50% of businesses fail within five years, according to the US Small Business Administration. That stat probably doesn’t surprise, but real estate investors should analyze why failures occur.
The harsh reality is that most companies fail from within. Real estate is no different. That’s why it’s important to pay attention to internal risks.
Think about what internal events could negatively impact your business goals. Perhaps it’s losing a top team member. It could be letting emotions dominate the buying process. Or maybe you don’t have access to sufficient capital.
Every company has internal risks. The ones that win recognize and manage those risks.
So before an internal issue damages your real estate business, implement the right systems and processes to protect the operation. Here’s how you can mitigate internal risks and keep your investment business moving in the right direction.
Emphasize data-driven decisions
Real estate investment takes planning. It can’t be done as you go. You have to make a plan, establish an investment model, and find properties that fit that plan. Planning as you go leaves you vulnerable to mistakes, such as:
- Misjudging cash flow
- Miscalculating estimates
- Neglecting due diligence
- Paying too much
When you don’t plan, you could end up following your emotions rather than data. In real estate investing, you can’t make investments based on what you feel will succeed. When it comes to investing, hope simply isn’t a strategy.
“People are letting their emotions get to them in this market. They’re trying to make decisions with their heart as opposed to their brain,” says Nathan Trunfio, President at DLP Direct Lending Partners.
Especially in a market where inventory is tightening, you must exercise patience and follow the numbers.
“It’s more important than ever to ensure detailed due diligence and analysis on each deal. There are still some golden nugget deals available. You can make money when inventory is tight. It just requires more discipline in today’s market,” attests Trunfio.
Within your organization, focus the buying process on data. You want to have a data-driven culture. Research from Forrester shows data-driven businesses grow by 30% annually. Simply put, data-driven decisions deliver profits. And profits are the goal of nearly every real estate investment.
“Know your buy box and analyze properties that meet the criteria. During bidding, stick to your strike price. Don’t get caught going higher. You make money on the buy more than anything else,” adds Trunfio.
Take care of human capital
What’s the biggest internal risk you can mitigate right now?
It’s your people. Human capital is your greatest asset. If you don’t manage your people properly, you can miss opportunities.
As an article in Quartz notes, caring for your people enables you to recognize “untapped talent” and develop “better leaders, more effective managers, better decisions, and a greater return on investment.”
In short, pay attention to your team members. Make sure they’re in the right role and are happy. Ultimately, it’s their performance that determines whether or not your business succeeds.
Because without the right team, you can lose direction. After all, you can’t do everything as a business owner.
“The best way to mitigate risk is by having the right people. And you need to put those people in the right seat,” states Trunfio.
This is how you get your operation moving in the right direction. But how do you get the right people?
First, define your company culture and recruit the type of talent that fits that culture. Bring those people onto the team. Then, place each person in a role where they can leverage their skills and best help your business achieve its goals.
Implement the right system
How do you mitigate internal risk once you have the right team?
The importance of this can’t be underestimated. As a Gallup survey shows, companies with high employee engagement are 21% more profitable. Setting clear expectations can make or break employee engagement. However, only half of workers really know what’s expected of them.
You have to mitigate this internal risk within your real estate investment business. Once you have the right people in the right seats, you should:
- Set responsibilities: Clearly define what you want them to do. Tie these responsibilities to work goals.
- Define expectations: Make milestones and goals that align with each team member’s larger objectives and shared company goals. For instance, if you want to hire an acquisition specialist, what do they have to do every day to achieve long-term objectives for their position and the business as a whole? Do they have to review 5 deals per day and identify 10 good real estate deals per month?
- Inspect: You can’t inspect without laying out responsibilities and expectations. People respect what you inspect. Inspections and audits ensure you have the right people in the right roles, and that you’re going in the direction of achieving your plan.
With a proper organizational structure, your team understands what they need to do to complete projects successfully (on time, on budget, etc). Of course, all of this depends on active communication within your organization.
For example, when a property deal is presented to your acquisition specialist, what’s the expectation? You should lay out the process so the team can move forward with a deal efficiently. That could mean coming back with their analysis within one business day.
Actively manage your resources
Every organization has finite resources. In the real estate business, resources, especially human and financial capital, play a huge role.
After all, property flips are expensive and buy-and-hold properties require capital. You have investor shares to pay. A lack of financial capital can turn attractive property ventures into disasters. You must monitor:
- Personnel: Where is there waste? What could lead to decreased production?
- Budget: Are capital constraints holding your business back? Can you access more capital to achieve greater profitability? Where can you cut costs?
- Intelligence: How is data driving decisions? Are your systems well protected? Is outdated technology limiting operational efficiency?
- Physical Assets: Is there a chance of damage to any of your real estate properties? Are you working with the right contractors? Have tenants been properly vetted?
You should perform a risk valuation for each part of the operation. If you can, put this into a dollar amount. See where you need greater controls and monitoring. Establish a schedule for reviewing internal risks and consistently refine your process to mitigate those risks.
Reduce internal risk. Invest. And succeed.
Real estate investment, like any other business, deals with internal risks. From human capital to organizational structure to managing your resources, you can take steps to mitigate internal risks. This will put your team in a better position to make real estate investments that make you money.
One risk you can solve right away is the need for adequate capital. As a real estate investor, you have access to private loans with good rates and terms. Take advantage of what’s available. And drive your business forward.