Saturday, October 22, 2011

Start With Consulting

I have often heard the lament “I want to be successful. I know owning a business is the answer but I don’t know what business to start?” Standing at the starting gate with no clear path in front of you is a daunting feeling.

There is a surfeit of motivational speakers who can address the various psychological barriers and provide thought provoking considerations about starting a business. At the outset I’d encourage you to read or listen to as many as you possibly can. Sooner or later, however, you will have to choose a path or stay in your rut.

I’ll cut to the chase and recommend you start with consulting. It is a low overhead business; essentially zero hard costs. Meaning most of the money you earn is available for employee and/or shareholder compensation. That is why so many people confuse consulting with employment. I’ll explain why my path started conventional but the success part only came to me when I consciously embraced an unconventional approach. My outcome may address your question.

Unfortunately I started late. I remained an employee until I was 48. My biggest regret is following the conventional plan laid out by society and not taking charge of my circumstances earlier. The formula is Go to school – get a good job – work hard – retire and enjoy the benefits. That’s the plan modern western society has drilled into us… it’s conventional and 90% of us follow that plan. Sadly I’m convinced the plan doesn’t work for most of us. Give yourself this test: How is it working for you so far? My consulting career is what got me out of “the formula” and on the path to building other more traditional businesses.

Education is important because you need something on which to build a consulting career. If you don't want to embrace education with vigour and intensity, you reduce your chances of success. You don't have to become a genius but you have to embrace thinking more every day. I changed technical careers several times in my 24 years in the rut… all to no avail. So education isn't the answer, it is just a necessary part of the journey.

During my early years, I was exposed to consultants a number of times. I simply thought consultants commanded high fees because they knew everything and were more highly educated than me. My initial enlightenment came when I started work as an employee at a consulting firm. Overall, I am very thankful for that opportunity to learn how the consulting business works. As everywhere, I met some fine people and some nasty people there. The key thing was I learned that some were a dumb as a plank, but were still successful consultants becuase they embraced thinking and learning. So I conciously embraced learning about marketing, on-the-job performance, networking, presenting the corporate brand & image, meeting customer needs, solving problems from a business perspective not a technical perspective, a corporate resume, and managing customer expectations. I was able to learn all the components of successful consulting while being paid a salary; just because I watched, paid attention, and learned from those who were already successful.

Specifically, I was in IT consulting but there are a growing number of other fields being outsourced these days. A budding entrepreneur should seriously investigate if there are opportunities in your field of endeavour that could form a foundation for a consulting career. IMHO, modern businesses are embracing more and more contracting and outsourcing in all facets of their business. They are deeming everything not in their core business to be an expense worthy of contracting out. If someone can obtain the skills to effectively deliver that service; their consulting business is born.

This is all pretty conventional stuff and some employees even stay at this “contracting” stage forever without realizing they can learn from the opportunity being presented by the consulting company.

So, of course, once you think you understand how it all works, the first rumblings of business success come when you step away from being an employee to become a one-man independent consultant. You can incorporate a company, throw up a website, buy some business cards, hustle your first contract and you’re in business by the end of the week for negligible cost.

This is where unconventional wisdom starts to appear. I alluded to it in a post a few months ago. You can keep at that cycle and you will be handsomely paid for doing so. If earning handsome wages is your goal then you have arrived and many people stay at this stage for the rest of their lives.

And BTW, I consider trades as just another name for consultants. In my investment sales career many years ago, the first time I ever met a truly rich man; he was an unassuming electrician with a small fleet of trucks and workers. He had an astounding mass of cash, securities & other assets and no debt. So if you are a tactile learner and like working with your hands, it doesn't preclude you from becoming a successful "consultant"; you will just go by another name - that of your particular trade.

Back to the story; after becoming a consultant, unconventional wisdom says don’t stop here but take the opportunity to learn all the ancillary tasks associated with running a business. Despite still being self employed (Step 2 on Kiyosaki’s ESBI progression) the consultant role is a great prep school to running a larger business later. You can learn about business revenue, taxation, marketing, sales, contracts, banking, IT, vendors, finance & legal, education, accounting, conferences & travel, invoicing & receivables, collections, effective networking, and brand presentation.

Remember you are paid handsomely as an independent consultant while you’re learning all this. You are in a sweet spot. But keep in mind Jim Rohn’s adage that wages make you a living but only profits make you a fortune. A a consultant still makes wages.

So far, this has been a low risk progression from employee to consulting to independent contractor. But you are still in the middle ground; you have some freedoms and are master of your dominion but you are still at the beck & call of a client for 8 hours a day. You’ve got a single solid foundation but recessions and other risk factors lurk on the horizon. One of my businesses, Brock Consultants teaches people about living well and prospering in this realm.

There are two measures of whether you’re self employed or you’re in business. As a one-man consulting firm you don’t meet either of them:
i) You can’t leave on a two month expedition to Antarctica and expect to have your business generate increasing revenue while you’re away.
ii) You can’t sell your consulting practice because it has no physical assets or revenue streams someone could purchase.

It is rather obvious and even conventional to diversify with some of your consulting revenue. So we’re right back where we started “I don’t know what business to start?” However, now circumstances are different. You have seed capital and a primary revenue stream to nurture your second business to maturity. Some entrepreneurs jump straight in and grow revenue from a cold start at the same time they are living off the proceeds; that is a hard balance to achieve. Instead, you’re quite comfortable with your consulting income covering your living requirements and more.

So now, your are better prepared to start work on your fortune. Pick something you can launch part time; keep your consulting income as long as you can. It will get insane working full time as a consultant for wages and part time on your fortune but nobody said becoming successful was easy. Making good choices for this second business will be a topic for a future post.

In summary, my unconventional advice for getting into business the low risk way is to start your empire with a consulting practice and grow from there.

Tuesday, October 18, 2011

Timeshare Investments

This is another investing tip for the next recession. My accountant, who also happens to be one of my real estate business partners showed me this one.

We’ve all heard the pitch to attend a short seminar to receive a free TV, lunch, or stay in a nice hotel or even an exotic location on the cheap. For those of us who said “OK” we discovered the real definition of high volume – high pressure sales. After demonstrating the will power of a freight train in saying “No”, you are unceremoniously dumped in a parking lot to catch the bus back to your vehicle. You feel like you were mugged. Welcome to the world of timeshare sales.

Timeshares are common all over the world and for the most part are very attractive, sturdily constructed and well appointed venues in highly popular locations. My personal problem with them is the upfront capital commitment. It ties you down a bit; you feel obliged to either take vacations to the same place each year or trading points for another similar type of venue in another location. Some people really like going back to places, and that’s OK, just not me.

So to avoid the continuation of the mugging process, needless to say, a lot of people purchase timeshares that don’t really want, need or even use them. But they are saddled with the annual maintenance fees to keep them because timeshares are not easily liquidated… until a recession hits.

This is where the unconventional thinker is rewarded. When an economic downturn finally grips the proletariat it causes a stampede for the exit. And as with any stampede, rational thought goes out the window. The masses see the sky falling and immediately bail out of their assets just to cut their operating expenses and/or raise capital. The unconventional thinker, on the other hand, has been studying and selecting the truly valuable members of this collection of assets. His powder is dry and he is just waiting to take his shot to bag them at the lowest cost.

If you can get past all the hunting metaphors, you can pick up any number of timeshares really cheap at the right time.. They abound on EBay, Kijiji, sales websites and other general sales locations. They are particularly appealing just before December 31 when the owner will be tagged with the annual maintenance fee.

And by cheap, I mean irrationally cheap. When this last recession was just starting to bite in 2008, my real estate partners and I picked up six of them for an aggregate total price of about $80; two in Anaheim near Disneyland, two on the strip in Las Vegas, one in Banff and my personal favourite in Fairmont Hot Springs BC. Some were priced at $1, a couple at $20 and the highest was $35. These were essentially token prices by irrational people simply to offload the responsibility of the annual maintenance payments in the neighbourhood of $500 per unit.

In fact, I'm sitting in the Fairmont property as I write this. I use it as an annual retreat for strategic planning of my businesses.

We placed the ownership of these units in one of our real estate corporations so there is offsetting revenue to pay the collective $3,000 or so in fees. Our intent is to sell these 6 weeks for $1000 each during normal years and make a profit. Since they are such a small percentage of my empire I haven’t yet taken the time to build a proper marketing website to do that… I will get to it someday.

If you don’t yet have any real estate corporations, you could add them to your existing business corporation as the seed of your future real estate investment portfolio. They would begin to make travel for real estate purposes a deductible expense to your business if you want to start growing that arm of your empire. You should transfer them later because you don’t want passive real estate cluttering up your regular business.

In the meantime, as this economic expansion takes its time to get going, the four of us have been using them amongst ourselves and families personally as holidays at cost. We donated a few to charity fundraisers, used them to investigate & locate further rental property investments, and even entertained our potential rental real estate investors in them. They are basically tax deductible expenses for our real estate ventures and we got them for a song.

So, my fellow unconventional thinkers, you should start doing your research and get ready to buy or add to your collection for the next recession. There may be some more come available if this “double dipper” in the immediate term comes to pass. Worst case, the next recession (i.e buying opportunity), should be here around 2018 give or take a few years. I’ll be selling mine to the conventional thinkers during the boom that will happen immediately before the next recession.

Monday, October 10, 2011

Remote Property Management

In an old post in August, I recommended rental property investments in the US. This time I’ll expound on some of the issues we faced and solutions we implemented. These are in somewhat random order and you’ll need to sequence them to fit your own circumstances. These are all non-financial. I’ll leave those challenges for another day.

1/ Turnovers are when an existing tenant leaves and the property needs to be filled by a new tenant. In my experience, this is what will eat you alive in remote ownership situations. By definition in remote property management, you have outsourced the task of getting new tenants because it isn’t practical to expect success with a long distance approach. There are also costs; re-keying the locks, cleaning, damage repairs, advertising, utilities, ongoing activities (lawn or snow), assessing your appliances, opportunity for minor maintenance updates, and so on. Your property manager will continue to charge his fee. This is just like long term profitability in the consulting business. You are far better to have a high utilization rate (long term tenant) than a high bill rate (the monthly rental rate). Do everything you can to keep your tenants happy once you have a good one.

2/ Make the choice to purchase multi-family properties (duplexes up to small apartment buildings) rather than single-family properties. This advice is simply to diversify a percentage of your revenue stream. When a tenant leaves, you still have revenue coming from the other units to cover expenses while you go through a turnover. With only one tenant in a single family home, it is a cash call to your wallet right away.

3/ When purchasing apartment properties, you should look at those with two bedroom units. They are rented by families and are generally more stable than one bedroom units which are preferred by single and more transient tenants.

4/ We have an “efficiency” (termed a bachelor in Canada) in our apartment building for which we can’t find tenants. In exchange for doing small repairs, upkeep, lawn mowing and snow clearing we waive the rent for a fellow who lives in our “unrentable” efficiency. We basically turned a necessity into a virtue. We gave him a new snow blower and lawnmower along with a small petty cash allowance for consumables and he is very happy. We found him through a notice in a church frrequented by one of our tenants. That's a good reference in itself and you can help someone get on their feet.

5/ Getting a property inspection before purchasing - this may seem essential and normal to home buyers in Canada but our first round of properties were single family homes; some with prices under $10,000USD. We just didn’t bother because spending 10-15% of the sale price to confirm the structure seemed unnecessary. It would be cheaper just to walk away from a bad purchase and write off the purchase price. We were only caught by a surprise once; with roof issues that were covered by snow. The replacement roofing was about twice the cost of thee inspections so we just took it on the chin. Generally our apartment buildings are more expensive (up to $100K each) so we do inspections routinely on them. We have walked away from two because of the house inspection results.

6/ Managing your Manager - Again by definition, you don’t live in the city where your rental properties are located. In those circumstances this advice is a necessity. And just like employees or other vendors, if you are not managing your property manager, they will start to take liberties. In the end this is your money and nobody cares more about it than you. However, finding a good property manager in the first place is a challenge. You need three basic things provided to you;
i) punctual, accurate, reliable & thorough financial reporting.
ii) timely triage on all the first line maintenance calls from tenants (you need to give them a discretionary limit on the budget for emergencies)
iii) handling of tenant turnovers, advertising, screening, evictions and so forth

7/ As with any vendor to your business, you need to pay them a fair fee to do all this, so don’t be cheap. Too many people in their own drive for profits, forget the old maxim about a fireplace... you have to put the wood in before you get the heat. In our lower middle class neighbourhoods in Dayton, Ohio that rate is 10%. In higher rent areas it is more like 5-8% as it is in Canada. Profound bit of advice: don’t accept a part-time dabbler. You will get what you pay for! The realtor that sold you the property may want to call himself a property manager but he is not. We used the tedious trial-and-error method. We hired & fired three before we settled on our current one with whom we eventually established a long term relationship.

8/ On the other hand, even when you hook up with a good property manager; you still need to "trust but verify" (see point 6). Any property manager will have an opportunity to charge you for a number of items that may not be required. Review your monthly statements in detail and confirm everything was or gets done as paid. Your review keeps everyone honest.

9/ Personal visits – you should plan the cost of an annual visit to your properties. It is a tax deduction! Technically, you aren’t supposed to work on properties (even your own) while visiting the US, but doing a few handyman things can save paying your property manager to do them. We haven't had any proiblems crossing the border even with service trucks & tools. During these visits, you can often resolve issues with or between tenants, re-align the activities of the property manager to your intentions, assess some major pending expenses, clean up the handyman repairs, refresh personal relationships with any vendors and just observe the general state of affairs. Face-time is worth it in many regards. There are 4 partners in our little group of adventurers. Only one of us has gone down to Ohio each year. I’ve been meaning to but when it comes up I’m always seem to be committed to administrative duties somewhere else in my little empire.

10/ Diversify to additional properties in different city markets. This is an extension of my model for diversified businesses. However, one caveat is do not diversify so much that you dilute the economies of scale. You need to reach a critical mass of “doors” in a geographic area to make your property management costs reasonable. We have 8 doors in Dayton and have reasoned out that we need more. I don’t know the magic number but suspect it may be about 12-15 doors before we get full economies of scale on the property management expenses. Then we might start the whole process over again in another area. As soon as we add another apartment building or two in Dayton, we may switch to Texas... good potential with oil & gas industry going forward.

I hope 10 tidbits is enough unconventional wisdom for today. Until next time.

Thursday, October 6, 2011

Investing in Recessions

With all the hoopla in the financial markets right now, sometimes it is hard to look past the immediate situation. If a recession happens it is important to remember they are a normal part of the business & economic cycle . This is an investing tip for the next recession.

We’ve all heard the expression Buy Low and Sell High. That is conventional wisdom that makes sense. Unfortunately, everyone (and I include myself in that list) has experienced the exact opposite. Circumstances have a habit of forcing us into a corner and we have to part with a good asset at the absolute worst time. Not good for us but an opportunity for smart buyers. Unconventional wisdom asks “How do I become a buyer at the right time?”

Have you ever noticed that recessions are the times when quality asset prices are the lowest, and competing buyers the fewest? It makes sense we should all be buying in recessions and selling in the booms. But this is where unconventional wisdom appears in the guise of reverse logic. Few people take this simple observation to heart… and I include governments, big banks and corporations in this groups.

Recessions come along with annoying frequency. We go through one every decade or so; some are worse than others. However, just like day follows night, an economic recovery follows every recession. You’d think after going through the cycle once the smart person would acknowledge that fact and have his affairs in order to weather the next one. You’d think! It took me three kicks in the teeth before I smartened up, so don’t feel bad. I hope and expect that in reading this blog you’ll benefit from my experience.

Sadly, I don’t hold similar expectations of government. It frustrates me to no end that governments trot out this old story when every recession arrives… “they were caught unexpectedly and they need to use deficit spending to stay afloat”. We have thousands of very smart people running this country… in theory. Why do none of them suggest we buy, build and invest when times are grim? Then they could close the public purse during the booms when every charlatan imaginable is selling stuff to them. Instead they could be setting aside those boom funds and preparing work plans for the next recession.

Big banks are the same; the vault doors are slammed shut in a recession when there are business bargains galore everywhere. You may identify the greatest business opportunity on the planet but don’t expect to get credit from a bank in a recession to help you purchase it.

So here’s an unconventional wisdom idea for you. Look around and get a sense of the economy. Start taking steps so when your next recession hits you have your personal and business life running completely counter cyclical to it. If the next recession is looming, you may have missed this opportunity and you’ll have to weather the storm to catch the next one. Remember this old adage: Opportunities are like streetcars – there is always another one coming along.

What steps may you ask? Well on the credit side get approved for as much credit as you can get during the boom, but don’t draw out any of it. When the recession hits; everything is on sale so you can purchase any manner of income producing assets (stocks, businesses, rental properties) or capital assets at low prices for resale (cars, land, tangible commodities, vacation properties)

On the revenue side, you should diversify your income streams. Get more of them for starters. Most people rely on one single job with a purportedly stable employer and don’t go on from there. Relying on a single employment position is like sitting on a chair with only one leg. Any little change throws you off your balance. This topic deserves its own post and I’ve said enough.