Real Estate Investments can be a Job, a Business and an Investment too

As I was reading a book with a forward by Robert Kiyosaki this morning, and looking at his "Cashflow Quadrant" diagram, it hit me how my own involvement with Rental properties is ALL of the quadrants!

There has been an ongoing discussion and debate about real estate investing, being a "passive" investment, etc. Personally, I feel this is not the norm for most participants, and probably only a few individual investors make real estate a truly passive investment. That is, those who either can afford to pay others to perform all of the tasks associated with owning real estate of any kind, but especially rentals. And usually, this group are cash buyers or owners, not highly leveraged investors like most of us. In other words, if you do not have debt service, and ignore the opportunity cost of the funds sunk into the property to own it outright, then duh, there should be enough "cash flow" to be able to afford to pay others to do it all for you, making it a truly "passive" investment from the owner's perspective. Must be nice.

But for the other 99% of us real estate investors, we have to be involved to one extent or the other, actively. It is to this group of my peers I am addressing here.

So, that all out of the way, let's examine my own personal case study to illustrate this "discovery" I made this morning.

Although I have been active in Real Estate investing since 1978 when I first obtained my sales license in Hawaii, and own many units outright, my actual role(s) has changed many times in the past 40 years. I think this progression is worth noting. Just as one aspires to progress through the "Cashflow Quadrant" ending up as Investor, we usually have to first be Employees, then Self Employed, then Business owners (the other quadrants).

To make this story short, at age 59, I am currently working in ALL 4 quadrants! Not because I have to, but because I want to, and enjoy it. On every one of my properties and units, I literally act in the capacity of ALL 4 quadrants. Let's take these one at a time to illustrate.

I am legally an Employee of my own firm. I receive a salary and have for the past 32 years. I pay social security and the other wage burden withholdings like any employee does. This is my W-2 income and pays my bills, establishes Social Security benefit, IRA contributions and a basis for my health insurance coverage.

In the capacity of Employee, I work IN the business, as a handyman, as a property manager, as a contractor/remodeler or helper, as well as a land-man finding and negotiating deals. This brings up a good point, that when you are providing any type of service or input into a rental property, you should account for that contribution. It is not "Free" just because you don't write a check to someone else for it. Failure to account for this undermines your property performance analysis (Garbage in, Garbage out, aka GIGO).

In the last 5 or so years, I literally resumed buying rental properties in order to create a JOB for myself! I retired 20 years ago. And played a lot, for many years. BUT as young retirees often discover, I got bored. Actually, I just missed the juice and excitement of being in the game, business, which allowed me to retire at age 39. Just because we don't have to work anymore, does not mean we don't want to! Hard to turn off the drive and ignore the sense of satisfaction I enjoyed building my business for many years, even when I was able to walk away. So, I bought old raggedy rental properties which I could work on, with my own hands, fixing them up on my own schedule and at my own intensity level. We do this almost daily, Ande and me (spouse and partner of 36 years). We love it! Not all the time, of course, with the occasional crap that comes with being a landlord, LOL. But it gives us something to do which we enjoy, and which we work around our playing in retirement.

I am a Business Owner too. I have other employees working for me, on the rental properties. I often work alongside them on projects, as a fellow employee, but they also work independently of my personal presence.

I operate my Rental Business as a cash flow producing entity. We acquire and renovate rental properties, find tenants for them and keep them in good repair and occupied. A Business. This is 1099 income.

Both the Employee and Business quadrants are closely related to the third quadrant, Self Employed. So, I will not belabor that portion, since it is interrelated already. But, suffice it to say, you can be self-employed without having a business (I.e., no other employees) so the distinction is relevant. Even at times when we had no employees, we still worked on our rentals ourselves, and that would be Self-Employed.

And this brings us to the final quadrant, Investor. Well, it is important to note that we OWN real estate which is the central feature in the above activities. In other words, we are not employees of, or business operators of, OTHER owner's properties. We only work on and manage our own properties. Therefore, we are also Investors. We enjoy many of the benefits all investors do, as owners of real estate. Possible appreciation in value, tax benefits, mortgage paydown, sweat equity creation, etc. Any funds we invest in these rental properties earn a return (hopefully!). The accrued natural or forced/created equity also earns us a return. Assuming we, instead of doing all the tasks of running a rental business ourselves, paid someone else to perform all those duties, then we would be "Passive" investors as the owners of the real estate. Of course, we choose to be more involved ourselves and are compensated for the additional work, accordingly. Plus, as hands-on owner/operators, we enjoy other benefits such as much more control over the properties and tenants, which can add up to a lot of money as a result. We choose our tenants ourselves and are close to them, meaning we are on top of the situation. Also, we are on top of the properties' condition and situation too, catching problems while they are small and easily remedied. Maintaining the standards and condition to everyone's benefit, ours and the tenants, current, and future. This all reduces turnover expense, drama, damage to the properties and vacancy rates, as well as supports higher rent levels, timely payment of rents and general property condition and appearance.

Not saying being a hands-off, absentee, truly passive owner cannot be successful. Apparently, some are happy with this type approach and presumably make money enough doing so to continue it. But, it is not the way we operate. We have the time, interest, skills and inclination to do all of this ourselves, and have done so successfully for many decades, and for over 100 properties of our own. Just saying, ours is ONE way to be involved with real estate investing, that has worked out very well for us and others.

Well, that is it for now. We are active in ALL 4 quadrants of Kiyosaki's matrix on all of our properties, at the same time. What do you all think? Please comment and discuss below. Thanks!