#126 Let’s Talk “Opportunity Cost”

Welcome to the Passive Income MD Podcast, where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. Hey, everyone. Hope you had another amazing week. Can't tell you how excited I am right now. After I record this podcast, I'm gonna be heading off to la, where I'm about to meet so many of you in person at PIMDCON 2022. I'm not sure when you're listening to this, but the conference is happening this weekend, and there's something special about getting together with people in person. The energy that happens, all the great discussion that happens. And I'm expecting to walk away from this conference different in some way. I'm gonna come away with new insights. I'm gonna come away with new connection. And I hope that so many of you are there with me, and if you're not, hope to see you at a future one. Now, this week, I want to talk about a concept that actually rules my life in a lot of ways. I saw this post on Facebook recently, and I don't know if you've seen this. It's like an image, and it says, There's a big McDonald's sign, and it says, A Big Mac doesn't cost you 399, it costs your health. And your health is emphasized. And that has a picture of Netflix. Netflix doesn't cost 17.99, it costs your time. Next, it says social media. It isn't free. It costs your focus. And the lesson here is that there's always a hidden cost. And it got me really thinking about cost just in general, what's important in life and what the consequences are of how we choose to use our time and our money. I mean, my mind works kind of funny like that sometimes. I mean, I think about a lot of things in terms of this term called opportunity cost. I don't know if you ever heard of that term, but the Oxford Dictionary defines it as the loss of potential gain from other alternatives when one alternative is chosen. So let's say that again, the opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen. So when you consider choice, realize that you're shutting off all other possibilities, at least at that moment. And so what happens in terms of consequences for you making that decision? The pros and the cons. And now when I consider, like, larger financial ones, like where I have to invest 25,000, $50,000, 100,000. I make sure that I don't just evaluate the deal in front of me. You know, should I do that deal or not? I also start to think about where else could I be allocating this money? Like, could this money be better used somewhere else? And I don't know if you think about it like that, but I used to see a deal and I would just think, yes or no. I think it's actually, you have to think larger than that. Yes, no, or what else could be possible. There's a concept called fungibility when it comes to money. Now, fungible. What it means is that you're able to replace one thing with, like, another identical item, that things are, like, mutually interchangeable. And money's like a classic example of it. It's that, you know, when you have a physical dollar, doesn't matter if your dollar is sitting necessarily in the stock market or your dollar is in cash in your pocket or whether it's in a real estate deal. Like, a dollar is typically dollar. I know there are exceptions when it comes to, like, tax benefits and things like that, but for the most part, it doesn't matter where that bill, whether you have physical bill or number in your bank account, it means the same. It can be interchanged. So wherever you put that money, it could be here, it could be there. You have to decide where is it best utilized. Now, people ask me all the time, have you lost money before in a deal? And I will tell you, absolutely I've lost money when it comes to real estate deals. I've lost money in the stock market, I' money angel investing. And fortunately, I've done much better in terms of my investments than I've lost money. But I want to tell you about a deal that I made very early on which gave me a very clear understanding of what opportunity cost was. Now, one of those first deals was actually a development deal. You probably understand this concept. Somebody buys a piece of land or with a house on it, and they say, you know what? This property could be much better if we took down that house, took it down to the land, and then built a nicer home and sold it. Especially when the economy is hot, when the real estate market is hot, especially when the land can be worth quite a bit. This deal that I saw, and I've happened to find it on a crowdfunding site, they were going to take a property in the hills of Los Angeles, these nice hills where you got great views, and there was a home that was an older home. And they felt like if you could just take down that home, build a brand new, beautiful, sparkling home, you'd be able to make a lot on the profit and on that development. Now, I live in Los Angeles and I know those hills, I know those areas. I don't know every street. But the concept made sense to me because you have an older home in the middle of all these amazing homes. So that land is quite, you know, worth quite a bit. And those homes, whenever they're built up, you can make quite a profit if somebody's willing to buy it, especially if the market's getting better. So I remember investing money into that deal wholeheartedly, knowing that there would be no cash flow. But at the end of that deal, when the, when the property was finished and completed, I. I'd be making a nice profit. Well, that's what I thought would happen. What ended up with that deal was that for months and months and months, there was no progress, Nothing was happening. We get these updates saying, we're still working on permits, we're still working on permits. Nothing's happening. This property happened to be on a side of a hill, so they needed to have some creative foundation work, some of these pylons, whatever they're calling it, different structural type, engineering type stuff. And for some reason, they just couldn't figure it out. They couldn't figure it out with the city. They couldn't get these things approved. And this thing dragged on for actually several years. In that time, my money is just sitting there. Nothing's happening to it. In fact, it's getting whittled down because there's debt on the property, meaning that there's a loan and that needs to get paid off with investor capital while nothing's happening with the property. And things were just sitting there. Meanwhile, I had other investments that I had invested in during that time that were doing quite well that I was making money on either cash flow. Now, some of the deals had even exited, which means that they had actually finished what they wanted to do and then sold. And I was worried for this deal, that this deal would never happen. And I remember getting an update several years later that basically said, look, we give up. We cannot develop this property. We cannot get the permitting. We don't have the experience. Essentially. They didn't say it, but you could read between the lines. They didn't have the experience to get it done. They couldn't figure out how to do it. So they were going to take it to the open market and just sell it as is and hope that Somebody would buy it for more. Well, fortunately, someone did buy it for more because the market had improved. And this was maybe about six, seven, eight years ago, and the market was doing better. And so at the end of the day, the all the investors got their capital back plus a tiny bit. If I remember correctly, the profit on this property was somewhere between 1 and 2%. Now people might look at it and say, oh, at least you didn't lose money. And I remember thinking that, oh, at least I didn't lose money, But I made 1 to 2% on that cash, on that money over two, three years during a prime time in the market. If it was just sitting in another deal or it's just sitting in the stock market, whatever it was, it would have done much, much better. So that gave me a lesson when it came to the idea and concept of opportunity costs. Sure, I didn't lose my money, but I didn't make a whole lot. And it could have done much better if that money was better served or better utilized in a better deal. And that taught me a lot about due diligence. At that moment, I realized that the people that were doing this deal didn't have the expertise, didn't have the experience to get this done. And it made me really think about future deals in a different way. Again, I started to look at deals not only in terms of yes and and no, but yes, no, and what else could I be doing with that money? Now I do the same thing with time and energy. Kind of like what that post in the beginning that I talked about with the Big Mac and Netflix and social media talked about when I, when I decided to spend time and energy on one thing. If I can think, remember this idea of opportunity cost, I realize I'm not able to spend it on something else. For example, if I spend the whole afternoon putting together furniture, which I've done before, then I miss out on time with my family. Or if I sit in line for a free scoop at Ben and Jerry's. I've done that before on your birthday, whatever it might be, or when they have those free scoop days. I just love free stuff. And that's always something I've loved. In some ways it's like an obsession for me, like getting the free T shirts and things like that. I don't know if you were like that as well, but I used to love that stuff. And I would wait in line for so long, 30 minutes an hour, just to get like one free scoop of ice cream. But then you realize, what are you giving up? For that, what is your time worth? What is your energy worth? And so a lot of these things now, I think in terms of time, what is the opportunity cost to do those things? Do you things that maybe I don't even enjoy, like putting together furniture, Can I outsource this? Can I put my money to use to buy my time so that I can spend it doing the things that I actually love doing with the people that I love? So I don't know if you start to think about that in terms of your time and energy. Almost everything now is in that camp. Is this the best use of my time energy? Could I allocate it elsewhere doing more fun things? Now all this is good and it sounds great. The problem is that it comes with a couple problems if you go overboard on this type of thinking. And those two things are fomo, fear missing out. And the other thing is something called analysis paralysis. So FOMO or fear of missing out, I have to tell you, it's something that I do struggle with. If I do one thing, you know, am I missing out on another? If I decide to go to this game and am I missing out on some other really cool experience? And the problem is sometimes it doesn't allow you to enjoy the present moment, and that's when you can get overboard with that. And if you start doing that like I do, I have to kind of pull back and say, look, I need to just enjoy what I'm doing. I made a decision and just have fun with it. The other issue is that I can get stuck in something called analysis paralysis, which means that should I do this, should I do that? And you think about all the different options, yes, no, or something else. Should I put my money here or there? And then you have such a difficult time making a decision that you do nothing. You probably also heard of the term called paralysis of choice. And that happens to me quite a bit as well too. You ever walked into, like a Cheesecake Factory, you look at the menu, it's so vast. There's so many things there. You actually have a hard time making a decision versus going to a place like In n out where there's only a couple things on the menu, you know what you want to choose. I deal with that quite a bit. So to overcome all these things, I've had to come to realize that actually the worst situation is not making the wrong decision necessarily. It's to do nothing at all. To lose out on both, to lose out on more opportunities in the future, to not try something, to take action, and then be able to course correct and help me get closer to where I want to be. So I've actually had to force myself, take quick, decisive action, make the best of it, realize that it's impossible for me to know all the possibilities of how something's going to turn out, to make the best of it, and then course correct as I go. I will tell you though, the positive side to opportunity cost thinking is that you do end up being really intentional about how you spend your time and money. And I don't think that's a bad thing because ultimately those are the resources that you have to shape the life that you want to again, spend it doing the things you love with the people you love. So I'd love to know out there, if you're like me, do you think about opportunity costs as much as I do? Does it cause some of those issues with FOMO and analysis paralysis? What have you learned to get over that? I'd love to know. Have an awesome weekend. Let's talk again soon. Enjoy the show. Let me know by dropping a review in the podcast app you're listening to us in. 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