My tenants don’t know this but I enjoy coming over to hang. I’m cooped up in my house working from 6am – 10am every morning, so it’s a pleasure when real human beings reach out to see if I can take a look at a problem. While I’m there, I enjoy asking to see how they’re doing.
One 26-year-old tenant told me he just hated his job, couldn’t stand his micromanager, and wanted to be free. Well what do you know! Same here when I was your age buddy. Months later, he actually quit his job to become a deep sea fisherman up in Alaska. Anybody want to go with? I got the hookup.
The closer the relationship I can develop with my tenants, the less likely they’ll screw me over. Don’t all tenants want to just spend time with their landlords on a Saturday morning? Of course not! I’m a little crazy that way because I’m always looking for a story to uncover to share with all of you. It’s sort of like being an investigative reporter, or Chip, from The Cable Guy.
Besides knowing how to fix things myself, there’s a big reason why I’m always down to visit my rentals. I feel bad spending so little time thinking about my rental properties proportionate to their value. Yes, I killed myself when I was younger for the privilege to take some risk. But once you get on the right side of inflation, building wealth gets easier over the long run.
Rental property makes up around 30% of my net worth (40% if you include my primary residence), yet I often forget I even have rental properties because no attention is needed most of the time. Only when I get a rent check or a text to fix a leaky dishwasher valve do I realize, “Oh yeah! I got me some rentals. Sweet!”
Net Worth Optimization Exercise
I’d like everybody to list out their assets from most valuable as a percentage of net worth to least valuable. Now assign a percentage of time you spend thinking, maintaining, or getting smart about the asset class per week, month, or year. Finally, take the time you spend on each asset class and subtract its percent of total net worth. Wherever you are short, consider spending more time on that asset class.
Here’s an example of my net worth optimization exercise, with corresponding thoughts.
Real estate (30% short): Real estate is a large portion of my net worth since real estate is the asset class I was most focused on accumulating in my 20s and 30s. Given the appreciation since the downturn and the decision to purchase a fixer in 2014, the overall weighting is at an upper limit of comfortability. Coming up 30% short is a big spread that needs narrowing, especially since we’re so far into the recovery.
I plan to spend more time thinking about how I can better manage my risk during a downturn, while also diversifying my real estate holdings into cheaper, higher yielding areas in the heartland through real estate crowdfunding. So far I’ve been regularly paying down the highest interest rate mortgage while also building up a cash hoard. Prices are weakening in SF, and I want to be prepared to maybe buy another property before another major IPO.
Online business (30% Over): I’m spending most of my time on the online business because it’s the most fun and has the most upside. If I didn’t believe in the upside potential, I’d lower the time spent closer to 30%. However, blogging is the best business in the world with a high correlation with effort and reward. What other business is there that costs so little to run, can be done anywhere in the world, and doesn’t require you to have to sell anything? I strongly believe my effort will produce a greater return each year than every other asset class.
Public equities (6% Over): I’m spending more time thinking about public equities because I’m not bullish on stocks. The S&P 500 is expensive and I’m doubtful that Trump will be able to deliver on all his promises regarding healthcare and tax reform. Therefore, I’ve been busy trying to prudently reduce exposure, even though stocks are a small percentage of my net worth (~12%). Right now I’ve got a ~48% weighting in stocks in my public investing portfolio.
Public fixed income (Equal): I went from spending 0% of my time on fixed income with 0% exposure to spending 10% of my time and having 10% of my net worth in fixed income since the 2016 presidential election. I just love being able to return a highly probable 4% – 6% gross yield until maturity since my net worth growth target is only 4% a year. To earn a higher yield compared to my mortgages is a fantastic arbitrage I’m willing to play for as long as possible. Every week I’m looking for new California municipal bonds to buy. Related: The Case For Buying Bonds
Private investments (4% Short): After spending lots of time researching each private equity or private fund investment before investing, I tend to forget all about them until there is a quarterly performance update. Since I can’t do anything about the funds due to a 5-10 year lock up, I spend my time on things which I can control, which is mainly my online business. I should probably spend a little more time thinking about new private investments since they fit my desire to protect myself from myself.
CDs (2% short): I used to love CDs given they were paying 4%+, 7+ years ago. Now, the best CDs are only paying ~2.5%. They should go higher as interest rates rise, but they aren’t as tax efficient as municipal bonds, which are already yielding higher rates. I’m spending more time thinking about how to redeploy capital when my CDs expire. Related: CD Investment Alternatives
Never Neglect Your Most Valuable Assets
You don’t have to find parity with the value of your assets and the time spent on each asset. You just need to make sure your asset allocation is risk appropriate. If you’ve got one asset class that is dominating your net worth, then it’s a good idea to spend more time getting smart about what’s going on, especially since times are so good. When times turn bad it may be too late.
I’m a big proponent of tracking your net worth due to neglect. When we have a child to raise, elderly parents to take care of, a job to suffer through, a business to run, or a world to see, it’s easy to lose track of our wealth. Once a quarter, go through the exercise of analyzing your net worth and time spent with each asset class. You might not end up taking action, but at least you’ll become more aware of what you have.
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