I am not a spendthrift. But I’m not a cheapskate, either.
I know people who are not happy in a deal unless they feel like they’ve beaten the other guy down to nothing. That approach to business is mean and inefficient. Most times, it will end up backfiring.
Let me tell you why.
You are building a new house. You have asked three contractors for bids. You call in the low bidder and begin the process of chiseling him down on his prices.
He needs the work. (Pretend it is 2010.) So he agrees to build your house for what it costs him. He will be able to keep his workers busy and pay them, but he won’t make a nickel of profit on the deal.
You feel great.
But what you don’t realize is that in building your house, you will make changes. Dozens of them. And every time you make a change order, he will screw you.
It will be a screwing he believes you deserve. By the time the house is done, he will have his profit and more. And you will have paid a higher price than you should have and made an enemy in the process.
As an investor in residential real estate for 30 years, I’ve seen this scenario play out at least 100 times.
I’ve learned from my business and financial relationships that getting the cheapest deal doesn’t necessarily mean you’re getting the best deal.
Instead, when I go into business with someone, I am looking for three things:
|•||The right match (someone who brings me something useful that I need)|
|•||The right personality (someone I enjoy dealing with)|
|•||The right deal (a deal that is good and profitable for both of us).|
For example, Peter, my main partner in my rental real estate activities, cannot afford to bring cash to the business. But he brings other things.
First, Peter is the right match. He’s detail-oriented, which I’m not, so he keeps good books. He’s also tighter with expenses than I am, so he won’t buy a new refrigerator when he can fix the old one for $25.
He’s better than I could be with renovations and repairs because he has 30 years of experience working with trades. He knows what services cost. And he’s very good with people—happy to listen and compromise but hardly a pushover.
Second, Peter is also someone I work with well—in other words, the right personality. We’ve been partners in various projects on and off for 40 years. Working with him is fun and easy. That makes the business fun and easy.
Third, the deal we have is a good one. In return for donating some of his expertise and time, I give him a share of the equity. Plus I pay him an arm’s-length management fee.
It’s a good deal for him because he gets income and equity in the real estate we buy without putting any cash up. It’s a good deal for me because Peter takes care of everything. The only thing I really need to contribute for a rental real estate deal is cash.
The relationship works well for me because he does things I can’t or won’t do on my own. I trust him implicitly. I’m happy to pay him very well for this, and so our deal is fair for both of us.
I have the same philosophy in selecting brokers, financial advisors, and insurance agents. I want expert advice and great service. And I don’t want to overpay for it. But I don’t want to underpay, either.