About the author: Andrew Syrios is a real estate investor and writer living in Kansas City, MO. He is a partner in Stewardship Properties along with his brother and father. Their company owns just over 500 units in four states.
Many real estate investors will start to feel as if they’ve hit a lull after a few successful deals. Perhaps you have found a good niche with flipping houses and are able to continue fixing and flipping a property every couple of months. Or perhaps you can add one house a year to your rental portfolio. But still, after getting off the ground, the business seems to have hit a plateau. The reason this feeling is so common amongst real estate investors and entrepreneurs alike is because of the fundamental difference between growing versus scaling a business.
The skills required for how to grow a business and how to scale a business are actually quite a bit different. The ability to grow your business often depends simply on hustle and knowledge. When it comes to scaling a business, it’s a whole different ballpark.
Scaling is about building the foundation on which future growth can arise. If you want to expand your business 10 times over, you can’t simply work 10 times harder. There simply aren’t enough hours in the day. And even if you could, what is the point of that? The key is to find ways how to grow your small business into a large one by, as cliché as it sounds, working smarter instead of harder.
Here are the top five ways to scale your real estate investment business.
1. Focus on a Niche
Many entrepreneurs are tempted by the dreaded “shiny object syndrome.” Once you start to master something, there’s a tendency for it to become a little boring or at the very least, routine. It is extremely important to fight this temptation.
Jim Collins, who studied how companies went from mediocre to excellent in his book Good to Great, found that great companies specialized in what he called “The Hedgehog Concept” which was coined from Isaiah Berlin’s essay “The Hedgehog and the Fox.”
As Collins explains it, “The fox knows many things, but the hedgehog knows one big thing… Foxes pursue many ends at the same time and see the world in all its complexity… Hedgehogs, on the other hand, simplify a complex world into a single organizing idea, a basic principle or concept that unifies and guides everything.”
Collins believes great companies only focus on market segments that meet three criteria:
- What your people are truly passionate about
- What the organization does better than anyone else
- Where it’s good at generating revenue
There just aren’t going to be a lot of market segments like this for any given company. A jack of all trades will be a master of none. For example, our company focuses on buying and holding real estate in working to middle class areas. It would be unwise of us to jump into low-income housing or luxury housing without making a very well-thought out, strategic decision to do so. Businesses that scale stay focused! Learn the different ways to invest in real estate, but stick to mastering one if you want to scale.
2. Create a Brain Trust
As Richard Branson put it, “It’s all about finding and hiring people smarter than you.” You are not going to be good at everything. This may require bringing in partners, finding mentors or finding a “mastermind group,” but it is critically important to find people who are doing the same thing as you and doing it successfully in order to discuss and bounce ideas off of.
Indeed, it’s very easy to put networking on the backburner, but you should make a point to prioritize it as a part of your routine. Not only have we found critical banks, lenders, contractors, vendors, and sellers through networking, but we have gotten a lot of great ideas from discussing real estate with other seasoned professionals.
And as you grow bigger you will want to bring some of those people into your organization and share responsibilities with them. Which leads to the next key step.
As noted above, how to make a business grow is not simply to work harder. There are only so many hours in the day and you don’t want to spend them all working . Therefore, you will need to delegate more and more tasks in order to free up your time for the most valuable tasks.
Economists have a term called “opportunity cost” which is what an “investor or business misses out on when choosing one alternative over another.” In other words, everything you do means you can’t do something else. Even if you can type 100 words per minute while doing data entry, that doesn’t mean you should do it. It’s just not worth as much as sourcing deals or negotiating with sellers, so you should delegate that task.
Before you hire a single employee, you can delegate tasks to contractors or vendors (for example, construction and cleaning), property managers, accountants, and so on. You can also hire virtual assistants from websites such as Upwork.com to do all sorts of menial tasks for you. And you can try to automate as many things as possible as well. Then, when you’re ready, you can hire an employee and delegate even more tasks to that person.
All of these things will help you free up time for the things that really bring in money. Delegation also provides what psychologist Daniel Pink calls “intrinsic motivation” to your employees. Having autonomy is a real motivator for people whereas being micromanaged (or not given enough to do) can sap even the best employee’s motivation.
Trust, but verify.
With delegation, of course, there is a catch. Employees can steal from you, or if not that, they can still be lazy and ineffective. Virtual assistants, contractors, vendors, and pretty much anyone else can also waste your money without providing much if any value.
The way to prevent such waste is to measure, measure, and then measure some more. This goes for more than just employee performance. For every rehab, always compare the actual expense to the budget, even if it went badly and you don’t want to look at it. If you don’t look at it carefully and figure out what exactly went wrong, there’s no way to improve. Start with our guide on how to deal with bad contractors.
For any employee, contractor or virtual assistant (or yourself for that matter), you should strive to create KPI’s (Key Performance Indicators) for them. Each employee should be responsible for a certain area of focus and there should be one or two key numbers that measure that performance. Some examples from our property management company include:
- Maintenance Tech: Call back percentage, number of complaints, work orders completed per day
- Leasing Agent: Applications per showing, leases per showing
- Property Manager: Occupancy percentage, economic occupancy (percentage of tenants actually paying), new leases versus move outs
- Construction Manager: Budget versus actual expense, estimated time of completion versus actual time of completion
Of course, you have to be careful with these. A maintenance technician who only gets the hardest jobs won’t complete a lot of work orders. So, it’s best to have a few KPI’s for each position and keep an eye out for complicating factors.
And while you may not know whether the number that comes back is good or bad, you do know what is better and what is worse. Therefore, you can start working with the employee to improve that number.
Determine what renovations will add the most value to your investment properties based on the ROI, comps, property type, location and other factors. Then, apply the same set of rehabilitations throughout all of your properties. For example, our company uses the same interior paint, carpet, light fixtures, and blinds in pretty much every property. We switch between white, black, and stainless-steel appliances, but we use the same brand. We have two exterior paint colors (so our website doesn’t look too boring) and may switch it up with the living room light fixture from time to time. But overall, the materials we use are as standardized as can be.
We’ve also created a policy manual and rules for how to work with tenants. For example, each tenant is given one opportunity for a payment plan. If they don’t meet that agreement, they have to pick a time to move out or we move toward eviction. We have built such policies up and down the company.
This process will take time, but it’s something you should think about right away. There’s something called “decision fatigue”. Basically, every decision you make takes energy. You want to put these decisions, especially the day-in and day-out decisions that are made over and over again, on autopilot. Save your energy for the bigger decisions. Having these policies in place also makes it much easier to delegate tasks to others since you know they will follow a pre-set plan and not do something in a way that you would not accept.
Real estate investing software can significantly help the process of standardization as well. If you manage properties, you should use a property management software to its fullest. There are many other programs out there worth utilizing. Monday, for example, is great for scheduling and Smartsheet is a very good for scopes of work and project management.
Scaling a business is about building all those things that can’t be seen from the outside. These processes though will allow you to grow your real estate business faster than you could have previously imagined, and without working harder to do so. Scaling is the foundation for which growth will be built on top of. Just as no house can be built without a foundation, no great business can be either.
Disclaimer: The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. Please consult your tax advisor. All calculations and information shown here are for illustrative purposes only. All third parties listed above are for demonstration purposes only and are not affiliated with LendingHome. All views and opinions expressed in this post are the author’s own. NMLS ID: 1125207 Terms, Privacy & Disclosures. Copyright LendingHome Corporation 2019.