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Thursday, April 22, 2010

Spinning the Flywheel

If you haven't heard of Jim Collins of "Good To Great" fame then you don't really know what I am referring to. I will do my best to explain; Mr. Collins says that a company working towards greatness is like the spinning of a heavy flywheel. The first few turns are agonizing and difficult. Once momentum starts to build, it still takes effort to turn the fly wheel, but it spins faster and faster. Building a great company takes lots of work and sometimes it can be agonizing. My partner and I meet outside of the office, sometimes several times a week, and discuss our business model. While none of this is agonizing, it definitely is a lot of work just like those first few turns of the dormant flywheel. Even fun work is still work.

What we are doing in our business is working. It's just that sometimes, it is not always apparent what it is that we should be doing. Even in the short time we have been in business together, we have pondered different ideas on dozens of occasions. However, we have never taken our focus off of our main objective and the methods we use to achieve it.

I am always trying to understand the bigger picture of exactly what I am doing and working towards. I see many investors with much more success than me still doing deals and moving their goals out to bigger and further destinations. One has to ask; "How fast does the flywheel have to spin before one decides it is fast enough?" Yes, I am building a real estate investment company. One that I hope, will provide for me until the end. One that will continue to provide for those that come after me. The question I ask myself is "At what point is it enough?"

I have only known one investor who, from what it seems by posts on Facebook, has decided it is enough and started traveling extensively, continuing to do so. So much in fact, I eventually hid this person from my wall because I was growing tired of all the updates on different countries being visited.

I plan on growing my company. To what level I am not sure yet. I currently know in which direction, but not really sure where I'm going or will end up. As Mr. Collins would say, "I have the right people on the bus. We just don't know where the bus is going." I think it is better to set monthly passive income goals than # of door or house goals. I hear investors ask how many properties I own or the number of doors I control. Really? Do you actually care how many houses I own? What if I have 100 and they all lose money? Are you still interested? Probably not. I like the questions "How many houses can you take if they each produce $1 of real positive income every month? How many if they lose $1 every month?"

I currently have set my goal at $1,000 per day net income after taxes. However, I do not want this $1,000/day to be coming all from one property. I wouldn't want one mobile home park or apartment building to be the sole source of this income. Talk about all your chickens in one basket. A little off topic, but do you know what a tornado and a divorce in Texas have in common? Someone's losing a mobile home. I do like the idea of mobile home parks. Finding quality education is another story. Lots of info out there about doing Lonnie Deals, but I think my days of flipping mobile homes in other people's parks are over. Great cash flow, but I am tired of dealing with park managers.

If I want to produce $1,000/day from single family houses, I figure I will need 50 houses generating between $1,200~$1,500 per month in rent. This will produce $66,310 in gross monthly rent. Deduct 45% for expenses and I am left with $36,470 net. Deduct another 15% for taxes and I arrive at my $31,000 a month in after tax, net, passive income. This is why I really do not want to be in the single family house business. To much property producing to small an income. A geographic management headache. A mix of residential and commercial is the only conceivable way I believe I can achieve my goal. If 1/2 the income can be generated from an asset class such as mid to large sized mobile home parks and the rest from small apartment buildings and houses I think it will be a nice mix of investments to produce the sustainable income I seek.

I am on the right bus and it is moving. I'm just not sure where it is going to end up.

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