Opportunity Cost - Always
By Christopher Levarek
“We have two lives, and the second begins when we realize we only have one.”
- Confucius
Opportunity cost is defined as the “benefit, profit or value of something that must be given up to acquire or achieve something else.” With this in mind, we would like to discuss this subject with regards to investments and real estate goals. Often the opportunity cost of specific ambitions or investment projects can be easily overlooked in favor of positive outcomes, profits or future goals. Always choose to see the opportunity cost of any venture and ensure it correctly aligns with your specific goals.
A Real World Example
Recently we had a discussion with a highly successful real estate investor who explained the journey that their investment strategy took as business/personal goals and ambitions changed over 25 years of working in the real estate space. Experienced in buy and hold apartment complexes, improving distressed properties and flipping luxurious single family homes, this individual had worked with a variety of investment models or strategies.
What became clear however was that, the current or present strategy utilized by this investor was not the most “profitable” in terms of money. The most valuable element presently for this investor was “time” itself and choosing a strategy that aligned with getting more time back for family and personal hobbies. The opportunity cost of giving up “time” for a more lucrative “money” strategy was too high and did not align with this investors present goals.
Time and Capital
For many, whether just getting started or experienced investors, the two functions of opportunity cost are time and capital. An active investor might commit more time and/or capital to a real estate investment whilst a passive investor would be looking for less time and possibly only capital commitment. Active investing or “an active hand’s on approach to purchasing and managing properties”, can be extremely rewarding for an investor however it also can be a massive time commitment. For the full-time job holder, active investing might take too much time away from family, day to day job or other personal ambitions.
On the flip side, passive investing or “purchasing of real estate through private lending, partnerships, mutual funds or REITs(real estate investment trusts)”, represents a much smaller time commitment in exchange for capital contribution. However, opportunity cost with regards to capital applies as well as it is worth looking at what else could said capital be applied to? In other words, is the contributed capital in the example passive real estate investment achieving the best desired outcome or are there better investments able to achieve more positive outcomes relative to the investors goals?
How do I decide?
With endless opportunities and investment projects, choosing the “correct” method or path can be difficult at times. However, whether you learn a life experience in the “wrong” or “right” investment relative to your goals, it is still a life experience. In the end, no experience is without lessons or rewards. These lessons or rewards can only improve us as human beings and more clearly allow us to focus on our true desires.
We recommend clearly defining what is important to you. This might change overtime and will need reevaluation daily if not weekly. What do you place the most value on? What brings you the most satisfaction? Why are doing what you do? With this in mind, choose projects or investment opportunities that align with what is most important to you. Choosing opportunities based on what is most valuable in your present situation and life will always be a good starting point.
In Final
With no wrong or right choices, you can not get it wrong however you can choose to look at all options and work towards the best choice for you in your present place. See the opportunity costs for your options and ensure the selected aligns with your why. As always, Invest Smart!