The Small, Simple Business Model That Supports Profits AND Free Time
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“Simplicity, simplicity, simplicity! I say, let your affairs be as two or three, and not a hundred or a thousand; instead of a million, count half a dozen, and keep your accounts on your thumb nail.”
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Henry David Thoreau, Walden
My approach to buy and hold real estate investing is very focused on how the business and properties contribute (or hinder) the personal lifestyle of me and my family. The nuts and bolts of real estate investing are interesting, fun, and meaningful to me, but unless my business can produce tangible results measured in money, free time, and flexibility, it doesn’t do its job for me.
I have found that a business model I refer to as “the small and simple real estate lifestyle business” produces the well-rounded results I want better than any other.
Recap: Big, Fast-Growing Businesses Aren’t For Everyone
I wrote an article called “Why Big, Fast-Growing Businesses Are Not the Ticket to True Financial Freedom.” My main point was that big, fast-growing real estate businesses with hundreds of properties and syndicated partnerships are exciting to talk about, but they don’t usually satisfy the primary goals of small entrepreneurs here on BiggerPockets.com.
Most small investors want more personal freedom, which in addition to money means having time and flexibility to do whatever they want. Freedom ultimately includes things like traveling, spending more time with family, contributing to the community, or leaving a well-paying job for a fun, rewarding, but lower paying job elsewhere.
My own experience and observations tell me that big, fast-growing businesses fall short of the criteria for more free time, more flexibility, and less stress for the owner. Even if the big business machine has wonderful systems and capable team members, bigger operations inevitably and often have “fires” to put out. These big-business fires are usually more stressful and risky than small-business fires, and they require the head decision maker (YOU!) to be on location to put them out.
A smaller, simpler real estate business can accomplish all of your personal goals, while also avoiding many of the stresses and hassles that come with running a business with many moving parts, high levels of debt, and overhead.
In the rest of this article, I’ll give you an example of a small and simple real estate business that can work very well. There are of course many different ways to accomplish the same end, so I welcome comments and discussion in the comments section.
The Finances of a Small and Simple Business
Let’s start with the money — because it always comes down to that. There are two main questions to answer here:
- What’s your number (i.e. how much cash flow do you need to cover personal overhead)?
- How many properties do you need in order to meet your personal cash flow number?
The answer to #1 is very personal. I can’t help you much there.
The answer to #2 for the small and simple business is this: “The least number of properties that will also meet my financial goals.”
A smaller number of properties is ideal for a lifestyle business because it means fewer tenants to manage, fewer HVAC systems to break, and fewer properties to keep an eye on.
You might ask, but how can a smaller number of properties still meet my financial goals? Let’s look at an example.
Let’s say your number is $60,000 per year, or $5,000 per month. To meet your goal, you could own 10 units free and clear (no debt) that each rent for $1,000 per month and have 50% expense ratios.
10 x $1,000/month = $10,000 x 50% = $5,000/month in Net Operating Income
Because you have no debt on these 10 units, you keep 100% of this $5,000.
Of course, you don't just arrive at this point in your business overnight. You'll need a big chunk of equity capital to make this work. Assuming that your basis of cost in each unit is $100,000, you would need to have 10 x $100,000 = $1,000,000 equity to achieve this goal.
While this number is not small, it is very achievable within a reasonable amount of time for those of you willing to work at it. It can also be done part-time while working a full-time job or while doing other parts of the real estate business.
The temptation is always to get bigger than is necessary. Like me, you may buy more units than you initially need using leverage. If you want to grow a little faster and are willing to take on a little more risk, this may work out. But, at some point my suggestion is to move towards a state of smaller and simpler.
This article is not about how to grow from $0 to this $1 million figure, but that is also an important topic. You can find plenty of information on how to reach this type of free and clear goal relatively quickly (10-15 years) from me and other well-qualified contributors here on BiggerPockets.com:
- “How to Win the Passive Cash Flow Game Using Real Estate Investing” by Chad Carson
- “How to Create $350k+ in Annual Retirement Income Through Real Estate” by Jeff Brown
- “A Slow, Boring, Incredibly Awesome Strategy for Building Wealth Through Passive Real Estate Investing” by Brandon Turner
- “How to Create a Million Dollars of Wealth in 13.3 Years” by Erion Shehaj
As an aside, a strong argument can be made to keep fixed interest, long-term debt on some of the rental properties as a hedge against inflation. I would not disagree with this argument, but I think we should weigh this need against an equally important need for simplicity and enjoyment of your life.
To balance the two goals, you could simply refinance 3 of the 10 properties and pull out $300,000 or so. The other 7 would remain free and clear. Note that it's far safer as the borrower to owe money on a few properties at a higher loan to value than to owe money on all the properties at a low loan to value.
You could use that $300,000 cash to invest in income producing assets like discounted notes or 3 more rental properties at $100,000 per unit. As long as the 3 financed units pay for themselves, you have provided yourself a moderate amount of leverage while still keeping things relatively simple.
The Small and Simple Business Model
Keeping things small and simple does not mean doing everything yourself. A lean set of systems and key outsourced personnel can give you the freedom you desire.
My business partner and I choose to manage our 58 units ourselves with the help of a bookkeeper and leasing specialist. But this lean model can work just as well or better outsourcing all or pieces of the property management to a third party management company.
Like any management company, we have a list of reliable specialty contractors whom we can call during or after business hours to quickly handle problems. These contractors include a carpenter/handyman, an electrician, a plumber, multiple HVAC companies, painters, roofers, a carpet cleaner, a lawn maintenance person, a pest control company, and a house cleaner.
I often tell people that I realized this small and simple business was for real when I was on a trip to the Patagonia region in the country of Chile. We were in the southernmost town of the country, virtually at the tip of the South American continent on the Magellen Strait. I spent 5 minutes talking on Skype to South Carolina, directing a plumber to fix a hot water heater at a unit. He never knew where I was, and the problem got fixed. I went on to visit a penguin colony for the rest of the day!
Our tenants pay rent online (preferred), in person at Woodforest/Walmart Bank, or by mail to our P.O. box. Maintenance requests are submitted by phone, text, or on our website. We recently switched to Buildium (to learn more about Buildium, click here) as our property management software, and in addition to accounting functions, it handles our website, rental applications, tenant screening, and maintenance work orders.
Here is a rough breakdown of our monthly non-personnel overhead costs:
- $30 = RingCentral Fax/Phone Line
- $60 = Buildium Property Management
- $100 = Office and Misc Expenses (paper, folders, signs, etc)
- $300 = Office Rent
- $60 = DSL Internet
- $30 = My Cell Phone (unlimited 3G data/text/calls plan with Republic Wireless)
- $10 = Additional Cell Phone (wifi-only plan with Republic Wireless)
- $20 = Rental advertising
$610 = Total Overhead Expenses
If you self-manage fewer units, like the 10-13 I discussed in the section on finances, you can get by on a lot less than this.
Out of all of the functions in a small and simple business, very few must still be done by someone in person. The two that stand out are showing units to tenant prospects and turning over vacant units between tenants.
In my case with a college town, the process is very seasonal. Most of the showings happen in February and March, and the turnovers between tenants happen for 5-10 days in August. So we just don’t plan any trips during those times. But for other situations, talk to local property managers and to your contractors to find someone hungry and willing to handle turnovers for you. Some managers will require a full management agreement, while others may be willing to be compensated piecemeal for finding tenants and for doing the turnover process.
Is a Small and Simple Real Estate Business Right For You?
As I said in the beginning of the article, the purpose of your real estate investing business is to serve your life. You are the one who must decide what your real estate business will do for you.
Think long and hard about the type of business you create. The business model you choose will determine not only your financial success, but also the amount of time and flexibility you will have to enjoy the fruits of your labors.
Fighting against the tide of “bigger is better” is not easy. A lot of outside hype and a lot of pressure in your own mind (especially for those of us who tend towards Type A personalities) will work against your desire to keep things small and simple. But I hope you can see the merits and the possibilities of following that path so that you see it through.
Leave your thoughts below!