38 Weeks to Get Rich
What follows is my summary & key takeaways to help you digest the 127 page document.
Week 25: An Example From Laborer to Entrepreneur
Here’s an example from the real estate industry about the continuum from day-laborer to real estate tech company.
Laborers get paid hourly and have low accountability.
If you’re starting at the bottom of the real estate industry, you aren’t starting as a broker/agent; you’re starting as the laborer that helps build the real estate.
That laborer is a faceless cog in a construction crew. They get ordered around to do menial tasks, “Move that. Pick up this. Cut those.” A laborer can easily be replaced because there is no specialized knowledge. There is no accountability or equity because the home owner doesn’t know or care that you worked on it.
Laborers are “low accountability” because if they screw something up the worst that happens is they lose their job. If the builder (general contractor) screws something up they get sued and stand to lose a lot more; their name is on the line.
Skilled laborers have knowledge and tools (leverage).
The next step up are the electricians, plumbers, heavy-machine operators, etc. They have some specialized knowledge; they’ve apprenticed and learned from someone how to do something more complex. Tradespeople get paid better, but there’s still a sort of cap on what they can earn. If the earnings go high enough more people will learn that trade and the supply/demand will balance with a normalized salary.
Heavy-machine operators (bulldozers and excavators) are combining knowledge (they know how to steer the machines) and the leverage of tools. It would take 20 men an entire day to do what a large bulldozer can do in an hour. So that operator has knowledge and leverage from their equipment.
General Contractors Get Equity and Take Risk.
Like we mentioned, when things go bad, it’s not Joe the laborer who takes the heat; it’s the general contractor that has to hand the violation, rectify the situation, or navigate the lawsuit. That’s their “accountability” at work.
GC (General Contractors) also have specialized knowledge. They look at a job and provide a bid/quote for the work that needs to be done. This is truly “specialized” because it’s not easy to teach. They have to factor the costs of materials and labor across several different fields and trades and combine that with current economic factors that may be impacting pricing (labor shortage or supply chain break-downs).
Because they have accountability for their work (their name is on the sign and permits) and because they have specialized knowledge (providing bids, quotes, and knowing the right contractors/tradesmen) they earn equity on a project.
The laborers are getting paid by the hour, but the GC is getting paid by the project.
If the GC bids the project at $200,000 to build a house, and it ends up costing him $160,000; he gets to keep the remaining $40,000. That’s great for the GC. But their accountability also requires that they eat the losses if they bid the project at $200k and it costs $195k; they only make $5k for 6 months of work.
Property Developers Apply Capital Leverage for Major Profits.
One level above the general contractor is the property developer. They’re the people that go in a buy a whole city block and tear down the old or broken or vacant, and build up something really nice and new. They accomplish this buy raising funds from investors (capital leverage) and apply it to the construction process.
The profits are higher because the projects are larger (one house vs an entire block) and because they’re using capital leverage (other people’s money).
Developers are able to do this because (if they’re good) they have an even higher specialized knowledge. Like the GC they know what things are going to cost (or have teams to figure it out) and they know which neighborhoods will benefit from being developed. They know where they can apply time and money and see a 100% return.
That’s why investors will happily give them money.
Architects, Large Developers, and REIT’s are even higher on the continuum.
A famous architect can charge outrageous prices because of his name recognition. He has a type of specialized knowledge that other architects don’t have, so he’s able to charge a premium.
Large developers apply even more capital leverage and labor leverage to build entire cities and corporate headquarters. They have huge risk, but even larger upsides.
REIT’s are similar but rely less on labor leverage and more on capital leverage. Their specific knowledge is less about the labor of creating a property and more on the financial markets, capital markets, and how real estate trusts operate.
Real Estate Tech Companies apply the maximum leverage.
Think of Zillow, Redfin, or Trulia.
Zillow, at it’s high was a $45B company. That’s incredible for a company that’s only 18yrs old. There aren’t many plumbers that have been in business for 18yrs that have a $45B plumbing company.
Zillow, and the other real estate tech companies are so highly valued because they’re applying ever single form of leverage to the max. They have investors (capital leverage), they have code (tools leverage), and they have employees (labor leverage).
And they use their specialized knowledge (all that housing data) and incredible leverage to transform an industry and make some pretty incredible revenues.
Layer in leverage and knowledge and accountability to unlock potential upside.
You don’t have to work in a tech-startup to apply accountability, specialized knowledge, and leverage to your industry. Approach your businesses with a new perspective and imagine how you could create more equity and profits.
Be watching for next week’s email, we’ll be discussing the skill of judgement.