The Snowball Effect: Use it to Amplify Your Real Estate Investing Success

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The snowball effect is a phenomenon that can take a person from point A to point Z in a hurry, but it can move in reverse just as easily. The snowball effect, of course, is the idea that one small event can produce more significant events, which in turn can produce even more events of even greater significance; just as a snowball picks up mass as it rolls down a hill. It occurs with positive events, leading to great achievements, or negative events, resulting in collapses of great proportions. The snowball effect is not a naturally occurring phenomenon though, it requires initial successes to jump-start the process, and attention during the process to ensure it stays on track, but the effects can be very powerful in building a business.

New real estate investors are often discouraged by the pace of business growth, especially considering the lofty goals most investors set after dreaming of a real estate empire. The discouragement often leads to a fizzing out or an abrupt end to an investing career, often because each victory was celebrated separately, instead of tied to the sum and built upon properly.

Here are some examples of how the snowball effect can work:

POSITIVE:
After thoughtfully developing a business plan and saving a large portion of his salary, a new rehabber with enough money saved for one deal finds and purchases a property to rehab and sell. He closes on the property and puts his team to work immediately, finishing the project near the estimated completion date and on-budget (good thing he built-in some contingency funds). The project was a huge success, netting the rehabber a nice profit.

Instead of withdrawing the funds for personal use, the rehabber uses the funds to purchase two more projects. As his business moves forward, he encounters more contractors and other key personnel, helping him complete the projects quicker. Additionally, he learns the tricks of the trade and hones his deal analysis skills. Now armed with available funds, better contractors, more profitable deals and priceless experience, this investor has the snowball rolling in the right direction.

NEGATIVE:
After staying up late and watching a real estate guru sales pitch, investor X is ready to make a fortune in real estate. He thinks back to those home flipping shows he used to watch on television . . . “how hard could it be?”

This new, self-proclaimed rehabber pulls out the yellow book to find an agent that can help him snag a good deal. He explains to the real estate agent what he is looking for, a house he can purchase, renovate and sell for a huge profit, just like on television. Within 45 days this rehabber has closed on a property and is ready to go to work. He does not have contractors lined up yet, but finds a handyman in the classified and hires him to do the work. The property is finished several months later, but the costs far exceeded estimates and some of the work is shoddy; worse yet, the after repair value is not what the real estate agent claimed it would be. After losing what little money he had, investor X decides real estate investing is too difficult and decides to give it up.

Prognosis of the Snowball Effect & Real Estate?
Certainly these examples are over-simplified and exaggerated, but they illustrate how easily a good situation can become great and a bad situation can dissolve into a terrible one. Furthermore, they highlight the importance at looking at successfully completed deals or steps as part of a bigger plan, not as individual, unrelated events.

So next time you complete a deal or make a business decision (big or small) take some time to think about how it might shape the future and consider steps you can take to amplify the snowball effect when it is going the right direction and reverse it when it is not. I look forward to comments about how the snowball effect worked for or against you in real estate, so please chime in if you have one!

Photo: Putneypics

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About Author

James (G+) is a Principal Member of K&V LLC, a real estate investing company in Lexington, KY. His firm focuses on distressed property rehabilitation in the Bluegrass Region. He is also a licensed real estate agent.

14 Comments

  1. Brandon Turner

    Hey James,
    I’ve never thought about my career in this way – but you are right. When I look back, I see that with each project I got a little better and a little more efficient. It’s not always easy to see the forest from the trees – but persistence does pay off.

    I guess this is a great reason for wannabe flippers to start small, perhaps even as just an intern, so they can get the ball rolling properly – and down the right hill!

    Great article! Thanks for sharing James!

  2. Some really wise words James. Being patient and picking good tenants and doing little things to build community has snowballed on me. Now have a close knit block with even some signs of neighborhood pride.

    Also, web tools and smart phones helped me communicate with groups from where ever I am. We take this for granted, but it was a game changer. Group emails ran our local drug dealer away. The more we organized, the riskier it became for petty crime, the nicer our block became.

    Really like your line about each business decisions amplifying the snowball. Some good food for thought. Thank you.

    • Thanks Al. It is nice to look back and see how some of the smaller decisions turned out to be a bigger deal than when you actually made them. It is cool to hear about how you built something by making sound decisions.

  3. So true James! I believe too many potential investors get caught up in the over glorifying ways they show on TV & the presentations made like you can flip 3 houses your first month in business. BS.
    I like the snowball effect because it can work both ways for good or bad & in this business you might only get one shot.

    • Thanks Mike. Those t.v. shows sure make it look easy don’t though. What they don’t show are all the behind the scenes business decisions being made, the paperwork being filled out, the bookkeeping being updated, the bills being paid, etc etc etc.

  4. I have a snowball story! :) After a couple years of trying to figure out my exit strategy out of the corporate world, I had decided to go the business route instead of real estate. Not two weeks later, out of boredom (at work actually) I watched a webinar about investing in Nicaragua. I thought nothing of it, but still out of boredom kept watching and started asking questions. Next thing I knew I had bought property in Nicaragua. Nothing like starting in reverse order… overseas investing?! Most thought I was crazy. I secured some creative financing for that one, and then that investment led to learning about turnkeys in the states, and ironically enough, the ‘next big market’ was Atlanta, where I happened to grow up. Sign me up! Except I didn’t have any money, again. Then I accidentally stumbled across an investor. We bought a rental house. I was certain I was done there. I mean, two big investments, as a newbie with no money, in less than 6 months. Then my investor pipes up and says he wants more. We’ve since bought two more Atlanta houses. In the midst of all of that, I made not only some extra money in referral fees, but I also made a couple huge contacts in the industry that both ended up offering me positions to work with them. A year and a half later, I left my corporate job (only two months ago now) and own my own company in REI working independently with both of those contacts. Did I mention I had decided to forget real estate and go the business route? I love playing in the snow.

    • Ali –

      What a story!

      I did a video interview series on my blog a while back called “Escaping the 9 to 5; How I Did It”. What I discovered in those 12 interviews were a couple of people that had a plan they worked. (The author of this post James is one of them). But for most of the folks that told their story, it sounded more like yours. Stuff happened; they lost their job, they left their job with a plan but nothing worked out they way they planned, or other similar stories. I also heard about some mistakes made and hard times.

      One thing that stood out among all these folks was their resiliance, and they way they just went with the flow. When something didn’t work out as planned, they moved quickly to plan B. Like you, a lot of those folks felt like they had done things “backwards” too. Great story!

      • Sharon, thanks for the awesome words! You know, you read stories all the time from people, and the one thing that often happens is that the story makes it sound like it all just fell into place, things were easy, and it just went from there. In one sense that does happen, but in the other, I tend to not convey (as I’m sure others do as well) the oftentimes stress and level of problem solving and creativity that are required to survive those types of transitions.You just put out a great reminder, even for me as I’m already out of corporate, is the focus on going with the flow and being resilient to the complexities of doing things like that. Things are inevitably going to get really complicated at times, but it’s a separates the men from the boys type of thing. If you can learn to go with the flow and get tough, you can live a really exciting and meaningful life and appreciate your own efforts. Great words!

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