If you only have a minute, here are the takeaways:
- Investing is emotional. I made my second real estate investment. It was more of an emotional decision than a numbers-driven one. In my opinion, this is OK (even normal) but don’t fool yourself thinking otherwise.
- Upstate New York and self-funded. The investment is an apartment community in upstate New York. I funded it with the money after selling my house and from savings. Ideally, this investment adds a revenue stream that funds my Business system target.
- Play your advantages. Most retail investors do not have an analytical competitive advantage. But you can have a behavioral competitive advantage. Counterintuitively, this usually means doing less, e.g. less trading, less complexity, etc.
- How to increase your behavioral advantage? Understand your asset allocation, automate your saving & investing, have a long time horizon, and protect your downside.
- Survival. The cornerstone of any strategy. You have to stay in the game long enough to win it.
- What game are you playing? The game of money is fascinating, but the real game we’re playing is the happiness game. And happiness not having everything you want, but wanting everything you have.
I made my second real estate investment at the end of 2022. Once I started to document my thought process, I realized how much my investing was an emotional and intuitive decision, not a math-based decision.
I believe I’m a rational, logical person. I could sit down in front of a spreadsheet and run comps on cash-on-cash returns, net equity returns, IRR, etc.
But is that the best use of my time? If I spent 10 hours crunching the numbers, would it give me direction on this decision? Or was my mind already made-up?
Morgan Housel’s thesis from The Psychology of Money is this:
Doing well with money has little to do with how smart you are and a lot to do with how you behave.
Most retail investors (including myself) don’t have an analytical advantage. But I can have a behavioral competitive advantage. Counterintuitively, this usually means doing less, e.g. trading less but buying and holding more. If I’m behaviorally sound, can I make occasionally risker bets?
Perhaps. First, let’s look at how I came across this deal, how I’m funding it, and other specifics.
Deal Details
In January 2020 I made my first real estate investment. It was a luxury mixed-use apartment complex (4 buildings, 188 units). I got access to the deal because the developer is the landlord of my father’s restaurant. The deal was interesting because I wanted to start learning about real estate and this developer has a strong 15-year track record within the city.
This new deal was put in front of all current investors. It’s a 156-unit apartment community in upstate New York, currently operating at 96% occupancy.
I funded this investment with the money from selling the house in Albany before moving to Dublin, Ireland. That covered 80% of the investment.
The rest came from savings. As a rule, we save 20% of our income. First, this goes to an emergency fund. After we have 6 months’ worth of cash, it’s split between low-cost Vanguard funds and held in a savings account, to be used opportunistically for investments like this.
How does this investment fit into the long-term plan?
The long-term plan is made up of two parts: A Money system target (e.g. able to fund lifestyle with a 4% safe withdrawal rate) and a Business system target that cashflows enough to fund our lifestyle and invest back into the Money system.
I calculated my Business system target as $70,000 /month.
Business system target = Gross Living Cost x 5 = $14,000/mo X 5 = $70,000/mo
This investment is about building additional revenue streams that — in aggregate — start to add up to this target.
Next, how does this investment fit into my asset allocation?
The rule of thumb for my age is a portfolio made up of 88%-65% invested in stocks (88% based on Vanguard Target mix and 65% based on the 100 rule).
This guideline is a bit oversimplified — it doesn’t account for securities like crypto, equity, or real estate. It also advises keeping only 1% cash, which violates every fiber of my immigrant mindset, e.g. money is safest stuffed into an empty tin of Folgers Classic Roast and buried in the backyard.
With that said, I also don’t think my situation is that unique. This asset allocation works for 95% of people. As much as I like to think otherwise, I’m probably no special snowflake.
Here is my current asset allocation.
Two things I observe:
First, my portfolio is 60% stocks. That’s slightly under-optimized but in my opinion, acceptable. Second, I am holding a lot in cash — too much, even for me.
Where’s the optimal place to invest the cash? Is it this real estate deal? Do I invest more in crypto? Should I park it in low-cost index funds?
These questions lead to my next consideration: opportunity cost.
What is the opportunity cost? What is the downside?
At this point, my mind is already 90% made up to invest in the deal. But thinking through the opportunity cost and downsides are still important thought exercises.
With 10% of my portfolio in crypto, I’m not eager to double down. I still don’t understand the space. I don’t follow it closely, I don’t understand the opportunities and traps. Crypto was my “mental outlet,” a way to get out some gamble. I just happened to get lucky (so far).
If the real estate investment required active participation (e.g. buying a duplex that I was managing and renting out) I’d probably opt to put the cash in low-cost index funds. However, this is a passive deal. I can take my most valuable asset (time) and invest it in my career and build an audience.
Another option: wait for another opportunity. This is less interesting to me, as in the past I think I’ve been guilty of waiting for some nebulous, bigger-better-deal, versus addressing the opportunity in front of me.
The final consideration before making this investment: if this investment goes to zero, is it an irreversible setback? The answer is a firm no. I’d be upset, but it wouldn’t affect my day-to-day life.
I bring this up last, but as Morgan Housel explains, this concept of survival is the cornerstone of any strategy:
The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference. This should be the cornerstone of your strategy, whether it’s in investing or your career, or a business you own.
Money and Happiness
Every time I write about money, I’m obligated to wrap up with this idea:
Every morning I wake up, look around at my family, and I can’t believe how rich I am. I wake up and think about the challenges and opportunities in front of me, and feel so lucky.
A few additional dollars doesn’t affect my day-to-day happiness.
I’ve been fascinated with the game of money since I was a kid. I enjoy writing and thinking about this game.
But the real game is the happiness game.
And happiness is not having everything you want, but wanting everything you have.
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