(This article is Part 1 of 2, although Part 2 is titled,
“3 Commonly Overlooked Assets That 7-Figure Real Estate Entrepreneurs Invest In (Other Than Property)“)
Misleading Job Titles Are Bad For Your (Business) Health.
If you’re like most real estate investors, Robert T. Kiyosaki’s NY Times bestselling book, Rich Dad, Poor Dad is on your bookshelf, and likely responsible for much of your inspiration to create wealth through real estate.
According to Kiyosaki’s subsequent bestselling book, Cashflow Quadrant, income-generation models can be broken down into only 4 categories, or quadrants (you’ll see the list in a moment).
If and when you honestly compare the pros of operating as a true entrepreneur vs. the cons of grinding it out as a mere self-employed person, you’ll start positioning all your future business activities and thoughts through the lens of the former. We’ll get to those pros and cons in a moment.
When it comes to to describing what we do to home owners, friends and family members, it seems we’ve got it all wrong. No wonder there’s often confusion!
Even more fascinating, have you ever told a licensed real estate agent that you’re a wholesaler, only to get that deer-in-the-headlights look, along with a response that ranges from “What does that mean?” to “Isn’t that illegal?”
Back to the Cashflow Quadrant, here is the breakdown of unique ways you can earn income in any industry or endeavor:
Based on this breakdown (with which I wholeheartedly agree), I would contend that 99% of the time, the title “Real Estate Investor” is inaccurate. Sadly, I am guilty of this, myself.
This is the most common label given by people who “flip” houses, either as a wholesaler or a retail rehab/reseller.
Let’s look at some examples of more accurate descriptions of real estate professionals in each of these categories:
- Works FOR a company, typically in a W2 capacity.
- Trades hours for dollars, earning a salary or hourly wages, with the possibility of bonuses and commissions.
- Staff member of a real estate (investment or brokerage) company (office manager, admin, intern, etc.)
- Bird Dog (depending on arrangement)
- Any other hourly or salaried job with a corporation of small business
- Relatively low risk, in that you don’t have your own capital and assets invested with the possibility of loss
- Predictability of income and scheduling
- Access to employer-paid benefits (health care, insurance, retirement, etc.)
- Lack of creative control and minimized decision-making abilities
- If you stop working or performing, you stop earning income, and will most likely get fired
- Having to deal with corporate politics
SELF EMPLOYED (S)
- Works for himself/herself, typically as a 1099 Independent Contractor or Sole Proprietor
- Trades hours for dollars, earning income 100% on commission, fees, or some type of temporary contract
- Requires direct involvement IN their business. If they stop working, they stop earning income
- Real estate agent
- Mortgage Loan Officer
- Some wholesalers and rehabbers fall into this category
- Most small business owners, merchants and professionals
- You control your schedule and time
- Creative freedom (in some, but not all, cases)
- You can determine your income (to a limited degree)
- Spend lots of time doing things you’re not good at or don’t enjoy
- If you stop working, your income will stop
- Stress and overwhelm
- Workaholicism (destroys your mental and physical health)
- Feels like you’re always treading water
- Less time with your family and friends
BUSINESS OWNER (B) (i.e. Entrepreneur)
- Builds, manages, and leverages systems and people that work for them
- Does not require their direct involvement to be profitable
- A true entrepreneur who works ON their business (strategy) vs IN (tactical) their business
- Wholesalers and Rehabbers who develop mWhoarketing and operational systems, and a team, to run their business
- Real estate broker/owner who hires a Managing Broker to oversee marketing, sales, training, and operations
- Builders and developers who hire a General Contractor and Office Manager to run their entire operation
- You can leverage and benefit from Other People’s Time/Efforts (OPT) and Other People’s Money (OPM)
- Time freedom because business runs without you (peace of mind, relaxation)
- Ability to truly earn what you’re worth
- Opportunity to associate with the most talented people in the world
- Be respected as a leader and innovator in and out of your field
- Only focus your time, energy and efforts on things you truly enjoy and are good at
- Many entrepreneurs become obsessive and fall out of life/work balance easily
- You will likely be misunderstood and even unaccepted by most people, including your friends and family
- A true investor leverages OPM (other people’s money), and earns on a completely passive income
- Does not require any of their own involvement. This is the most passive form of income
- An investor does not have any strategic or creative involvement in their investments (if they do, they are both an Investor and Entrepreneur)
- Income/Rental property investor who pays a property manager to handle all marketing and operational logistics.
- Private lender who invests their own capital with rehabbers to cover property acquisition, construction and holding costs (these are the people many rehabbers are
seeking for capital, and those who hard money lenders borrow from before marking up the capital and reselling it to rehabbers).
- Limited (“silent” or private equity) partner in various types of companies or projects requiring large sums of capital.
- Holder of stocks, bonds, mutual funds, options, futures, or other securities
- This is the ultimate form of “mailbox money” or “beach money”
- Creative and time freedom
- No operational challenges to stress about
- Once successful, truly successful investors typically have lots of attractive and lucrative opportunities brought to them
- When people say, “The rich get richer,” this is the category they generally are referring to
- There are a plethora of unique investment categories to choose from, including real estate, securities, private equity, commodities, exploration projects, angel investing, venture capital, and much more
- Financial risk
- You need to use your own capital, so most people can’t access this quadrant
So, given those descriptions, examples, and pros and cons of each, let’s look at 5 prominent examples of people who are likely to refer to themselves as “real estate investors,” and how they are usually inaccurate…
1. Bird Dogs
They are really real estate “lead generators” who open up deal opportunities for wholesalers and rehabbers
- You will often hear someone operating solely as a Bird Dog telling people they are a “real estate investor” (and cash buyer), because they are representing someone who actually does have the capacity to buy a deal with cash.
- Most likely, they are self employed, but could of course be a salaried/hourly employee of a real estate company.
They are really real estate “suppliers” who provide inventory to rehabbers and/or builders/developers
- Most wholesalers refer to themselves as “real estate investors” for the same reasons as Bird Dogs.
- Compare to a wholesale supplier of food products. They buy (with 30-90 days to pay) their product at a deep discount from a manufacturer (owner/creator of the product), and resell it to business (owner/entrepreneur), who improves upon the product and resells it to a consumer in a retail environment. In the meantime, such a supplier would hold/store the inventory at their own expense
- A wholesale supplier of real estate buys (with 30-90 days to pay) a product (a house) at a deep discount (e.g. 30% minus repairs) from the home owner, and resells it to a rehabber (business owner), who improves upon the product (renovate) and resells it to a consumer in a retail environment (primary home buyer). One advantage a real estate supplier has over a product supplier is they don’t have to hold or store the inventory on their own
They are really real estate “Dealers” who sell to consumer home buyers
- This is the most common type of person who mistakenly calls himself/herself a “real estate investor.”
- What comes to mind when you hear the word “dealer?” A car dealer… an HVAC dealer… a jewelry dealer. They’re a dealer because they sell directly to the retain public. These people most often buy their products from wholesale suppliers, not the actual manufacturers.
- Although some savvy dealers do figure out ways to “cut out the middle man” and buy “direct,” many choose the convenience of skipping that step.
- Property dealers can sell their products on their own (FSBO) or with the help of a real estate broker (a distributor of sorts).
- So, if you’re a rehabber, next time someone asks what you do, try saying, “I own a real estate dealership.” I guaranteed it will open the door for a further clarification!
These folks generally fill all three roles of manufacturer, wholesaler and dealer.
- Most of the time, traditional home builders will not refer to themselves as “real estate investors,” however Rehabbers who delve into the world of new construction often do apply that dubious title.
- As a dealer, can also sell their products on their own (FSBO) or with the help of a real estate broker.
- Compare to a company that manufactures shoes, who assumes responsibility of product/inventory storage, as well as shipping direct to consumer.
5. Private Lender
Simply put, a private lender in the real estate investing space operates as a BANK
- Ironically, the only type of person actually worthy of the “real estate investor” title most often doesn’t refer to themselves that way.
- The goal is to collect varying amounts of interest, fees, and equity.
- This category includes individual lenders/investor who provide cash directly to rehabbers, as well as “hard money” lenders who essentially “wholesale” or “broker” private capital they’ve raised to rehabbers.
In future articles and videos, we will discuss how real estate agents and brokers play into this topic.
Now that we (hopefully) agree on the accurate distinctions between common titles and roles of players in the “real estate investing” game, we can proceed forward to discuss how someone could wear multiple hats (titles) at the same time, and why.
In Part 2 of this article, we’ll talk about how and why these different types of real estate “professionals” use leverage to create the highest levels of income in the industry, and in a way that doesn’t require them to work 100 hours per week doing so.