Hi, Reader!

When I was in the early stages building my real estate business, things were wire-to-wire. By things, I mean everything. And all the time.

It was selling one deal on a Monday, and using that same capital to buy a new deal on Wednesday.

It was the plumber trimming out the fixtures in the morning, and the photographer taking listing photos in the afternoon.

It was getting under contract for a new deal and not knowing how I would pay for it.

It was cleaning an apartment on Friday for a new tenant to move in on Saturday.

It was borrowing a leftover half-full bag of grout to use on a different property across town.

When you're building quickly and taking advantage of every opportunity you can, things are tight. Capital, time, supplies, contractors. And this is OK for a while. It's efficient to work this way, leaving nothing to waste. When you're hustling like this, you can grow faster.

But it can be stressful. With all of the moving parts, things don't always turn out as planned. Because, well, sometimes the plumber doesn't finish before the photographer shows up. Sometimes, the capital you thought you'd have to close the deal isn't available.

When you're operating like this, you're lacking one very important thing.

That thing is best described as buffer. It's not going wire-to-wire. It's having a little bit extra - of whatever - just in case.

There are two areas of life in which having a little extra buffer has lead to a massively increased quality of life for me: time and capital.

James Clear, professional thinker and author of Atomic Habits has a quote about buffer.

Buffer sounds great, doesn't it? More than enough money in reserves? Lining up flight connections with plenty of room to spare? Count me in.

The hard part about buffer is that, in your small business, you have to earn buffer. You earn buffer by going through the challenging times of having no buffer. After you realize the stress that having no wiggle room can bring, you realize you need to operate differently.

The other thing is that buffer and growth are often at odds with each other in the early stages of a business. If you have plenty of extra capital sitting and doing nothing, it provides buffer. But it's also inefficient. That capital could be used for growth.

If you plan for a project to take twice as long as it should, that extra time might provide some peace of mind. But you're probably leaving money on the table.

As your business and wealth grows, you earn the right for buffer. Since growing as fast as possible is no longer the most important thing, you don't have to be as efficient as possible. You trade some efficiency for peace of mind.

Here are two ways that adding buffer to my life and business has increased its quality and helped me sleep better.

Doing smaller deals than I could.

In real estate circles, it's contrarian to stay small. The talking heads will always tell you to go bigger. Bigger deals might work well when times are good. But when times get challenging (like now), maxing out your deal size brings inherently more risk. When you do bigger deals than you should and you're stretched too thin, you might have higher debt payments, lower reserves, and overall less room for error and the unexpected.

Focusing on deals that are below my maximum allows for buffer. I can make higher down payments, allowing for more cash flow and reducing debt risk. Smaller deals bring less risk. One small deal gone bad won't sink me like one big deal gone bad might.

Not Forcing Deals

As I've gained more experience and more capital buffer, I've eliminated the need to do a deal. There was a time that I needed deals to pay the bills, but I'm not there now. I'd like to keep doing deals in order to grow, but I'll only do it if it makes sense.

There are large real estate operators who need to do deals. They need the fees that new deals generate. This is a very tricky place for an operator to be in and something I do not aspire for myself. Since I never collect any fees on my deals, I have the freedom to only go after great deals that are actually going to provide great returns. Having a capital buffer creates a time buffer. I can afford to be patient until a truly worthwhile opportunity comes up. Being desperate for a deal is one of the worst places for a real estate investor to be.

THIS WEEK ON THE PODCAST

I talk with Andrea Barnes. Andrea has an incredibly inspiring story where, at 50 years old, was unsure how she would retire. Andrea built a bigger portfolio than she ever imagined and has now completely retired thanks to the proceeds of her investments. Enjoy hearing about the magic of real estate, her criteria for passive investments, and what passive investing allows her to do.​
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Listen here on Apple Podcasts.

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Curious about commercial real estate? Read The Top 6 Reasons to Invest in Non-Residential Commercial Real Estate. ​