I’m not a secret agent.
I don’t work for the NSA.
I don’t parade around at night dressed in women’s clothes.
My little secret isn’t all that impressive, but it is something that I don’t think I have ever mentioned on this blog.
I am a real estate investor.
It isn’t really that big of a secret, but it is something I haven’t really felt the need to talk about here, because I didn’t think it related very much to software development.
I am beginning to change my mind though…
Software developers need to know how to invest
It isn’t just software developers, but everyone needs to know how to invest. There is a extremely large amount of bad information about investing and money management out there and it is easy to just do what your financial advisor says and retire at 70 years old barely making enough to survive.
Money management and investing skills are especially important to a software developer, because software developers tend to make a pretty decent wage.
Let me start off by telling you a little bit about my story and how I got started in real estate investment.
I actually started investing in real estate when I was 18 years old. As soon as I got out of high school and went to find a place of my own to live, I had decided that I did not want to rent.
My limited, but somewhat correct assessment at the time was that renting was throwing away money, but if I bought a house instead, I would be actually investing that money. (This view is not quite correct, as it is a bit of a simplification, but that is what I thought then.)
I didn’t really have any money, just a couple thousand dollars, but I decided that I would try to find and finance a property somehow.
I finally found a pretty beat up small two bedroom house for about $68,000 that I could buy, but I needed to borrow some money for the down payment and because I had basically no credit history at all, I had to accept a 13% interest rate with a stiff penalty for paying off the loan early. (Ouch)
Somehow I did it and became a homeowner though and ever since then I have been learning about real estate investment and adding more properties to my holdings.
After purchasing my first house, I ended up moving to Santa Monica taking a job that I was not at all qualified for during the crazy dot com boom. I ended up renting out my property to a friend of mine when I left town.
Renting was hell. I had all kinds of problems. I had a string of bad renters who took advantage of me. The house got torn up and I got overcharged to repair it. Lots of bad stuff… It was so bad that I tried to sell the house, but the deal fell through.
But, while I was in LA “making the big bucks,” I started to do a little math. I was making a pretty big income, but even at the size of the income I made, if I saved almost all of it, I would only become a millionaire after 10 years of hard work—assuming nothing went wrong and I could keep that inflated hourly rate that long.
I remember thinking to myself “holy crap am I about to waste 10 years of saving every dime I can to barely become a millionaire in 10 years?” I didn’t even realize at the time that inflation would have made the 1 million end up actually being worth about 800k. Also, 1 million US dollars isn’t exactly rich anyway.
I remember thinking a more realistic scenario would be 20 years, and that was something I couldn’t stomach.
So, I started to do a bit of research. How could I do something smarter than the default? I first looked at mutual funds and thought that a 6-7% return would accelerate my plan by quite a bit, but when I looked at the numbers, I realized that the compounding effect would take around 20 years to start to be really effective as well.
For example, if I had started with $50k, adding $9k savings per month for 10 years at a 6% interest rate, I’d end up with $1.5 million at the end of 10 years, but $4.1 million at the end of 20 years. $4.1 million is pretty much rich, but 20 years is still a long time and a 6% interest rate is not something you can just bank on for 20 years.
There had to be another way. Some way that I could do something smarter.
I did a bit more research and found that the richest people in America made their money in real estate. I also stumbled upon this interesting scenario that convinced me real estate was the right track.
Suppose you find a stock that you know will increase in value. You go to the bank and say, “hey, can I borrow $90k to buy this stock? I’ll put down a down payment of $10k.” You’ll be laughed right out of there. If you open up a trading account on a margin, you can usually only leverage at 100% or less. So, if you wanted to buy stock with credit, you could put down $50k and borrow $50k… perhaps.
Now suppose you find a house that you think is a good deal for $100k. And suppose that house is actually worth $120k—because house prices are very subjective. Now suppose you go into the bank and say “hey, can I borrow $90k to buy this house, and I’ll put down $10k?” If you have decent credit, you’ll get the loan easily.
Now, let’s suppose that the stock actually increases by 20%. So, the stock is now worth $120k. You made an investment of $50k of your own money. You had to pay some interest on the other $50k you borrowed, because you can’t really rent your stock (well, you can, but that is sort of complicated.) So you end up making a profit of let’s say $120k – $100k – $5k interest = $15k on your $50k investment. Not bad, but it is about a 30% return on your investment.
Now, imagine the house you bought increases by only 10% to $110k. You made an investment of $10k of your own money. You had to pay interest on the $90k you borrowed, but you were also renting out the house, which covered the cost of that interest. So you end up making a profit of let’s say $110k – $100k = $10k on your $10k investment. Cha-ching $10k became $20k, a 100% return on investment.
Where the heck are you going to get that kind of return?
The way was clear to me
It was pretty clear to me after this little mental exercise and all the other research I did, that real estate investment was an almost guaranteed way to create true wealth in a much shorter amount of time than it would take to do so in just about any other way (Except for starting my own business, which I really wish I would have done back then.)
I began purchasing properties and financing them with 30 year fixed interest rate loans.
My plan was this: buy a new property every year if I can.
I figured the worst case scenario, as long as my rents covered my mortgage, would be that in 30 years I’d own millions of dollars worth of properties.
I figured best case scenario would be that the values would go up and I’d be able to sell some to pay others off and have millions of dollars worth of properties in a much shorter time frame.
All of my plans hinged on making some sacrifices and investing in real estate for at least 10 years, I still wasn’t thinking short term. But, this plan seemed much better than the alternative which required me to have a very high income for 20 years and live on a tiny portion of it. It was also much less susceptible to possible problems. I was in much more control of my future with this plan.
I figured best case, I could basically “retire” at 30. Worst case, I could retire rich at 50 (After all the 30 years loans were basically paid off.)
So that’s my story
Well, that is my story of how I got into real estate investment. I actually ended up getting a real estate license and learning quite a bit about properties, rental management and investing. And I did figure out how to deal with tenants. With many units today, I have less trouble than I did with 1 unit back then.
By the way, if you are interested in learning more about real estate investment. One book I highly recommend is The Millionaire Real Estate investor. There are many really bad and “scammy” real estate investment books out there, but this book is actually really good.
So, what do you think? Is this a topic that interests you? Do you want to hear more about financial matters and real estate investment here?
Like I said, I think all software developers and programmers should at least have some money management skills, but what do you think?
There are two basic kinds of people in this world.
- Those who live their lives evaluating each individual transaction.
- Those who live their lives as an investment waiting for dividends to be paid.
What is behind these two types of people are their motivations.
Those who place a high value on each individual transaction are usually motivated by immediate gain and fairness.
Those who place a high value on investing are usually motivated by the principal of the harvest—You reap what you sow.
A little story
I’m going to diverge for a moment to tell a bit of a story that got me thinking more about this issue.
This weekend I went to a little café with my wife and daughter. We usually go there on Saturday mornings after my daughter’s play gym class. It is a nice little café, but the food is a bit pricey.
I don’t mind paying a little more for higher quality food and higher quality service, so I go there despite the price.
This little café has an ongoing promotion where if you turn in 8 receipts you get one of your meals free. (Approximately a $10-12 value.)
As I said, my wife, my daughter and I have been going there for quite some time, so we had finally saved up 8 receipts. We ate our meals and went up to pay for our food. The bill was about $25.
The owner of the café carefully looked at the receipts right in front of me. She seemed to scour over every single one, looking for a valid signature and that it was from their café. (Now remember, we are in here quite often, they definitely know who we are. Most of the staff immediately recognizes my daughter.)
I thought to myself, “ok, well this is a bit insulting, but not a big deal. She’s just checking the receipts.”
The café owner pulled one of the receipts from the stack and said “you already used this one.”
I looked at the receipt, saw that it had not been used, but it did have a discount on the total from a previous redemption. (The total was still $15.)
I explained to her that I had 8 receipts which had all represented different visits and each totaling over $15, with the average size around $25-30. I also explained to her that one receipt did have a redemption on it, but it still had a valid meal that was fully paid for on it.
The response, I got back was “you already used this one.”
We went back and forth a few times. In the middle of the conversation she answers a phone call and finally hands me off to someone else, saying “I’m done, you deal with this guy.”
The new cashier tells me the same thing, and the details from here are not important. I’m not even going to tell you whether or not they gave me the discount, because that is not the point.
There are actually quite a few lessons that could be picked out from this story. Let’s start with the main one.
Thinking in single transactions
The owner of that business thought of only this single transaction and not the future transactions that could take place when dealing with this issue.
Here I was a paying customer who had brought in 8 receipts. On one of those receipts was a discount that had been applied, because I had previously brought in 8 receipts. So, I had been there and paid for food a minimum of 17 times (including the current visit.)
The business owner was so concerned I was going to rip her off for $10 one time, because one of the receipts wasn’t valid that she was willing to sacrifice all my future business, and potentially upset other customers that were within earshot of her rude comments and handling of the situation.
So what does this have to do with development?
We’ll get to that in a minute, but I want to expound upon this point a bit more, because I think this lesson applies to so much of life in general.
The big point here is that thinking about life’s transactions individually instead of paying attention to the bigger scope of what is going on can have you coming out ahead for the day, but can cost you dearly in the long run.
“You can shear a sheep many times, but skin him only once.”
Now what should that business owner have done? What would I have done in that exact situation if the tables were turned?
First of all, I would not have checked the receipts in front of the customer. I would have either briefly scanned the receipts or if we had been experiencing a high volume of fraud and I was so concerned I would have said, “Please wait one moment,” and quickly checked over them out of sight.
Next, if I did spot that one receipt did have any kind of problem with it, I would take a look at the average check size of all the receipts—Wait, I’m lying. To be honest, I wouldn’t even do that. If you come to my restaurant with 8 receipts and I said I’d give you a free meal if you turn in 8 receipts, as long as you are not obviously trying to rip me off, heck even if you are, but you did come here and buy something 8 times, I’m going to say “thank you so much for your business, I am glad to give you one of your meals free. “
I don’t even mention the issue, I don’t even say one word or give one look to embarrass the customer. Why? Why do it? Why would you want to ever risk ticking off a paying regular customer and possibly upsetting any other customers nearby? I mean, wouldn’t you spend $10 in advertising to get a weekly customer? Wouldn’t you spend $100?
Can we talk about programmers now?
Yes, yes. I suppose we ought to.
So there are two very important things to consider.
- Are you approaching your development career as a single transaction or as a dividend paying stock?
- How are you treating your customers?
Investing in yourself
It’s really easy to to fall into the trap of analyzing every decision in terms of what will pay me the most today or what will have immediate benefits. It is much more difficult to look beyond the current desert that may be before you and see the oasis that awaits those with patience and integrity.
I’ve talked before about buying my own monitors. I’ve also bought plenty of other equipment. Sometimes because my employer wouldn’t buy it for me or sometimes just because I know it will make me more effective in the long run and I will look better by not being cheap, but buying it on my own, even though my employer might have bought it for me if I asked.
I’ve invested time and money in training—hours on weekend and week nights learning something on my own—plenty of transactions that didn’t benefit me in the short run, but had huge benefits in the long run.
This blog for instance is one of them. I spend a good 2-3 hours, sometimes more writing one post a week. I used to write 3 posts a week, before I started doing Pluralsight videos. I don’t make hardly anything from publishing a blog post, but I can’t tell you how much having this blog has paid off in job opportunities, business opportunities and just meeting a lot of interesting people that have something to teach me.
I’m never happy to live in today. I always have a plan, an agenda. My career is something I actively manage and the way I do it is by investing in it.
Now, I am not perfect, far far from it. I get trapped in that transaction style thinking plenty of times myself. I’ve gone months without reading a book to benefit my career. I’ve wasted away plenty of time or made poor choices that only had immediate benefit rather than long term benefit. I just try to live my life in general like there is a thing called karma, even if I might not totally believe in it.
I strongly believe in the principal of the harvest. You reap what you sow. It doesn’t matter to me if it works by magic or a practical series of cause and effect steps—It doesn’t matter. What matters is that it works.
As we segue into customers, one other point I want to make about your career as a developer is helping others and being as nice as possible to everyone.
This is so vitally important that you better start doing it now!
Seriously, one general tip to get ahead in life is make friends not enemies. You never know what relationships you develop may end up benefiting you the most.
When someone needs your help or asks for it, help them. You’ll be amazed what you might learn by teaching and you’ll be putting serious karma in your bank account.
I’ve been in places where people have withheld knowledge, and not helped others because they were afraid that it would make them less important and hurt their job security, but that is just utter foolishness.
The most valuable person in any company is the person who can make those around them more successful!
Don’t be penny-wise and pound foolish!
To be honest, I don’t even try to analyze the bigger picture that much anymore, because I know good things are coming if you do good things.
My personal philosophy has evolved to: always do the right thing because it is the right thing, and not because of the rewards you are going to receive from doing it.
Investing in your customers
If you are writing software, you have customers—period!
I don’t care how far removed from them you think you are. Someone is using your software otherwise you wouldn’t be writing it.
At the very least, someone is paying your paycheck and that someone is your customer as well.
I’m not going to try and offer any very specific advice in this area, because I think it is sufficient to say that when dealing with your customer, you should just keep in mind the number of paid receipts they have already brought in and how many more you would like to receive from them.
I’ll admit sometimes I fall flat here myself. I am often really good dealing with a direct customer, but sometimes I forget that my indirect customers are still my customers.
Just because you are getting a paycheck, doesn’t mean you’re not selling a service. You just happen to have a regular customer.