De-risking real estate

Perhaps my most important learning of 2020 was "make small bets".

The idea of making many small bets totally transformed the way I think about business ideas.

As Seth pointed out in his blog post from January 1st, 2021:

...consider a portfolio of projects. Some of them have a very high likelihood of working out, and each one of these outcomes is pleasant, if not game-changing. Play often enough, though, and your persistent generosity will pay off.

And then, mix into that some of the moonshot projects that most people are afraid to take on. They’re afraid because they have equated “low chance of success” with “risky.” They’re not the same. Risky implies that failure will cost a lot. It won’t. You can thrive with this strategy because you have a portfolio, and because you realize that “unlikely” is not the same as “not worth trying.”

How do ambitious moonshot projects succeed?

An ambitious moonshot project requires a smart person to succeed, and smart people don't play the lottery.

Instead, they ensure success by ensuring failure doesn't take them out of the game.

"Small" is subjective

Elon Musk bet his entire net worth that SpaceX and Tesla would take off. If he had been wrong, he would have had zero capital... but he wouldn't have been out of the game.

He had an audience, a following, a reputation, and that's worth a lot of money as well.

This bet wasn't risky. It had a low chance of success, but, as Seth points out, that's not the same as risky.

If he failed, he would still have all his knowledge, his drive, his reputation, his connections, and he would still have a shot at the next thing.

How can I turn the time I spend on real estate into a small bet?

With that in mind, my question becomes – if I am going to invest in real estate, how can I de-risk that investment and turn it into a small bet? I plan on spending a significant amount of time learning how the market works, and probably investing a lot of money personally as well.

In particular, the biggest opportunity cost is to spend two months focused on real estate. If I don't end up pursuing it, that is effectively worth ~$50k, as I discussed in an earlier post.

If I pursue another project during this same time period as well, I am cutting my total opportunity cost invested into real estate by effectively half. Instead of investing $50k of my time, I am suddenly investing $25k in real estate.

And let's say for kicks that I also start a third project. Now my risk exposure for my real estate investment is down to ~$17k, spread across three projects.

Now you might say, well, by splitting my focus across two or three things, I am halving or thirding my focus and energy. And that's true. Multitasking decreases effectivity.

But multitasking refers to trying to do multiple things simultaneously; not trying to do multiple things at different times of the day.

Despite that, though, there is probably a cost to working on multiple projects and spreading focus around. But there is probably also a point where you reach diminishing returns in terms of focus.

I wouldn't be able to manager ten projects at the same time effectively, but two? Three? Definitely would be able to do better. I would also hazard a guess that the curve of effectivity across projects is nonlinear, and drops off rapidly past a certain number of projects happening in parallel.

Parkinson's law comes to mind:

Work expands so as to fill the time available for its completion.

As does the old quote...

If you want something done, give it to a busy person.

Now, this is an awful lot of logic for something that comes naturally to some people – working on lots of things at once.

But I think it's important not to get discouraged by this: building a business isn't like a running race. We don't all start in the same place, but are gifted with different talents and dispositions that cause our success curves to appear differently.

Plan of action

So for me, I'm going to be working on three different projects going forward, I think. The first is going to be real estate, obviously, at about 50% of my time. The second is my book at about 25% of my time, and the third is TBD, also at roughly 25% of my time.

This should de-risk my investment of time significantly. There are other actions I can take towards that goal, but we'll take a look at them as I learn more about real estate.