We have heard mention of this principle a thousand times, "it takes 10,000 hours to become an expert in anything." The problem many of us run into, though, is there are only so many 10,000-hour blocks in our lives.
Let's do some math - a year is comprised of 8,760 hours, so 10,000 hours is just over 416 days. Theoretically, it seems that in a little over a year, we can become an expert in something. But, we must consider that we all have several things demanding our attention throughout the day: our day jobs, our families, our projects and hobbies. At a minimum, most of us spend 2,000 hours a year working and 2,555 hours sleeping, which leaves 4,555 hours for everything else we need and want to do.
So, how does this relate to real estate investing? As investors, we have to decide whether we will spend the time to become experts in real estate, or if we are going to focus our attention on another area and invest passively.
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Actively Investing in Real Estate
Active real estate investments take on a couple of forms with varying levels of involvement: think flipping houses, developing land, managing rental units, both residential and commercial. Developing land and taking on renovation projects will be the most involved investment opportunities because they require hands-on management daily to ensure the projects are on-schedule and on-budget. There are engineers, architects, construction workers, and vendors who must be scheduled for time on the property to complete the work. If one, or many, parts lag, the whole project's timeline can be compromised. These types of projects also require a certain level of knowledge and skill, and often require large capital infusions along the way. Managing rental units requires less effort, but still needs an active investor to make decisions (about tenants and property), collect rent, complete capital improvement projects, and oversee the maintenance.
Passive Real Estate Investments
On the other hand, passive real estate investments require little to no involvement past the initial investment, other than occasionally checking to see how the investment is performing. While these investments do offer a hands-off approach to investing in real estate, they also leave control of the investment in someone else's hands. Passive investments could be through REITS (real estate investment trusts), mutual funds, and through investing in private equity real estate syndications - also known as 'crowdfunding.'
In general, a company in one of these categories combines their own capital with that from investors to acquire properties that they then actively manage so investors can remain passive. Investors earn dividends on their investment and often earn a share of the profits as well. Minimum investment requirements vary and can be anywhere from a few thousand dollars, all the way to a few hundred thousand. The minimum investment in the Reliant Self Storage Fund II is $50,000, for example.
Crowdfunding is a relatively new platform providing investors the opportunity to invest passively in a broad range of real estate asset classes nationwide. Crowdfunding platforms facilitate funding of real estate deals by pairing those needing capital for their deal and those looking to invest. Generally, investors can review information on multiple deals and make decisions on which they want to invest in and how much they want to invest (this is the active part of the investment). Then, the sponsor who is raising the money, takes care of the day-to-day management of the property, including renovations, tenants, facilities management, and, eventually, the sale of the property. Depending on the type of crowdfunding platform, investors will see their return upon the sale of the property, or on a monthly or annual basis if it is a long-term hold. This is exactly the structure here at Reliant. Individuals can invest in our Fund II, will receive a quarterly dividend on their capital, and will share in any profits the fund makes over the course of its life.
When self-storage developers are looking at prospective opportunities, they should evaluate the utility capacity in the area as part of their due diligence process. Bringing these services to a site where they do not yet exist can be a time consuming and expensive process that involves significant coordination with utility providers and often, other property owners and the local municipality.
Related Link: The Worst Deal Reliant Has Ever Done
Applying the 10,000-Hour Rule to Real Estate Investments
Just as Steve Jobs, Warren Buffet, and Bill Gates became experts in their field leading to the success of their companies, investors can apply the 10,000-hour rule to their investment strategy.
If your chosen career is in real estate, you may have reached this 10,000-hour mark, or at least be well on your way. Each day you are honing your craft and learning more about the intricacies of the industry and uncovering investment opportunities. You are having conversations with colleagues, sellers, buyers, asset managers, property managers, actively increasing your knowledge base and widening your perspective. If this is you, actively investing in real estate may be a natural fit because you will be using your skills, experience, and knowledge in your investments.
However, if real estate isn't your full time job, passive investing in a fund like the Reliant Fund II might be a safer route. Doubtless you have already invested 10,000 hours learning your chosen career and are an expert in your field. Unless you are willing to put in the same time to thoroughly understand how the real estate industry operates, and the various investment and underwriting strategies, passive investing is probably a better option. And while there may be a learning curve even to passive investing - you want to understand the investments you are looking at, the legal documents you need to sign, and to be sure the sponsor can deliver to their predictions - it will still be significantly less than the 10,000 hours you would otherwise need to actively invest in real estate yourself.
For example, a developer may go to build a self-storage facility only to find an abandoned underground oil storage tank. If that tank corroded and leaked, there could be oil or other pollutants seeping into the soils and/or groundwater below.
In situations like these, the developer will often need to notify the U.S. Environmental Protection Agency who will then require additional testing and potentially, remediation. Mitigating environmental contamination can be a costly endeavor.
Becoming an expert requires time and intentional effort learning, trying, and practicing your skills. Actively investing in real estate is no different. To be successful, it requires knowledge of the industry as a whole, property types, specific markets and submarkets, property management principles, and investment strategies. Hiring experts can help mitigate some of the risks, but there is no substitute for deeply understanding the topic yourself.
If actively investing isn't right for you, passive investing through REITs, mutual funds, and crowdfunding opportunities like the Reliant Self Storage Fund II are options worthy of consideration if you want to earn a respectable return with less than 10,000 hours of work, figuring it out.
Related Link: Reliant Mission Statement