Running your Real Estate Operation Like a Business: Sometimes You Have to Shrink to Grow!
I asked for ideas the other day for a topic and a friend (whom I just made the time for) suggested the very title before you. Three days prior I had spent a good 1 ½ hours plus with Michael Perry, a real estate investor and merchandiser here in Charlotte, NC and Atlanta, GA. We had previously meet at our local Real Estate Investment Assoc. ( www.metrolinareia.org) . As we were discussing the in’s & outs of what’s working and not in our local markets, he hit home on a topic that’s very close to me and one I often preach to others but had recently been derailed from….
What was it you ask???
It was the fact that we as individuals need to get back to our roots… Seems as though everyone is trying to be a millionaire by doing nothing but sit in our underwear buying and selling real estate just as the guru’s tell us. Yeah right – No Guru is doing it for a living!
Michael is right!!! Through my fog of fighting the blahs and headwinds of my real estate operation, I had withdrawn from the everyday job of hitting the streets. Calling friends and acquaintances, to see if I can be of help to them and perhaps, vice-versa. I’ve grown complacent by just trying to get by with emails and quick voice mails (I’m still resisting texting). I’ve not had an 1 ½ conversation like I had with Michael in a good month –were as they used to be commonplace. I often state that one has to get back to the roots of what created success! Something we should all think about.
But I diverge and will make that another topic.
So here it is a Sunday morning. By reaching out to someone old, but someone new, Michael has provided the very spark for this post. I believe everything works in cycles (or as a beach bum may say: tides). Everything comes in…, goes out…. Cycles up and then pulls back.
Real estate, Stocks, Bonds, Health, Weather, Seasons, Moods, Business…. Just about everything goes up and down. Heck, the media latest hot topic is that if you had invested in just a standard S&P 500 Exchange Traded Mutual Fund that you’d be at ZERO gain had you invested 10 years ago. How’s that for a case of always skimming some cream off the top along the way and diversification??? Always Take Some Profit Off the Table!
The truth is that one does need to shrink (or pull back) at times to grow. Often I tell beginning landlords whom have this idea of getting some 20 rentals and being set that they will get there sooner by buying some, pulling back by selling some (taking some profit), and then reinvesting in more…..
A pivotal point in my real estate career was back in 2002. I had mostly small multi-family properties. 9-11 had taken the steam out of job growth, mortgage money was just opening up (and thus, taking tenants to home ownership) beyond reason, and home building was just hammering away. I had an excess of vacancies and was scared. I tried improvements, specials, and a lowering of standards and I found that business was just going to be tough for the foreseeable future. I didn’t like that! I wanted growth for the future; however, I was scared to buy more rentals because I couldn’t keep them full and thus, performing at a level I had grown accustomed to in the past.
I found no difference in local acquaintances in the business as we were all searching for the magic bullet. I’d go to local real estate groups and bend “Guru’s” ears…. They really didn’t care and what I found was didn’t really know the answer…. They would spout off generic crap straight from what you could find in a book from the bookstore let alone their $999 coarse. Whether you want to say it was a local issue or national, I couldn’t find the answer with how to keep my rentals full and grow it successfully. Believe me, while I certainly don’t know it all –I’m not a novice either.
What I did realize (even before I had a clear direction) was that I needed to pull back and sell. I needed to shrink the operations and get a handle on them (to the point of comfort ability). As a result, I followed my Two year rule (another story) with rentals and sold off an under-performing 12 unit. I took a $58k loss but had $160k in equity to redeploy. I knew the profits I could make with that equity doing something that wasn’t as challenging (and thus more fun!) would far outweigh the age old saying of “time will heal all wounds”. You see some will say just sit still and let the magic compounding of real estate bring you out of it. Sure it will work, but I prefer to enjoy the journey as much as possible –not hate it.
What I did discover was that just as in home ownership…, renters prefer to rent single family homes too. Sure there are some niches; such as high density living (not in Charlotte) or social living in 200 unit + apartment communities (this was not a direction for me). Other than one home, all I had was small multi’s and I also noticed the highest of vacancies existed specifically in this category.
So what did I do? I decided that I would sell off my biggest PITA’s and under-performers. I would keep those that we’re easier and coincidentally (or maybe not) those that were in my target markets (neighborhoods that I thought would accelerate above city averages). I sold off a duplex (for $125K) and 1031’d into three single family homes. Coincidentally, I just sold one of those home (in less than 60 days) in this market for $130k. What happened to other two? They both have the same tenants whom happened to be in both homes for some 30+ years. Wow, talk about a no-brainer!!!
I sold a 14 unit complex, paid the taxes on the gain, bought seven single family homes (to replace half the unit volume), and redeployed remaining profits (diversifying) into another real estate business of mine. What I’ve discovered is that my vacancy rate runs better with SFH’s, tenant turnover slows, and for some reason maintenance too.
So as I was shrinking in total rental units, I was searching for another direction. At the time, the buzz at the local real estate associations was ‘rehabbing to sell retail’. I didn’t have time for that (or at least that was my excuse) as I held a full time job at the time. What I did know was I knew our local real estate market (valuations) and I was a lender by profession. I made my first real estate loan in early 2003. Just as I said in my story about my first rental A Way To Wealth With Rentals, I collected a few on time payments and was off to the races. I had found my new direction: hard money lending.
What did I discover just as I have now? Nothing new really as I’ve seen all the cycles from both my dealing in account receivable financing (in the corporate world) and my real estate operations -as we face headwinds or as I like to say PAIN…. We often need to pull back in our operations , reassess the direction, look for new directions before proceeding with new growth.
It’s not a bad thing!!!
It is just part of life. Life is change and everything cycles. So here I sit today. Actually in the same spot I was some seven years ago. I’ve been pulling back (shrinking) in my hard money operation (as the headwinds are strong) and looking for a new direction. Anyone that has read this blog “Building Strategies” or as Michael (from our 1 ½ hour conversation) knows that my new direction maybe ‘rehab to sell retail’ in the world of real estate.
Will it work? Will it be the magic bullet? I don’t know! What I do know is that I need to pull back in my present situation and seek a new direction. Trust me, I will go slow and wind up the real estate machine slowly until the headwinds of change are pushing from behind -against my back.
Thank you Michael for being a friend and bringing me back to basics! It really isn’t that complicated.