Building the Architecture of Your Empire

architecture_blog.jpgBy James Knull

How much time do you spend trying to get organized, instead of enjoying your life?

At the beginning of my investing career, the answer to that question was, “a lot”. Instead of growing my portfolio and having time to enjoy spending my cash flow, I was scrambling to keep up and spending money all over the place on inefficiencies.

I had an assistant who didn’t have direction, business partners who weren’t in the loop, and properties that weren’t really being accounted for. All the while, good deals were passing me by as I struggled to keep it all together. If only I had planned things out a little more at the start, I could have avoided a ton of pain later on.

I started investing in real estate and before I knew it, I had 15 properties. I knew that I wanted that growth to continue but I needed to have the right structure in place if I was going to get to hundreds of doors.

The thing is, I’d dreamed of having a huge portfolio in ‘the future’, but in reality I didn’t really know what it meant to build a business that could handle growth. I had to start from scratch.

I spent about 18 months sorting things out and building systems that could handle growth. It was a long process, but I can honestly say that it would have been impossible to get to where I am as fast as I did without a structure to support the weight of the tasks and information necessary for growth.

I’m going to share some important lessons I learned along the way that can help ensure your success in the future.

Here’s a fact: human memory isn’t that powerful. There are so many little bits of important information associated with a deal. For example, no one can be expected to remember all of the details of communications with Realtors, partners, mortgage brokers and inspectors, especially if there’s, say, a dozen properties purchased over three years.  That’s a lot of stuff! That’s where systems come into place.

A system is a clearly defined rule that gets followed the same way every single time it comes up. Remembering a few rules is easy, remembering a million details is not. Here’s the key to building a good system: build it BIG. There’s no point building a system for three properties when you want to own many more.

MANAGING THE PAPERWORK

First thing’s first, managing the paperwork is crucial. The inspection, mortgage documents, first leases and miscellaneous property files can be a stack of paper over an inch think.  Good luck sorting through 15 deals’ worth.

Your system needs the following components:

1) A Precise Labelling System For Your Documents

And I mean precise. Sure it’s easy to keep a few deals straight, but keep in mind, we’re planning for the potential to grow to over 100 properties. Here’s a great example:

File name: 2016.05.15.10179-105st.purchase.purchasecontract.pdf.

This naming system works because the computer will sort automatically in chronological order with the first part of the label. The address is next for easy reference. The subsection is all paperwork to do with the purchase, and finally this document is the purchase contract. If you want to have a paper record or backup as well, then organize your filing cabinet in chronological order, by property. And then, within each property folder, place the subfolders for the different categories of documents.

2) A Flow Chart Showing Where Documents Go By Type

Build a flow chart that’s easy to follow and maps out where everything goes. Every single piece of information should have a subsection and, if needed, a sub-sub-section.

3) A Written Detailed Description Of Precisely How Every Part Of The System Works

Now this is critical – incredibly important. At the very least, assume you’re going to forget the system at some point and you will need to remind yourself of how it works. But more importantly, you’re planning to grow big. The point of having your system well laid-out and easy to follow is so that your future assistant can walk right in and start using your system effectively. Imagine handing a thick deal file to your assistant and know that, with zero training, everything will be labelled and filed correctly. It’s the year 2022 and you really need to see the purchase contract on 10179-105 Street. No problem, found it in seconds.

The point I want to hammer home is that doing the work up front saves time and headaches. Be disciplined and be meticulous. It might be annoying to type in the file name with that much detail over and over, but it’s worth it when you’re not digging through a literal mountain of paper trying to piece it all together like a tortuous puzzle years later. Get a friend to read the description to see if they can follow it properly. Imagine how it would work with 100 properties. And don’t forget to test the system when it’s done.

MANAGING THE MONEY

The second thing you need to plan for is managing the money. It’s easy to file taxes, have a bank account, manage rents, and bookkeep for one or two properties. But remember, plan to get bigger. Talk to your accountant and come up with a structure that you can grow into. Find out how your accountant wants your financials submitted and create a repeatable bookkeeping system that will allow you to easily manage the expenses for 100 properties.

Develop a banking system that can handle the expense flow of 100 properties. Will you have a separate account for each property? 100 cheque books? When it’s time to do your accounts payable, what is the process for writing all those cheques? Once you know the process, create a precise system for labelling all information, a flow chart describing where everything goes, and a precise written description of where, when, how, and why the information moves and is filed.

MANAGING THE PROPERTY

The third area you will need to plan for is property and building management. At what point do you hire a property manager? How do you manage the relationship with them? How do you keep track of the maintenance schedules for each property? How often do you pay them a visit to ensure they’re doing OK? Again, you’ll need a precise system for labelling and tracking information, an easy to follow flow chart, and detailed instructions on how it all works.

MANAGING THE JOINT VENTURE

If you are involved with joint venture partners, a few considerations to start incorporating into the system include: managing prospective partner leads, joint venture structure, and regular reporting to the partners. Think about how these responsibilities could be handed off to an assistant. What kind of templated documents and reports do you need to create? Once you have them created, label them, create a flow chart, and write out precisely how they work.  

BUILDING YOUR EMPIRE

The reason that developing detailed systems is important is ’scalability‘. The only way you can ’scale up‘, or increase the size of your operations, is by having systems that other people can easily follow. The bigger your business gets the more people you will need to handle the different components.

Perhaps, when you are at 50 properties, you have a single administrative person handling the filing and bookkeeping. At what level does it make sense to split this into two roles? The beauty of having precisely designed and described systems is that, whenever scaling up makes sense, it’s an easy transition that doesn’t slow you down.

The ultimate goal of a well-crafted business is to have systems, processes and structures in place that are easy to follow. That way, anyone can follow them and if you, the owner, happen to forget how it works, you have something to refer back to. I would suggest that with your first property purchase, the first time you do a task, document what you’re doing and how you’re doing it. Follow the system described and you’ll end up with a very detailed policy manual.

Now you’re in business! As you grow, you’ll never get bogged down with disorganization. This is going to take a lot of focus and discipline at first. Creating a complex structure might be overwhelming, but it’s worth it. There’s no way I would have been able to grow my portfolio without an organized business structure that could handle it.

Start early, be detailed, and build the architecture of your empire!

James Knull started his career in real estate investing in suited houses using the REIN system as his roadmap and continues to build his portfolio today. James now invests in multi-family and is a REIN Diamond member and was awarded Player of the Year in 2014. James’ passion for investing led him to become a Realtor® with Remax Real Estate in Edmonton. He specializes in investor clients and has worked for REIN members from BC all the way to Quebec to buy all kinds of properties in Edmonton.

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