Real estate is often touted as a career where your ability to earn is capped by only one thing – your ambition.
To a large extent that is true. Becoming an agent or building a real estate business offers the potential to become very financially successful.
Too often, however, somewhere along the way that pursuit of success becomes about vanity metrics rather than personal business sustainability.
It’s a phenomenon I’ve seen time and again and previously addressed with the phrase ‘volume is vanity and profit is sanity”.
To recap what I mean, this occurs when the agent goes after a high volume of listings or an increased rent roll but in the process fails to account for the impact that will have on the bottom line of their business.
And in an industry where we measure success in listing volumes and rent roll size, it’s an easy mistake to make.
It’s also one that can be readily avoided by asking yourself 10 simple questions. But first let’s just explore why an increase in listings or a larger rent roll does not necessarily equate to improved profitability and a higher financial return.
The law of diminished returns
Regardless of whether your focus is property management or sales, there comes a tipping point in every real estate business where increasing the volume of what you currently do will require greater expenditure or will see your profitability decline.
And this can occur in a couple of ways. For example, in order to attract more business, a property management company might reduce their management fees.
Sure, they now have more properties under management, but each is less profitable.
Or an agent might seek to increase their listing volume, so adds extra team members.
If the volume of listings does not cover that expense and more, each listing is now less profitable.
That said, let me be crystal clear, adding to your team to grow your business is not a bad thing.
However, as you add team members, you need to carefully consider the KPIs you need to reach and have the profitability of your business front of mind, which is where the following 10 questions come into play.
What are your fixed expenses?
Every real estate business has fixed expenses ranging from the cost of office space to staffing, marketing and more.
You should know exactly how much your fixed expenses are each year, and each month as this is the baseline of your business.
Is each of those expenses necessary?
Take a good hard look at exactly what expenses you incur each month, and ask yourself, is it necessary?
Some expenses are non-negotiable, but others that might have seemed valid a year ago, such as a subscription or software you no longer use, could go.
What is your break-even point
When you know your business expenses, you have a clear understanding of your break-even point.
You know exactly how much money needs to be brought into the business each week, each month and each year before you start enjoying a profit.
How can you reverse engineer?
Reverse engineering is when you look at the results you want and work backwards to identify what exactly needs to happen now.
When you know your expenses and break-even, reverse engineer the activities you and your team need to undertake to achieve the profit you desire.
What can you outsource?
Are there tasks within your business that you can outsource to allow you to focus more on dollar-productive activities?
Weigh the cost of this outsourcing against the money and time you lose by completing that task yourself or in-house.
What is your most effective lead source?
Every agent and property manager should have an acute understanding of where the majority of their leads come from – whether that’s word of mouth referrals, social media, letterbox drops, etc.
If you don’t have the data on where your leads come from, look back over your listings for the past year and trace each one back to where it came from.
How can you amplify that lead source with minimal cost?
Once you know your most effective and most affordable lead sources, double down on those strategies and seek to amplify them for minimal cost.
How does your business profitability compare?
Try to identify other successful and more efficient operations that you can emulate. What strategies do they use and why do they work?
What is the market capacity?
This one is important, and too often agents and property managers fail to ask this question; is there enough business in your area to achieve your business goals?
Who can support you with knowledge of business operations?
Business is not a journey you should have to navigate alone, so seek out people and professionals who can support you as you seek to achieve your goals.