wrong path if you sense that they can’t handle the stress.
Recognizing the Signs
If we’re going to do the right thing and help our clients make the right decisions, then we need to know what to look for to see if they aren’t a good fit for being a landlord. Many of these signs can be discerned from a discovery call before someone ever becomes a client, and in fact, your BDMs should be trained to watch for those signs.
One way to suss out these red flags during a discovery call is to ask them what they didn’t like about their last property manager (assuming they had one). If you are immediately hit with complaints about how expensive repairs were, how stressed they were about vacancy times, or how the rent is barely covering the mortgage, then you’ve found yourself someone who shouldn’t be a landlord. People who understand the benefits of real estate and the ups and downs along the way don’t make such comments. Weed them out and recommend that they sell instead of being a landlord.
But what about someone who is already a client or who slipped through the discovery call screening? What do you look for? The short answer is to look for anything that makes them a bad client. Are they freaking out over a $2k HVAC repair? Is the prospect of dropping the rent by $100 to get the property rented sending them into a downward spiral? Are they blowing up your phone because it’s the 5th of the month and the tenant hasn’t paid the rent yet? Folks, I know you don’t want to hear it because you don’t want to lose owner clients, but these people should not be landlords.
Do this exercise when you have some time. I do it on occasion for my own portfolio of PM clients. Go into your PM accounting software and look at the list of owners. Scroll down the list and see how many names you immediately recognize, and see how many you barely remember if you remember them at all. The ones you barely remember are the people who should be landlords. The ones you immediately recognize are generally the people who are always over-involved, and the reason they behave that way is because they aren’t well suited to be a landlord. Every little hiccup freaks them out, and when they’re freaked out, you hear about it. That’s why you remember them. The passive landlords who understand the value of real estate and have the personality and emotional stability to handle the long-term process of building wealth through real estate never call you. They just let you do your thing.
Some PMs pride themselves on having high empathy or high “EQ” and being able to calm these clients down. Sorry, but that’s the wrong way to look at this. All you’re doing is putting a bandaid on a gunshot wound. You’ve calmed them down on that phone call, but then they’re going to go and stew over the situation for the next week and be miserable with anxiety. The very next time something unexpected pops up, they’re going to have the same reaction, and you’ll be right back there trying to calm them down rather than doing the honest thing and telling them to sell.
Ethical Management Sometimes Means Advising to Exit
When so much of our industry’s brain power is put into the idea of door growth, it’s hard to imagine encouraging an owner client to sell a property, but that’s exactly what you should be doing in many of these situations. Not just because these kinds of clients are bad for the functioning of your business, but because it’s simply the right thing to do for the client, which is what should actually matter. The client is literally suffering emotionally because of their ownership of the rental property. Do the right thing and help them get rid of the suffering.
Memorize this line: “have you considered whether continuing to own this property is actually serving your desires and goals?”
The reason that line should be used is that it doesn’t accuse the client of being “less than.” It doesn’t make them out to be a weakling who can’t handle the stress. It’s not accusatory. It just reframes the situation and makes them consider whether they truly want to own a rental property. And to be honest, most people who are reacting this way already know that they don’t want to own a rental property. They’ve just been constantly told that they should, and they’re certain that you’ll tell them that they should since it’s your entire business. If you stop and ask them that question, you’re likely to find quite often that the person just explodes with all of the thoughts they’ve been holding in about how they literally hate this and want out. Listen to them.
Once you open that conversation, help them do an honest assessment of the situation. Tell them what their property is worth, what the net income is likely to be for the next few years, and the potential risks that they always have (big repair bills, non-payment, tax increases, etc.). If the owner finishes that conversation and is still leaning towards owning the property, then okay, they might be able to handle this! But if they’re not confident that this is for them, then start talking about what a sale would look like. Be sure to be honest about the potential tax implications, also.
Your goal here should be to act as a legitimate advisor, not someone who is just pushing investment in rental properties because managing them is what you do. You literally have a fiduciary obligation to look out for the best interests of the client over your own. That isn’t just about their financial best interests, it’s their best interests overall. Honor that obligation. Help guide them to the best decision for them.
It might also help to have a financial advisor on hand that you can refer them to in order to discuss more passive investment options. Knowing that they have good alternatives to continue making money in a way that isn’t so stressful can be a life changer for many people. I promise you, whatever you lose on fee income from that property being sold is miniscule in the grand scheme of things. Help that owner and they’ll become your greatest advocate.
Reputation is a Long Game
“It takes twenty years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” - Warren Buffett
Owner clients talk. Even former clients talk. The property management community is a small one, and the landlord community is also. It doesn’t take much for a former client to spread the word about you, good or bad. What do you think is going to be better for your professional reputation? An anxiety-ridden client who is holding on to a rental property and miserable every minute, complaining to everyone who will listen about her latest repair bill or missed rent payment? Or a former client who tells everyone who will listen how honest you were with them and how you helped them exit a situation that they hated?
Not many property managers have the backbone to do something that isn’t in their own financial best interests. But that means that if you’re the rare PM who is willing to do so, then you’ll stand out all the more. Imagine hosting a podcast where you talk honestly about these things and tell your listeners that not everyone should be a landlord. In other words, be the polar opposite of grifters like Grant Cardone. Be a damned human being with morals and integrity. As sad as this is to say, being that kind of person is an extreme rarity in today’s world, and things that are extremely rare get attention. While every single one of your competitors are trying desperately to convince the single mom nurse that she should dump her life savings into a rental property even though she is highly anxious about the idea, and your podcast is there giving it to her straight, you just might get a 5-star Google review from that person who you’ve never even had a conversation with.
Frankly, we should all be doing this just because it’s the right thing to do. It’s the compassionate thing to do. But if that isn’t enough to convince you, then do it because it can have real reputational upside for you in the long run.
Think Different
Steve Jobs wasn’t exactly a nice guy by all reports of people who were close to him. So it might seem odd that I would use his photo and one of his famous marketing taglines in an article talking about PMs having a little more compassion with clients and potential clients, but I put that quote there because it’s relevant to the message that you can do things in your PM business completely 180 degrees apart from how the rest of the industry is doing it, and still come out on top.
The “Think Different” campaign that Jobs oversaw with marketing agency Chiat/Day was intended to express a very powerful message: challenge the status quo. Even the phrase itself is bucking the status quo, because it’s obviously grammatically incorrect (the correct form would be “think differently”). Chiat/Day chose this specific formulation of the idea because it made it clear that you weren’t just supposed to think a little differently. You were supposed to be completely different. Bold. Rule breaking. Brave.
And that’s what I’m encouraging you to do here. Everyone else is telling clients that it is always crazy to sell property. That it is always a good idea to be a landlord. That real estate is always the path to success. Think different. And nothing is ever more different than honesty in a world that is sorely lacking in it. Be brave enough to tell people the truth. Even if it means you lose a door. I promise you that you will ultimately gain more than you lose.
We’re Hiring!
My property management company is looking for another BDM! If you have PM experience, and you either live in Atlanta or are willing to move here, please send me a resume. The position offers a combination of salary and per-door commission (with a heavy emphasis on commission), so we’re looking for go-getters who will put in the work to close leads. You would start off with 40+ leads from day one, so plenty of opportunity. Georgia real estate license required, or must be willing to get it prior to starting. If interested, email me a copy of your resume to toddo@revolutionrm.com
Open to Work
Are you an experienced PM industry employee looking for work? Or are you a PM company or vendor seeking the best talent? Send me your info and I’ll feature it here! And look forward to future editions where we’ll be featuring some of the best RTMs available!
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Debate Me
Disagree with my take here? Have a different perspective? There’s nothing I love more than a good debate or even just an intelligent conversation. If you’d like to jump on a podcast recording with me to discuss this topic, please let me know!