As featured in Forbes.
When moving to a new city, it takes months—sometimes years—to learn how to navigate it. Time is necessary to find all of the well-kept secrets, like the best restaurants to dine in, the most patient groomer to take your dog to and the best coffee shops to frequent.
Time and the experiences that time yields allow you to grow and feel like part of your community. The same is true in investing. Real estate investment companies have come and gone from the greater Seattle area in the last few decades and have provided a valuable lesson on what it takes to be successful as a growing brand: calculated expansion.
The majority of real estate investment companies that have tried to grow into markets beyond their home base are cautionary tales. Some have grown rapidly by doing as much business as possible and spun out of control, sinking returns. Others have spent buckets of money to establish themselves in a new market only to lose it and lay off staff when they couldn’t sustain that spending later.
The minority, the success stories, have provided their peers with a five-step formula:
- Enter the market and make introductions.
- From the introductions, form new relationships with other real estate professionals.
- Develop those relationships to source new investment deals.
- Be choosy about deals in the beginning, not taking too many.
- Scale up to take on more real estate investment deals as the company grows over time.
This investment success formula can be compared to farming. Entering the market and making introductions is planting the seed, forming new relationships is watering the seed, developing them is providing the seeds with sunlight, and selecting deals is harvesting the seed.
Being intentional with real estate deals allows not just for a calculated expansion of a private investment company over time but also for that company to take calculated risks. For instance, an investor might create and promote a new product in one or more of its markets if it has the key resources of time and energy to balance its existing services with the new one. Or, if they’re maintaining a smaller portfolio of clients in one new market, they may have the bandwidth to take a risk and establish themselves in another new market with the same model.
When investment companies grow too quickly, they are often afraid and unwilling to take risks. This impacts their private funds, as the funds face the potential of being watered down when a lack of risks taken converts into a lack of rewards reaped. In that case, investments do not yield the returns investors have grown comfortable with, and discontent grows. For companies whose base of investors is repeat clients, the erosion of trust could be a devastating blow.
These lessons form a strategy for real estate investors looking to expand into new states: Focus on the home base. Deliver on promises to investors while slowly building rapport with new connections in new markets.
This long-game strategy is often written off by impatient investors who want to see immediate return on investment. These are the same investors who use not the farming analogy, but the fishing analogy, when running their businesses: Throw a line out and see what your luck is. However, based on real-life examples, learning the lay of the land, building the right relationships and picking real estate deals that align with an investment company’s goals pay off when considering the bigger picture.
If you’re in private investment considering your next move, remember to lead with patience. There’s nothing more attractive to investors than an informed and successful investor with a consistent track record. Making the effort to learn about a new market before jumping in, with the assistance of your new network, can be the move that makes your business the premier choice in any area.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
