One of the mantras of the FIRE (financial independence, retire early) community is the owning of income property. With rare exception, investors do it all wrong, taking on extraordinary risk for no reason.
Side gigs are handled the same way. Whether you run a full-fledged business or a side gig, you probably make the same mistake real estate investor’s do.
Americans love to invest at home. There is a tendency for people from all countries to focus their investment dollars in the domestic market. The comfort of understanding the local business climate clouds the investor’s judgment. American’s are the worst. For decades I have recommended 70% S&P 500 index fund/ total market index fund and 30% international index funds for my American clients. This is still weighted heavily toward U.S. companies. The diversification in broad-based index funds with a third of the portfolio in international is a good mix in my opinion. Small business owners and real estate investors rarely make such a sound decision.
Stay Close to Home
I am just as guilty on this issue as you are. When I started my real estate empire (I owned way to darn much) I bought locally only. When I needed more opportunities to keep the empire growing I expanded the circle from the local city to the county to NE Wisconsin. Hundreds of buildings and not a one was outside NE Wisconsin! Stupid.
I see the same thing today. People want some side income to accelerate their retirement date so they buy a couple rentals locally. Unless you are lucky enough to live in a market where real estate prices are conducive to profits for investors, you are taking extraordinary risk to keep things close to home. Most markets are not prime for income property investment. It takes work finding the right property at the right price in the right community.
Imagine owning income property in Detroit in 2008. Your idea of diversification was to buy a handful of properties around town. Then reality set in. Real estate prices collapsed along with the local economy. Many areas of the city never came back. If you were lucky you might have owned properties in “good” parts of the city. Then again, areas of town where most income properties reside are not always the “best” parts of town.
Luck plays a role in our success. In my instance I invested heavily in the local market and sold before things went south. My idea to sell was based upon burnout, not some high level of intelligence of when to buy and sell real estate.
Spread It Out
Most investment property owners in my office make the same mistake I did. It usually works out because NE Wisconsin has been a forgiving real estate market for the most part. RE values declined around 2008, but rents and occupancy rates stayed solid.
A few clients are smarter than me. They invest in income property over a national footprint. Today, most markets are not priced for income property ownership. The numbers just don’t work. A serious investor understands her local market might lack opportunity for investment. If she is smart she will look to other markets for opportunities.
Keeping it close to home is comfort food to the investor’s mind. We can visit our property anytime with little effort. We can save money by doing repairs and maintenance ourselves. We can manage our own property, too. These actions bring down the cost of ownership while valuing your time at a low level. (Remember, every property cash flows if you pay cash for the property and do all the work yourself.)
Smart investors hire the work and management done. Smart investors invest and refuse the siren’s call of doing every job themselves. (Jack of all trades, master of none.)
Investing in communities where rents justify the purchase price of a property is vital to successful real estate investment.
The longer I write this blog, the more people I meet who own several properties in several areas of the country. The wide distribution of their holdings increases the chances they will always be successful in this area of their portfolio. Issues with one property will not spill into other properties. Regulation changes in one city will only affect one property, not the entire portfolio.
Best of all, by having RE investments a great distance from home, the tendency to “take care of it yourself” is diminished. Property managers are required when investments are spread out. Like an index fund, you let someone else handle the bull work. You are the investor only. You buy right and let the managers do their job while you buy more awesome investments.
Do as I Say, Not as I Do
“Forgive me Father, for I have sinned.”
It has been a while since I went to confession. Actually, I am not Catholic so I never went to confession so now is a good time to clear my conscious of past sins.
You heard my confession on concentrated real estate investments. It gets worse. Business owners focus on local markets more than RE investors! Sometimes it works out. Then again, sometimes 2008 purges a great number of businesses, destroying a small business owner’s lifetime of work.
Once again I was lucky. I started my practice and focused solely on the local market. In the early days any out of state tax returns happened by accident. By 2000 I knew this was an issue. I expanded my reach to all parts of the country. Little did I realize the importance of such a decision. By increasing my skills preparing taxes in all the states, I prepared myself for the day when this blog would deluge my office with non-local tax returns. Good thing I had experience to draw from.
The hard part for my firm is hiring people qualified to do such returns. Employees make the same mistake of limiting their skill sets to a local market. Then reality sets in. Mix and repeat and you have a clear picture of the timeline of most people’s lives.
By 2005, nearly a third of my tax clients were outside the local area serviced by my practice. Today over half my clients are non-local.
Show Me the Money
Why do I share this information? Simply, profits. The comfort gained by remaining local only not only increases risk of failure, it keeps profits lower.
We will use my practice as an example again. Preparation fees are quite reasonable in my vicinity. This is great for clients, but terrible for the owner if you want to earn a decent living doing what you love. Certain clients are more profitable than others. Other areas of the country have better preparation fees.
Let me be clear, this is not about screwing the client over profits! Higher fees allow me to hire more people at a higher wage, meaning I can attract more qualified tax professionals. Even offering a higher wage doesn’t guarantee top-notch tax pros. God knows I have struggled finding people performing at my level in the tax arena. (Imagine the difficulty in finding high level professionals for seasonal part-time work!) But if I don’t offer the higher wage (and have the resources to do so) I will never attract AND keep high quality people.
My fees are not much different for clients in different states. My fees ARE higher when people have larger returns that include multiple states. Revenues and profits rise because I have a much larger pool of profitable clients to draw from. A local plant closure will affect only a few clients. As a result my firm is more recession proof than ever before.
Readers of this blog know I tend to be a slow learner. I want to hold on to preconceived notions as long as I can before fessing up. My real estate holdings and tax practice concentrated efforts locally. Not so with this blog.
Admittedly, it is easier to think with a larger geographical footprint with a blog. Readers come from all corners of the world. I now have tax clients from Russia, Peru, Spain, the United Kingdom, Canada, Australia and more. Understand, these are Americans living abroad. Over diversification can spread a firm too thin. I do U.S. taxes only! And a lot of Americans live outside the U.S.
Can you image how stupid I would look if I wrote this blog for the local community only? My readership could be counted on fingers and toes. Local folks don’t always appreciate my humor for which I humbly refuse to apologize. The entire population of the county I live in is under 50,000. My monthly page views are approaching that level.
Building a wall around yourself only limits opportunities for you. Your competitors will not subscribe to such limitations. To build a secure investment property portfolio or business you need to cast a net. The larger the net the more fish you will catch. It’s a simple law of physics.
I can see it already. You, my dear readers, will be doing some soul searching today as you review your investments, side gig or business. It’s okay. I was there, too. I cleared a path as I stretched out into the great beyond. I’ll be waiting.
My previous post on delegation had a comment from John McCarthy with the following request for advice:
I would be interested in some of the behind the scenes (nitty-gritty) detail of the things you are now delegating. Like you, I am running a tax preparation firm. For the past 15 years it has been a side business, but now I am putting my full effort into marketing and expanding it. I spent a year building a financial planning practice at XYPN but decided I could do more good in the world by helping other financial advisors as a tax consultant and a safe place for them to send their financial planning clients to for tax preparation. I am really enjoying working with financial advisors to provide proactive service to their clients.
If you were advising a new business owner of a tax practice, what would be your top three pieces of advice? Would love to hear your perspective!
I felt my answer would serve more readers than just business owners and the answer in rather long so I decided to make it a special post. (Two posts in one day! Wow Mr. Accountant, are you on something? Why, yes. Yes, I am.)
First, let me address how I structure delegation in my office. Delegation is more than just taking stuff on my desk and throwing it on somebody else’s. If you want work done right you need to delegate to the proper people. The best delegation keeps projects from your desk in the first place.
I will use tax returns as an example. When clients bring in their tax return the front desk scans all the paperwork and puts the return in one of three drawers marked: A, B, and C. “A” tax returns are easy and any preparer can do them. A limited review of these returns is conducted before distribution to the client. Advanced preparers (that means me and any high-paid employee) never touch these returns. “B” tax returns make up 60% of the work load. Advanced tax professionals handle these returns with review, except for me. Novice preparers (do I have any of these?) can data enter these returns, but an advanced preparer finishes the return. The “C” drawer contains the most complex tax returns and comprises 25-30% of clients. Anyone can data enter the material, but an advanced preparer finishes the return with a review by me. If I prepare the “C” type tax return, my work is also reviewed.
Bookkeeping and payroll never enter my office; I have a massive allergic reaction to that kind of tedious work. The truth is I can hire bookkeepers and payroll clerks all day long. So I keep control of my time by never accepting recurring work on my desk. A steady flow of bookkeeping or payroll will tie me to my desk with low margin workload. I will do the “real” retirement thing if I am ever forced to handle such work.
Karen, my office manager, and Ashley, my administrative assistant have authority to make decisions. Every phone call does not have to reach my office. By granting authority I create a shield between me and nuisance sales calls.
Phone calls can destroy your life. My cell phone is usually off unless I expect a call. Sorry. At the office, notes in my mail box pile up. I handle phone calls in blocks so I spend the least amount of time on the phone.
Another thing my office started doing to save time is screening new clients. Below I will show you how to get lots of news clients. These new clients will wear you out if you don’t control the flow. Karen and Ashley contact most new clients and pre-approve them. Most of the time they can handle all the setup work the client has, eliminating any need for me to be involved. Consulting appointments are set up on my scheduler so I can plan and control the time involved with each client I must work with.
My clients rarely face a tax audit because we audit proof every tax return (I guess I have another post to write). However, we take audits from off the street and from other accounting firms. When you are in over your head and every accounting firm in town sent you away and law firms say it is hopeless then we are your guys. In other words we take the worst of the worst audits. Our success rate is pretty good considering the type of audits we handle.
Three Pieces of Advice for Business Owners
There are a lot of moving parts to a small business. I’ll try to stuff as much as I can into three nuggets of advice while keeping this post reasonably short.
- Get more clients than you want and then fire the ones who don’t fit in. Sounds brutal! It is. Clients leave for a variety of reasons. Having a few too many clients allows you to pick the easiest clients to work with (and the most profitable) and firing the rest. Be gentle when you fire. I usually send a letter stating I have too much on my plate to handle their account in the manner it deserves. Sometimes I find another accounting firm who will take the client and provide an introduction. My competitors know I am not out to harm them; I am a source of new clients. Clients from hell never get a referral. To date I have never had a client complain about being let go or beg to stay. Also, don’t take every client who walks in the door. If something feels wrong, walk.
- Focus on the type of client you want. If you want business clients give presentations to the local Chamber of Commerce, Optimist Club, et cetera. Go where your client is. You don’t talk about taxes if you want golfers as clients; you only attract other tax people. (Witness this blog.) You can’t be a master of the entire tax code. (Only I am that good!) A great demographic to chase outside business owners is landlords. These taxpayers need a good tax professional considering all the new cost segregation and tangible property rules. Lots of good speaking material there to acquire new clients. Focus on certain taxpayers and get good at that area of tax code, including reading regulations and tax court rulings.
- Learn to say no. This is really hard. You want to help and you know how to help, but you are only one person. Over-extending only means all your clients suffer; a lesson I had to recently relearn. This past tax season I had close to a thousand ex-pats contact me to prepare their return. I said no to all of them. I can do the returns and know how. My problem is time. I want a life outside of work and have a family. Ex-pat returns do not fit nicely into my office structure. My focus is on small business, landlords, and investors. That is a full plate for a small accounting firm.
- Under promise and over deliver. As an accountant I sometimes have willful math difficulties. I promised three pieces of advice and here we are on four. It is not always possible to over deliver, but I always try. When it doesn’t happen I review my office workflow processes and modify until I keep my promises and give a little something extra.
There many are more tips on how to run a successful business that one small blog post cannot cover. Each business is different. Always keep your eyes open for new ideas to improve your practice. Read. Read a lot. The library, and even investing in a few books, is a great investment. Your time is valuable. Control it. If you lose control of your time doom will follow. Good luck. (Luck has nothing to do with it.)