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In this episode of The Property Management Show, we’re talking about top-line growth versus bottom line performance in your property management company.
There’s a belief that’s accepted among business owners that you suffocate without profit.
However, it’s also possible that you can suffocate without healthy top-line growth. Profit may be achievable, but top-line growth is possibly more meaningful for a company, even though profit is what indicates what a company is worth and how much you’re taking home as its owner.
Two guests are exploring this idea with us today. Jordan Muela is the co-founder and CEO of LeadSimple. He’s also the co-founder of PM Grow Summit and the co-founder of The Profit Coach. With him is Danny Craig, who digs into numbers like nobody else. He partners with Jordan at The Profit Coach.
True or False: Growth Solves Nearly All Problems
In the discussion of top-line growth versus profit, there’s an idea that growth solves nearly all problems.
You could be operationally efficient and really good at what you do, but you have no clue how to grow your business or use sales and marketing to achieve bigger outcomes. Or, maybe you provide an average service but you’re great with sales and marketing. The company with the grasp on sales and marketing will probably out-perform that company with outstanding services but no way to sell them.
Also, there is no point in scaling something that doesn’t work. If a business is hemorrhaging cash and losing money or underperforming even without the sales and marketing budget factored in, nothing good will necessarily come from trying to grow.
Another thing to consider – what does your end state look like? In other words, why are you in the business? If you want to maximize your cash flow from month to month, that’s one outcome. If you want to accumulate a bunch of doors, scale up, and then sell, you have to measure whether you can feed the business enough cash to get the growth you want before you sell. That’s a different path.
Depending on your end game, you’ll know how concerned to be with scaling and profitably. Growth won’t solve all issues if you can’t at some point optimize that growth.
Growth is great. But, if you cannot get profitable, you’ve got an issue.
Remember this: When you strip out the sales and marketing expenses of an organization and that company is still consistently losing money, it’s pointless to scale. That business needs a lot of help, and top-line growth isn’t necessarily the answer.
Falling into the Black Hole: Where and How this Happens
A business can grow to the point that nothing seems to work anymore. As the organization scales, it doesn’t matter how efficient you were before. You cannot continue to deliver the same output at the point where everything seems to be breaking because you’ve reached a new level. Even with the best processes and systems, it seems that nothing is in place to support the growing machine.
This can happen to property management companies at two stages:
- First Black Hole: Between 200 and 300 doors are under management, and the owner wants to transition from being a property manager handling the day-to-day work to being a true owner who is spending time bringing in new business and strategizing for the future.
- Second Black Hole: Between 700 and 1,000 doors are under management, and processes suddenly aren’t sufficient to handle the growth. It feels like you have to rebuild everything. An owner is acting as a CFO, managing HR and leading the marketing charge. It’s too much.
Moving Past the First Black Hole
There are three major drivers when you encounter black hole number one, based on benchmarking and consulting done by Jordan and Danny.
First, profitability. Cash and profitability are closely related in property management. With the recurring revenue model, if you don’t have cash, it’s because you’re not profitable. So, you have to understand your direct labor efficiency. For every dollar spent on direct labor, how many dollars do you get in revenue?
Direct labor is where everyone in the company is spending 50 percent or more of their time delivering property management services to owners or tenants. You need to know how many dollars you’re generating in revenue for every dollar you’re spending on salaries and commissions.
Second, revenue per unit. There is so much focus on growth, but sometimes it’s easy to forget whether the revenue is there. Is the top-line revenue there per unit? You can grow top-line revenue not just through acquiring more doors, but by getting your profitability per door where it needs to be. Data shows that you cannot make a profit if you’re earning less than $150 dollars per unit, excluding maintenance.
Third, controlling costs. This is an obvious requirement. You have to watch your facilities and operating expenses.
What do you do as a business owner if you find yourself in this black hole?
It starts with intention. If your intention is to be profitable, you’ll be committed to driving profit. Every small business needs that commitment.
On the labor side, it’s critical to understand the tasks of your team and what it takes to achieve them. You may be in the weeds and you may assume you know what everyone is doing. But, in the first black hole, you’re coming out of the weeds. There’s a little less oversight into what your team is actually doing. If you’re losing efficiency, it could be because they are confused about their job. Maybe there is a lack of knowledge that’s driving the inefficiency. Or, without the oversight, they’re being less efficient just because they can. Hold people accountable to specifics, not general ideas.
You probably hear people say to staff for growth.
You have to know how much time it takes for your team to manage a process. You have to embrace constraints and use them to your benefit. For some companies, it’s a salary cap. This is a form of accountability. Knowing what the constituent tasks are of your team members is also a form of accountability.
Salary caps and accountability provide visibility to management and owners. It gives you an opportunity to further investigate where you are having inefficiencies. Maybe a portion of your revenue is being driven by a particular set of people. Each team member needs a clear understanding of the tasks they absolutely have to execute. Regular accountability about these steps and processes is critical to both growth and profitability.
For example, if you have an HOA department and the revenue that department drives is only half of what you’re spending to staff that department – a change is needed. If your idea is to triple the number of HOAs you’re serving in the next 12 months, how actionable is that? This is a situation where you need to adjust your labor. Move around who is doing what. Consolidate roles.
Departmentalization is great, but if you cannot afford it, it’s just not practical for your company.
If you find yourself in black hole One, buckle down. Check your labor. Be consistent and more managerial with what you expect from people. Find a constraint of choice to help you.
Steve Crossland in Austin manages 100 units. His constraint of choice is doors. He won’t manage more than 100 doors, and he won’t spend more than half his time managing those doors. He has no employees.
What does that mean?
It means he has to choose the best doors to manage in order to be profitable. And, he is profitable. You can be boutique and profitable. Or, you can spend a lot of time marketing your business hard because you want to get to 25,000 doors. The rules are different in each situation.
Moving Past the Second Black Hole
One of the biggest differences between successful companies and unsuccessful companies is embracing a culture of experimentation. This is a never-ending journey. You want to be able to try different things and remold your processes when you can. With all of this opportunity, you have a real chance to achieve your goals.
How can that drive profitability?
With the recurring revenue model inherent in property management, you’re not getting huge annual contracts with up-front payments, so you have a lot of money to play with. You’re getting paid monthly. You’re collecting a paycheck. In many cases, property management companies actually thrive on real estate sales and maintenance companies.
Cash does give you flexibility, and so does clarity of mind and focus. These things come from a well-oiled machine. You cannot have freedom if you’re chasing your tail all the time. With the right efficiency on the operational side, you can step away from day to day tasks and embrace that culture of experimentation.
Growth for the sake of growth is ridiculous. But, growth with purpose leads to success that cannot always be measured by profits.
For example, look at Appfolio. Software companies are dramatically different from property management companies. But, Appfolio started by raising $18 million and then bringing in another $20 million. But, they started losing cash fast. Millions of dollars were lost in the first few years, and it seemed like the company wouldn’t survive those losses.
Suddenly in 2017, in one year, Appfolio became immensely profitable – just like that.
They market-sized their fees. They went from $1 a unit to $1.50 a unit, and nobody batted an eye. Now, this company has grown by leaps and bounds and out-innovated a lot of others. Instead of being concerned with profitability, they wanted to do something different.
This is where you might find yourself in the second black hole. Your business might be at zero profit or even losing, but with access to capital, you can keep growing. That makes some business owners uncomfortable. If you’re wrong, and you’re scaling something that you cannot turn profitable, you have then spent the lifecycle of your business not taking owner distributions and grinding away. You’re just adding risk to your model. It worked for Appfolio, and yet many small businesses are not suited to follow that playbook.
People start property management companies because they can choose a niche and get their own piece of the real estate pie. Big corporations aren’t price-gouging them yet and cutting them out of the market. There is something inherently decentralized about the industry. With innovations, it could be centralized. Companies like Mynd.com are coming up with new ideas. They believe they have a scalable product, and investors are behind them. Mynd.com is built by industry veterans, and time will tell where it takes the industry.
The larger you scale, the more things will change for you, including your numbers. If your company is growing like crazy because of all your sales and marketing and you pull that back and your company is still profitable – you’re doing something right. But, if you pull back the profit you’re earning and your operation is still leaking cash, you’re not going to emerge from the second black hole with the revenue you need. The valuation mechanics change as you scale.
Property management entrepreneurs have the opportunity to feed their portfolios with Connected Business Units (CBUs).
When one company is bankrolled by real estate sales, or other endeavors that complement the property management business such as maintenance or construction, you shouldn’t lose money. Finding the right CBU for you could be a better way to grow than to try to add more doors and more doors and more doors…
Revenue per unit is where the money is made when you’re climbing out of your second black hole. How can you get your revenue per unit up? Maybe it’s through ancillary fees. Maybe it’s providing maintenance or other services. You want to milk each door for what it’s worth, and you want to provide value for that extra revenue.
Expand your scope of services and expand your value propositions.
If you want to see what Jordan and Danny are doing, email email@example.com and check out The Profitable Property Manager podcast.
If you have any questions about growth through marketing, sales and better business, contact Fourandhalf.
Thanks for joining us, and we’ll see you next time.