Understanding Your Business: Look At The Bigger Picture
By Paul Esajian on December 15, 2014
One of the biggest mistakes that many investors make is not looking at their business like a business. Instead of looking at how you can purchase the next property, you need to look at the bigger picture. Every lead you generate and dollar you spend will impact something else you do in your business. If you understand that everything you do is connected and has an impact on something else, you get so much more out of your business. Anyone can buy an isolated piece of real estate, but if you truly want to have an investing business, you need to treat it like one.
To get the most out of your business, you need to know what you really want out of it. If you only have the time and desire to close one or two deals a year, you would run your business much differently than if you were closing multiple deals a month. Your goals should be in line with how you run your business. You may want to make a million dollars flipping houses, but you need to generate leads and contacts to do so. These will either cost time or money, which will have a direct impact on your goals. The real estate business can be conquered in several different ways, but it all starts with deciding what you really want out of it.
Once you have a clear vision, you can map out the necessary steps of how to get there. The action part of your business plan is always more important than your goals. This is where reality often sets in and you see that the business may not be as easy as you thought. Where and how will you meet new contacts? What is your marketing budget? Do you have access to private money? Do you want to buy and hold or flip properties? All of these questions, and many more, should be answered before you really get going. If you do not treat this stage as if you were running a business, you may end up needlessly wasting money or not maximizing opportunities.
Even if you have closed a few deals and think you have the business figured out, you need to keep the business side in mind. There are many investors, and businesspeople in general, that do not know all of the expenses they have every month. Your expenses have a direct impact on your bottom line. If you are wasting money on marketing that isn’t working or on areas of your rehab without getting a good return, the money could be allocated elsewhere. Every expense you make should be documented, either in an Excel spreadsheet or any other accounting method you feel comfortable with. With the increase in technology, it is easier than ever to stay on top of your budget and expenses. A simple Excel spreadsheet detailing any expenses you make for the month could be a real eye opener. In some cases, you could be wasting hundreds of dollars every month without even realizing it. If you are spending money to purchase real estate, you are running a business and need to know where your money is going every month.
The other side of the expense ledger deals with income. With every deal you close, you need to know where that money is going. Obviously, there will be taxes that will have to be paid either quarterly or at the end of the year. Before you spend any money, you should consult with your accountant to see how much is really yours to spend. If not, you can end up owing quite a bit of money when Uncle Sam comes calling. You may also see a much smaller check at closing than you expected. You need to stay on top of what the closing costs, expenses and splits may be that has an impact on this. Whatever your net profit is you should track where this money is going. Are you going to reinvest a portion back into your business or use it for personal spending? What was the cost to generate the lead for your most recent closing? Is this a one-time source or can you tap into this again? Closing deals and collecting checks is the end goal but if you are not smart with what you do what these checks your success will only be short lived.
There are many small things that a successful investor will do with their business that the average one will not. In most cases, this starts with viewing their business as a real business, regardless of how busy they are. If you can start with only tracking your monthly expenditures, you will be far ahead of the game. From there, you can look at where your money is really going and in which areas you can improve on. You never want to get in a situation where you suddenly get too busy and become unorganized. When this happens, it can be much more difficult to find the time or energy to break down your business. If you have taken the steps to open up a business account or an LLC, this should be just the beginning of running your business. Once you view your business like a business, you will start getting much more out of it.