Scaling Past the Plateau: How To Prepare Your Business for 100+ Units
There are several “plateaus,” so to speak, when scaling a real estate business (or any business for that matter). These are times when you have to reformulate the way you do business in order to make the next jump.
Early on, you can, to one degree or another, shoot from the hip. As a new investor, pretty much everything goes through you, be it acquisition, rehab, financing, and management (if you don’t hire a third-party manager). As you get bigger, you need to hire employees and build out systems in order to handle that growth. This requires a different set of skills and a transition in leadership style.
As you scale, there is another transition to make. This happens when there are at least three tiers in your company flow chart and you have to manage through managers because you aren’t working directly with frontline employees (such as maintenance technicians, leasing agents, etc.). This transition is, in many ways, even more difficult than the first. But it is necessary if you truly want to scale to 100-plus units.
The First Question: What Do You Want?
This is really important. Some people seem to think that they are required to grow and grow and grow and there’s something wrong with them if they don’t. But we don’t all want that.
I have a friend in upstate New York who has about 10 houses and does all the management and maintenance himself and that’s how he gets by. And he gets by quite well. He doesn’t plan on building a 100-plus-unit portfolio, and given that he doesn’t want to, there is no reason for him to try and do so.
As Chad Carson so eloquently put it:
“As you move up the curve, you pass milestones like survival, comfort, and even small luxuries that make life sweeter. But you finally arrive at a place called ‘enough,’ the peak of the fulfillment curve. In terms of happiness, it doesn’t get much better than this.
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“But as you continue moving past the peak of the curve, each subsequent amount of money you earn and spend has diminishing returns on your personal happiness. This occurs because the extra you earn, spend, and accumulate carries with it clutter, complexity, stress, and hassle.
“The place called ‘enough’ is different for each one of us. But it’s vitally important as a real estate investor to learn what it is for you.”
His “graph” is also quite helpful when it comes to thinking about this issue.
The lesson here is that it’s not necessary to grow bigger because you think that’s what you should do. Figure out what you want and make sure your business is in line with that goal.
Your business should serve you, not the other way around.
Scaling From 0 To 50 Units
If scaling is what you want, then this is where systems come into play. And yes, “systems” is a big buzzword these days. Various experts love throwing it around as if saying the word “systems” a lot will solve all of your business problems. It’s a bit more complicated than that.
Systems take time and work to build and implement. We have what I would call a “Google Docs graveyard” scattered throughout cyberspace of systems and tracking documents that just didn’t take. And that’s okay. Some things work and some don’t.
It’s not a clear-cut path but more of a slow trial-and-error process to create systems. As I noted in the above video, “The way I like to think of it is that every time you find a solution, you systematize it, you policyize it … because say you have a situation you have never come across before. Well, you’re going to come across it again.”
So turn that solution into a system or a policy as best you can. Maybe it won’t take. Not all of them do. But some do and you can build off of those that work while learning from those that don’t.
You will also need to think in terms of delegation. This is twofold. First, you will want to integrate technology more and more into your company. For example, property management software is an absolute must if you are managing yourself and have more than a couple of units.
Secondly, you will likely need to start hiring. I don’t have enough space to go into that here, but you can check out my article on the subject and further, I would definitely recommend reading Who by Geoff Smart and Randy Street. It’s the best book on hiring I’ve come across.
Scaling From 50 To 100+ Units
This is when the “three-tier” flow chart generally comes into play, which (in its incredibly simple form) looks something like this:
Of course, this “hierarchy” would look much more like a pyramid in practice. There’s no reason to hire a manager to oversee one solitary frontline employee. But at this stage, mere systems and policies aren’t going to be sufficient to run a larger business as you scale toward the three-digit mark for units.
At this stage, you will need to start implementing KPIs (Key Performance Indicators). As I noted in a previous article, “Key performance indicators are the numbers you will want to keep and evaluate. The whole point behind key performance indicators is not to measure something against a specific number, but to have a concrete idea of where you’re starting so you can measure improvement (or the lack thereof).”
By doing this, you can begin to judge the performance of managers and effectively judge the performance of frontline employees (who the managers should be evaluating) without having to "go with your gut." Are they getting better or worse? Are they doing better or worse than you did when you were doing that task (or the previous employee, contractor, etc.)?
It’s just too hard to “feel” your way to the right decision when there are this many layers of management and this much complexity in a business. And it’s much easier for an employee or manager to blame shift or try to gaslight you. Trust me, your gut will surely fail you. You need hard numbers to evaluate.
Some of these KPIs could be as simple as occupancy and delinquency. Or with leasing, it could be the number of showings per application. With maintenance, it could be the percent of work orders with a callback, etc.
I should also add that for anyone looking to scale a business, I would highly recommend these three books in the following order:
These are indispensable titles for a business owner looking to scale. Although I should note, all the books on my list of best books for entrepreneurs are worth reading.
Different levels of business development require different approaches. Indeed, Marshall Goldsmith wrote a very provocative book called What Got You Here Won’t Get You There arguing that successful entrepreneurs need to shed much of what made them successful in the first place in order to make the next step forward. This includes all sorts of “Type A Personality” quirks like “trying to win too much” or just trying to do too much. You need to delegate.
Just how many units one has to have before that delegation (and the systems and policies necessary to facilitate it) need to be implemented in the business of real estate is a bit of a grey area. But what is certain is that if you intend to scale past 100 units, you are definitely going to need to do a whole lot of both delegating and system-building to make it work.
What systems have you successfully implemented in your business or seen others implement?
Share your tricks for system success in the comments.