The Value of Emotion in Real Estate Investing

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Is there a role for “emotion” in real estate investing? While many investors take a very rational, logical perspective to real estate, Thoughtful Real Estate Entrepreneurs also understand the importance of the subjective side of real estate—the emotional connection a tenant or buyer has to a property. Properties that speak to the hearts of the people using them are more special and rare—not to mention financially resilient—than those are simply functional and utilitarian. In this episode, Jeff explains the considerable value of buying properties that elicit an emotional connection.

Episode Summary

If I asked you which body part do you use more in real estate investing, your head or your heart, I would say probably 99% of people would say I definitely use my head more than my heart. But is that the right way to do it? Well, in today’s episode, I’m going to make a strong argument for why listening to your heart and listening to the hearts of others is extremely important to be successful in real estate investing. I can’t wait to dive into this. So let’s cue up that theme song and we’ll jump right in.

Welcome to Racking Up Rentals, a show about how regular people, those of us without huge war chest of capital or insider connections, can build lasting wealth acquiring a portfolio of buy and hold real estate. But we don’t just go mainstream looking at what’s on the market and asking banks for loans, nor are we posting We Buy Houses signs are just looking for “motivated sellers” to make lowball offers to. You see, we are people-oriented deal makers, we sit down directly with sellers to work out win-win deals without agents or any other obstacles, and buy properties nobody else even knows are for sale. I’m Jeff from the Thoughtful Real Estate Entrepreneur. If you’re the kind of real estate investor who wants long term wealth, not get rich quick gimmicks or pictures of yourself holding fat checks on social media, this show is for you. Join me and quietly become the wealthiest person on your block. Now let’s go rack up a rental portfolio.

Hey, thanks for joining me for another episode of Racking Up Rentals. Show notes for this episode can be found at thoughtfulre.com/e98. Please do us a big favor by hitting the subscribe button in your podcast app. It really, really does help other fellow thoughtful real estate entrepreneurs to find us. Thank you so much for that. Onward with today’s episode.

So let me tell you a quick story. The date was, let’s see, probably early 2015, and I had just started working with my coach Greg, who you are going to get a chance to meet in great detail in about two episodes from now – and I’m super excited for that. Greg came to town and we were spending a day together on the streets trying to figure out where the focus should be in what we were going to do. And as part of this, at the very end of the day, before I was driving him back to the airport, I was taking him on a little tour of the properties that I already owned because he wanted to understand where I was starting and what my context was. And so we were just driving around and I was showing him things, and I pulled up to the last one, which was the first property I had ever bought as an investment. It was a triplex and it was about two lots away from a busy road. It’s a very nondescript kind of a building, just a long rectangular box, and when you pull into the parking lot, all you saw was just the end of the building, no windows or anything like that. We pulled in, and he just immediately started laughing and he said, this looks like my dentist office; we’re selling this the next time we possibly can.

And I stopped. Really? I mean, you don’t even know anything about it, yet. We, what do you mean, we’re selling it? And he said, Look, there’s no romance with this property, it might be a fine investment, but this is definitely something we can upgrade to something better. And that planted a really interesting seed in my mind, something that I spent the next couple years working with Greg really trying to digest and understand and embody in my own real estate investing journey. And that’s what I’m so excited to chat with you about today.

Now, the normal perspective in real estate investing, this is no surprise and maybe you either share this now or have shared it in the past. But of course, the normal perspective says real estate investing is about your brain, it’s not about your heart. You know, if you invest with your heart, you’re gonna make bad decisions. You know, smart investors just use their brain and they don’t listen to those other things. And it’s just, it’s all about the numbers, if the numbers work. That’s all that matters. And in that moment, I definitely had that perspective that said, if the numbers work, that’s all that matters. I didn’t have a desire to be able to drive people to my properties and say, Look at the gorgeous properties I own; aren’t I special because I own these gorgeous properties? That was not part of my mentality at that time. But it came to be very clear to me that that perspective was actually very, very valuable.

So in today’s episode, I asked you this question. Is there a role for emotion in real estate investing? And I’m going to give you an adamant Yes! There is a role for emotion in real estate investing and for an important reason that you might not be expecting. So let me tell you that and then we’re going to unpack this.

The reason why emotion is so important in real estate is because your tenants and your buyers are humans. And humans have emotion. Humans have heart. Humans can’t help but look at things and have a reaction inside their gut and inside their heart about something. Now, it’s not to say that that reaction or that feeling is the sole driver, in all cases. That’s not what I’m saying in today’s episode. But I am saying that you have the opportunity to tap in to emotion because the users of your properties, the people who will buy them from you, the people who will rent them from you, they have emotional reactions and connections to properties and to lots of things in life. But especially properties, we’re going to talk about that right now.

Every human being needs to have something in their life that speaks to their heart, right? Humans can survive on shelter, food and water. But beyond that, they need something that speaks to their heart; maybe that’s another person, to be in love. Maybe that is a passionate pursuit, a sport, a hobby, art, anything like that. But people need things that speak to their hearts. And real estate is something that is just absolutely omnipresent in their lives, and they’re in it and around it all the time. And that is also something that can and should speak to their heart to the greatest degree it possibly can.

Now, there are broadly two types of real estate out there. And we’re going to just oversimplify and categorize things into two buckets: utilitarian real estate and romantic real estate. Now, both types of properties have functionality, right? We’re not saying that somebody will buy a house from you just so that they can stand outside and look at it and feel an emotional tug. No, it still needs to be functional for what they are trying to accomplish. But generally, there are two types of real estate. Real estate that’s utilitarian meaning it’s simply functional. And secondly, real estate that is going to be used personally. And that is romantic real estate.

Now, I’m stating this as if these are two clear buckets. And of course, while there are properties that are distinctly in one bucket or the other, you could also think of this as a spectrum, a continuum where on one end of the continuum is the extreme of utilitarian real estate and on the extreme other end of the spectrum is romantic real estate. And you can think of a lot of things that are kind of in the middle in different ways. And that’s totally fair. But we want to think about this in terms of these two categories. So let’s talk about utilitarian real estate.

First, utilitarian real estate is about serving a purpose. It is purely functional in nature. Some good simple examples of this would be storage units, or maybe a warehouse or a small business that has a utility kind of a bay to it, where they’re working on cars or things along those lines, maybe a gas station, for instance. So a utilitarian piece of real estate is really about the function that it serves. And utilitarian real estate is a commodity, right? It is a commodity and it’s fairly interchangeable with the other similar commodities. A fancy word for this would be fungible storage units, which are more or less interchangeable with other storage units. Now, certain storage units are going to be more conveniently located for some people, some are certainly going to be better run than other ones. Some are going to be nicer, more beautiful, the doors are going to roll up smoothly instead of squeaking and being covered in rust and things like that. But for the most part, it’s safe to say that people don’t rent storage units because they make their heart go pitter patter. They rent storage units because they have a utility that they need to accomplish with that type of property. Utilitarian real estate is not rare. It’s not scarce. Now, there’s not infinite supply of it. But it’s not rare. You don’t come across and say Oh, look at this, it’s a storage unit, because they are generally fairly available.

Now let’s switch and talk about the other category, personal use properties that are romantic in nature. And romance is this word that my coach Greg uses that I just think sums up the idea of the emotional aspect of real estate. Human beings need a sense of romance in their life and real estate can be a provider of that for them. So romantic real estate is much, much, much less of a commodity than utilitarian real estate. It’s far more subjective as a result. So while you can have two houses that both have three bedrooms and two bathrooms, they are rarely identical.

Now, if you were to go out into, let’s say, a subdivision where all of the houses were built at about the same time, say 2015, and they’re all about the same size and the same quality, that’s going to be a more utilitarian version of real estate. And the subjectivity as one person looks at one property versus the next one that’s next door is going to be far less, but romantic properties are far less of a commodity. So this can apply to lots of things as well. But let’s say houses, for instance, apartments, retail stores, things along those lines.

Now, the thing about romantic real estate is there is a level of rare to them. While utilitarian real estate is not rare, there’s plenty of supply, maybe not infinite supply, but there’s plenty of interchangeable supply. Romantic real estate, because it’s not so perfectly interchangeable, is far more rare. And rare is what leads to value, right? When we talk about the concept of supply and demand, the less supply there is of something, then the more a price can usually be for it as long as the demand is there. Because there’s not as much of it, it’s harder to find, it’s less interchangeable with the other options that a person has available to them.

So there’s utilitarian real estate and there’s romantic real estate. And of course, there is a continuum of properties along the spectrum between those two things. But those are two poles on the ends of this spectrum that we need to really think about.

Now, there is a nice segue to the topic of demand. What is demand real estate? Well, just to put it really simply, and again, I get this definition from Greg, is demand is when you own stuff that other people want. It’s really that simple. Other people want what you have now, the other people who want it might be buyers, they might be tenants, they might even be investors who want to share ownership or have their money loaned on certain types of properties that are not infinitely available. But demand is when you own what others want. So we always want to be buying demand real estate.

Now demand shows up in utilitarian real estate. Absolutely. And it shows up in romantic real estate. Absolutely. But it’s a different dynamic of demand. In the world of utilitarian real estate it’s really based on supply and demand pricing. So if you own a storage unit, and there are 500 other similar storage units available, you don’t have a great deal of control over the pricing of that storage unit, assuming you actually want to get at least up because the market pricing will dictate what you are reasonably allowed to charge, right? This is basic economics 101 from your college class; when there’s a lot of supply of something and a fixed amount of demand, you don’t have a ton of say over the pricing; the market controls the pricing.

But when we think about romantic, personal use real estate, the pricing on those homes or apartments or retail stores or whatever we’re talking about is less elastic. Now, of course it still follows the overall principles of supply and demand. But there’s a very important difference here because romantic personal use property is not perfectly interchangeable. It’s not fungible, it’s not something you can just say these two things are exactly identical. It’s much harder to compare them. And because it’s harder to compare, it’s also much harder to say there are other properties that are exactly equivalent, that are available for less and thus I have to keep my price at what that market demands. There are qualitative differences in romantic properties for personal use that don’t apply and show up quite so much in utilitarian real estate. So that means that while there is certainly an element of market pricing, of course, overall to even romantic real estate, it’s not dictated quite as much.

Let me give you a simple example. Go back to that idea of a subdivision built in 2015. If you’ve got one of those houses, and you want to put it for sale, and two blocks down, and then three blocks down, because the houses are all very similar, those homes recently sold for $225,000, it’s not going to be reasonable for you to list your property for $350,000. Because these are very, very good comps that are very nearby, or people can say that house is virtually the same and these two both sold for $225k. So you’re not going to be able to get away with $350,000 purchase price because it’s easy to compare your property with the others because it’s lacking enough of a bit of romance to be able to break that commodity dynamic.

But if you own instead, a 1938 English cottage in an old neighborhood, every single one of those homes is different, it’s different in its quality, it’s different in maybe whether the basement has been finished. It’s different in lots of different ways, it’s different in square footage, it’s different in layout, and thus they’re harder to compare, and thus, they’re more rare. So for the person who finds that type of property romantic, you have the ability to dictate the price in a way that has to refer to the comps out there, but doesn’t have to follow them perfectly, because they’re not perfectly comparable.

So let’s talk for a minute about what creates emotion, what is it that creates this sense of romance that is indeed so valuable, and it’s lots of things that you can probably really relate to. One of those things is location. We talk about the word location just obsessively in real estate. But location is romantic, or location can be non-romantic, right? There are certainly parts of town where people want to be more than they want to be in other places. If you are in proximity to other things, if you can walk from this house to the local coffee shop, or the local bistro, or the local neighborhood grocery store, that has got a very different level of romance than the property that is five miles deep into a subdivision somewhere where the closest grocery store you have to drive to and it’s a big box store. Those are different levels of romance. Now, this is not to say that everybody prefers walking to a small bistro rather than going to the Olive Garden at a big box development. But for those people who do, that is very, very romantic architecture, or the style of the property has a huge impact on romance, right?

You could take two properties that had the exact same stats in terms of bedrooms and bathrooms and size. But if one is like a 1970s box, and the one next to it is like an English Tudor or a Craftsman or a Victorian style, the Craftsman, Victorian style, English Tudor is going to get the pitter patter of the heart going a lot more than the 1970s box ever will.

Sometimes it’s about materials; you could look at two properties that are exactly the same and if one is just sort of basic, boxy, wooden siding, and the next one is sort of a beautiful, distressed, original brick look to it, again, a lot of people will feel more of a romantic pull towards the brick than they will the wood siding. Charm is an important word with this whole thing as well. Now my idea of what’s charming is different almost certainly then your idea of what’s charming to some extent. But there are definitely things that we all tend to universally consider to be more charming. So charm can add a high level of emotional connection and romance.

How about this idea of story? Some properties have story that can come from different things. I own a property for instance, that was the original bank in a small town that has now grown into becoming just a neighborhood of the greater city of Portland where I have most of my properties and because it’s this beautiful vintage building and it has that classic story of “this was the original community hub financial center”, that has got a level of story that other similar properties maybe functionally don’t have, right? Sometimes a property can have story because of history. Sometimes it can have story for other reasons. But when there is story associated with a property, then a person is renting or buying not just the property, but the story as well.

That’s such an important point over here, as well, in terms of the greater topic of romance and emotion versus utilitarian real estate. Utilitarian real estate is being consumed, utilized, rented, bought whatever, for the functionality of the property, whereas romantic real estate is being bought, rented, consumed, used for both its functional purpose and the way it makes people feel. And that is super important.

And it also brings us to a very important point, as well, which is, as human beings, as consumers of things, we have our own self-image, we have a story in our mind as to who we are, we have a story in our mind as to what we stand for, and the person that we are, the person that we’re trying to be, the trajectory that we’re on in our lives, etc., we have a narrative in our minds. And romantic real estate is a tool that we can use to help verify, solidify or prop up that exact story. So there are people who see themselves as I’m a small neighborhood, walkable to the grocery store, kind of person. And thus this infill, beautiful little cute apartment complex is how I see myself. Whereas there are other people who don’t have that exact sense of identity of themselves, or financially, they’re not in a position where they can spend money to fulfill that sense of self-image. And so they’ll just be in an apartment complex, where they’re just one of 500 units on the outskirts of the suburbs of town.

Similarly, somebody may think I have always pictured myself living in a cute little English cottage, from the 1920s, surrounded by other cute little English cottages from the 1920s. That’s the kind of person I am. And thus, that’s why I’m buying that type of a property. So it’s really important that we never underestimate the importance of somebody’s own self-image in terms of their decision making process, because you might look at this and you might say, Well, why would somebody pay $2,000 a month for this two bedroom, one bath apartment, when they could spend $1,200 for the exact same size apartment if they’re willing to drive 12 miles outside the city? Well, because those people who value that self-image, it’s so important to them that they’re willing to spend the extra money because they’re not just buying the utility of the roof and the toilet and the sink, and the cooktop and all that; they’re buying the experience of feeling like they’re being the person that they want to be. In other words, their heart is making a major part of the decision for them.

So let me just give you a few simple examples, things that on a utilitarian basis these two examples are very similar, but you can see why one would follow very different levels of demand and would probably sell or rent for a lot more. Let’s just talk about houses. Here we’ve got two houses that functionally are very, very similar. The first one is a 1985 Ranch House, three bedrooms, two baths, one level, 1500 square feet, in a subdivision of properties, also built in the mid 80s. The alternative is a 1930 cottage that’s three bedrooms, two baths, 1500 square feet, the exact same size, and it sits in a historic neighborhood. Which of those two properties is likely to sell for more? It is likely whether it’s your personal set of values or preferences or not. The property that is the 1930s cottage is likely to sell for more because it has more of what some people would consider the romantic factor from the perspective of utility. It’s the exact same size. It’s the exact same functionality, but the other things that come with that property, such as the feeling of being in this particular historic neighborhood, are a big part of what people are actually paying for. The 1985 Ranch is going to be valued, it’s very much based on what the other 1985 ranches around it are selling for. The 1930s cottage is going to be far more a function of what that buyer feels and how much they want to pay for that particular property.

Let’s talk about Apartments for Rent. Let’s say that you have two apartments that are virtually identical. Again, one is a 1970s, two bedroom, one bath, it’s in good working condition, it’s got T-111 siding, and it’s just kind of a box of a shape. Right next door, you’ve got a 1948 apartment complex, small, same number of units. It’s also two bedrooms, one bath, and it’s vintage, meaning it’s a got original countertops, and all that kind of stuff. It’s not updated, so it’s old in its own right as well. And this building is made of brick, which of those two has got more emotion and romance connected to it? Well, through the eyes of a lot of people, the 1948 vintage original brick building is going to have more romance. That’s the building that’s going to be able to charge higher rents because that experience is more rare. The 1970s two bedroom, one bath box with the T-111 siding is going to be more available, it’s going to not be as rare, it’s going to be easier to find, it’s going to be less special as a result.

Let’s talk about a commercial or retail type of experience; let’s talk about a 2000 square foot small retail space. The first version of this is in a suburban strip mall, that is next to a dry cleaner with a small parking lot. Or you could have the exact same size, 2000 square foot retail space in a vintage building in a neighborhood that is walkable, where there are lots of homes nearby. And it’s got local coffee shops and boutiques surrounding it instead of the dry cleaners. Which of those two is going to be more romantic in the eyes of a lot of people, which is going to elicit more emotion? More emotion is going to be elicited from the vintage building in the walkable neighborhood, in most cases, than the strip mall because the strip mall is closer on the spectrum of utilitarian overall.

Now I want to point out, it’s not up to me to tell you what your idea of romance should be. And it’s not up to me, a guy who invests in one particular area, to pretend that I know that the culture in every town in America is the same and that people value all the same things. There are different parts of the country where people might value X, Y, and Z more than they do where I am. But the point is this. Everybody can look at a piece of real estate and feel an emotional connection or not, feel an emotional connection and the value of that person having an emotional connection of some sort to a piece of real estate that you own is very high. That is very valuable. If you own a bunch of real estate that people look at as being purely functional, purely utilitarian, well, that’s fine, too. But that’s not the same as owning real estate where people look at it and say that is functional and I love it, it speaks to my heart. It makes me feel like the person I am trying to become. So don’t underestimate the importance of emotion.

I want to draw the connection here back to something that is both our left brain and our right brain as we close. You might listen to this and you might say, Well, that’s all well and good, but I am a financially oriented person, I am looking for financial results; I am looking for deals that makes sense on paper and that actually produce. So let me ask you this: if you own commodity real estate, if you own utilitarian real estate, and someone comes along and builds more of the product that is very comparable to yours, how does that impact you? Suddenly your property, there’s a lot more supply for it. There may or may not be more demand and you have less control over your own situation.

But if you own romantic real estate, romantic real estate cannot just be copied, it cannot just be reproduced in the same way because there is a level of scarcity and a rareness to what it requires. To be romantic, there are not infinite plots of land available in the romantic locations. You can’t go back in 2021 and build a 1930 English cottage property. You can’t reproduce those things. So there’s a level of scarcity there. When there’s a level of scarcity, and you have something that people want and demand, you are more financially resilient. All else equal, people will choose the piece of real estate that not only meets their functional needs, but also speaks to their heart.

So if you found yourself in the middle of some sort of an economic downturn, and you own a product that’s totally a commodity, completely interchangeable, like let’s say, an apartment that is very utilitarian and you’re charging $1,200 a month for that apartment, and this person can move to something that is virtually identical for $1,100 a month, you better believe that they’re going to do that, because why wouldn’t they do that? They can have the same thing for less cost.

But when you own romantic real estate, it’s not as easily interchangeable. So someone might say, well, I can move from this $2,000 apartment to a $1,500 apartment and save some money. But it’s not a lateral move, I will be giving up the romance of this particular property and most people are reluctant to do so. So all else equal, the romantic pull on the heartstrings of your tenants or your buyers is the thing that is going to make you more financially resilient, because you will be less subject to the perfect elasticity of pricing because of supply and demand because you own something that there is not a lot of supply for.

And that my friends brings us to the end of another episode of Racking Up Rentals, a little different episode today. I hope that this has intrigued you and made you think a little bit differently about maybe what you own and what you might be trying to buy more in the future.

Show notes for today’s episode again, just as a reminder, thoughtfulre.com/e98. Please do us a big favor by hitting the subscribe button in your podcast app and rating and reviewing the show. Did you know that we have a Facebook group for Thoughtful Real Estate Entrepreneurs too? We do. It’s called Rental Portfolio Wealth Builders. We’d love to have you over there. You can search that in Facebook or just type in group.thoughtfulre.com and we will take you right there through your browser. If you liked this episode, please take a screenshot, post that screenshot to Instagram and tag us; we are @thoughtfulrealestate. I’ll see you in the next episode. Until then, this is Jeff from the Thoughtful Real Estate Entrepreneur signing off.

Thanks for listening to Racking Up Rentals where we build long term wealth by being win-win dealmakers. Remember: solve the person to unlock the deal and solve the financing to unlock the profits.

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