February 2001
Vol 24 No 6

At about this time each year, once all the final figures for the preceding year have come in, I find myself reviewing my activities over the past 12 months, and setting both my personal and financial goals for the next year. I conclude by summarizing what I've done and what I have set out to do, then writing this down so that I can refer to it over the year. Since my early 20s, I've done this for more years than I care to count. As a result, the record of this pilgrim's progress is cause for both pride at objectives that I've attained mixed with liberal doses of dismay for the goals I've failed to meet. The slim margin that separates success from failure can often hinge upon how one uses the hours of the day to be as productive as possible. This month's letter will focus on ways to manage your time to enable you to work more efficiently.

Every Monday morning, everyone in the world is given a bank account that holds 168 hours. Nobody can increase this limited, irreplaceable resource regardless of their power or wealth; all one can do is find a way to use it in the most productive way. In our competitive world, those who manage available time better will do much better than those who don't. We've all heard that “time is money”. It's far more; but if we treated our investment of time in the same way as we measured investment yield on our capital, we'd try harder to increase the compound yield produced by our working time.

Time is the ultimate resource of the entrepreneur. Knowing how to use it is the key to success. In today's high-tech world, relatively low-cost equipment gives us the ability to magnify our work output if we can learn to use it. But, time management entails much more than merely plugging in a computer and expecting it to do the work. Being able to accomplish more within an allotted period of time also takes a disciplined work ethic, a positive attitude, clearly defined objectives and a “time budget”.

Since we can't increase the amount of time available, our first priority should be to avoid wasting the few hours we have available to us each day, and to find ways to double up what we do in order to wring a few more precious hours out of each day. That means, that we should assess the ways that we normally spend our spare moments to see how to cram more into them. Be honest; how much time do you waste in business meetings at which nothing is ever finally decided? How much money do you spend sending documents by FEDEX or UPS, or by messenger? Would customers and clients alike be just as happy if you could work with them via telephone, Fax, or email? The world is becoming much more efficient, and to succeed. entrepreneurs must keep pace with it. How?

Today, cellular telephones can be paired with portable computers and battery operated fax machines that both print and make copies to completely eliminate the need for maintaining expensive office space. By scheduling meetings on-line and attaching reference materials to aid in the decision-making process, then requiring that signed concurrence be faxed among participants to confirm agreement as to a course of action, many hours each week can be saved for more profitable uses.

We showed one harassed entrepreneur how he could cut expenses and increase his “bottom line” income by S25,000 per year simply by reducing his staff and operating his real estate brokerage with only a token “virtual” office. More importantly, he also saved all the productive time he “spent” earning the money to pay this expense. Furthermore, ha no longer wasted hours commuting to and from his work, or between appointments.

Professionals can be great time-wasters; especially when you arrive punctually at their offices only to be kept waiting until they catch up with their schedules. Over the years, I've found that, except for instances in which I've needed specific counseling, I've been able to accomplish a lot simply by faxing attorneys and accountants a list of questions, or requests for specific services, and having them fax their responses.

Mailing financial records to accountants for tax preparation, or engaging attorneys by Fax to do specific document preparation, closings, or to render legal opinions saves many hours. Many real estate transactions have been closed without ever entering an escrow company or an attorney's office. During the past year I bought and sold over twenty houses without attending a formal settlement as such. Documents were signed, then faxed, mailed, and Fedexed for approval to reduce wasted time.

BUYING OR SELLING, CREATIVITY SAVES TIME AND MONEY

The same efficiency can be employed by almost everyone in buying and selling houses and investment property. It's hard to “close” a sale without the prospect seeing the property, but I've both bought and sold real estate using video-tapes of houses to weed out those that didn't meet the buyer's criteria rather than spending hours making appointments to show houses that buyers would reject. My purchase and sale contracts contain provisions that make faxed signatures binding on all parties. We get escrow companies to fax us closing documents for our approval signatures prior to the closing date, thus reduce settlement to little more than picking up checks. In most instances, we even do away with checks by wiring sale proceeds directly into sellers' bank account.

From the standpoint of trying to save time as a buyer, we've solicited telephone calls from motivated sellers using direct mail and newspaper carriers to deliver “flyers” in bulk through select neighborhoods. By getting respondents to bring their “house papers” into our office, we've been able to test their motivation while gaining territorial advantage by setting the stage for negotiation on our own turf. We've also used similar techniques to canvass residents in transient neighborhoods and apartment houses looking for buyers. Posting signs and notices in prominent places, and using some of the direct-dial software that is available in some markets enables a buyer to solicit purchases on a wholesale basis saving hours spent searching for properties and buyers.

One innovative subscriber has a buyers^' Internet web-site with an enticing proprietary name – something like “Nothing Down” or “Easy Credit” – to attract buyers, and an equally enticing one for sellers. The key to generating activity via the internet lies in creating a provocative web-site that attracts attention, then using attachments to show case what you are trying to sell. It's critical to project sincerity and honesty in your ads through an “institutional” approach that portrays an ethical and reliable image rather than a high-pressure campaign that will drive off potential customers and clients.

Few people rent or buy a home without first checking it out. Showing houses is a time-consuming part of the business, but even this can be streamlined with a little planning. Most people wait until the weekend to look at houses, so brokers usually schedule “open-houses” then. As a broker, I scheduled a half dozen open houses at the same time using only two people to “house-sit”. First, we made sure that we advertised all the “open house” addresses and times in the weekend newspaper. We scheduled show-times in sequence, about an hour apart. We opened the drapes so that people could look into the homes in the event they visited them ahead or behind advertised showing times.

We placed flyers on each house that showed the addresses and prices of all our “open houses” together with the times each would be open. We included a hand drawn map end the telephone numbers in the homes we were presenting in addition to our brokerage telephone number. This way, those who wanted to look at all our houses would know when we'd be at each place. If a person wanted to go back and look at a house that we'd already locked up, we'd make an appointment to revisit it at the end of the day. If a potential buyer showed real interest in a particular home, one of us would try to “close” the deal while the other continued to juggle the advertised “open-house” schedule.

This was a pretty efficient way to spend a Saturday or Sunday afternoon. It provided a means to show-case several offerings and a means to work as many prospects as possible. Today, with a cell phone. lap-top and portable printer, we could be much more efficient. I once bought a house from a seller who was a model of selling efficiency. On his lap-top he had loaded market comparables, mortgage rates, title company closing statements showing estimated closing costs, lead-based paint and radon disclaimers, a partially completed contract, and a variety of financing terms. I think I made the deal as much because I admired his acumen as much as because I liked the house.

It's easy to justify deducting a sophisticated computer and accessories when so much time can be saved. Among the many items that can be stored in memory, and printed out as needed, are leases, maintenance contracts, trusts – and special deeds into and out of trusts – Options, Bills of Sale, a variety of Notes, Mortgages and/or Deeds of Trust, Installment Contracts, plus a variety of conveyances such as Quitclaim, Grant, Bargain and Sale, and Warranty Deeds, etc. In Some areas, it is possible to purchase the complete tax rolls on a disk that can be loaded into a computer. The same goes for the telephone book. With these, finding a missing owner of a vacant house can be made much simpler. I guess that means that you'll be forced into buying a few deductible cellular phones too.

NO INVENTORY, NO EMPLOYEES . . .

Over the years I've been engaged in a variety of businesses. Some of these were chronicled a few years ago in my “Be the Boss” seminar. This dealt with ways to build and operate a business. My experience has taught me that many small business owners fail for a fairly narrow range of reasons: Too much debt. Too much inventory. Too many employees.

Let's take these one at a time: When a business is on a pay-as-you-go basis, it grows much more slowly. That's the bad news. The good news is that slow growth give the fledgling owner time to learn the business of running a business. Going into debt in order to grow faster can create a situation in which debt service virtually eliminates all cash flow. At the same time, the demands on the new owner multiply geometrically. In short, he is being paid less and less for doing more and more. How many people do you know who are in a squirrel-cage? The faster they run to keep up with debt, the more debt they incur, and the faster they must run! Debt is a necessary evil when it comes to buying houses, but patiently seeking out non-recourse debt provided by sellers allows the entrepreneur to reduce his risk of failure and to avoid a lot of unnecessary stress. What about employees? My attitude certainly doesn't do much for the unemployed but it can make the difference between survival and failure for the small business person. With the first employee hired, unless you are very careful, you can pick up a participant in your retirement plan and company fringe benefits. You become susceptible to OSHA regulations and fair hiring practices. You may come under Workers Compensation laws too.

Let me tell you a little tale: One Christmas season, a misguided property manager whom I contracted with hired a temporary employee who “just wanted enough pay to buy milk for my baby”. This milk contained a fair measure of cream in the form of pilfered tools and property that soon started disappearing into the trunk of his car. When confronted with his theft and dismissed, he promptly made a worker's compensation claim for a “back strain” despite the fact that he had been hired under a specific contract rather than as an employee as such. He cost me $3500 for only a few day's work.

Inventory, especially inventory obtained on credit, is what keeps the owner of a failing business from being able to close down and retreat, licking his financial wounds. I've seen many people work themselves into an early grave trying to dispose of inventory at a price that will pay off the debt incurred buying it. By way of contrast, when a “service” oriented business runs out of customers, it can simply shut down. In the real estate business, those who buy and sell houses (inventory) always do well as long as house sales are brisk, but when buyers stop coming around, for those who borrow money with personal guarantees, about the only way to weather the down-turn is to rent houses to occupants – with, or without, Options – until they can be sold. For those who buy without any loan guarantees, all they have to do is to return the property to the sellers.

Rather than actually buying debt-leveraged real estate for resale, it makes a lot more sense for both financial and liability reasons to Option the property, or to enter into an assignable contingent contract which permits the speculator to withdraw from the transaction. In good times, Options or contracts can be sold with a profit equal to the sale of the house itself; and the risk/reward ratio will be dramatically improved.

Those who buy and sell mortgage notes have an odd kind of inventory that continues to pay them while they await a potential buyer. Unfortunately, the same recession that can bring real estate to its knees also brings those who make payments on the notes to the brink of insolvency. I was wiped out financially at the very start of my real estate investing career by a short, sharp recession. When nearby houses serve as collateral for the notes, they can be foreclosed and rented for income to support loan payments. But, if distant property serves as collateral, the note-holder is subjected to the tender mercies of indifferent property managers who can make Black Beard look like a saint. If notes are secured by land or non-income producing real estate, or personal property, there's a pretty fair chance that the note holder is going to lose money.

There's no doubt that a lot of people have made a lot of money breaking all of my rules, but a lot of others have failed miserably after many years of hard work, thrift, and prudence. When just starting out, there's little to lose and much to gain by being aggressive and by trying to grow as fast as possible. On the other hand, once a measure of success has been achieved, trading off risk of failure for a little less success can save a lot of money. Worse; with only a little slip, years of work could be lost forever.

ONE STEP BACKWARD CAN WIPE OUT TWO STEPS FORWARD . . .

In 2000 stock market speculators experienced an interesting phenomenon: many “dot.com” stocks that had soared 100% in the past two years lost all their gain in 2000 when prices dropped 50%. To quantify this, if a stock went from $100 to $200 in two years, that would have amounted to a 50% simple return each year. Then if it fell back 50% to $100 in 2000, 100% of the prior two years' gain would have been lost. More to the point, that stock price will require two more years at an average yearly increase of 50% to recover the ground it lost. Worse, it may not go up at all!

There's an even more insidious aspect to loss that many people fail to perceive: In the final analysis, lost money can be made up with some effort, but regardless how energetically a person strives to recoup financial losses, time spent on failed ventures can never be made up again. In the above fantastic illustration, a 2-year rise of $100 to $200, 1-year drop to $100, and 2-year return to $200, would still require 5 years. Suppose the speculator simply invested in the S&P Index? In recent years it has risen at an average steady compound rate of about 14% per year. $100 invested in this index would have risen to $192.54 without all of the emotional turmoil, risk, and anxiety.

If you substituted well-located rental houses for the S&P Index, you'd realize comparable results. Before you write me to tell me that houses don’t yield 14% per year, let’s do a little bookkeeping. In comparing investments, recognize that single family
houses provide a variety of “returns” that must be taken into account when calculating their yield. First of all, houses in the mid-point of the market will produce about 6% 7% net after-tax rental return each year. In the 28% bracket, 6% -7% after tax amounts to 8.33% to 9.72% pre-tax when compared to pre-tax stock or bond yields. This is an inflation-indexed return. Rents can be increased to offset loss of purchasing power brought on by inflation. Only low-yielding indexed treasury I-Bonds offer indexed yields. Stocks don't. Even the hint of inflation tends to cause both bond and stock prices to head for the basement.

If a house were free and clear, this would amount to free cash flow that could be compounded monthly. If the house were mortgaged, much of this yield would be recycled into mortgage amortization. Either way, the investor would be rewarded with a reasonably reliable rate of return. Because of the relatively high degree of fixed rate leverage used to buy single family houses, as rents rise, so does leveraged yield. And as prices are driven skyward, yields outstrip market value increases. Here's an illustration:

Suppose a hypothetical $100,000 house is bought with $10,000 down payment and a $90,000 loan. Let's say that payments, taxes and insurance costs just about equal net rents; and that depreciation covers maintenance costs not paid for by the tenants. Suppose house prices increase by 10% to $110,000; the return would he 100%. A house half-leveraged with only a $50,000 mortgage could still provide a yield of 20% in the same scenario; so a 14% total yield including rents, tax benefits, amortization and appreciation isn’t at all unreasonable in many markets. And the risk of loss would be negligible even in turbulent times for a reasonably leveraged single family rental house in the middle of the market.

As a landlord, I've weathered inflation and recession and have experienced the way that houses perform in good times and bad. The past ten years in America have been unbelievably good for many people, but if even a mild recession occurred sometime in the next few years it would be devastating for many. Start now to streamline your operations to reduce time and expense caused by obsolete ways of doing business. Implementing as many time-saving techniques as possible can pay huge dividends whatever the future brings.

Time And Tide Wait For No Man . . .

BUYING OR SELLING, CREATIVITY SAVES TIME AND MONEY

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