One rental property could give you a little cash flow, but if you want to reach financial freedom, quit your nine-to-five, and even retire early, you’ll need to scale your real estate portfolio. This might seem like a daunting task, but in today’s episode, we’ll show you how to go from a novice investor to a wealth-building entrepreneur!
Welcome back to the Real Estate Rookie podcast! Off the back of their latest book, Scaling Smart, Kathy and Rich Fettke join the show to share their best secrets for building a sustainable real estate business. Successful investors manage their portfolios like full-fledged businesses, so whether you’re still searching for your first deal or struggling to scale up, we’ll show you all of the systems, processes, teams, and tools you should implement now to prepare for the future.
In this episode, you’ll learn the crucial difference between growing and scaling your portfolio, as well as the number one mistake rookies make when attempting to scale. You’ll also hear about some creative ways to fund more deals, and, finally, the keys to a recession-proof investing strategy!
Ashley :
Hey rookies, as you’re getting started in real estate investing and you have dreams of scaling your portfolio, or maybe you already are, it’s so important to have the building blocks for how to scale your portfolio. Stick around to learn how to set up your real estate investing business for success. Welcome to the Real Estate Rookie podcast. I’m Ashley Care, and I’m here with Tony j Robinson.
Tony:
And this is the podcast where every week, three times a week, we review you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Now, Ricky’s today we are super excited because we’re going to be joined by Rich and Kathy Feki and they’re extremely experienced real estate investors and serial entrepreneurs who really do know the ins and outs of running businesses, of all shapes and sizes. And they have a new book coming out this month called Scaling Smart, which you can find at biggerpockets.com/scaling smart. Now, in today’s episode, we’re going to discuss a few things. We’re going to talk about the difference between growing and scaling your real estate portfolio, some of the most common mistakes that Ricky Investors make as they expand and some effective strategies to manage your business. So Rich Kathy, thank you guys both so much for jumping on and joining us on the Ricky Podcast today.
Kathy :
Oh, we’re so happy to be here with you guys.
Tony:
Yeah,
Rich:
Great to be here. Good to see you guys.
Ashley :
Okay, so Rich and Kathy, we are so happy to have you guys on the show. As you know, Kathy is one of the hosts of On the Market podcast, one of the favorite podcasts of BiggerPockets. So today I want to start off with breaking down what is the difference between growing and scaling a portfolio? If a rookie is going to go from one property to two properties, is that considered growing or scaling? So rich, why don’t you start us off as what the difference actually is
Rich:
In real estate and business, there’s a difference between growing and scaling, where growing is where you’re pouring more resource into it, more money, more people power, whatever it might be. So the more you grow, the more you add on, the more expenses you have, and all that. Scaling is about finding a more effective way. It’s where you almost get the cost of or reduce your costs by multiplying by the economy of scale, if you will. So as you get more properties, you have one property manager and you can negotiate with that property manager for a better rate. Often if you have more properties. That would be one example of scaling. So scaling in a way is about taking your resources and scaling them, multiplying the resources that you have. So instead of investing a lot more into scaling your portfolio, you have to invest less, but you get to grow your portfolio, if that makes sense.
Kathy :
To give an example of what would be growing versus scaling would be somebody put all the effort into buying that first property, say in one market, and then they go duplicate it in another market. They have to start all over, find their team, find a new property manager that would be growing, not really scaling. Now you’ve had to double your workload and the expenses, all the travel, if you’re in one market, it’s going to cut down your travel, it’s going to cut down all that work that you had to do in the beginning to research that market.
Tony:
So if I’m hearing you guys correctly, it’s like scaling is still allowing your business to get bigger, but doing it in a way that gives you a better return on your time. Is that a fair way to think about it?
Rich:
Return on your time and money. Yeah, exactly. Yeah, so it’s the money you’re putting into it, you’re getting more bang for your buck if you will in the time that you’re putting into it. Same thing, you’re getting more out of the time that you’re investing and the people on your team. Exactly.
Tony:
Now, Kathy, you mentioned scaling up in one market versus growing across different markets, and I love that example. I guess what are maybe some effective strategies, and Kathy, we’ll start with you for actually scaling up a real estate portfolio.
Kathy :
I think we’re going to talk about it in a bit, but the first step really is knowing why. Why would I want to scale up? What am I going to get from it? I think this is the biggest mistake most rookies and non rookies experienced investors make is not really knowing what their goal is. Flipping is going to give you a different result than a burr versus a syndication. Every kind of investment in real estate is going to give you a different kind of result. So you’ve got to know what that result is first. That would be the first step in scaling because otherwise it can be very confusing. I remember when I was first starting, I would go to lots and lots of different RIAs, real estate investment groups and learn about multifamily, and then I learned about tax liens and there were so many different ways to make money. It got confusing. So understanding, I didn’t have a book called Scaling Smart. I didn’t know how to sift through all of that.
Rich:
And what we’ve seen being in real estate now for 25 years is that so many people get caught up in the shiny object syndrome. They get caught up in the how many doors do you have, how many properties do you have? And often you have to stop and say, okay, for the sake of why do I want to scale? Because people can get addicted to that and they start, they don’t pick a lane. So I think that’s a huge part of scaling, getting clear on what it is that you’re going to focus on in the beginning.
Tony:
I think shiny object syndrome is something that affects a lot of entrepreneurial folks, and I think the idea of starting with your why is an important one
Ashley :
To kind of bring that back to rookies as in, okay, rookies, you’ve defined your why. You understand why you want to get into real estate, why you’re going to scale your business. Now as a rookie, what should they be doing to really clarify their strategy? Should they be building a buy box? Should they be choosing their markets? What’s the next step after defining their why?
Rich:
Yes, to what you just said and defining the buy box is huge. It’s really about, it’s that in the book it starts with what about you? Let’s talk about you first, and then it goes into what’s your business about? And so if you look at it or what’s your portfolio about, if you look at it that way, and the reason I keep coming back to business is Kathy and I really believe that if you treat your real estate portfolio like a business, that you can be way more successful with it. And so that means creating a business plan with projections coming up, what do I want my portfolio to look like? So with your buy box, I think that’s a great idea. Starting with that, what do I want to focus on? What am I going to be an expert in? What do I want to specialize in and what do I want to scale?
Then from there, I think it’s a great idea to pencil that out and look at three years in the future and say, okay, what do I want my portfolio to look like three years from today and three years? Because you can kind of grasp that it’s not too far out in the distance where you’re like, it’s just a dream. You can do that. Come start with the big 10 year vision of what do I want my life to look like and my portfolio to look like and all that 10 years from now, but then pull it back. So you look at where you are today, lay out your portfolio, what it looks like or your business, whatever it is, and then you say, okay, three years from today, what do I want this to look like? And getting that clarity, just like a business plan, you can really map out and look at, okay, when do I need to make my next acquisition, my next purchase, and what’s that going to look like and is it going to be a single family?
Is it going to be a duplex, is it going to be a quad, is it going to be a short-term, rental, whatever that might be. Laying out what that looks like three years in the future is a super powerful exercise, not only mentally, but also for looking at who are you going to have on your team as well, kind of creating that future org chart, if you will, about my portfolio looks like this in three years. Who do I need on my team? Then what’s that going to look like? And then you can start researching that, talking to other people who have a portfolio of that size and say, what does your team look like? And then you can start looking at, okay, here’s where I am today. What’s my next hire? Am I going to hire an independent contractor? I’m going to bring someone on full-time to help me manage this. Is it just an executive assistant or an assistant or a virtual assistant or a bookkeeper, and what’s my next hire? So starting with that three-year picture I think is a great way to do that.
Ashley :
I remember Tony before he had done, I don’t know if you did on Mastermind or what it was or read a book, Tony, but I did it right after you did. And it was even though you were a one man team, you built out your org chart and then you added in your business partners into spot, but it gave you an idea of, okay, here’s all the rules in my business. Even though I’m doing the majority of them right now, I know that eventually these are the roles that will need to be filled. And kind of being able to look at it visually and prioritize which ones should be filled first too. So that is a great exercise to do to kind of help figure that out.
Rich:
Tony’s a lot wiser than we are because it took us five years to do that.
Tony:
I wish I could take credit from it. I’m pretty sure I read it in a book somewhere. I was like, that makes a ton of sense. But one of the other things that I do as well, and I still do this today, but I try and keep a list of all the things that don’t like doing within my business. So that way as I’m thinking about, okay, who should I hire next? I’ve got a list of what are the things I should be looking for for this person to do, right? One of the things I just gave up within our real estate business was pricing. Our portfolio consists of short-term rentals, Airbnbs, and a big part of being successful there is managing your pricing on a very consistent basis. And when we had five properties, it was fine for me to do that, but with 30 single family homes in a hotel, I was spending way too much time now managing pricing. And we hired someone last month and it’s been one of the best things I’ve ever done. So I think even still, I still forget sometimes that there are certain things I probably shouldn’t be doing anymore.
Kathy :
We wrote a whole section on that and I cannot emphasize how valuable that is to create that org chart. And it may seem complicated, but it really comes down to what you just said. Tony is writing down all the things that you are doing or that need to be done for this business and putting them in an order. Usually there’s a CEO underneath that CEO, which is probably you, is someone in finance, someone in product quality, there’s somebody in marketing. So in the beginning it’s probably you, but as you grow, you can replace yourself with the stuff that you don’t like doing and that you’re really not good at, but somebody else loves to do. Our first hire was a bookkeeper. We didn’t love it and we weren’t that great at it, and we found a bookkeeper and guess what? It’s her favorite thing in the world.
She can do it. And then that just frees you up. Now you’ve got all these extra hours to put in the thing that you’re really great, whether it’s sales, marketing, acquisitions, whatever it is you have, that is the key to scaling, replacing yourself specifically the things you’re not as good at and don’t like doing with somebody who does. And it doesn’t have to be full-time. It can be very, very part-time to bring in that person, which could for you up more than you realize. If you’re really just not good at it, it might take you a lot longer than somebody else.
Ashley :
We have to take a quick break, but if you’re enjoying the show, you can also hear Kathy co-hosting the On the Market podcast from BiggerPockets on YouTube and all your favorite podcast platforms.
Tony:
Alright guys, welcome back. We’re talking with Rich and Kathy Fed Key about how to scale a real estate business where a lot of folks that are listening, they’re focused on building decently sized portfolios that I think one of the challenges that a lot of people face is the financial side, like Rich for example. You said that the focus for you was buying turnkey rentals and for some people the capital to get that first one, it’s there, it’s available, they’ve saved it up, they’ve pinched pennies and done all the things they put into that first deal, but now it’s like, well man, I got to do that all over again for the second one and the third one and the fifth one and the 10th one. So from a financing perspective and being able to actually afford the acquisition new properties, and Rich, maybe we’ll start with you on this one. What have you seen as maybe a good strategy to do that?
Rich:
Yeah, it’s really looking at that. Sometimes it’s like starting off, you’re getting scrappy, you’re finding ways to get some built-in equity or you’re partnering with someone. And a lot of times it’s that it’s finding a way to partner up with someone and I think that’s something we should address because so often most people who are investing are not on their own. They either have a spouse or a business partner, boyfriend, girlfriend, whoever, that they’re working on this together. Our daughter’s 25 or younger daughter’s 25, and she and her boyfriend, they team up together and they look at what their strengths are in each area, and so he’s working his job and bringing in money, she’s working her job and bringing in money. So partnering is a great way to bring more money to the table. Sometimes in the beginning it’s getting scrappy. You’ll have to do those things like learning sub two or learning how to wholesale or learning how to flip. There’s different ways, but Kathy’s man, she’s met with so many investors who’ve been in the same position. Kathy, what are your thoughts on that?
Kathy :
You have to have money to basically invest passively. I think that I should say in most cases there are probably creative ways like sub two to do it, but for the most part you have to have money, but when you don’t have money, you do have to get scrappy and you do have to be creative and you maybe have to work a little harder than when you have money. If you just suddenly came into a large inheritance, that’s a different story For us, when we first got married, we would rent and we would rent our house and then we would rent out rooms in that house. And I know a lot of people do that with short-term rentals, but that was the way that we were able to save some money. Then when we bought our first house, we rented out rooms there as well, that helped us make more money.
When my daughter came to me and said, when our oldest came to us and said, Hey, I want to buy a car. We said, no, no, no, no. Talk to a mortgage broker first because you might be shocked to find out that you could qualify for a home, but if you buy a car you won’t because now you’ve, your debt to income is all thrown off. This is probably one of the biggest problems that people do is they go into credit card debt or get a large car payment, but when you go to a mortgage broker, they’re going to look at that. Now you don’t qualify. So she made a very smart decision, kept her old car, it worked fine, and she went and listened to her mama met with a mortgage broker. Sure enough, she could afford a home. She bought one that with just 3% down. A lot of people still don’t realize FHA loans will allow you to put just 3% down if you live in it, $250,000. That was like 10 grand. She had it. She had saved it. So she was able to get into that home, fix it while she lived in it, improve it, and then sold it for $150,000 later, which she was able to put into another property. So again, you got to be a little scrappy in the beginning. Make it work, find ways to make it work.
Tony:
Kathy, I wish I could have introduced you to maybe 2016, Tony, because exactly what you said is what happened to me. I got my first big boy job. I got this promotion and this pay raise, and I was like, I’m going to go out and buy a really nice car, and I got a nice BMW. And then Sarah and I looked to buy our house literally later that same year. So I didn’t even have the car a year, and they’re like, you guys were approved. Except Tony, you’ve got to sell the BMW. So it’s like I had the car for six months, but had I just made that decision you earlier, I could have saved myself some frustration. Did you sell it? I did sell it, yeah. I sold it. I had to sell it. Sarah’s like, you better sell that, that car. So yeah, we resold it
Rich:
And look where you are now. It
Tony:
All worked out. But I love the idea of using a primary residence to help fuel the start of your investing career as well, because I think a lot of people don’t view that first home purchase or that next home purchase as an opportunity to invest. But like you said, Kathy, you can rent out spare bedrooms in the house that you live in. You can buy small multifamily and live in one unit and rent out the others, and it’s a very low cost way to get that first or that second deal done. I mean, heck, Ash and I, we’ve interviewed people on the podcast, that’s all they do. They’ll live in a house, house hacket, move on to the next one house hack that one, and they would just kind keep stacking their portfolio with all these FHA 3% down loans and they look up 10 years later and they’ve got a really, really nice portfolio. So ways to get scrappy for sure.
Kathy :
We’re still doing it. We’re still renting out. We’ve got an Airbnb on our property that helps pay for a lot of the expenses. So we’re still house hacking. It works 100%.
Rich:
That’s how we got started in 97 and all the way up through today.
Ashley :
Well, one other thing too I want to highlight is that you said to go and just talk to the mortgage broker, and that’s what everybody should be doing is just tell them your financial situation. Don’t go in and say, I want an FHA loan for this amount. Go in and tell them what you are trying to do, not what you’re looking for, and see what loan options and products they have available to you. And also if you don’t qualify right now, they should be able to tell you, just like they did with Tony, is like, oh, you got to sell your car as to what you could do differently so that you are approved for the loan to be able to get your first property. Okay. So yeah, I want to move on from funding to, okay, now maybe you’ve got your first deal. How would you build those systems and put processes in place as a rookie investor with only one deal to be able to scale efficiently and effectively?
Rich:
I think it starts with just looking at, I mean, systems are built of processes. So you have a process and then you get a few processes go together and they create a system. So it might be your buying system, your acquisition system, it might be your management system. So I think it’s starting with the basics is just like what are you doing now with that first property or the few properties you have? What are your current processes? So whatever it is for looking for a property, this is my process, and this can be just check boxes first, this, then this, then this, this. You just lay it out the way you do it and the way that’s worked well for you. And bang, you got your first process written down of written documented process, and then you, okay, you come over here and it’s like, how do I look for property management and how do I vet them? And you come up with a process there and then all those processes build into one system. So really coming back to answer the question, it’s starting with what you’re doing now. Write it down, do it as a checklist, step one, step two, and keep it simple. So many people get caught up in thinking a process has to be very complicated and laid out, but it can be seven steps, it can be 10 steps.
Tony:
One more follow up question guys, because we’re talking about systems and we’re talking about adding people, but how do you know, at what point does it make sense to actually hire someone to join your team? And Kathy, you mentioned earlier, it doesn’t have to be full-time, it can be part-time, but I think the struggle that a lot of rookies face is say, I’ve got one long-term rental and I’m cash flowing a couple hundred bucks a month. Does it make sense for me to start or to think about hiring a bookkeeper when I’ve only got one property? Does it make sense for me to think about hiring an acquisitions person when I’ve only got one deal? So what is that tipping point of knowing when to actually hire someone and in what capacity?
Kathy :
Yeah, it’s such a good question and it just depends on your situation. If you’re working full time and you have kids and you are busy, busy and trying to get to the gym and do all the things, it would just depend what your time is worth. So if you have more time than money, maybe you don’t need to hire someone right away, but if you have more money than time and you’re busy, then it absolutely makes sense. Just recently I had to argue with someone who just would not get a house cleaner, just would not do it. It’s like, well, what is your time worth? People still cleaning their own Airbnbs. Sure, there’s a time when that makes sense, but when does it stop making sense? How do you build that in to your business plan such that as you release certain jobs that you are doing so that someone else can do them, your time can be used to bring in higher value dollar, so to speak.
So what is your time worth? And in the beginning, if it’s not worth very much because you’re not working, then you’re going to probably do a lot of things. We wrote about it. I interviewed this beautiful couple Black Swan real estate where they, like we said, were scrappy. In the beginning she was studying to be a doctor after school, they would go and work on the properties themselves. They did everything on their first flip, even put the expenses on their credit card, which we were not recommending, but that’s what they did. It worked out. They were able to make a big chunk of money when they sold that property. It was that chunk of money that helped them bring in helpers next time, just friends just to help us paint this place. And as they grew and did another flip, had another chunk of money they could continue to hire.
As you build your business, you do have more money to hire better, and in the beginning it might not be, you just get who you can have help you in the beginning. Everyone’s wearing a lot of different hats. What we write about in Scaling Smart is that turning point from just everybody doing everything and grabbing who you can to get that ship to float. Shifting into specialists and only hiring specialists, people who are experts at that thing that they do will take you to that. It’s kind of like if you’re playing a video game and then you do the booster button, it’s like you’re a rocket ship. Once you can get into the specialization. Now, there are ways to bring in specialists earlier on in the business when you can’t pay them. You can give them a piece of the equity, you could piece of the profit, you can be partners. There’s ways to bring on those people early on, but you do have to give up something for them. Of course.
Rich:
Yeah. If I could add onto that too, it’s coming back to that question. It’s about what is it that you’re really good at and what is it that you really love doing? And then that would be your next hire is the people who do the things that you don’t like doing. So I think it’s getting really clear on what’s your unique strength? What is it that you love to learn about? You love to do that. You get lost in finding that and identifying that for yourself, and then hiring specialists in all the other areas so you don’t have to do those things. And that’s going to give you just rocket fuel as far as your motivation, your discipline, when you’re doing what you love to do and what you’re really good at. And that is the greatest contribution to growing your portfolio. And then you’re going to find people that do the other things that are really, really good. Like Kathy said, the specialists, they’re really good at it. They love doing it. They love learning about it. So get those people to replace you in those areas.
Tony:
Alright guys, we have to take one more ad break and when we’re back, we’re going to hear about how to set up your real estate business for success to survive economic downturns.
Ashley :
Welcome back to the show.
Tony:
If I can ask one last question on just the team building piece, but you mentioned earlier that a lot of people don’t view their real estate investing as an actual business, but if you think about maybe the traditional startup world, people with their tech startups, in a lot of those situations, the founders aren’t even paying themselves and they’re reinvesting every single penny back into growth, into employees, into customer acquisition, into whatever it may be to get the business to grow. But you don’t necessarily see that same perspective with real estate investors. So again, you guys have a lot of experience. I’m just curious, do you have a preference of like, Hey, should I as a founder of a real estate investing business adopt the same mentality of a tech startup founder? Or should I maybe try and balance out taking some of the fruit of my labor earlier on?
Rich:
I think in the beginning you got to be willing to grind. It takes discipline, it takes focus. You have to be willing to work for free in a way because building something, but it’s like Jim Collins who wrote Good to Great. It’s all about that flywheel concept. It’s about it’s so hard to get that flywheel hiccup. Imagine a 5,000 pound flywheel that’s made of concrete and you try to get it turning and in the beginning it’s so much effort, you’re pushing it and you’re pushing it and you’re giving it all you got, and all of a sudden you start to get that flywheel starting to move and then you’re pushing it. It’s still hard and you’re putting work in, but it’s getting to move and all of a sudden you, after a while, you’re just going along with your fingers just touching it and it’s spinning along. But in the beginning, before you get that going, it takes a lot of effort, a lot of strength. So yeah, I think it does take commitment
Kathy :
And it’s so important to in that time to keep your expenses down, to do whatever it takes. But our nephew is making a six figure income and he lives in a van. He lives in a van because it’s fun. He’s young, but also and actually right now on a boat. But he takes all of that money and invests it because he’s young and it’s a little bit easier to do that when you’re younger. I got to hear Kim Kiyosaki speak at the investor conference and somebody got up and said, I’m really scared to jump into real estate. I’ve got a good job. I’m just so terrified that I’ll fail in real estate. And Kim was quiet and she said, well, why would you do that to yourself? Why would you allow yourself to fail? And it was just kind of a funny response. Yeah, why?
Because basically this person was saying, I want to give up this job I have that’s got stability and income and jump into real estate something I don’t know how to do. The thing is she’s probably going to fail if she does that. So what Kim Kiyosaki was saying is why would you give up a steady income to jump into something you don’t really know? So there’s a balancing act. It’s a lot easier in life to have a steady income and many people who start real estate do they’ve got another job so that they don’t have to depend on the real estate income. And then it takes a lot of stress off and in the process as you learn, then you can start to put more of yourself into the business that’s growing. But don’t just think that a dentist took 10 years to become a dentist, a good real estate investor, often it can take 10 years. So don’t think that you could just leave one thing that you know well and jump into another that you don’t know well and succeed.
Ashley :
So as a rookie investor trying to scale their business, how do you actually make that sustainable over the long term? So you’ve mentioned hiring your team members, putting your processes in place. Is there anything else a rookie needs as a resource or in their tool belt to actually with build out this business and be sustainable over a long period of time?
Rich:
I’m going to go with the team. It’s about the people. So it’s about hiring the right people, like Kathy said, those specialists, whoever your partner is. So often we’re not doing this alone. Kathy and I together, Tony and Sarah. It’s just like there’s usually someone involved in that, whether you like it or not, or whether you think it’s true or not, there is someone else who you’re partnering with. Most people are not doing this solo. So it’s really looking at how can you keep those relationships, those working relationships very effective. And that comes to looking at what do you bring to the table? What strengths do you bring and what strengths do you do? So with Kathy and I, we really looked at that together and for the long haul it’s like what is it that I do well and that I’m focusing on? And what is it that Kathy does well in our business and also in our real estate portfolio?
Kathy’s great at finding deals, negotiating, creating relationships. So that’s her strength in building our portfolio. I’m more of the systems guy. I am going to put the systems in place and create that. I’m going to track things. I’m going to report on the numbers. I’m going to work with our bookkeeper. So really looking at that and that way when you are doing what you’re great at over the long haul and having people on your team that are really good and keeping that connection with those people, I think that’s the key to sustainability and it’s slow growth is sustainable fast growth often,
Kathy :
And we wrote a whole chapter on how to keep your people happy, whether they actually work for you or for your company specifically their in-house or their partners with you, like a property manager. People aren’t necessarily inspired just to make you wealthy. It’s not generally how it works. So your employees, your team members, your partners, they need to be excited too. I can’t tell you how many times I’ve seen people nickel and dime their property manager, making them just feel really worthless and then being upset that they didn’t do a good job. When they’re not paying them. Well pay your people, well, give them incentives. You work with a really good real estate agent, don’t try to negotiate so they don’t get what they worked for. In our company, we have profit sharing. So instead of everybody, we get excited, we hit a goal, everybody gets excited because we hit a goal together and everybody profits from it. So that’s the biggest mistake I’ve seen is just being too selfish in business, wanting too good a deal, trying to take too much from the seller or from the real estate agent or the property manager or whoever’s on your team. Let everyone win together and you will have a sustainable company. Everyone will want to keep doing that again and again and again.
Rich:
Yeah, we have a saying at real wealth, the only thing more important than a great idea is the team that can see it through. So it’s huge. And it’s the same thing. The only thing more important than a great deal or a great property is the team that can see it through. So for the long haul, it’s the team.
Tony:
Now, we talked a lot about building a sustainable business, but I guess maybe the other side of that coin is that sometimes there are things that are outside of our control. There’s been a lot of economic uncertainty over the last couple of years. In your experience, you guys have probably seen some swings both ways in the world of real estate investing and building businesses. So how can someone who’s new maybe protect themselves when those downturns come
Rich:
Reserves? It’s like in business or with a portfolio. Kathy and I went through 2008 and it hit us hard and we learned some massive lessons through that. And it’s having the reserves, making sure that part of your system is part of your process is a percentage of that is put aside in reserves, whether it be a business and making sure our CFO is constantly looking at our cash balance and what we have available if all of a sudden we stopped getting any business and it needs to sustain at least six months and you can make it through something when you got six months of reserves on a portfolio or on a business. So my answer would be reserves on that one, Tony.
Kathy :
Yeah, absolutely. And then the other thing would be what we’re seeing a lot in the commercial real estate world more than anything is just people thinking that the economy was only going to go in one direction and having their pro forma and their underwriting support that. So the idea was, hey, interest rates are going to stay low forever for the next five years that we have this business plan, they’re going to stay at this 2% rate. Well, once you’ve been in this business long enough, that’s not true. Things are changing all the time. So you’re really analyzing your assumptions and having several outcomes, probable outcomes when you underwrite a property. Like what if rents go down? What if interest rates change? Should I go on this? Adjustable rich has pushed, pushed for us to go on the 30 year fixed when I was like, yeah, but the adjustables lower. He’s like, I don’t want to worry. I don’t want to stress later. Sure enough, he was right again, that lock him in, lock him in. So don’t think that things are always going to stay the way they are. They do change. People could lose jobs. There could be a chance that rents go down if more supply comes on, it may also go the other direction, but underwrite for different scenarios.
Ashley :
The one thing I want to add to this is, and I was just searching for the link to this because BiggerPockets did something with Steve Rosenberg before where he had built an emergency preparedness document. And this is for if your property gets hit with a hurricane or flood or whatever, this is the procedures your property should implement. And so if you go to BiggerPockets and you search emergency preparedness, it should come up. I couldn’t find the exact link and maybe we can put it in the show notes for you, but what I think investors should also have to protect themselves or to be prepared in the event of a recession, a downturn, whatever it may be, is have this emergency preparedness ready for that kind of a financial emergency and not just a weather emergency or a fire, whatever it may be. Because I’ve heard from several investors lately, and this is more definitely on the commercial side of investing, but as investors are getting into trouble with their properties, because like Kathy said, they expected the market just keep going up.
They could refinance and keep the same amazing rate. What the complaint is is that there’s a lack of communication, lack of clarity from the operators of theses properties. So your goal may not be to go out and to be a syndicator, but even as a small investor, if all of a sudden you can’t pay your mortgage, you are going to need to communicate with your lender, especially if you have a small local lender, you have a portfolio loan, there’s a lot more of an advantage of being open of what’s going on, and they have more flexibility to actually work with you. So I think having some kind of emergency preparedness plan in place for a financial emergency, maybe even if it’s a personal thing as to here’s what I am going to do if this worst case scenario happens, this is the policy and procedure I’m going to follow and my team is going to follow also. And I think that could be something that could really help somebody not have that fear of, oh my God, I’m not getting into real estate because if there’s a recession, I’m going to lose everything. My house floor coil is on, all this stuff. So just make a plan for that and have that ready in place.
Rich:
That’s super smart. We created something for the book that it’s something we use at Real Wealth and have used. It’s evolved over the years, but we call it the boa, it’s the Business Opportunity Analyzer. And that can be for a property or it can be from a new idea in a business. Because what we found is so many people came in on our team are like, what about this idea? What about this idea? And we would go down that path. We’re like, oh, let’s launch this. Let’s create a whole investor academy with modules and learning and all this stuff. And we put all the work in. We put a year of working on it and then found out that it was not really what people wanted, and we invested a lot of time and a lot of money. So now this business Opportunity Analyzer, it’s 13 questions that takes you through this process of, have we done this before?
And it might even be the property. You might look at it like, have we invested? Have I invested in a property like this before? If so, how did it work? What worked, what didn’t? And then there’s another question, what is the minimum way we could launch this or test this out? Things like this. So it takes you through this whole process. And then basically, if an idea can survive the boa, if it can make it through the boa, the business opportunity Analyzer, when you get out at the end, you have a clarity about if this goes well, here’s what it looks like. If this doesn’t go well, here’s what it would look like. And then it gives you just a filter to look at that decision and say, yes, let’s move forward with it. Or No, I’ve really asked all the questions here and it doesn’t make sense.
Ashley :
That is such a great idea. And the reason I’m thinking of it is beneficial to me is with partners as to my partners bringing me ideas as I can just give them the sheet because sometimes I feel like they feel so discouraged if I’m not on board immediately with an idea or this paper can actually be the one to make the decision and not be if we should move forward with the decision.
Rich:
Perfect. Well, it’s one of the downloadables, when you pre-order the book, you get that as a downloadable. So you’ll have to pre-order the book. Ashley,
Ashley :
Actually, I got the book, but I’m not going to have to pre-order it to now. Get the downloadables. There you go. Okay. Well thank you guys so much for joining us today. Everyone listening makes you go to biggerpockets.com/scaling Smart. So you can go ahead and pre-order your copy and check out all of the downloadables like Kathy had mentioned earlier in the episode for 20 bucks, you get access to so much information and resources for this book and any other book. So start with a book and see, and then use the BOA to decide if this is actually an idea you want to continue with or a strategy for your real estate investing business. I’m Ashley. And he’s Tony. Thank you guys so much for joining us on this week’s Real estate rookie episode. You can find Rich and Kathy on biggerpockets.com and we’ll also link their show information in the notes. Thank you, and we’ll see you guys next time.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.