Growing a real estate portfolio with a large purchase is a daunting task. It has the thrill of a successful outcome tied with apprehension of taking on something so large, usually in debt form. For many investors its the apprehension that prevents them from acting on it. There is a limited few that dare to go big in this industry. This is why most larger buildings end up being owned by “the same four people” in a certain town or city. People usually end up admiring these people saying “If I only had the guts” or “Man I wish I could that” as they walk by the buildings. But they never will. Because these are the same people that focus on the failed expansion stories that seem to be routine in corporate business news.
At one point in our lives, we’ve likely read a news story about “Company X” going out of business because they expanded too quickly. The story will tell you that 3 years ago Company X bought “Y Company”. It will state that Z number of people that are currently employed by the now merged company are out of work and have lost their pensions. But yet they won’t offer any true explanation as to why it occurred beyond the expansion being “too quick”. In reality it wasn’t that the expansion was too quick it’s because it was executed sloppily. There’s no calendar time frame on being successful in expansion. It comes down to execution. A failure to execute the merger effectively by proactive and changing things that don’t make sense or they sink the success of the acquisition afterwards by paralyzing themselves with fear. What kills many of these companies are the same things can kill real estate entrepreneurs when they expand.
#1 Expansion Without Forethought
In the business world and as real entrepreneurs some people tend to approach expansion…well…like a bat of hell. Out of the gates they are zig-zagging around, reacting to the major urgent items that are thrown at them that need to be done to close the deal. They’re gathering documentation, signing papers, reviewing final drafts of contracts. They are reacting to what the transaction needs to happen. They aren’t taken any time to look ahead and plan for the day after the acquisition. They believe they have all the time in the world to change things after the ink is dry.
What they should be doing is reacting to the urgent items in tandem with proactively working towards things that need to be done to set-up a smooth and successful acquisition. As a real estate entrepreneur being proactive may include things like creating your property plan and evaluating the current logistics of the property. I.e. On-site staff, door key systems, storage spaces, recurring expenses. Looking at all areas of the operation for efficiency and redundancy as well as how to best adapt the property to your current administrative operations.
When buying a new property don’t fall into a pattern of doing things or keeping things only because it was established under the old regime. ‘They used it/did it so therefore it must be necessary for you.’ This one way to inadvertently leave money on the table or lose money on unneeded services or overpriced vendors. It might be administrative tasks that don’t meld into your process so they should be eliminated or modified. Or contractors that you don’t communicate effectively with so projects are taking a little longer or not being done to your standard. It also creates a more cumbersome operations system that decreases the entire portfolio’s efficiency, not just that one property’s. If you fall into the trap of “there must be a reason it was done this way” or “they used this person because they knew the building” you’re starting down the path of the many failed mergers of Corporate America.
#2 Expansion Paralyzation
The other reason for expansion failure arises from the after acquisition glow which turns into acquisition terror. They wake up one day rather sobered from what they’ve done. They’ve purchased a $500,000 property….*gulp*. In this sobering light they become scared, fearful of failure. They are so obsessed with the risk they have taken that they become over-determined not to become a statistic of a real estate failure. This usually presents itself in cult-like worship of their bottom line. They begin pinching every penny to build that nest egg to astronomical sizes so they can pay the bank if (god forbid) the property starts to fail. They opt for cheaper labor and forgo regular maintenance for the $75 here or $400 there all to ensure that they don’t fail. They put laser like focus on reducing cost. Overtime, as they had predicted when they started their Rainy Day Crusade, their property does begin to fail. People are moving out, vacancies are taking longer to fill, and the rents are slowly, slowly going down. It’s not the economy or the market. It’s the consequences of the real estate entrepreneurs overzealous attempt to not fail. The quality of units has gone down and the property has a new less desirable reputation. The rents they had when they bought the place now become overpriced. And it spirals from there…
Being overly focused on the bottom line can create low tenant satisfaction. Cosmetic repairs aren’t completed on the building, or broken items are replaced with inferior quality items. Tenants become increasingly inconvenienced by mechanical breakdowns because of routine maintenance being put off in addition to buying inferior products. They are no longer getting “what they pay for”.
Reaction Mixed with Proaction While Avoiding Paralyzation
If you decide to make a large move, plan your expansion and don’t just react to it. Make sure you are doing more than just reacting to demands of the transaction and are actually evaluating and creating plans. Don’t do certain things because that’s how they were done prior, evaluate everything in the potential acquisition’s operation. Once you’ve acquired the property don’t over-correct out of apprehension. Refuse to allow yourself to be so focused on the bottom line that you neglect other critical areas that determine the property’s success. Trim costs when it seems reasonable but don’t become a penny pincher that drives your own property into the ground.