One of my favorite books is “How to Stop Worrying and Start Living” by Dale Carnegie.
A famous concept in the book is to “keep your supply lines open,” which alludes to always maintaining a backup plan.
In the context of the work, the open supply line was a job at home that the character could always return to if he was ever in a bind.
For us, keeping supply lines open applies to several verticals:
Network: Treat people well, keep in touch with them, and look to provide value where you can.
-Contractors, potential investors, brokers, attorneys- If you cross paths with good people but couldn’t work with them at that point in time, it doesn’t mean you won’t in the future.
-The foundation guy whose bid was too high might be the perfect person for small masonry repairs down the line.
-The attorney you crossed paths with might be a fit for your friend’s new ground-up development, make the referral.
-The broker who sent over countless deals that didn’t work for you might source a home run in the future- keep lines of communication open.
Underwriting/Asset Protection: You don’t know what’s behind the walls of the property you’re about to buy or what the market will look like 12 months from now.
- Have a plan for when things go wrong and a process to handle each issue (which will likely involve tapping your network).
-Get your renovation costs priced out during the inspection period but account for the issues you can’t see so your budget doesn’t get whacked when they find rotted framing.
-Be conservative with leverage (debt can either amplify returns or crush you).
-Stress test your property and make sure you can survive a ~25% decrease in rates (this also points to conservative leverage).
-Place appropriate insurance coverage on assets and make sure the replacement costs listed in the policy are accurate (construction costs are different today than 10 years ago) – if the property burns down, at least you’re not losing everything.
-Buy assets in good locations- related to the concept above, if you lose everything, you still have good dirt.
Reserve Capital: Processes will take longer than expected, things will break, and hang-ups may occur.
-Account for holding costs (then extend your projected timeline) so you don't run out of money during the renovation period and take guys off your job site.
-Maintain cap ex, vacancy, and maintenance reserves- If you're not budgeting for these, a major repair could incinerate your returns.
We can’t predict everything but we can better position ourselves to take the punches and still execute.