Great Topic…
First, I’m compelled to state the obvious; these are very personal decisions. What “works” for one just as likely will not for another. However, while absolutely true, to leave it at that is a bit of a “cop out”, on some level.
In fact, it may also contribute to legitimate frustration and additional confusion about how, why, and or, how well (effective) a scaled up version of the same business is, or could be. I’ll submit that it’s possible, and yet also concede that the scaled up version carries a greater risk for “shrinkage” and or inefficiencies. In reality, perhaps on some level, this is or has to be an acceptable consequence. It is also an excellent place to remain focussed and strive to avert this apparent forgone conclusion.
We can also start by acknowledging that we have many examples of “large” operators that are extremely flawed, and full of “what not to do” type illustrations. This could be used as part of one’s argument about not pursuing such scale.
That said, myself and a few others I’m in contact with have come to different conclusions. I’ll attempt to be brief about my experiences…
As a prerequisite:
We’ll assume that one has the DESIRE (big consideration from my perspective), to “scale up”. If so, then it’s a matter of analyzing and assessing the potential for loss from the Mom and Pop model (assuming a good Mom and Pop, which many are not).
Tony, Shawn, and Bernd in each of your posts are statements to which I believe there can be no challenge. Utilization of systems (for either large or small scale operations is critical). Keeping in mind that real estate requires a very LOCAL perspective. Maintaining a sizable respect for, and competitive advantage over, competitors in both the same niche and in all other products types is essential for a successful operation, large or small. However, as Bernd points out, these are fundamental requirements for a successful operation irrespective of its’ size.
To me, the secret sauce, as is often the case, comes down to the individual operator. Many Mom and Pops have very focussed, committed, and connected Operators. After all, the business, asset, Park (whatever you prefer) is likely a huge part of their lives and future (both financially and otherwise). The operator knows how long the street light’s are on, the sprinkler timers, how many people are currently “late” with their rent. What time the painter or handyman will be on site tomorrow, and what kind of truck he’ll pull up in. This sort of specific knowledge and connection to the Operation helps tremendously in terms of profitability, long term value, relationship with the local municipality etc. etc. This sort of relationship and detailed knowledge and focus is critical.
So, how many different/unique sites can one person, or (2) counting both mom and pop, realistically maintain this level of connection and involvement? To me this is the root question. To often this question is muddied with “other” considerations such as; risk reward, personal desire, peace of mind concerns, perhaps even an individual’s comfort with success. (Many of us have very different idea’s about this). In addition, as in many businesses, sometimes profitability is actually at more of a parity relative to the investment of time, capital etc at either end of the spectrum. Meaning that one may be “better off” to remain relatively small as opposed to find themselves in some version or the “middle ground”. Until a higher threshold is met, the potential profitability may not be enough of a reward relative to the additional risk and effort required in “the middle”.
(One such example…I went to a “central accounting office model” when I had about 300 units. At that time I decided to spend nearly $100k annually to hire an internal CPA/Controller. The decision sucked a huge amount of my previously free cash flow. I found myself literally working harder for less money. This was very difficult at the time. I can also, tell you that I believe that I would not have been able to successfully get to the volume I’m currently at without his involvement/assistance. I certainly do not regret the decision)
I believe this “middle ground” is an area many move up into, and then promptly back out of, with a severe distaste in their mouths. Let’s face it the business is not “easy” at any level, and not right for some at any level.
Tony-I have made many mistakes. Most of my experience has been gained at a high cost, similar to what you describe. I always attempt to learn from others when possible and not re-invent the wheel. That said, I don’t know in this business, or most others for that matter, another way to truly learn.
My decision to pursue scale was the result of the following conclusions. I have the desire. I’m willing to work harder than many. At this time in my life (I’m 37 now) I’m willing to take some risk (this tolerance continues to decline each year) to “build” a better future. I’m willing to re-invest a significant portion of profits I could otherwise enjoy now. I believe the biggest obstacle to a successful large operation is the disconnect that commonly occurs, I believed I could mitigate that with my personal passion and a strong “appropriately incentivized” team. The further development and utilization of systems designed “along the way” and modified for larger scale. The use of technology. The requirement that all things tangible (like the Income Statement), and the less tangible (like the appearance of the Community, and the residents, and area’s opinion of us) must be measured. We use extensive reporting and metrics in an attempt to duplicate the oversight and focus that the Mom and Pops may have. These include daily, weekly and monthly reports. A tremendous amount of communication, site inspections and assessments (by a principal/me) schedules, timelines deadlines. The establishment of goals related to occupancy, retention, utility recapture, resident satisfaction, budget targets, employee satisfaction/retention etc etc. Bottom line… a lot to monitor, oversee, guide etc. Also bottom line…very doable for anyone who’s committed to it.
I’m happy to continue to share specifics about my experiences and evolution in this business, with the disclaimer that I am not in any way attempting to convince or suggest that it is what anyone else should do. I maintain that these sorts of higher level decisions should be personal to each individual’s circumstances and comfort levels.