Crafting a long-term real estate investing strategy is like making an alloy. First, you take raw materials like investment capital, savings from job income, ability to obtain financing, risk profile, and most importantly, time. Then, you mix them in the right proportions to create a finished product that is stronger and more flexible than the individual parts that went into the process. Essentially, you are taking brittle iron ore, adding heat to melt impurities away, then finally adding carbon to produce mighty steel.
So when someone asked me whether age should factor in the decision of how you should invest in rentals later in life, the answer had to be yes. Age strongly impacts two of the most important raw materials of any real estate investing strategy: time and risk profile. But how exactly?
In Real Estate, Time is FAR More Valuable Than Money
If I gave you a choice between the following two scenarios, which one would you pick?
- Scenario A: You are in your early 30s with $10,000 in savings and the ability to save another $10,000 per year from your income
- Scenario B: You are in your early 60s with $500,000 in savings and the ability to save another $50,000 per year from your income
Let me tell you what option investors that fall in the Scenario B have told me they would pick: Scenario A, hands down. Why? Because, in real estate investing, time is far more valuable than money. It’s not even a close contest. Let me explain why.
At its core, money has three basic functions:
- Means of exchange: We receive it for goods or services we provide to our employer or customers, and we spend it on goods and services we need.
- Security: We refrain from spending it and keep it as emergency savings to provide peace of mind in an uncertain world.
- Investment capital: We invest it and earn a reasonable return for the risk we are undertaking to stave off the effects of inflation.
So, you see, once we have taken care of day-to-day purchases and have saved up adequate reserves, the only thing that’s left to do with money is invest it. Or put differently, money will naturally flow to where it can earn a return. “Lenders lend,” as my mentor Jeff Brown has brilliantly said. If you can bring to the table opportunities for invested capital to earn good returns, you don’t even need to look for the money. It will find you. Also, if you can scale your opportunities, you can always find money to pull them off.
On the other hand, you can’t make more time. You can’t scale it. You can’t buy it. You get what you get, and you don’t throw a fit—like my five-year-old told his brother last week. Age inversely impacts the time horizon that you have available to make your strategy work, which in turn reduces the options at your disposal.
For instance, the more time an investor has available, the more compounding works…