As I’ve mentioned in earlier posts, owning and managing property is more like running a business than owning a stock. Here’s a quick rundown of how I might categorize the major competencies necessary in a successful real estate investment business:

• marketing
• accounting
• tenant management
• information management
• asset management

Most landlords start out somewhat proficient in one of these areas, and less so in the others. When owning one or two properties, this lack of proficiency can be pushed through with some common sense, preparation, and entrepreneurial courage. With a bit of luck the new landlord can learn things the hard way without making any mistakes that kill her business.

However, once a landlord owns more than two small buildings, infrastructure, proficiency, and discipline start becoming necessities. The landlord must begin keeping track of significant amounts of information related to rent payments, mortgages, taxes, insurance, repairs, etc. Without the proper support systems in place, the landlord will begin making mistakes that significantly affect not only their profitability and return on investment, but also her ability have a stable portfolio.

For example, assume a landlord owns a single unit that rents for $1000/month and that this amount covers her mortgage payment plus standard costs. An 8%(1 month) vacancy rate translates to lost revenues of $1000/year. Assume that this landlord makes $50,000/year in her profession. $1000 is 2% of her earned income. Now fast forward and assume that same landlord now has five units, but still has that same 8% vacancy rate. These vacancies are now costing that landlord $5000/year - 10% of her earned income. All of a sudden, the same performance goes from impacting the landlord’s cashflow slightly to significantly impacting her cashflow.

This is a simplistic example of how part-time real estate investors must continually improve their operational skills and infrastructure in order to effectively grow their portfolio. There are numerous other areas where inefficiencies are negligible in the beginning, but begin to be significant as a landlord’s portfolio grows. In the future, I’ll explore each of the competencies in more detail.

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