Last week I was fortunate enough to be invited as a panelist to the 4th annual IMN Single Family Rental Investment Forum in Scottsdale, Arizona. It seemed like pretty much every major player in single family investment was there, including B2R, Colony Homes and First Key.
It’s a bit surreal when you hear people talking about how the company they represent owns 5,000 or 10,000 houses (or some other ridiculous number). One guy even referred to his operation as “small” because they only owned a meager — and quite frankly, rather pathetic — 1,700 homes.
There were plenty of smaller investors in the group and certainly in the audience. Still, among this crowd, we were quite small fish indeed.
While some of the discussions centered around topics that only a few investors would have any interest in (say, how to value packages of hundreds of houses several states away), others were more applicable to a general real estate investing audience: how to keep your rehab costs down, whether to manage in-house or outsource, hold or flip, etc.
But there were two major points that I couldn’t help but take away from this conference that I believe are worth highlighting:
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The Importance of Measuring Just About Everything
There are advantages and disadvantages to both being big and small. Small investors can certainly be more flexible and quick and less bureaucratic as well. But one common factor among these larger companies that immediately became apparent was how much they measure. Over and over again, from a variety of different investors, lenders and vendors, this point was hammered home.
And this is something I think many smaller investors can learn from.
It’s not just about measuring how much money you made on a flip or how much you are all into a property versus its ARV for a hold. There are all sorts of smaller things that can be measured and then evaluated and improved. For example:
- Average Profit or Equity in Particular Submarkets
- Marketing Costs/Lead
- Marketing Costs/Acquisition
- Costs for Particular Types of Marketing/Lead or Acquisition
- Cost of Repairs/Budgeted Repairs
- Cost of Particular Repairs (i.e. HVAC, Plumbing, etc.)/Budgeted Cost for Those Repairs
- Cost of Repairs/Budgeted Repairs for Different Job Sizes/Types
- Average Length of Remodel
- Average Annual Vacancy in Particular Submarkets
- Actual Rent/Estimated Rent
- Average Time to Lease
- Average Time to Lease in Particular Submarkets
The list can go on and on.
These are the components of the larger picture (i.e. the profit from a flip). By evaluating each of them, you can figure out where the problems are or if there are certain types of properties, areas or job types that you do well on or not so well on. Nothing is better to help make decisions than such data.
And while there are many on the above list that may not make sense or be worth the time to track, for the most part investors err on the side of too little rather than too much measurement. After all, it’s awfully hard to make informed decisions about the future if you only have a foggy idea about what happened in the past.
We’ve actually been working with a consultant lately to create key performance indicators for each position we have in the company. Not only does this let us track performance more objectively, but it also gives employees and vendors clear objectives to aim for.
In the end, it’s simply not enough to know a flip went badly. You need to know why in order to avoid that mistake again, even if it’s not particularly enjoyable to dig back into the numbers on it. And if something goes well, that doesn’t mean it couldn’t have gone better. What gets measured gets done — or is at least more likely to.
I wrote an article a while back recommending that investors and entrepreneurs don’t get ahead of themselves and work to grow their business at a consistent, moderate pace instead of hunkering down or trying to go into overdrive. While I still believe that, I don’t think that precludes having big goals and taking action on them.
Talking with industry leaders about the massive projects they were taking on takes the mystique out of them. While you’re not going to go from buying one house to buying hundred at a time overnight (nor should you try), that doesn’t mean you can’t get there in good time.
Sometimes this means thinking in an entirely different manner. Indeed, other than one large portfolio that just came across our desk, looking into these large acquisitions and trying to reach out to the institutions that sell and finance them hadn’t been seriously considered before. Perhaps it should be.
And perhaps there are opportunities around that you’re not looking at because they just seem too big.
Perhaps they’re not.
I came away with the sense that there is a middle ground between large institutions and small entrepreneurs that everyone should reach for no matter how big or small they are. You never want to lose the nimble flexibility of a small company nor the entrepreneurial passion. But at the same time, you want to measure and analyze your business in a thorough, corporate-like manner.
And of course, don’t be afraid to think big!
What important business-related lessons have YOU learned lately?
Let’s have a conversation in the comments section below!