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The Psychology of Money: 5 Lessons for Real Estate Investors

Top 5 Lessons for Real Estate Investors

“The Psychology of Money” by Morgan Housel is one of my recent favorite books. Although it’s not specific to real estate investing, the concepts apply to any aspect of investing, including real estate.

Housel’s book is not an instruction manual on how to invest. Instead, it’s full of sound advice on navigating your investment journey and making money while staying sane. Today, I’ll briefly explain five lessons I learned from this book and how they might apply to you as a real estate investor.

Define the Game You're Playing

Make sure your actions aren’t influenced by someone playing a different game. As an investor, you hunt for deals to propel you toward your goal. You crunch numbers, consider strategies, and observe other investors’ actions. Sometimes, you stretch for a deal that doesn’t make sense for your life because you saw a colleague succeed. It’s human nature to compare.

But letting someone else’s game dictate your actions is problematic. Even if you make the same income as someone else, your expenses and responsibilities are likely different. Your goal might be to collect monthly cash flow and let a property appreciate long-term.

Meanwhile, your friend might try to fix and flip for short-term gains. These properties’ expenditures, tax implications, and time commitments differ. Taking action for a game you don’t want to play can be disastrous.

The moral of the story is: Don’t take on a riskier project just because your friend made money on it. Develop a plan that works for you and ensure your actions match that plan.

Define the Cost of Success and Be Ready to Pay It

Housel calls this concept “Paying the Price.” It stems from the idea that nothing worthwhile is free. We understand this for physical items and services but often overlook that investing has its price. Most financial costs don’t have visible price tags.

Instead, the price comes in uncertainty, self-doubt, and sometimes regret. Whenever you buy or invest in property, there’s a price tag beyond the sales price.

What if you get a bad tenant who trashes your place after months of unpaid rent? What if you missed something during the inspection that cost a fortune to fix? What if the neighborhood turns out to be drug-ridden, and no one rents your house? Aside from money, these scenarios cause uncertainty, self-doubt, and regret. But are those reasons not to invest?

Housel suggests viewing these hefty price tags as ‘fees’ for what we want, not fines or punishment. If we see these costs as necessary for our goals, we’ll accept them as part of the purchase. We control how much we want to pay for our future wealth through investing. Higher risk means a higher price tag but also a higher potential return.

You can keep your money in the bank with little uncertainty in CDs or a Money Market account. However, you might have little to show for it at the end of your working years and significant regret. The decision is yours. We all tolerate different rates of risk. Whatever helps you sleep better at night is the price tag you should accept.

Less Ego, More Wealth

Let’s be real: No one cares about your fancy car or expensive watch. If you see a guy with a nice car, you think, “What a cool car!” Meanwhile, the guy buying the car wants people to say, “What a cool guy!” If you’re buying to show off, stop it. When you let go of your ego, you no longer buy things to maintain pretenses. Wealth is created by not buying what you want now so you can have more options in the future.

This applies not just to luxury items but also to deals you’re trying to force. If an agreement wipes out your cash reserves, reconsider. No matter your earnings, you won’t build wealth if you can’t control spending. All spending should bring a return on investment.

Use Money to Take Control of Your Time

Money can buy many things, but none pay a higher dividend than time. The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It doesn’t matter what you want to do with your time. You might love your work and want to continue. You might want a long vacation with your family. You can do that if you don’t have to show up to work. As a freelancer, you can choose jobs without being tied to outcomes.

The freedom to tell someone to go pound sand is incredible. On the other hand, a big house, fancy car, and expensive clothes can tether you to a place you don’t want to be. Choose how you spend your money wisely.

Increase Your Time Horizon

Time, not brains, is the most powerful force in investing. Warren Buffett started investing young. Though considered an intelligent investor, most of his billions came from compounding interest later in life.

This applies to real estate, too. Over time, real estate values trend upward. Over the last 20 years, real estate has appreciated an average of 4% annually. The previous ten years saw immense appreciation in the Boise Metro Area of Idaho. Except for 2023, the area increased at least 6% per year.

A longer time horizon means big mistakes fade into the background. Rebounding from a bad tenant or a faulty purchase isn’t as painful when investments increase in value and generate rental income.

Final Thoughts

My friends, I hope you found value in these lessons from Morgan Housel’s “The Psychology of Money“. If you have other lessons or tidbits you thought were great, I’d love to hear about them. But if you need a real estate investing guide, please contact us.

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