To Make Money in Real Estate, Follow Millennials

One big theme I harp on is that the new demographic bulge of millennials reaching adulthood (their peak spending years) will drive the success or failure of companies. Those who can adapt and cater to changing tastes stand to do well, while other who fail or cling to dying cohorts will be relegated to the dustbins of history.

Real estate has been one of the things on my mind in recent days, and it is without a doubt that millennials are influencing how future communities and properties are designed. Take this for instance:

“What millennials want are places that have a vibrancy, where you … can shop, go out to bars, walk, and bike,” says Lynn Richards, president and CEO of the Congress for the New Urbanism, a Chicago-based advocacy group for more pedestrian-friendly neighborhoods.

(…)

“For a very long time we built up our towns and villages and cities to drive” in, says transportation consultant David Fields with San Francisco–based Nelson/Nygaard Consulting Associates, adding that even drivers like to park their cars and walk around. “People ultimately want choice.” He says demand for biking-accessible communities is currently the highest he has ever seen.

Developers are taking note. Communities in the suburbs that chose to design for driving (I’m looking at you, Orange County) will suffer in the future as the new generations choose to live in walkable high-density places with plenty of amenities. This means that forward-looking cities like Portland, Denver, Austin, and Vancouver will reap the rewards (and they are, in terms of skyrocketing real estate prices)

As the article notes:

Developers and builders are taking note. They are offering bike storage facilities, valet, repair service, and even wash stations in fancy apartment and condo buildings to lure younger buyers and renters.

Crescent Communities, which builds subdivisions, homes, and apartment buildings across the Southeast, looks for cities and towns whose streets are lined with sidewalks and dedicated bike paths.

That’s because the No. 1 thing potential buyers of all ages want in their communities is walkability, the builder learned through surveys it conducts regularly. So Crescent looks for communities that already have those amenities in place to which it can link up its new buildings and developments.

While those hot areas are already expensive now, they may still have room to grow. What’s more rewarding is to look for communities that are still relatively affordable but which have the potential to be the next “hot” city where millennials flock to. I like to look for college towns close to large cities with good public transportation, a fun pub culture, and close to the outdoors (or at least with biking trails and green spaces).

Some potentials:

  • Fort Collins, CO
  • Madison, WI
  • Asheville, NC
  • Salt Lake City, UT
  • Bend, OR
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Millennials Just Hustling to Survive

One big theme in my book is how everyone, especially millennials, have found ways to compensate for the rise in living costs without a corresponding increase in wages. One big way to do this is unfortunately to work a side job. Traditionally, this was limited to low-wage service industry workers. I remember hearing stories from my patients waking up at 4 AM to drive to work in Los Angeles from the outer suburbs, only to return in the evening and work a second shift at a local restaurant. Mind you, all this is to just cover the bills – it isn’t even about making extra spending money.

This practice has now slowly but surely engulfed millennials, many of whom are recent graduates from university who can’t find any meaningful well-paying work in their fields. Many of them choose to monetize hobbies. As the article describes:

The 31-year-old Torontonian makes adult Sailor Moon outfits and sells them on Facebook, a gig she estimates brings in about $800 a month on top of what she earns in her full-time position at a mascot manufacturer.

(…)

Covering everything from teaching English over Skype to driving an Uber, the term has even found its way into Urban Dictionary, where it’s defined as “sideline that brings in cash.”

It’s a tough time out there. Regardless of whether extra money is a need or a bonus, you can monetize your talents in one of these ways. See more details on side gigs in my book on wealth, as well as ways to turn your hobbies into highly profitable businesses.

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Disrupt Yourself in a Declining Industry

A friend sent me this article about the plight of the diamond industry, namely that they can’t appeal to millennials.

This is a frequent problem faced by many different industries, who have failed to adjust to changing consumer tastes. This is why a favourite Silicon Valley expression is: “disrupt yourself or be disrupted”. Namely, stay ahead of the curve, innovate, and shape consumer preference rather than be the laggard clinging to a dying product.

One great story of adaptation that I’ve seen is with Nvidia. They saw many years ahead of time that the market for PC graphics cards was in decline (due to consoles and lack of new groundbreaking games). As a result, they leveraged their expertise into the burgeoning field of mobile device SOCs (chips and chipset). This became a smashing success. By licensing the underlying technology and IP from ARM, Nvidia’s top chip engineers (from their graphics side) could fine tune the SOC to be more power-efficient and powerful than the competition’s.

What if you’re in resource extraction like coal or oil, threatened by the next generation of clean energy? Why not disrupt yourself by investing money in those technologies? That way you can dominate the new industry even while your old products become obsolete.

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How the Wealthy Became Rich

The answer? It’s mostly through slow and steady investment.

The article defined wealthy as those with at least $3 million in investable assets, which is easily within reach.

According to the survey, more than three-quarters of the wealthy investors surveyed came from middle-class or lower backgrounds, and earned their wealth mostly through income from work and investing.

They took one of three basic paths to wealth: earning it; investing to get it, or becoming an entrepreneur. Only 10% attributed their wealth mostly to an inheritance. In short, the wealthy have worked their way to their enviable portfolios, and took a long time getting there.

Regardless of the asset (preferably stocks or real estate), diligent saving and investing over time will let anyone achieve great wealth.

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There’s a Reason They Promote Active Management

Just saw this ad on Morningstar:

marketwatch ad

Investors have started to wake up to the high fees and poor performance seen with active management, and as a result, big financial service firms are trying to stem the flow of money away from active funds to passive funds. As a result, they’ve ramped up advertising trying to sell potential customers with fear. “Now is a turbulent time,” they say. “In an uncertain world, it’s not good to be passive.” “Have an expert guide you.”

But really, if they have to work that hard to sell you on something, it’s probably a bad investment. Just remember: they’re worried about profit, not about working in your best interest. They (apart from Vanguard) have little incentive to sell you on low-margin passive products.

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Why Boring is Best in Investing

Are you a solo investor trying to imitate the big boys? It may not be such a good idea. You may have seen hedge funds, institutional investors, and big university endowments delve into “alternative” investments, meaning esoteric low-liquidity products that ordinary people wouldn’t have access to. Financial service providers, hoping to capitalize on a trend, created mutual funds and ETFs allowing ordinary people to buy into these supposed hot new strategies. Warning: they just want to charge high fees.

The performance has been dismal. As the chart on the link shows, a boring tried and true approach with stocks and bonds has outperformed all of these newfangled products.

The article goes on to explain the reason for the discrepancy:

Ben Johnson, Morningstar’s director of global ETF research, says many alternative ETFs have serious flaws. “Those guru-type portfolios are just equity strategies taking the long side of some well-known hedge-fund managers’ positions and following them on a lagged basis,” he told me.

“Oftentimes what you see in these ‘mimicking’ strategies is the derivative of the underlying asset that is many times watered down or is otherwise not directly connected to the…real asset.”

In other words, the ETFs are very poor substitutes for the real thing. Institutions like Yale get to pick the best private equity and hedge funds, and can buy, say, actual timberland rather than the WOOD ETF.

So yeah, if you can buy and operate an acre of farmland and know how to run it profitably, you may do ok. But for the rest of us, just stick with a diversified collection of stocks and bonds.

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What is the Goal of Your Business?

A friend sent me this article about the future of entrepreneurism in the world. In short, the central thesis is that the giant companies are entrenched in their industries, and it’s harder to compete with them given their incumbent status. Thus, it’s far better to stay small, keep costs low (the key theme in my book!) and make “subsistence” level wages that replace a day job. For example, a local plumbing business is like this. At most, it may grow into a handful of employees and service the surrounding cities, but it doesn’t want to scale up and become a national presence (is there even a comparable national business that provides plumbing?). That’s too much investment, hassle, work, and time before the eventual payoff. That’s not to mention the bureaucratic headaches in providing benefits to employees, building up marketing, HR, and legal departments. In the face of this, it’s quite logical that many a business owner is quite comfortable pocketing $200,000-$1 million in yearly profits from operating a small business.

Side thought: this is a workable theme for a business concept. Uber’s premise is that it provides a single app that links service providers (taxi) to customers anywhere in the world. One could argue that independent taxi drivers and companies could have preempted Uber’s rise by banding together and making an easy to use and interoperable app. In any case, we can extend this concept by applying it to things like plumbing services. Imagine if you can access a worldwide network of plumbers at your call on the app, without having to fumble through the local Yellow Pages.

Going back to building a successful business these days, the alternative is to be high growth and low profit and eventually cash out in a sale to one of the big boys. Threaten them enough with disruption and then whisper into their ear that it’s better to head off a rival early with a manageable buyout than to face the loss of their entire business. Facebook did this to Instagram, paying a high price but preserving their business model. This is arguably easier to do in the fast-moving world of tech than in other industries.

Ultimately, is it a bad thing that so many businesses are now focused on the modest goals of profitability and sustainability? I’d argue no. For many people, there’s no need to grow big. Having fun, creating something, and being mildly profitable is surely enough to live a comfortable life.

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Minimalist Like the Japanese

I recently published an article about my experiences in Japan. One thing that stood out to me was the culture’s emphasis on minimalism. Part of it probably comes from the lack of space. Japan is an island with a few major cities, and as such people crowd into small apartments the size of shoeboxes in the US. That forces them to be selective with what they own and keep in the home. You can’t really hoard much without quickly being unable to get around.

The other inspiration for their minimalism is their culture’s appreciation of subdued elegance, a leftover from Zen Buddhism. It preaches harmony of yourself with your surroundings, inner peace, and beauty in emptiness (and by extension, empty spaces). It’s definitely an appealing (and cheap) way of interior design your home.

Still, there are some Japanese who take this to an extreme. Some hardcore minimalists have less in their house than some jail cells. You may need to find the best balance that works for you.

Luckily, with the advances in technology, it’s easier than ever to digitize our possessions and have instant access to them from a mobile device anywhere in the world.

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Inspiring Business Ideas – Self Employed Specialty Consultant

Today I stumbled upon an interesting post by a medical resident on a specialty site for medical education. She describes how she has been able to charge an obscenely high rate of $388 per hour for her tutoring services. Here are the key excerpts (typos included as written):

I started tutoring at 10 years old. I tutored for free initially. It was fun for me. I love the moments when the “light bulb goes on” in my peers. I find learning so much more interesting when other people’s welfare in addition to my own depended on how well I learned. I guess that was an early sign that medicine would appeal to me. I relish the challenge and the privilege of someone else’s well-being weighing on my shoulder. It somehow made what I do more meaningful than if I were to just do it solely for myself.

Then in 10th grade, I started charging $10/hr for tutoring AP sciences. I loved it. I was the favorite of teachers & parents, many of whom confided in me all their worries about their kids’s academic performance and future prospects. I felt that not only was I helping the student acing AP tests, but also I was somehow part of their household harmony.

I continued to tutor in college. I worked for tutoring companies at first. Ecstatic at the pay raise, $23/hr, when I saw the newspaper ad. Only to learn that I was to drive to students’ home, in Bay Area traffic, pay for gas and maintenance for my car, foot the occasional car accident bills because I was so tired and distracted trying to find new students’ houses all over Bay area.

It came down to about $5/hr of my time, way worst then when I was my own boss in high school, when it was a solid $10/hr plus I had free rides, free food, and made my own schedule. The worst thing in working for others (tutoring companies) was to learn that my students paid my boss $65/hr while I got $5/hr.

Then I said to myself, “screw this. I’m not going to let some talker business man eat off my back when I’m doing all the hard work.” So I quit all my jobs where I was not my own boss. I put my credentials, experiences, tutoring results, student testimonials, & CV on craigslist. Before long, I was getting tutoring requests left and right at $23/hr, with students coming to where I am (so no driving, no getting lost, no parking tickets, no car accidents). I tutored the hours I wanted; I made the curriculum myself.

Shortly after my craigslist advertisement went up, I could not keep up with the demand of tutoring requests. So I said to myself, instead of working like a dog to fulfill every tutoring request, I’m going to raise my hourly rate, until I can comfortably satisfy the demand & still take care of my other responsibilities and still go out with my friends and have a life.

I continued to tutor because I love teaching and being my own boss. After Mini was born, students came straight to my house, paid me $100/hr, and were so understanding towards my role as a mother that I could put Mini in a front sleeper/carrier and tutor at the same time.

Did I say I love being my own boss?

I continued to tutor throughout medical school and into residency, as I take on more responsibilities in my medical training, & Mini demands more intellectual engagement, I had fewer & fewer hours allotted to tutoring. Yet, I still had lots of demands… more than I could fill.

So I kept increasing my hourly rate, to the peak of $420/hr while still in California. Now, I’m perfectly content with the equilibrium price of $388 for the past 2 years.

It’s an interesting read because of how she independently discovered the advantages of being a self-employed niche consultant, as described in my book. Let’s see which principles she recognized and applied.

  • Scale: It doesn’t have to grow too big. Actually, being too big becomes a hassle to manage. Instead of doing the work that was initially interesting, the owner eventually transitions into managing employees, inventory, and crunching numbers as an accountant.
  • Exit strategy: Going along with the previous point, she started out with a firm a goal for her earnings – to supplement her income from her day job, provide some welcome distraction, monetize a hobby, and not work too many hours at the same time.
  • Price adjustment: If there’s anything you should take away from this article, this is the point. Many times business owners starting out are unsure of how to price. One way is to price at the market median (look around at competitor prices), provide exceptional quality, and titrate the price upwards as the number of customers grow. This is especially key if you don’t want to scale up and up such that the company exceeds the ability of one person to manage.
  • Focus on your expertise: Her business was in specialty tutoring. While anyone can bill themselves as a tutor, she had exceptional and unique credentials that she could leverage into higher income. Imagine how much you could earn as a dedicated nanny+tutor to the children of the privileged wealthy, if you had a degree in medicine from an Ivy League plus a masters in early childhood education!

As a side note, the UC system is taking the price adjustment technique to heart. They have a simultaneous problem of a revenue shortfall and too many international and out of state students rousing the ire of Californians. They are implementing the best solution for this, which is to raise prices for those students, maximizing revenue and decreasing their numbers at the same time. It’s a win win for the system!

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The Eternal Debate – Angular or Well Rounded?

No, this isn’t about the dreaded question many college applicants have – should they portray themselves as interested in a single subject/area or as someone with multiple skills – but rather with what areas to study and what skills to develop in order to be able to succeed in an uncertain and ever-changing world.

Let’s first look at the angular approach. This can work in highly technical fields where the more specialized individuals, due to the shortage of supply, can command premium wages and outstanding job security. Examples include delving deep into medicine, engineering, or basic sciences. You can even carve out niche positions in the social sciences and humanities by focusing on say 17th century Czech literature. You will be the world authority on this subject and if ever something comes up in this field (say for instance a Robert Langdon style puzzle), you will be highly sought after to help decode it.

The big downside is that the narrower you go, the less choice you will have for work. If you want to make use of all that time spent in study and acquiring expertise, you have to find a job that offers that opportunity. This may not always be available, and the few that exist may have someone like you already entrenched in it. There can be a big letdown if you fail to find or secure that job and instead have to settle for something more menial. When super specialized people fall, they fall hard. They can instantly go from senior management or chief architect to barista. Finally, you are forced to go to where the jobs are. If your lifelong dream is to stay close to your family in rural Wisconsin, becoming highly educated and specialized for a job that’s only offered in global alpha cities (like a cardiologist specializing in a rare rhythm disorder) may not be ideal.

The other approach of being generalized is naturally on the extreme other end of the spectrum. Mind you, being well-rounded doesn’t just mean not specializing, but rather branching out and linking different disciplines that have the potential to mutually support and reinforce each other. For example, you can link business administration and communication, international relations and French language, media studies and marketing. This kind of chaining maintains versatility but also improves your competitive edge.

Compared to someone who only has one degree, having hands in multiple pots increases the range of jobs that you are a candidate for. Furthermore, during the interview can play up synergies between different degrees. In contrast to the highly specialized technocrat, you will mainly be looking at jobs that deal with people rather than machines, and are therefore amenable to people coming from all backgrounds.

This is a better approach for someone who doesn’t yet know what he or she wants to do in life and where to live in the future, for whom it’s important to remain general and not close doors prematurely. This is also a case where doing a “gap year” like JET, Teach for America, or Peace Corps can help with getting into the right grad school or internship.

Don’t be afraid to specialize after picking your niche. Say that you get a degree in politics and philosophy, go on a Peace Corps mission to Bolivia, and return for a masters degree in public health. Then you go around looking for jobs and end up as a junior analyst for the WHO drafting briefs and compiling data. This is a perfect time to improve your long-term prospects by shifting your career in that direction. Whether through a funded PhD in say epidemiology or simply by working at the job for many years, you will acquire specialized skills. That can later take  you to become a manager at the Gates Foundation focusing on vaccine development, for example.

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