Understanding Business

[Bryan P.]

He talks alot about aspects of business management. He says there's more than numbers to managing a business. There's:

1. numbers/finances
2. operations
3. sales

He infers to me that I really do well with the numbers, but I need to consider the operations and sales aspect of the business. The problem is that he has no experience running a "buy/hold" real estate business, so he doesn't necessarily know what to say when it comes to operations and sales.

Can any of you shed some light on these aspects of the business model? I bought my first rental property and the numbers are working out very well. I want to continue in the business but I need to educate myself on these various aspects. If I don't, I will fail. It's a must.

If you have any wisdom about the various aspects of the business and managing them properly, please advise! I know it's a broad subject.

-Bryan

[Bryan P.]

I meant to say I talk alot with my father-in-law who is a successful business person in our town. He runs a paving business, the leader in the county. He's teaching me about business management and the rest I have included above..

[Account Closed]

Your buy and hold real estate investing is better done as a business. Your father-in-law is right.

You may not have a traditional product to selling, but you are selling space. You want to have a product that is priced right in your market. You have to decide where you want to be in the market as well (high end vs low cost leader).

Operations is about how you run the business. There are many considerations in operating your rental business - lease agreements, maintenance, collecting rents, marketing vacancies, fielding tenant calls and many other issues.

[Vikram C.]

Are you asking how to manage the operations of a buy-and-hold residential business? What sales are you referring to? Finding tenants?

Much of business is just hard work, common sense, being willing to try new things, learning from your mistakes, etc. It also involves being able to deal with some uncertainty and being willing to take calculated risks. If you want to run a larger business, you will need to be able to recruit and train people so that you do not perform all the functions of the business yourself.

[Yan P.]

I want to add something to Vikram's posting. It's a quote that a successful businessman in my neighborhood once told me, sort of a mentor. "Always work on your business, never in your business."

[J Scott]

The terms "operations" and "sales" can be used in many different ways, but every business must deal with these things.

In real estate, operations involves the details of ensuring that your properties are put to their highest and best use, and remain there, generating as much long-term cash-flow/appreciation as possible. This could be the work you do to rehab a property, the work you do to find quality renters, the work you do to keep your renters happy and keep the properties in good condition, the work you do to market and sell your properties, etc.

From a sales perspective, real estate involves ensuring that your assets are generating profits for you -- either cash-flow and/or appreciation. Sales could be the process of renting your properties, selling them, developing them, etc.

Btw, in addition to the things you've mentioned, there are a few other aspects to your business that you I think you need to be comfortable with to ensure success:

- Forecasting Cash-Flow. Many business owners realize that not property forecasting cash-flow can put them in a situation where they can't pay the bills, but they ignore the other end of the spectrum -- without a good cash-flow forecast, you can't grow your business optimally either. To grow your business optimally, you must understand what your cash-flow will look like over a reasonable period into the future.

- Having a Plan. Without a plan, your business is going to run you, and you'll never accomplish your goals. There are different reasons to want to run a business (freedom, feeding your family, personal satisfaction, creating a legacy, building wealth for future generations, etc), and if you don't know what your goals are for running your business, you'll end up building a business that doesn't give you what you need from it.

- Know Your Market. To build a successful business, you need to understand your customers and their needs. But, it's easy to assume that your customers and their needs will be the same next year (and the year after, etc) as they are now. This generally isn't the case. You must constantly have your finger on the pulse of your market, and more importantly, you need to be prepared to change when your market changes.

[Bryan P.]

I'll have to learn operations as I go. I don't know what to expect-I just know that passive income isn't really passive. It's going to take work and effort.

As for a plan-I know that I want freedom. I want to grow my money and stop living paycheck to paycheck. I'm really only cash flowing 800/month after expenses. It's hard to get anywhere in life with that little cash flow coming from my job.

Is that a well enough defined plan? Be honest, please...

What should I look at when making a plan? Should I have time limits and concrete goals?

[J Scott]

Originally posted by Bryan Patton:

As for a plan-I know that I want freedom.

Are you sure? I know a lot of people who say they want freedom, but in reality they want wealth...

For example, you can achieve freedom by purchasing a very cheap property, paying it off quickly, moving in, and then building enough cash flow to pay for the basics -- food, clothes, used car, insurance, etc.

That would give you freedom from having to work for someone else...

The problem is, most people want more than that -- they want a nice house, a couple cars, good food, vacations, toys/gadgets, etc. This is over and above freedom and requires a good bit more cash flow than just simply having freedom.

So, do you really just want freedom? Or do you want more than freedom?

[Bryan P.]

JScott-

I guess I am viewing freedom from the perspective of not living paycheck to paycheck, or close to it. Right now we're close to it with only cash flowing 700-800 a month beyond expenses. It's scary and we both have masters degrees. It's nuts, actually.

If I made enough money not to live paycheck to paycheck, I would highly doubt that I'd raise my expenses dramatically. My personality doesn't allow me to buy luxurious things. Trust me on that one.

I just want to not be scared anymore. I'm sick of worrying whether or not an emergency is going to occur and I won't be able to afford it.

I have a 4 month old daughter and it'd be nice for her not to live like I did as a kid, worried about money. It would also be nice for her to have a decent start in life, unlike me who started with nothing.

-Bryan

[Vikram C.]

Bryan, freedom is a nice word but it is not a "plan". It is a goal (perhaps even a dream).

A plan is something that should be sufficiently specific that you can act upon it. An easy way to tell the difference is to ask yourself whether you can show your "plan" to someone else and whether they will be able to figure out exactly what you are going to do. If they can, it is a plan. Otherwise, it is something else.

BTW, do not assume that you can spend as little once you are wealthier as you do now. I do not consider myself an extravagant person but I am sure I would seem that way to people with less money. Your spending does increase as you make more money, although, hopefully, not at the same rate.