Why "I'm Being Patient" Is Costing You $87K and You Don't Know It | Ep 124

James
The most expensive decision in real estate isn't a bad deal. It's the deal you never made. Oh, I know, right? And it's capital sitting in your account waiting to be deployed. And Sophisticated investors, they often treat waiting as like a neutral safe position, which is totally cool, but it's also a choice. Yeah. Okay. And that choice, just like everything else, has a real return profile. And so we just. It just happens to be invisible oftentimes. So, we're going to talk about that today on the Furlough Capital Real Estate Podcast where we dive into the intricacies of passive real estate investing. And our mission is to equip people to fully understand their choices and what it means to wait so that they can invest wisely in both property and people. So that together we can build wealth instead of just sitting around and improving housing. I'm Jesse. Whoa, I'm James. And this is my wife, Jesse. It's freaky Friday.

Jessi
It's freaky Friday.

James
Whoa.

Jessi
I would be interesting to be you for a day.

James
Yeah, it would be. He'd be awesome to be a good idea.

Jessi
I might mess up some deals.

James
Dude. What was it? I think it was in Ted Lasso, right? Where I think it was like one of the opening, like first or two episodes of the season, where he's asking everyone, hey, if you could be a lion or some other animal, like an elephant or something like that, or like, if you could be any animal, what would you be? Anyways, what is it? Tarte. What's his first name? Jamie. Jamie. He asks him that, and he goes, I'd be myself, obviously. And he goes, I don't think you fully appreciate how psychologically good that is. Yeah. That you like who you are. 100% solid. That's funny. Yeah, yeah, yeah. You want to be me. Oh, I do not. Weird. I'm good. You can be yourself.

Jessi
Yeah, we're good.

James
I want to hang out with you. Don't want to be you. It's all good.

Jessi
Anyways, that was not gonna be my intro. My intro, I, as far as I'm kind of understanding this concept It reminds me of like the one thing that I learned in an economics class. The one thing.

James
I was like, the book, the one thing?

Jessi
No, not the one thing. No, no, no.

James
The one thing you learned the economics class, which, by the way, when we were in college together, I was like, if we're going to date. You absolutely need to take an economics class so that we can connect and understand.

Jessi
So we can have a conversation.

James
Because I am not going, you need to be at least a little financially literate if you're going to hang out with me. So you took it.

Jessi
So I took it.

James
Oh my god. He's kind of a keeper. A little microeconomics.

Jessi
I took microeconomics.

James
101 or whatever it is.

Jessi
It was really hard. And I was like, this is not how I think about demand.

James
If goods go down, supply decreases, prices increase. It's easy.

Jessi
Well, there were all these, like, yeah, outside forces. And it was weird. But the one thing. We talked about opportunity cost one day. Yeah, we did. And for whatever reason, I was like, I totally get that concept because the kid was like, Well, you know, it's like I'm here in class. But I could be out skiing. And so, like, I'm losing that opportunity to go skiing. But I have the benefit of being in class doing this. So, you know, I have to waive both of those. Yeah. And I don't know what the professor said. He said something like, That's genius, or I don't know.

James
Perfect. You understand it.

Jessi
I get it.

James
That's right. That's right. So. We're, yeah, we're going to talk about that a little bit. And I think it is quantifiable to a degree when it comes to investing. Yeah.

Jessi
Well, yeah. Yeah. It's easier for my brain to think about To think about the loss time-wise, you know, financially-wise, it's like, well, I don't really know. Like, it could be worse. And I think maybe people get trapped in that of like, Well, is it really guaranteed to be better? Or maybe it is better if I just wait, if I leave it here, if I leave it.

James
Oh, this is perfect. This is actually my very next point. which is there's a version of discipline that's actually fear wearing a suit.

Jessi
Yeah. Yep.

James
Okay. Yeah. So waiting for the perfect deal can feel responsible, but perfect is always a moving target that always seems about six months. Away. Right. And so oftentimes, amateurs they'll overpay. They're chasing hype or just burning a hole in their pocket. Man, I've talked to so many people where they want to invest in a house. And they're like, was this a good deal? I'm like, no, it's not. I'm going to buy it anyways because I need to buy a place. I'm like, okay, good luck, man. Interesting. Why did you ask me? But there are some sophisticated investors that make the opposite mistake. They underpay by never buying anything at all. Okay, because they're always like, they're just waiting, they're just waiting for that perfect deal. Right. And I definitely, like, I'll admit, like, I'm talking to myself here because that can definitely be me.

Jessi
Oh, I've had that feeling of monopoly before. You're just like monopoly. Well, yeah, you know, because you're going around, you have them cash, but you're like, well, I don't necessarily want that one. I want this one that's going to give me the triple But then it's like, oh my gosh, the next 10 rounds, people landed on that property that you could have like yanked on.

James
I don't have that problem. If I got cash, I'm buying it. Done.

Jessi
Okay, so I'm the fearful.

James
That's cool.

Jessi
I don't know. So, but here's the seems like strategy, but it's not good strategy.

James
Fair enough. I understand what you're saying.

Jessi
Anyways.

James
But cash, it isn't neutral, right? So when inflation runs at 4%, say your safe liquidity maybe is earning like 5%, you feel like you're winning. But the compounding that you're missing in cash flowing real estate assets isn't showing up anywhere. That cost is invisible until you actually sit down and do the math. So, I oftentimes I'll call this type of spreadsheet, aha, whoa, this type of investor the spreadsheet samurai. Which again, I've I fall. I'm this guy. I love it. Every deal gets stress tested. Every assumption gets questioned. The model is always almost right, but it never closes because the perfect spreadsheet is never the same as a good investment. Right, so let's talk about the math in the title. Here's how I got to the 87,000.

Jessi
Yeah, that's a very specific number.

James
Yeah, right. So let's build just a simple model just for the fun of it. So let's say that you have $500,000 ready to deploy. Cool. That'd be great, right? I'm it. Yeah. Love it. Okay, so a solid multifamily deal offers you a 7% cash on cash return with 3% annual appreciation. Pretty typical. Like there's nothing crazy here. On these numbers, right? And so if you wait 18 months looking for something better, you've quietly given up roughly $87,000 in cash flow and equity before you've even found that perfect deal.

Jessi
Oh, oh, that is brutal. Okay, yeah, okay, you can calculate that. Because had you had you done you're saying had you done the investment And gotten those returns, which aren't like insanely amazing, but they'ren't horrible either.

James
They're normal, which is why people go, I'm waiting for the insanely amazing deal.

Jessi
Ah, but you look even if you waited for the amazing deal and did it, you still may not make up that and the well, and that's the thing, like the hole gets bigger and bigger.

James
So that's something we talk about with um I actually talk about this on the property management side as well. If I get an owner who's like, I want to get this extra $100 a month, I'm like, dude, the market doesn't suggest this. Like, this could sit for a month. Do you know, like, the problem you run into? It's like the vacancy just eats up that extra $100, which by the way, he was never going to run for that, anyways. Yeah. And I think you get that. And so, like, you run into that problem where you're like, dude, take the $100 hit today. It's okay. Let's get this thing rented because you'll never catch up if you hold out for that higher one. And it's that same idea. It's yeah, if you're waiting for that amazing deal, dude, like I that's that is so hard.

Jessi
I feel like there's this mental fortitude game that you almost have to play. That it's like, this is good enough. Like, it is good. I don't, I don't have to wait for something amazing. Like, I don't know, maybe going through the math with somebody would be helpful because they're like Oh, yeah, I should do this. Like, obviously, I'm going to get this much in a return. And if I do nothing, like, I'll get nothing. There's no guarantee that I'll find the best deal or find something better. So I have this right now that is guaranteed.

James
Yeah, one of the this is only like semi-related, but it's semi-related. Ramit Seti, he's a personal finance kind of guy. Oftentimes at the near the end of the year, he'll send out an email that is kind of this like, Hey, like, or when he's launching a class or whatever, and his classes aren't cheap. Like, they're a couple grand minimum to join. I'm out of join a couple of them. But one of the things he says in his thing is: look. Like, I get that this costs money and this is a real investment. But imagine yourself a year from now if you don't do this. Where are you going to be? What have you given up? Like, that's the actual cost here, not that. Who's the other one? Dan Martel. He I think it's him. No, no, no, no, it's Alex Shrimozi. He talks about like if your goal is to be a millionaire, he goes every year that you settle for earning $100,000, it's He goes, you're not earning $100,000. You're not earning the $900,000. He goes, that's how you got to think about it. And so You know, but um, so it's that idea of like what they're trying to say is take action now, take a take a ton of action, get after it, make the investment, go for it. It's worth it rather than trying to wait for the perfect opportunity. Which often doesn't exist. So, historically, real estate values increase about 4% per year on average. And every 12 months you wait, you're not just missing cash flow, you're also likely paying more for the same asset. So there's that piece as well. So timing the market in real estate is even harder than timing stocks because the deals don't trade on an exchange. You can't buy the dip at midnight. So that's another piece to this as well, which I don't, yeah. So, what the pros do, experienced people, they don't wait for perfect. They underwrite. So, what operators, what we do is we don't wait for perfect. We underwrite conservatively and we move when the fundamentals are sound, right? So, like, you might take, I don't know, some B plus. deal, right, but it's deployed today, that B plus deal could beat, probably will beat, an A deal deployed eighteen months from now. Pretty much every single time. Now, obviously, if you're like, I got the capital and A deals come along, yeah, you know, awesome. Right. So, and the other thing that makes real estate difficult is that the best deals, they rarely look perfect on paper when you first see them. Because inherently, we're looking for some sort of fixer-upper thing. There's just some sort of There's like an operational problem, there's a leasing problem, there's some sort of capex, like physical problem related to it. So they just Look bad and it makes you feel uncomfortable. But it's like, yeah, man, that's where the value is. It's just, it's just hard. So the question isn't: is this the perfect deal? The question is, is the risk adjusted return on this deal better than the guaranteed loss of continued inaction? That's the comparison. Yeah. What I okay, man, I'm quoting a lot of people today. It was it's the guys, the makers of Basecamp. They talked about project management and how you improve things and And it was really interesting. They said when you're deciding to roll out a feature or do something, don't compare it to what it could be perfectly. Like, compare it to what it was yesterday. Is it a little bit better than yesterday? Ship it. Because if you ever compare it to Perfect, you will rarely ever ship. This is actually like a fundamental philosophical difference between Tesla and Elon Musk and Google with their self-driving car. So Tesla was very much like, yeah, self-driving, it's a little bit better than humans. Cool, ship it, let's do it. And they started, and it wasn't perfect, and they got into accidents. And weird, crazy stuff happened. But statistically, like it was actually safer, just a little bit. And then they got more data and they kept iterating, iterating, iterating, and it's just continuously gotten better. And they figured out how to get similar results with cheaper, easier technology as well. Google, on the other hand, they went down the path of like, no, no, no, we want full self-driving. Like, we don't need any people in it at all. We want perfect. And I've it's been over 10 years and and they've started launching it into different areas like when we were in When we're passing through Phoenix, Arizona, they have it there. It's in San Francisco. It's in a few markets, and they're testing, and they're like, they're legitimately getting there. Sure. Compared to millions of cars that Tesla has on the roads that people are using. That's. Not perfect, but better. And both can work, but I tend to, I really like that advice: no, no, no, the comparison isn't What would perfect be? The comparisons, well, what was it yesterday? Are we better than that? Awesome. And this is asking that similar question, right? When you're looking at this investment, it's not. Well, how does this compare against my best investment of all time? Right. Anytime we're looking at the line apartments, yeah, they're all going to look worse than that one because that investment was amazing. We're making 144% annual average return. It's ridiculous.

Jessi
Like, we're never going to match that.

James
We can't compare it to that. Instead, it's the question of what if I don't do anything? Or what if I put it what if I just have it in a money market account or wherever? Like, that's the real question. That's the comparison. That you need to ask. It's important. Yeah. I think you can ask that in all sorts of areas in life.

Jessi
Oh, for sure. But yeah, I mean, I just a couple of scenarios pop in my brain where it's like, oh man, like, I've always ran wanted to write kids' books. But I have this like it needs to be a certain way. It needs to be just right. It needs to be just like this. And it's like, oh, I can start with something and how it goes and then improve it.

James
I agree. I agree with that. But. Yeah. The thing, or I'll often see you run into too, is before you do something, you want to have the perfect amount of time. You want to have a significant amount of time blocked out to do it. Like, I'm just going to keep quoting people. Cal Newport talks about deep work and that idea of having big blocks of time to do, you know, thinking work is fantastic and it is good. But if you never do it, you know, there it is. I actually think you're more off if you're like, hey, I got a 15, 20 minute chunk, and you get started on something. You stand a better chance of then moving into like, okay, I'm not going to prioritize this because I have a little bit of momentum. Going. Sure. And so now I'm going to give it more space because I'm going. But at the very least, you're making progress. I should take that own advice for email. All right. So I got three actions for this, okay, to help you dial it in. First one, run the ideal capital. Sorry, not ideal. Idle. Don't do that. Run the idle capital cost, right? Take whatever capital you're holding in reserve. And then calculate what its return would be for a B plus deal.

Jessi
You know, it's a pretty good deal.

James
Over the next 18 months, that's your cost of waiting. Okay, make it a real number, not just a feeling. That's the first thing. Do the math. And I think that idea of like a seven percent cash on cash or potentially like a ten percent IRR somewhere in there, that's going to be your like middle of the road, B plus. It's good. Yeah. That kind of deal. Next thing: define your floor, not your ceiling. And I think this is where people get into trouble. Instead of chasing the perfect deal, define what's your minimal acceptable deal. Okay, what's your cash on cash floor? What's your debt coverage floor? What's your market criteria? Anything above that floor? It's deployable. Stop negotiating with yourself about upside. We do this in tenant screening all the time. What's our minimum tenant? Once they pass that screening criteria, boom, we're going to rent it to them. We're good.

Jessi
Looking for perfect.

James
Yeah, I think we're acceptable. Exactly. Now, now, okay, and to be clear, because again, we deal with this with tenant screening all the time. It's like acceptable means like this is good. I can live with this. It is. I'm happy with this. And that's okay if you have a high floor.

Jessi
Sure.

James
Unless you never deploy, in which case, all right, maybe you need to reassess it. And that's where doing the math comes in, right? If you're like, you know, for that B plus deal, right? That's your floor, that potentially. What is that? Do that math. And then, number three, ask your sponsor, that's me, or your property manager, if you have one, one question: What's the cost of the next 12 months of inaction in our portfolio? Okay. If they can't answer it, that's information as well. But they should be able to help you work through some of those things. Like, I know for me, like, we've looked at deals all the time and we know what the returns are, and we can kind of like, yeah, here's what we're looking at.

Jessi
Interesting.

James
And yeah. So I'm pretty certain by the time this airs, we will have closed on another property and done another round of funding to fix it up. Feels if I'm doing my math right on when this happens. So yeah, that's. There you go. So, if I had to give you a takeaway here, it's just the big idea, right? Waiting for perfect. It is a strategy. It just may not be the best one. And the hidden cost of inaction, it is real and it is compounding, and it's almost larger than the risk of a sound but imperfect deal deployed today. Is. So yeah, that's just my encouragement. Like, try not to wait for perfect. So here's my closing question. Trying to get you. So, if you had to put a dollar figure on what your current cash position has cost you over the last 12 months, okay, what would that number be? And are you still comfortable with it?

Jessi
Hmm.

James
So there you go.

Jessi
It's a good question. Feel like people are gonna be doing some math?

James
Dude, I hope so. They should be. It'll be good. So, if you want to look for imperfect deals, maybe we can help you with that. Like, because none of our deals are perfect. There's always something crazy going on with it.

Jessi
But, there you go.

James
But they're deals, and they're there, and you can get them deployed. And oftentimes, we have short-term ones, so you can hopefully have your money ready to go for the next one. Yeah. So if you want to check those out, you can visit us at furlo.com, learn all about us, our investing thesis, what we're about. It's going to be awesome. So you can check us out there. So with that, thanks for listening. Have a great day.