First, why do real estate investors want to “scale”? The word scale that I’m referring to is derived from the term economies of scale. One definition denotes it as “the cost advantage that arises with increased output of a product”. With rental properties this is true, there is a cost advantage (which is great because costs aren’t going down) but there is also a decrease in risk because of the diversification of your growing portfolio. Since your portfolio may grow to include more and more units covering different areas and classes, your diversification and sheer number of units should reduce the vacancy volatility you were accustomed to with a lower number of units—thus keeping your cash flow constant and hopefully increasing.
So, you’ve been working in your real estate business for quite a while now. You’ve learned the ropes, you have a small team in place that does your heavy lifting as well as your financials but, like any entrepreneur you are concerned about the future. You notice costs aren’t going down and inflation is eating more of your dollar every day. As entrepreneurs, we feel the inherent desire to grow to achieve the level of financial freedom that got you into this business in the first place so we need to grow.
How does one grow their business so they can enjoy the benefits that come from economies of scale?
Scaling isn’t just about adding zeroes to your income and expenses. It’s about building systems and processes that assist you in your growth. Your growth, if planned right, should feel like you are always being challenged to adapt and change your strategies to fit your market, customers and competitors. If you grow at the right speed, your first 10 properties may only feel as hard as your first 100 which should only feel as hard as your first 1,000 etc.
Here are some items that will get you started on your path to scaling your real estate investment business:
Have a Goal: You need to have a plan on where you are going to take your business. In order to have this plan you need to figure out how “big” you need to scale to have the best possible chance achieve the “goals” you have set for yourself. Is there a certain number of units you want to sell one day? Is there a certain amount of cash flow you want at a certain time period? You need to do some time value of money calculations and then come up with a plan to get you there. Easier said than done, I know but again, nothing worth doing is easy. I would recommend starting with the 12-Week-Year by Brian P. Moran & Michael Lennington. It has done wonders for me. Once you have your “goal” of how “big” you need to grow, its business plan time. I will cover business plans in another article. But I think it’s time you reanalyze your SWOT and think about what things are you going to do different? Who are you going to hire and how can they synergistically help your business? What Systems and Processes will you now incorporate into your dealings? Where will you find the money (that’s next)?
Other People’s Money (OPM): Cash is King and let’s face it, real estate is very capital intensive—you can only fuel so much with your profits. The good news is most real estate investors that made it “big” didn’t use their own money, they used other people’s money. They used banks, private money lenders, investors, partners and even creative financing to fund their real estate ventures. LennyLongo.com and many other bloggers have plenty of articles on fund syndication, creative financing and private lenders but please let me know if you need more information on one of these.
Systems & Processes. In our day and age, technology has invaded every facet of our lives. We wake up to a screen and we oftentimes see one before bed. Fortunately, when combined with the right people, behavior and plans, there is a lot of technology that can be used to synergistically grow your business and meet the goals you have established.
- Project Management Software. There are many project management software applications that can help you and your team get on the task that your business plan has set. Asana, Basecamp, Trello and Podio are just a few ones I have seen used. Here is a writeup on 17 of them.
- Cloud Storage. You are probably well versed in cloud storage providers. Box, Google Drive, Dropbox and Onedrive. I would pick one and go with it. They are relatively easy to switch if you need to. On a related note, I would also implore you to go paperless. I did this a few years ago and it has made my life not only less cluttered but it’s also great knowing any invoice, contract or article can be pulled up, anywhere with an internet connection, by me or my team.
- Property Management or Self Manage. When scaling, you can include the hiring of property managers into your company or simply hire a reputable property management company. I need to write another article on this subject but the gist is you really need to do your research on who you are hiring to manage your assets. However, if you decide to self-manage via your own company and do the books with an in-house bookkeeper, I’ve had great luck with Appfolio. Appfolio can probably be used after 20 minutes of fidgeting around with it and it comes with a lot of free online training. I have also used Yardi and I will never subject me or any of my employees to that again. Perhaps if I start buying institutional investment property I will look at Yardi again but it was simply too cumbersome for me and my needs of managing less than 1,000 units. Others I know use Buildium and love it. I have no affiliations with any of those property management links and earn no money from them.
Responsible People You Can Trust. It’s time to build your team! Where do you go to find people exactly like you to run this business? Nowhere. You don’t want to hire people like you. You want to hire people that complement your weaknesses. You also want to hire people who are responsible and can make decisions without you there. Do you know anyone in your everyday dealings that would be an exceptional fit to your company? Set up that interview. Ask responsible friends and family if they know of anyone that would fit the criteria you have explained to them.
It should be your goal to find people to outsource all your tedious work that you do not have time to do or work that is necessary but relatively unimportant to the future success of your business—as you will be overseeing those major areas of expansion. Do you really need to deal with every Realtor, contractor, seller, buyer, title, tenants or 3rd party vendors? No, but one or two qualified and responsible new hires can. You probably need to spearhead the analyzing, negotiations, acquisitions, lending requests, joint-ventures, syndications and investor meetings. On these important tasks, you can also use a personal assistant, which I highly recommend.
Growing Pains. Be warned though, you do not want to grow too fast, if you do, you may exhaust yourself because you created another full-time job for yourself doing all the things you were doing before you scaled up, but only doing it five times more. Do you really want to be making all those offers, handling negotiations, managing rehabs and more when your newly scaled system, process and employees should be handling it for you?
Due to the nature of real estate investment, you will probably never be able to completely disconnect from your business and be an absentee-owner. You need to be supervising these large transactions, at least from a proper vantage point where you can take control when necessary.
I can’t tell you exactly how to scale “your business”, as we all have our own method of performing acquisitions, financing, marketing and property management. Telling you my method of buying multi family properties will not work everywhere as each market and lending environment is different.
At the end of the day, you need to be comfortable with your rate of growth. Your growth should be done at a rate that allows you to sustain your current operations while bringing on people, systems and processes that can support your current growth rate. If you feel that you are violating your principles by not giving the customer service you are known for, or the speed of your growth is disrupting key business plans, you need to scale back, assess and reset.
Please let me know if you have any questions.
Here for your success.