122: Are You Better Off With a Yacht or a Dinghy?
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Imagine you are stranded on a deserted island with dwindling food and water supplies and are faced with a difficult decision when two vessels appear on the horizon.
The first vessel is a small dinghy 🛶, manned by another stranded individual who offers to take you on a journey to a larger island in hopes of being rescued.
The second is a luxurious yacht 🛥️, manned by a skilled captain who guarantees a safe return home to your family with ample food 🍝🍗🍕🍰 and supplies.
Faced with the choice between an uncertain journey on a fragile dinghy or a safe and comfortable voyage on a yacht, you must weigh the risks and rewards of each option before making a decision.
This is a no-brainer, right?
100 out of 100 people would pick the yacht, right?
For whatever reason, when you are choosing between life and death situations, things may appear to be straightforward, but the same cannot be said for financial decisions.
Despite the logical choice being clear (or at least somewhat clear), when it comes to investments that have long-term consequences on financial security, individuals often struggle to make rational decisions.
We are going to dig deep to understand this phenomenon of rationalization paralyzation better and see how we can prevent ourselves from potentially making these same fatal errors.
Behavioral Finance Biases
Have you ever heard of cognitive bias?
What about cognitive bias in behavioral finance? 🤔🤔
Basically cognitive bias in behavioral finance is caused by a combination of cognitive biases and emotions that cloud one’s judgment.
These biases can lead to poor investment decisions, such as chasing past performance or succumbing to market hype.
There are all kinds of cognitive biases in behavioral finance out there, and we think it’s pretty interesting stuff, so we will link an article in the show notes that talks more about it.
For now, we want to explore one of the common behavioral finance biases that surface when making investment decisions, which is the tendency to view all options as interchangeable or similar. This is known as “commoditization bias” and it can lead individuals to make decisions based on superficial factors, such as past performance or brand recognition, rather than on a thorough analysis of the underlying assets and the risks involved.
Do you ever buy a bottle of wine 🍷 because it has a cute label?
This is the same idea, but with much more expensive and serious consequences.
What happens is that this can lead to poor investment decisions, as the true value and potential of each investment option may not be fully considered.
To overcome this bias, it’s important to have a clear investment strategy and to conduct thorough research on the options available.
It’s important to be aware of these biases and to seek out the advice of professionals who can help make logical and sound investment choices.
Investing in 🏢 multifamily apartments can be a great way to generate passive income and build wealth, but it’s important to approach the process with a clear strategy and avoid common biases that can lead to poor decisions.
A vs B or C Class Assets
“A” class apartments are generally considered to be a better investment option than “B or C” class assets for a few reasons.
The first is profit potential: A-class apartments are typically located in more desirable areas and are in better condition, which means they can command higher rents and have higher occupancy rates.
This can lead to higher cash flow and a higher potential return on investment. 🤩🤩
Deferred Maintenance Costs
So another great asset (pun intended) of A-class apartments is that they are generally newer or have been recently renovated, which means they are less likely to have deferred maintenance issues. B and C-class assets, on the other hand, may have older systems and appliances that need to be replaced or repaired, which can be costly.
We’ve actually seen this firsthand; one scenario where we’ve seen this issue realized is when an inexperienced sponsorship team underestimates the cost of the rehab ⚒️ projects.
Nobody likes sticker shock, and when this happens it really leaves the investment in a bind, either you have to sell quickly lower your price or you have to do a capital call since there is no money for improvements and/or unexpected rehab costs. Both options will dramatically lower the overall returns for the investors. 😔😔
We also love ❤️️ that A-class apartments are typically located in safer, more stable neighborhoods, which can make management and leasing easier. C-class assets, on the other hand, may be located in areas with higher crime rates or other challenges, which can make management more difficult. Why would you make things harder on yourself than they need to be?
It’s worth noting that A-class apartments tend to have more amenities than C-class assets, which can attract higher-paying tenants.
👉 Overall, A-class apartments can offer a more stable and profitable investment with lower management challenges than C-class assets.
And we are speaking from experience here. When we first got started in apartment investing, we were not privy to the option of buying exceptional A-class assets.
As someone new to the game, we were relegated to C-class assets.
We bought Cs, not by choice, but because high-caliber A-class assets weren’t an available option. So please don’t make the same mistakes we did!
If nothing else, the Kitti Sisters are known to make timely pivots when necessary, and our decision to pivot from B and Cs to As assets are no different.
Though we have achieved great success in selling C-class assets in our portfolio, we also realized that in a challenging economy, managing B and C assets will be increasingly difficult with increased delinquency and deceleration of rent growth. This makes it harder to generate returns on these assets and can lead to increased risk. 👀
Love the Deal, but Love the Team More
Arguably more important than the due diligence on the property is the due diligence on the team that is managing the asset.
This is because even if the property has great potential, it will not yield the desired returns if it is not managed correctly.
We cannot emphasize enough that is crucial to evaluate the team’s ability to manage the property through any economic storms. ⛈️
This includes assessing their focus, experience, and knowledge.
The team should have a singular focus on the property and should have the necessary experience and expertise to navigate any challenges that may arise.
This might surprise you, but it’s actually really common for newer passive investors to overlook the importance of the management team and become too focused on the perceived value of the property itself.
What tends to happen is that they may overlook the lack of experience or financial strength of the team and instead focus on superficial attributes that do not have a significant impact on the investment.
This is a mistake that can have severe consequences and should be avoided at all costs.
So it’s absolutely essential to conduct thorough due diligence on the team and make sure they have the necessary qualifications to manage the asset effectively. ☝️
✨ Here at the Kitti Sisters, we spend all our resources, time, and efforts to hand-select pre-vetted investment opportunities backed by industry data so that you passive investors, gain access to the best of the best deals, and not just any old deals.
Remember, alongside you, we also invest in investment opportunities. And we definitely don’t love to lose our own money let alone yours! If you want to accelerate your rate of achievement rapidly, you must search out and align yourself with the best teammates. 💪
You have the potential, the resources are available, and the opportunity to grow your long-term wealth is there. The only thing missing is your decision to go for it! So what are you waiting for?
The Big Picture
As the story of the dinghy and the yacht illustrates, making the correct decision when investing in property is not as difficult as it may first seem. The key is to FOCUS on the important factors that truly matter for the success of the investment, such as selecting the superior asset, the sponsorship team, their financial wherewithal, and their ability to navigate any economic storms. 🤓🤓
By filtering your investment decision through the correct lens, you will be able to make well-informed investment decisions.
Remember, just like a stranded person, who chose the safest and most secure vessel to take them home to their family, with the right considerations you too can protect and grow your family’s wealth. Apartment investments are not a commodity, what property and who you choose to invest with matters.
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