THRIVING DURING CHALLENGING ECONOMIC TIMES
By: J SCOTT
At this point, it's becoming clear to a lot of us that the economy has peaked. We've hit that top inflection point and from here things are likely to get worse over the next 12 to 18 months.
Between rising interest rates, real estate values still in a bubble, lending standards tightening and lending costs rising, the strategies that have worked in our real estate businesses over the past several years are going to have to change. Remember, real estate is a business. Whether we treat it as such or not. And in order to survive and thrive moving forward, we’re going to have to do what great businesses do during these challenging times.
What do great businesses do during these times? They stop focusing on rapid growth and start focusing on maximizing their profitability. They stop worrying about being the biggest and start worrying about being the best.
To be more specific about how we accomplish this, here are my top five suggestions for how we should be re-engineering our real estate businesses to weather the coming storm:
#1 Do Fewer, But Better, Deals
Many operators measure the success of their business in terms of growth in number of doors or total assets managed or some other vanity metric that sends the perception that they are consistently getting bigger. But the companies who survive over the next couple years won't necessarily be the biggest or fastest growing. They will be the companies that are the best.
When times are good, investors are happy to take risks. Strike out on a few deals and hit home runs on others.
But, during a downturn, investors quickly become risk averse and are happy to give up those home runs in order to avoid the strikeouts.
Want to keep your investors happy? Do fewer, safer deals.
#2 Do More With Less
I know as well as anyone how quickly monthly expenses can add up. Between tools, payroll, and marketing costs, it's easy to go from a business that's spending a few hundred or a few thousand dollars per month to a business that's spending tens of thousands of dollars per month very quickly.
And there's nothing wrong with this if you have the deal flow to support it. But, these days, most of us don’t. If your plan is to grow your company by throwing lots of money at it, you run the risk of running out of cash in a time when it can be very difficult to keep the machine churning.
This is a great time to start asking yourself the questions, "How can we achieve all of our goals with less overhead? How can we utilize our resources more efficiently?"
Which brings us to this next tip.
#3 Focus on Automation & Great People
One of the best ways to utilize resources more efficiently and to accomplish more with less is through automation. While many of us have come to rely on hiring more people whenever we want to grow our business, buying or building great tools and spending the time and effort to automate is the key to true, long-term efficiency.
In a nutshell: People cost more over time. Tools cost less over time.
If you’re going to spend money, spend it on tools that can allow you and your staff to be more productive in those areas of the business that can’t be automated (relationships and reputation).
But that doesn't mean that you should stop hiring all together. While tools and automation will help you grow efficiently over time, amazing people are still the single best way to put your company on the right trajectory.
Automation is the engine that will get you from Point A to Point B, but people are what will help you figure out where Point A is and where Point B should be.
Long story short, now is the time to have a small number of amazing people and a strong focus on tools and automation.
#4 Get Creative on Your Financing
Gone are the days when putting together a deal is as simple as getting a loan quote from a lender, raising money from investors or partners and closing the deal. The numbers rarely work in that simple scenario anymore.
In tough economic times, great investors don’t find great deals. We create them.
And we do that by understanding how capital stacks -- the debt inequity that we use for our deals -- work and can be structured in interesting and creative ways. We also do that by understanding the cost of our capital and the risks to our capital.
Sure, getting a loan from a big lender might be cheaper than bringing in passive investors to your deal, but which is more risky long-term? If things go south, is it easier to reason with your partners or your lender? Which of these is likely to walk away sooner should you run into an economic roadblock?
Great operators recognize that real people are often much more reasonable than faceless corporations. And it can be worthwhile to give up a little bit of profit to work with reasonable people than to trust your livelihood to a big bank or company that will always do what's financially optimal to them.
#5 Protect Your Reputation
I put this one at the bottom of the list, but it should probably be at the top. While it can be easy to make short-term decisions that prioritize your company over your investors, your partners, your vendors, and your employees, great business-people recognize that reputation can only be built long-term.
Reputation is the great differentiator between successful and unsuccessful people and companies.
Put others first during hard times and they will put you first during good times. We build our reputations by doing the right thing when it's hard, not when it's easy.
Every time you need to make a tough decision in your business, you should be asking yourself, "How are those around me going to be looking at this decision 2 years, 5 years or 10 years down the road?" With that perspective, it’s a lot easier to make the right decisions – the decisions that are right for everyone you do business with, not just you.
There are a lot of ways to optimize our real estate businesses during these challenging times, but if you stick to those five tips above, you’ll have a great head start on most of your competitors.