By Harman Nagi and Anish Patel

Clint Harris | When sales meets Sears and self storage. (try saying that ten times fast)

Clint Harris is a general partner of Nomad Capital. He got his start in medical sales before jumping full time into real estate. He and his team buy big box retail spaces and convert them to self storage facilities, and they make A LOT of money doing that. The formal name for this type of strategy is adaptive reuse, and we’ll be diving into another version of this in a future newsletter: converting hotels to housing.

Listen to the conversation on Spotify.

• The Fed’s “Doveish Pivot”: Jerome Powell’s signaling that aggressive rate-hikes may be behind us has the commercial real estate industry excited. 2024 is expected to see benchmark rate cuts, which will directly translate to lower borrowing costs for the real estate industry.

  —> Implication: Lower borrowing costs are welcome news for any real estate investor. Sellers don’t mind this news either, given they know this also means buyers can afford to pay more for their assets, so expect to see more transaction volume and an increase in prices if these rate cuts do materialize.

• The Pandemic-Driven Migration Boom Is Waning: The share of U.S. homebuyers looking to move to a different metro area dropped to its lowest level in a year and a half. This is driven by more employers calling workers back to the office, decreasing home prices in pricey coastal metros, and increasing home prices in pandemic-area migration destination cities.

  —> Implication: This will have an impact on demand, pricing, and cash flow potential for short-term to long-term rental housing in secondary cities (i.e., the pandemic-area migration destinations). On one end, prices in those markets may settle; however, demand may wane as well, unless there are additional drivers of growth for that market, (e.g., strong employer opportunities).

Your day job is an asset, not an enemy

By Anish Patel

“I just want to get out of my [insert expletive of your choice] W2”. 

I know you’ve said something along those lines to someone at a real estate meetup or muttered that to yourself after an inspiring Bigger Pockets podcast. We’ve all done that. It’s a great motivator. It’s provocative. Gets the people going!

I get it. Working isn’t always fun. Bosses are annoying. Deadlines are annoying. Doing expenses is annoying. That recurring, hour-long weekly meeting is annoying.  Income tax is annoying. That one coworker - extremely annoying. 

What’s not annoying? Not working at all. Canoeing on the lake by your summer lake house with not a care in the world as a steady stream of passive cash flow from your vast real estate empire flows into your bank account (see Nick Offerman below to support your day dreaming needs). 

Okay now stop daydreaming. If you’re just getting started and saying that getting out of the W2 grind is your chief priority as an investor, YOU ARE WRONG to think that way. 

Hear me out. As a tech professional earning a decent salary (with possible equity upside) and enough cash to spare to invest in real estate or elsewhere, you should refrain from turning the career that you’ve worked so hard to build and toiled at for years into your mortal enemy. Instead, I urge you to think about your W2 as an asset, as a means to an end. 

In this deep dive, we’re going to walk through how and why the day job should be thought of as a tool to complement and accelerate your investment journey. We’ll also walk through what the day job can’t do for your financial goals (what? did you think this was going to be unfair and unbalanced?). 

Specifically, we’re going to discuss:

• W2 is a funding mechanism

• Transferable skill sets

• Transferable observations and experiences

• Networking among colleagues

• What the W2 (likely) can’t do for you

• A hopefully helpful visual

W2 is a Funding Mechanism

No s***, right? And yet, we’re so inspired by the plenty of books out there that talk about buying a home with no or low money down. Building equity seemingly out of thin air. And yes, that can work. But you know what’s easier? Buying property with money. And you happen to have a set of skills and an educational background that result in a nice paycheck deposited into your bank account every two weeks. 

But you already know all of this. What you may or may not have realized is that it will be a long road before your rental properties will yield enough cash flow to displace your W2 income. I’m sorry, but it’s true. Stay tuned for future deep dives where we will share the financials of real life properties, but for now, just take my word for it. For a while, your W2 will be your best source of income, and you should be totally okay with that. Also, you’ll need to qualify for loans to buy a property. It would be much more challenging to qualify for a conventional loan without a W2.

Now don’t give the W2 too much credit. It is simply your real estate funding source, no more no less. So for all its warts, your W2 is here to help you in your journey, not hinder it.

Moving on to the less obvious points of this deep dive…

Transferable skill sets

You may not realize it, but you have unique skill sets that are directly applicable to real estate. These skill sets were initially developed to get you your current W2 position and are being cultivated and refined through your work at your employer. If it wasn’t for that W2, you’d still be chiefly talented at beer games, video games, or sleeping in any condition. And best of all, you can improve and (to an extent) make mistakes at the expense of your employer rather than your own real estate funds.

Ironically, as you view these skill sets with this lens, it can help improve your performance at work (read: earn more income) because you realize that the better these skills get, the better investor you can be. Just like that, the job becomes more motivating!

To make this point easier to digest, below is a table showing how skill-sets cultivated at a W2 can be applied to real estate. And this isn’t even comprehensive! We’ll be diving into each of the below in a future deep dive, so stay tuned for that.

Transferable observations and experiences

Similar to transferable skill sets, by working within an established organization, you can make observations and endure experiences that you can apply to your real estate business. Yes, you must view even that one, single-family home as a business. If you happen to be working at a well-oiled, profitable business, you’ll get to see how things are done the right way. And if you’re working at an unprofitable, dumpster fire of a business, that’s also good! You’ll get to see first hand what not to do.

Your real estate venture will likely start out with a single employee - you. But that doesn’t mean you can’t begin iterating on processes that will eventually be used to manage a team of support staff (e.g., VAs, PMs, GCs) down the road. In fact, building your business while acting like a big, established business from the start is one of the critical lessons taught by Michael Gerber in one of my favorite books, E-Myth. 

Networking among colleagues

We do a bit of a dance, don’t we? Living this double life as a dutiful tech employee by day and a real estate investor by night. So mysterious, so interesting.

Well, stop it. 

It doesn’t have to be this way. In fact, you’re not helping yourself by doing so. To beat the dead horse one more time, you can be both a dutiful tech employee and a real estate entrepreneur. You can start by talking to your closest colleagues about how you are interested in real estate investing and ask if this is something they’ve explored or know someone who has. They may surprise you! Perhaps they have also been looking for ways to grow their wealth outside the stock market. Or perhaps they have already dabbled in rental properties. Or maybe their uncle has really scaled a portfolio and would be willing to share some wisdom with you. If your colleague happens to be interested in real estate, you could tell them about this super cool newsletter you started reading (shameless plug). 

Also, your performance at work impacts how people perceive you. It’s a natural human tendency to assume that competency in one area suggests competency in other areas too. In other words, when you eventually get to the point where you are ready to take in money from outside investors, your current or former colleagues that respect you for the value you provide at work could be a place to start! So chew on that before you consider burning bridges with that annoying colleague I reminded you about at the start of this.

That all being said, your W2 will (likely) never get you financial freedom.

It is simply a means to an end. 

We’ve all heard of the term “don’t trade your time for money”. The goal is to decouple your earnings from your time invested. In other words, you need to find ways to make income that don’t require you to be there (i.e., passive income). Earning a level of passive income that displaces your monthly expenses is financial freedom. A W2, by definition, requires you to be there; it is active income. Unless you can earn a 7 figure salary, it will not directly get you to your financial freedom goals on its own.

It’s plainly, stupidly obvious and almost embarrassing to write, but you must find ways to optimize the hours you work as an employee while maximizing income generated. If you are presented with an opportunity that will pay more income but require a disproportionate increase in hours, that is not just going to hinder your ability to learn and grow as a real estate investor, it will move you farther away from financial freedom (see definition above). 

So remember that when they dangle that sweet carrot of promotion or pay raise in front of you. Avoid falling into the rat race trap that will have you chasing the next promotion only to pass by opportunities to grow as an investor and accelerate your journey to financial freedom. 

Keep your eye on the prize.

A hopefully helpful visual

As you can see in the below visual, the W2 income helps finance initial learnings and the amount you invest into income producing assets. That, along with the skill-sets and network you cultivate at your W2, will impact the slope of your investment income (read: the time at which you reach financial freedom and size of yacht you can buy). 

However, those minor pay raises aren’t going to do much for you, so be wary of those carrots. Also, be wary of the W2 job taking up too much of your time such that it delays the time at which you start investing, delaying the time at which you reach financial freedom, or reduces the time you  can put into learning how to invest well, deepening that initial trough of losses and or negatively impacting the slope of the investment income line.

Recently, the wise-beyond-measure Charlie Munger passed away. He was 99. I’ve learned an incredible amount from Charlie Munger and in honor of him, here is a small sampling of his genius that can guide any person in any area, not just investing:

This is our very first Pixels and Properties newsletter! We’d deeply appreciate any feedback or insights you might have. Was it too long, too short, or missing something? Anything you would like us to cover in future newsletters? We’d love to hear from you! Please reply and tell us what you thought!

The views and opinions expressed in this newsletter are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Please contact your legal, tax, and financial professionals before considering any investment.