An issue that matters to all real estate investors—whether part-time or full-time—is how to drive your investment business for performance, results and enjoyment. Those three things are critical to success.
Let’s start our discussion with the assumption that most of you who are reading this probably are old enough to drive. I would also venture to say that probably everyone drives pretty naturally, without thinking much about it. You have done it a lot, and you are probably pretty good at it. You probably jump in that car and head down the road and are pretty successful navigating that automobile and getting where you want to be with productivity, efficiency, safety, etc.
I can only hope that your investment business—if it is not there already—ultimately evolves to the point where real estate investing also comes pretty naturally to you and you are successful, productive and efficient in getting to your destination or meeting your goals. These two processes—driving an automobile and running (or driving) your investment business—have a lot of similarities.
Just as you have a dashboard on your automobile that you use to monitor your driving experience, you also have a dashboard, so to speak, for your investment business. In each case, you monitor that dashboard to make sure you have the optimum experience in what you are doing at the time. Also, in each case, there are a number of gauges on the dashboard that all require your attention, and at the same time.
Your dashboard has many gauges you must monitor
For instance, we all know that you cannot drive down the road successfully by only monitoring your fuel gauge. There is a lot more going on with that automobile that you have to be aware of. It’s the same with your investing business. There is not one single gauge or key performance measure that you can focus on entirely and be successful as a real estate investor. You must balance your observations across multiple measures, monitoring multiple “gauges.”
For example, let’s imagine that as you are driving down the road, you ARE focusing only on your speedometer. It’s probably going to result in some reckless, unsafe behavior and perhaps even a ticket if you are exceeding the speed limit.
In the same way, you cannot focus solely on your tachometer, the gauge that measures the wheels’ RPMs, or rotations per minute. How fast and how hard is that engine working to get you where you want to go? If you focus purely on that, you may not be operating at the speed you need. If you are running too many RPMs, it can be very, very damaging to your engine. Likewise, if you are not running enough, you could be going very slow and not meet your goal, objective or destination.
Further, we all know you cannot just drive down the road and focus purely on your fuel gauge and ignore everything else. “Hey, I have a full tank of gas. I am good to go. I can go any speed I want at any RPMs I want and be fine.” We all know that would not be productive or efficient. It ultimately would not enable you to reach your goal or your destination as a driver.
Are you in proper alignment?
It’s the same with your business. There must be balance across all your measures in order for you to be productive and efficient as a real estate investor. And just like that automobile, you have to be aligned in order to go down the road straight, efficiently, cost-effectively to reach your destination. Your business has to be aligned across multiple measures in order to get you where you want to go, as either a part-time or full-time real estate investor.
Finally, as a real estate investor, you have to be aware of what is going on in your business. You have to have your finger on the pulse of your business. You have to be watching those gauges. To be successful as a real estate investor, you have to be looking at the road ahead, and the road behind, just like you do when you drive your automobile.
So, let’s talk more about what you need to balance and what you need to measure. What are those “gauges” you need to watch in order to make sure that you are a successful investor and you meet the goals and objectives that you are setting out to achieve? There are many of them, but let’s focus on three.
Gauge No. 1: Volume
First, let’s look at volume. Volume is the number of houses you intend to buy in a period of time—whether that is a week, month or a year—to achieve your goals, whatever they may be. I correlate this with your automobile’s speedometer, which shows you the number of miles per hour at which you intend to drive.
The key for you as real estate investor is to set a volume goal. How many homes do you intend to buy this week, this month, this year? Without that goal, you will really be setting yourself up for disappointment. In the same way, when you get behind the wheel, you have to know how fast you are allowed to drive, can drive, should drive, or need to drive in order to get to your intended destination in whatever amount of time you have allotted to get there. As I have talked about in the past, the beauty of the real estate investing business is that we can determine exactly the number of homes we need to buy in order to meet our goals at the end of the year by simply looking at the profit per house we intend to make and multiplying that by the number of houses we need in order to reach our ultimate profit goal.
The point is, it is critical that you have a goal—whether you are a high-volume real estate investor, full-time, or you are a lower volume, part-time investor. Just because you do a lot of houses doesn’t make you a great investor, any more than doing a few houses means you are a poor investor. But you have to have that gauge in front of you and you have to monitor it to make sure that you get where you need to be in terms of the number of units you intend to buy.
Gauge No. 2: Velocity
Second, let’s talk about velocity. I am going to correlate this to your car’s tachometer, the gauge that measures your rotations per minute, or RPMs. Velocity in your real estate business is going to measure your efficiency and productivity. It’s the rate at which you buy and sell homes, which is critical. You have to be deliberate in your buying and selling, and the time it takes you to do it in your real estate business.
You can’t buy a house and sit on it, let it stand still with no renovation, no tenant, no marketing or no selling activity. In our business, time truly is money. You are going to incur a holding cost, principal payments, interest payments, tax payments, insurance payments, maintenance payments and utility payments. Those are going to rack up if you are not moving your real estate investment properties. Regardless of your exit strategy—whether it is a rehab, wholesale or a rental—you have to move your properties with the right velocity or you can literally erode your profit margin on that property by sitting on it.
So you have to watch your RPMs. How fast and how hard is your business engine running to move that volume that you have set as a goal? You can buy all the houses in the world, but if you don’t sell them, you are not going to be a very successful real estate investor.
You have to watch that tachometer and make sure that you have the correct number of rotations and movements in your business to get the inventory to whatever destination you have set for it, whether you are going to sell it, rent it or whatever that may be.
So in addition to volume—the number of units you are going to buy and sell—you have to measure the velocity, or the speed at which you are able, intend and need to move those units.
Gauge No. 3: Value
Finally, let’s talk about value. I am going to correlate this to the fuel gauge on your automobile. Value is the measurement behind the volume and the velocity at which you are buying and selling properties. Value is your gauge of the profitability of your business. You know the volume you need to do and the velocity at which you need to move those properties and now finally you have to make sure that you have the value in place, or the profitability on those deals.
It does no good for you as an investor to have extremely high volume if you are not making any profit on those homes. You will hear investors brag about the number of houses they buy and sell, but you may not hear them talk about the value of those investments or the profits they generate. They may be realizing nowhere near the profits of the investors who sold 10 percent of the homes that they bought but with a much greater value or profit margin. Those investors who bought and sold only 10 percent may actually have a much more sound and profitable business.
So you have to watch that fuel gauge. How much is in the tank? How much profitability are you generating on each house? You want to maximize the efficiency of those investments in the same way you maximize the efficiency of every gallon of fuel you put in your car.
You have to keep in mind, too, that if you choose to be an investor who is doing low-margin, low-value deals—which is fine—then you must be prepared to focus on those other two gauges: volume, which is going to have to be very high for you; and velocity, which is also going to have to run very high. Because you are making less value or profit on each deal, you are going to have to push harder on the volume and velocity in order to meet your ultimate profit goals. At the opposite end of the spectrum, if you as an investor are going to focus on high-margin deals, you may not need to do as much volume—or velocity, for that matter. So you can see the relationship among volume and velocity and value.
What’s the secret to success?
In conclusion, keep in mind that high volume does not equal high success. You can burn and churn through a lot of houses over a course of time, but it is kind of like speeding down the road. It could be very reckless for you, and it may not produce the efficiency or productivity that you need at the end of the day. So be careful not to become solely focused on your volume—the number of houses you buy and sell—as a real estate investor.
Second, remember high velocity alone does not equal success. Just like driving that car down the road at a very high, high RPM, you are going to stress that car. You are going to wear it out, and you are going to risk blowing it up, as a matter of fact. It is the same with your business. If you are burning and churning through houses at rapid rates, you may be leaving some profit on the table. Be careful not to be buying and selling so rapidly that you are not doing it properly or maximizing the value of each of those homes.
Finally, high value does not equal success. Remember you can’t just do one big fat deal, and then hang it up for the year. You have to do multiple deals. Plan your destination, drive your business, keep an eye on your gauges, and enjoy your investing ride.
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