How to Know Whether You’ll Scale (or Fail) in Real Estate

Henry:
You’re a real estate investor or in the real estate space, you’ve probably heard someone talk about wanting to 10 x their goals or 10 x their business or 10 x their door count. And that kind of big dream thinking is something I love about this space. But when you’ve got a big dream like that, there’s also a lot of risk. So today we’re talking all about how to scale smart. What’s going on everybody? I am Henry Washington. Welcome to On the Market. Dave Meyer is out today, but I am joined by James and we are here and delighted to have Kathy as well. And my good buddy and Kathy’s husband, rich.

Rich:
Yeah, stoked to be here. Stoked to see you guys and hang out. Always fun hanging out with you.

James:
I think we should have Rich on more.

Rich:
I think so too.

Henry:
There’s a little known secret that’s not a little known secret and that is that Kathy is amazing and I love her, but Rich is my guide, man, rich, love hanging out with them. So for those of you who don’t know, Kathy and Rich, they both have extensive and proven backgrounds in a bunch of different parts of the real estate industry. They are investors and entrepreneurs, they’re brokers, they’re syndicators, they’re coaches, and just all around amazing people.

Kathy:
Oh, thank you.

James:
That’s right. And today I’m excited to talk with them about their new book called Scaling Smart. And if you haven’t got that, you must buy it, you guys, it’s essential for growing and scaling. I mean, this is how we grow as an investors and we’re going to get in today. Some of the most famous companies that have scaled and failed, the 13 questions, Kathy and Rich ask themselves before they expand any branch of their business and when they hire someone versus when they should create a system. That’s a very, very important topic that you need to cover as you grow your business and how to have fun while you’re scaling. And for some of these, Henry and I will get Rich and Kathy’s input on issues that me and Henry are having in our current business. I mean, we get some free coaching today, Henry. I’m pretty excited for the episode.

Henry:
Yeah, man. Best part of podcasting in my opinion is you get to listen to expert advice and you kind of get to ask for a friend, wink, wink, and then take notes the whole time. Alright, so before we get into my personal coaching questions that I have for you about my business that I’m asking for a friend, Kathy and Rich, you start the book off with a case study on how we work failed and their competitor Regis survived. So what mistakes did WeWork make in how they scaled?

Kathy:
Well, WeWork is one of those companies that had meteoric growth. They just took off like a rocket ship and yet their idea wasn’t that new. Regis had been doing it for a while. WeWork was at some point valued at 47 billion just shortly after just I think it was like six or seven years after launch. And that was in 2019. A few after this valuation, WeWork filed for an IPO and the documents actually showed that the company was losing $219,000 per hour. Whoa. Those losses skyrocketed and obviously when the pandemic hit, but still went public at a $9 billion valuation. Now remember it had been 47 billion. SoftBank maybe is the biggest loser in this story because they are the ones that invested in this company. And then after filing just a few years later, they filed bankruptcy to reorganize the way they probably should have in the beginning.

Rich:
I mean, Regis was like, if you look at it like the tortoise and the hare, really, it’s like WeWork came out, they were trying to be the hare. They’re trying to grow fast, they’re having all this money to spend, they were burning through it. They were just being ridiculous and the way they were operating. And Regis came in as more of that tortoise slow and steady staying in their lane doing what they do well, whereas WeWork horizontal instead of vertically integrating, they went horizontal. They came up with companies like we live and we grow, and where they have WeWork labs, it just ridiculous. They just kept adding on these different business lines that was out of their lane and they were even letting people party. They throwing big parties and all these things serving Don Julio in 1942 and all this, it was ridiculous. So they made that big mistake WeWork did of trying to scale, not even scale, but trying to grow horizontally if you will, a business term instead of keeping it in line with staying in their lane.

Henry:
Expand a little more about that. What you mean expand horizontally? Because when I think of business, it’s what a lot of businesses do or aim to do, which is you start a business and it goes well and then you branch off into something similarly rated that you can leverage your original business idea and then you go down that lane. What made this the wrong move?

Rich:
Yeah, what you’re talking about really is more like vertical integration. It’s about staying in your lane and doing what you do well and building that flywheel where you get it turning and it gets turning faster and faster and easier and easier. You know what you’re doing and you’re great at what you’re doing. Whereas WeWork, like I said, one of those was WeWork Food Labs. So all of a sudden they came out with, they started serving food and coming up with how they can have more, what they could serve at their locations in a way building a restaurant. So it’s so out of their line where if they stayed vertically integrated, it would’ve been what else can we do to serve entrepreneurs who are looking for a workspace to get things done and to be more effective in a cost effective way. If they focused on that and said, how can we vertically integrate? What else could we do there? Then they would’ve been much better off.

Kathy:
And just to compare it to Regis, who also went through the pandemic and also offers shared office space, they actually came out of the pandemic more profitable than before.
So what was the difference? And the big difference is again, like the tortoise, they kept their expenses in line, they just offered coffee, not like Rich said Don Julio, 1942, just not so flashy and focused on the core business, which again was just providing shared office space and not so much flash. So again, the big difference in what many people say took WeWork to bankruptcy was just overspending, overspending, overspending and not scaling. The way we describe and many people describe the difference between growing and scaling is when you grow, you kind of think of a company that’s just getting bigger and bigger and therefore more employees and more expenses, whereas the income is either growing at the same rate or not as quickly. So expenses, you just look at the US government, that’s a good example. Expenses growing, but income not. And that can take you to a point of bankruptcy versus scaling where you’re still growing at that steady pace, but you’re controlling your expenses and maybe even limiting them. So being more effective in the things you do.

Rich:
And we learned this from making the mistake ourselves.
We’ve been in business for 21 years together and we’ve made this mistake in the past and it often comes when you start getting an influx of cash. Either you’re doing really well profitability wise or you get an influx of cash like SoftBank adding all that money to WeWork. All of a sudden you start to get loose on your accounting, loose on your expenses, you think you got it all figured out. But the bottom line for anyone listening to this is nothing beats the peace of mind that comes from having reserves. So making sure that you set a set point. Our CFO has a set point in our company where it’s like you have to have this much money in reserves and if it gets below that, we need to really look at where are you going to cut so you don’t start dipping into that.

James:
Rich, I love that you talked about that because as you grow your businesses, that is one of the hardest things. You got to start taking on expenses, then you got to catch your revenue up with your expenses and then figure out the sweet profitability spot.
And if you look at WeWork right there, when they go to that, you said horizontal integration, it’s almost like that shiny object syndrome where they get funded with so much money or that it’s so good that you’re like, I want take over the world. Whereas you really should be systemizing one step at a time going, okay, this is what we do, let’s perfect it, let’s rock it, let’s make it the best it can be and then move on to the next thing. And it’s like they kind of just start jumping around. And that’s where I think especially for our audience, the real estate investors, we can all do that. There’s so many different concepts popping up all the time, and I see that as a big mistake is people go, well, this person’s doing this really well over here, now I’m going to go do this. And then their core business starts falling. It always blows my mind. They’re like, oh, I’m going to go do this now. I’m like, but what you had was something that was producing good income and now you’re just leaving it because it’s popular. How do you prevent that? Kathy, you should

Rich:
Speak to this with optimism.

Kathy:
Yeah, I’m as guilty as they come. It’s sexy, it’s exciting. And usually people who start companies are visionaries. They have big ideas and they have to be sort of at some point controlled. And that is so hard for a visionary to have chains put on them is what it feels like when structure is put into place and when people start to question your ideas. Some of the projects we did at Real Wealth, the Shasta Wine Village, what did I know about that? Whenever you take on something new, there is so much r and d research and development that goes into that new business. It’s a new business and because people already have a business, they think, well, it’s just part of the business, but it’s not. It’s a new business. And if you try to take the people that are currently operating your current business and put ’em on a new business, now you’re throwing the old business off and not really good at the new business.

Henry:
Alright everybody, we have to take a quick break, but stay with us. We’ll get into questions. Kathy and Rich ask themselves whenever they’re scaling and the mistakes James and I have made as we try to scale our own investing businesses right after the break. Hey investors, welcome back to On the Market. We’re here with Rich and Kathy Feki talking about Scaling Smart

Kathy:
After years of us battling because he’s the operations guy and I’m the idea person. And this happens so often in relationship. You’ve got one who’s the idea person and one who puts those ideas into action. The person who puts those ideas into action gets exhausted because of these relentless amount of ideas that come So Rich brought to our team at Real Wealth, something called the BOA Sounds scary and it is for a visionary. So Rich, you want to kind of explain what that is?

Rich:
Yeah, it came up from trying to say no to Kathy Feki is a tough thing to do.

Kathy:
He didn’t stand a chance.

Rich:
So after years of the battles and me trying to say no, and she’s saying, you always shoot my ideas

Kathy:
Down, you don’t listen to me.

Rich:
And it wasn’t that and was for me, it was because it’s like we need to think this through a little bit. Let’s plan it out. Let’s see where this is going to end. But she is such an optimist or was such an optimist that would be, she would only look at it going well. So the BOA is basically 13 questions that takes you through a process. It works so well for anyone. We use it all the time at Real Wealth now with our team, with any new ideas. And it takes you through this questionnaire of, okay, if this project works out well, what does it look like? How will it work? What if this doesn’t go well? How much will we lose in people power in hours in money? It asks questions, have we tried this before in the past? Because a lot of times in a company, something’s been tried in the past and then someone comes in new and they’re like, Hey, we should do this.
Or they start doing it on their own or they come up with the idea and they don’t realize that you’ve tried it before. So it takes this boa, which is the Business Opportunity Analyzer, takes you through this process of basically vetting an idea just like you would vet a property and once you get through, you go through your checklist. By the end you’re like, usually it’s like, no, we better not do this. That’s the way it’s been at Real Wealth. And so I would say it’s probably 80 20, honestly to 80% of the time. It’s a no by the time we get to the end of the boa, but when we do go through it and we get to that 20% of the yes and we do that, there’s a much better chance of the idea working out.

Henry:
Man, I like that. It sounds like it’s a way of visualizing risk versus return through the questionnaire because a lot of the times we have these ideas, you’re right, we don’t the visionary, my wife is the rich FET key in our relationship, and I’m like, you’re always killing my dreams with

Rich:
Reality dream

Henry:
Killer. But no, it sounds like a great way to visualize what’s the potential risk if it goes bad versus what’s the potential reward if it goes good. And then you can make an educated decision on is the reward worth the risk? And I think that’s super smart and I want

Rich:
To give a shout out to BP Publishing because what they did is they took the bow, which we had in a very rough form, and they created this amazing PDF, like a fillable PDF that takes you right through the process and that’s one of the downloads you get when you order the book.

Henry:
That’s amazing. I was just going to say, that sounds like something I want, so I’ll steal that. If you’re a real estate investor and you’re thinking here, how does this relate to me? I just want to grow my real estate portfolio. Well, you also have to think about, because I did this, I grew fast and I learned a lot of lessons growing fast. And when you’re a real estate investor and you’re buying value add properties, we’re underwriting these deals with a certain rate of return that we’re looking for so that it’s producing us a certain amount of money. But there’s a period of time that has to go by where you’re actually adding the value before you’re actually producing the return. So if you are saying, I want to buy X amount of doors or 10 x my portfolio and you buy, buy, buy, what happens is the properties you’re buying aren’t producing the income yet you’re adding more expense by buying more properties. And what Kathy and Rich were saying is true even in this scenario because if you’re adding more expenses before you’re actually getting the income, well then you can find yourself in a position where you don’t have the funds to sustain the portfolio that you’ve built. And so sometimes you have to slow down just so that your portfolio is actually producing the income you’re underwriting it to produce so that then you can scale smarter and maybe not as fast. Is that what I’m hearing? 100%?

Kathy:
Yeah. We interviewed a lot of real estate investors and business about exactly that. About just, ah, it’s so fun, right? It’s so fun to find a deal and it’s kind of like getting a puppy and now you have a puppy, very exciting in the beginning, but imagine having 10 puppies or a hundred puppies, so you’ve just really increased the amount of work. And so the first chapter in scaling Smart, rich and I took a lot of time focusing on why do you want a hundred puppies? And again, I’m talking about properties, but we all know the kind of work that goes into both. So the very first chapter is why for the sake of what,

Rich:
Yeah, why grow? It’s called,

Kathy:
Why Grow Rich, why is that chapter so important? Some people might get to it and say, I just want to learn about real estate. Why are we talking about my why

Rich:
It’s huge, and going to real estate conferences and meeting with investors and all that. What I’ve seen and what we’ve all seen I think is what we call big, well, we used to call it big Ayia back in the day. I was a competitive bodybuilder back in the eighties. Of course I had my flaming red mullet and my colorful pants and all that. But back then, bodybuilders, you think that they’re so ego driven and they think they’re so good and so great, but underneath those big rock hard pecs is a really weak soft heart because it’s, am I swollen enough really is what they’re thinking? And the same thing applies. It’s like they think that they can’t, they’re not big enough. No matter how big they get, they still don’t think they’re big enough and they wear big loose sweatshirts to hide their lack of size, their perceived lack of size.
So it’s basically like a body dysmorphia thing. But we see the same thing in real estate investors. It’s like, how many doors do you have? And they get caught in this trap of like, oh my God, I only have this many doors. They have this many doors. I want to grow, I want to grow. And they get in. It’s never enough. So that’s the big challenge that we see a lot of times in people wanting to scale. They’re wanting to scale because there’s ego involved, there’s an addiction involved. So I think sometimes you got to step back and look at for the sake of what a lot of people say, I’m doing it for my family, I’m doing it for financial freedom. I’m doing it to have more time freedom. And they create just the opposite. They don’t have time with their family, they don’t have time freedom. They try to grow and scale too fast, and that really can blow things up.

Kathy:
It literally just happened in our book signing in Dallas where somebody from BiggerPockets showed up and we got to have some one-on-one time with him, and he’s doing amazing. I forget how many doors, I don’t care. He was very successful. And his next thing was, I’m frustrated because I want to get to a hundred million dollars. And we were like, why? Because I want to spend more time with my family and not want more freedom. It’s exactly what Rich just said. And it’s like, well, how is that going to give you more time for your family and have more freedom when you actually already have it right now? Right?

James:
I love that thing about Big Auryxia because that is, especially when you’re a young entrepreneur, you start to have some success and you have that grind where you’re really putting in the work, and then there’s this corner that turns and it goes from hard work to success. And then you see the success and it feels so good after working, right? Because I remember when I started wholesaling, it was like a year of just getting pounded on the door, making no money, and then all of a sudden the lights turned on and then it was like, this feels good. I like getting deals done. I need to grow crazy. And we went trying to do every deal you could possibly do well from just trying to get one deal done to take them all over because it feels good. It’s that hard work that pays off.
And it is something that you have to be very careful about. And I’ve learned lessons, especially over my career of you can’t do it all yourself and you got to start hiring the right people. Putting the people in the right spots is so essential because the operator that is trying to grow can actually be more detrimental to the business than anything else. And it is about having that good foundation. And so I know Henry, you’re always growing. I mean, when you’ve been scaling your businesses up, that’s always the question, how do you scale? It’s like, well, I don’t know. You just do more and you hire more.

Henry:
You just do more stuff and then you figure it out, right? There’s no plan needed. Yeah. No, man, you’re right. I have been growing and I have been this year or last year was the first year I really brought in employees and I was really first faced with the question of, well, who do I hire and what do I have them do and how do I hire them? And how do I know that I really need to hire somebody or do I need to implement some system to do the thing that I feel like I’m struggling to do? And all these questions were floating around in my head because there’s just always been this big fear about hiring somebody. It’s like a conundrum. I need to hire somebody so that I can make more money, but I need to make more money so that I can afford to hire somebody. And so I personally want to know, do you have a plan or a way for people to understand how they know when they need to hire somebody? Who is it they need to hire or is it that they have a broken system they need to fix?

Rich:
Absolutely. Oh man. I mean, if you don’t hire people, then all you’ve done is created a job for yourself. You don’t have a business. And that’s what scaling smart’s all about. It’s about how to grow, whether it be your real estate portfolio or your real estate business or any type of business. You’re really not an entrepreneur. You’re not creating freedom for yourself if you’re trying to do everything yourself. So it starts there. I think really the most important thing to do is start off by looking at what is it that you are doing? Really get all that down. What’s everything that you’re doing in your business set? Step number one. Step number two is what is it that you’re not great at that you’re doing in your business that can all help identify that first hire or the next hire, and also look at what is it that you hate doing in your business?
What is it that’s getting in your way of doing what you’re really great at? And that will be your first hire. What’s getting in my way of doing what I do best in my business? So it starts there and I think the next step is then making sure you systematize and process everything, get documented processes for what you do and how you do it. Because if you don’t do that, you’re just going to hire someone. You’re going to say, Hey, take this over and you’re going to be very let down because they’re not going to do it well, they’re not going to do it the way you like it done. So start with that is start documenting what you do, how you do it, whether it be with checklists or written process or even videos so you can show people how to do it. Then when you make that hire, you get to say, Hey, look, this is how we do things here and this is the way we follow this process. And then it makes that hire a much safer hire instead of hiring someone that you’re going to tear your hair

Henry:
Out. And this is something that I share with my students as well, is documenting everything you’re doing and people say it all the time, but people get really overwhelmed with figuring out how to document or what I should document, and I tell people, just get out of your own way and capture everything. And I found that one of the best ways to do that is just when you sit down to do a task screen, record it beautiful. So you just screen record the tasks that you’re doing and just start talking as you’re doing it, right? Why are you clicking this button? Why are you selecting these filters? Why are you, and all of a sudden the tasks that you’re going to do anyway is now documented by screen recording and you talking to it, and we live in this great age now where we can drop that into some AI tool and it will literally print out a document for you of the tasks that you did. And so it’s so much easier to do that now, and you’re absolutely right over document, in my opinion, just document everything. You may not need it now, but when the day comes and you want it and you need it, you’ll already have it.

Rich:
Absolutely. That’s that nugget right there, Henry, is that that’s worth the time of the show right there. That’s huge. It really is.

Kathy:
And visionaries, often if you do a personality test, you can often find out that an entrepreneur isn’t really someone who is a great boss. That’s not always the case, but is often the case because they’ve had to get out there and do it themselves. So trying to, like you said, Henry, trying to figure out what is it that I do? It’s like it’s all in your head. I don’t know how to get it on paper. So that might mean that your first hire is someone who can pull it out of you, who can just watch what you’re doing. You said the computer screen is one way, but maybe the first hire is somebody who’s just got the opposite skills as you do. Maybe they’re really good at managing people, maybe they’re really good at creating systems. That was one of our first hires, Maggie Pike. She could just take stuff out of my brain and put it into processes because I literally couldn’t do it. I don’t have that part of my brain.

Henry:
One of the things I was also trying to do when I was hiring was trying to figure out if I hired this person, how would the tasks that they do pay for themselves, right? Because I had this fear of spending money I didn’t have. And so I was like, if I can hire somebody and they’re going to do X, Y, and Z and that’s going to bring in X, Y, and Z revenue, then it makes the hire worth it or the right hires, there’s something to doing it that way, or am I thinking about that wrong?

Rich:
I think you’re thinking about it perfectly, right? It’s so true. That’s why coming back, what I said earlier is looking at what is it that you’re great at and you should be doing? That’s your unique strength. It’s what you bring to the business where you put in an hour and it’s going to bring in five grand or 10 grand to the business. Whereas someone else, if you’re working on the bookkeeping or something like that where you could pay someone $50, $75 an hour and have them do that, it frees you up to do more of what you’re great at and what’s going to be that highest return on your time investment really.

James:
Yeah, and I think that’s important for when you’re scaling in that first initial hire. I know for us, accounting is one of the most important people we can hire in the very beginning because they tell us our profitability, what our costs are, and when we can scale and not scale. And sometimes it’s more than just the vision. So does the math work? Can I hire this person? What volume of business do I need to do? How many flips? How many rentals do I need to do to pay for this? Where’s the income coming from? Finances are the foundation of business. You got to make money. It’s got to be profit. That’s how they stay in or you end up like WeWork and that first initial hire of a county is so important because if you don’t understand your cost, you can grow really, really fast and be writing a check the whole way out the door.

Kathy:
That’s exactly why they said WeWork failed was poor accounting, and we’re talking about a multi-billion dollar company that got that wrong. So I couldn’t agree more, James, that it’s like if you don’t know your numbers, make sure you’ve got somebody in there who does. And again, generally an entrepreneur is moving so fast that they’re not paying attention to the numbers. And so the next step is being able to, the best word I can use is submit to your operations people. And that is so hard for a visionary to be contained, but I know the big shift for us in our company was when I got humbled enough times by saying, you know what? We’re going to do it anyway and we’re going to worry about it later and this is going to work out for it not to work out for me to go, okay, I should have listened to my team.

Henry:
Okay, time for one last quick break, but while we’re away, pop on over to biggerpockets.com/scaling smart to grab a copy of the new book and we’ll be right back with James’s questions in a moment. Welcome back everybody. Let’s hop back in. Well, this was extremely helpful for me. When you have people and you start to hire people, it creates an environment where you now have this business culture you need to manage. And I know James has a lot of businesses and they employ a lot of people. And so James, I’m going to toss it to you here and let you take it away.

James:
Yeah, the fun part is scaling. People ask me this all the time too now it’s great. I can say, go read Rich and Kathy’s book.

Henry:
I think you meant to say you were going to buy about a hundred copies and just hand it out to people.

James:
I think that’s the best way to start scaling. I’ll just, the whole business is getting on this book,
But as you grow and scale, especially when we’re in an industry like real estate where the markets change, and as the markets change, you have to change your business up fairly often. The way we wholesale today is not how we wholesale 15 years ago, or even 10 years ago or even three years ago. The way we flip properties today is not how we did it 10 years ago, five years ago. You just constantly have to be perfecting this business and tracking it. But the thing that I’ve had an issue with, and I want you guys’ feedback for this, this has been a constant question that I try to figure out. I can be my actually best employee sometimes where I will put in the extra work because I’m motivated. I’m building something that I’m passionate about. And with entrepreneurs, I look at it sometimes is there’s two different types of coaches.
There’s the Belichick coach, which is on the sideline, getting things done, and then there’s the quarterback coach, which is actually directing the team, but they’re hands on. And I fall into that quite often. I cannot, I have a problem not putting my hands on things. I just want to see how we can perfect it. When I start taking a step back, performance does slip and it’s not, what I kind of had to learn was, well, it’s okay to let it slip as long as it’s still functioning, it’s not going to be running a high rev anymore. What do you do in those scenarios when your business, you can suffer when you start scaling and have to, what I’ve learned is, well, that’s okay if it falls back a little bit. I can still build these other revenue centers here, but what do you do when that happens?
That is not a good feeling, right? I remember the first time I hired sales managers, my sales drip dropped 50%. We had higher expenses. We have sales management now salaries, which was eaten up another 10% of our bottom line. And your volume’s dropping in those scenarios. What do you recommend operators to do to fix those issues? And then how do you deal with that as an operator? For me, I just want to jump back in and fix it right away. I’m like, no, no, no, we got to get sales back up. So I mean, what is your advice for entrepreneurs that are those go-getters that want to grow, but you have to deal with the bumps of growing?

Rich:
Well, before I jump in with advice, which is not coaching, let me do some coaching and ask you what you want. So what would you want here? What would be the ideal situation for you to be able to scale and have this turn out the way you want it?

James:
Well, I mean, I think what all entrepreneurs want, we want every employee to run at the same lever standard that I want to run at

Rich:
With

James:
That same drive. But then the issue is they wouldn’t be an employee also if they would be the entrepreneur starting things. And that’s one thing I had to realize was, well, you can’t replace that, but you can empower ’em and you can incentivize ’em and you have to trust them. But ultimately what we want anything is to have more time, have more freedom, and also just for me, it’s about freedom of time. So I can grow another thing. I will not leave this revenue center to go here until this is fixed and working.

Rich:
Okay. So what are you doing to incentivize those people, that person that would be stepping into, say, your role as the quarterback? What are you doing to incentivize that quarterback?

James:
Well, so if we look at our sales manager who he’s incentivized off revenue and net profit, so he has an equity stake in the business as far as, okay, this is the growth of the sector. So he doesn’t just get paid on revenue, it’s off profit. So if we’re running efficiently, he’s going to get paid more. And then it’s also on a tiered up system. So if we hit a certain amount of sales volume, he can go into the double, triple bonus. And one thing that I’ve learned, maybe not learned, but adjust my business due is how do I work? Well, if I’m incentivized and there’s no lid on me, I’m going to push to the max to just blow through the atmosphere. So we don’t put lids on any of our employees managers, or they have the right to go do whatever they want. They can push as hard as they want, and they can grow as much as they want and the ceiling’s open.

Rich:
Got it.

James:
So financially we have no lid. And then other things that we do for our employees and management team is we incentivize them as far as where is their growth, where their goals, if they want to build out a portfolio, how can we assist that with our employees? We’ll find them a property, put up a hundred percent of the cash, help them manage the renovation, and they just got to get the financing. And so to get them, we want to see them doing better in 10 years, not just making more money. And so meeting with those employees and incentivize them, how do we get you to grow rather than just pay you? And so those have been the two biggest things that we’ve done. But as an owner sometimes I’m like, well, you have this great opportunity. Why aren’t you even pushing higher? I could lend you this money. You could buy this deal, you could do more. But then they get a little complacent at that point.

Rich:
And I think that comes, I mean, I love that. I love what you’re doing, James. It’s like that’s it. Incentivizing, not putting a cap on it, kind of creating a culture of entrepreneurship, really. You’ve built a team of entrepreneurs. There’s this piece in here that you’re talking about, it’s like if they were true entrepreneurs, they would be doing it on their own. So what keeps them from wanting to go do it on their own?

James:
Well, I think it’s the brick and mortar and the comfort, which a lot of salesmen, I mean, they know that when they’re in a bigger group, they feel more comfortable about growing. And also if they’re working in their team environment, if I look at some of my core salespeople or managers, their comp plan, they’re going to almost make more working on our team than they would if they were building out their own set of business. And so we make sure we heavily incentivize our teams to where they have that financial compensation to where they can really grow financially if they want. But typically, if I look at my core employees, they still like that blessing that I’m doing it right, this is going fine. They need that extra acknowledgement that, no, you’re doing it the right way, just keep doing it this way and growing. So I think what keeps ’em there is us, how we set up our comp plans, how we set up their growth pattern to where we’re focused on their 10 and 20 year goals, not today. And because of that, we grow together, which keeps our average employee in our office at seven, eight years plus.

Rich:
Have you seen where some of these employees that you incentivize do the job as good as you do any of them?

James:
No.

Rich:
Interesting. Yeah. I mean, you’re a hard person to replace, right? It’s tough. That’s what I was going to look at it. It’s like when you have this culture of accountability and a culture of entrepreneurship, usually that thrives when you got the right people. So usually when you come back to anything, it’s either a process problem or a people problem. So it might be the people. Do you have core values at your company?

James:
I would say we have vague core values.

Rich:
That’s a no no. That’s what I’ve seen. I’ve seen it’s like when you have a core value of, I know people who are in a similar business to you, they often have a core value of grit or resilience, something about digging in and making it hard, not afraid to do the hard work and hiring to that. So when you’re hiring people, it’s like, tell me about your grit. Tell me about a time in your past jobs when you’ve really hit the dig in and make things happen and figure it out to get the result you want. And so hiring to that is going to give you a better rate of bringing on the people. It sounds like you’ve got the process figured out. And so now it’s like, do you have the right people that are truly as committed as you are? I mean, you’re doing all the incentivizing. You have no cap on it, so there’s no reason that they wouldn’t be able to do the job the same way you do unless there’s a lack of training showing this is how I do it, this is how it works for me. It doesn’t sound like a motivation problem, is it?

James:
No, it’s not a motivation problem. I think it’s that last In our business, it is the industry that we’re in. If we look at our brokerage broker business is actually very easy to systemize. You create a lead, you create the training, you delegate the lead, let the salespeople sell from there. Our business in real estate, especially when you’re talking about as people are growing flip properties, burr rental portfolios, more technical real estate, it’s not just, Hey, we have this money, we’re going to buy it and here’s our return and scale it this way. But that technical side, which comes down to the core underwriting, how do you create that margin in a deal is the difference between whether you can buy it or not buy it? What’s that plan, that magical plan that will take it from the red to the green? And that’s where we run into bottlenecks because in Seattle, what we look at is we got to invent the return. How do we take an asset and make it more profitable? And most of the stuff that we buy is on market, so anybody can buy it, but it’s about putting that magical plan on it, and it’s that technical side, that last 5%, that really holds back the growth because that last 5% can make up for 50 to 60% of your total revenue just by looking at it that way. And that’s usually where we run into our bottlenecks on our hiring is we just get stuck at 95%.

Rich:
It’s almost like the 10,000 hours thing. It sounds like you’ve got the 10,000 hours, probably a hundred thousand hours in doing this type of thing. So it’s like, yeah, how do you ramp up your team or that person that’s going to do what you do the way you do it? It could be a time thing to get them to almost have them be like an apprentice where they’re shadowing you, they’re seeing how you do it and what you do. I mean, it sounds like the motivation is there, sounds like the value of grit is there and now it’s transferring your skills, whatever this unique ability that you have over to someone else, which would free you up to step away from that role. Kath, what do you think

Kathy:
Gamifying, it came to mind, fun contest sharing with each other, whatever you would do to raise the level of ability, like Rich said to your level, and also being so clear in your job description of, Hey, we’re looking for people who are willing to go above and beyond. In one of our interviews and scaling smart, I interviewed Jillian Hellman from Realty Mogul, and she made sure that all the tough parts of the job were also in the job description, so people really knew what they were coming in for. But I also want to share something that came to mind, which is burning people out and that you may have endless energy, but not everybody does. And so we have a friend who basically works his employees to the bone where some really good employees are just leaving because they can’t keep up with the pace. So I would also question that coming back to for the sake of what, for the sake of what

Rich:
Do you offer free rock stars to everyone?

James:
Yeah, it’s on tap here. We call it Sales Juice in our office.

Henry:
You got that covered. Well, this is amazing because I got to ask some questions that were burning at my business. I got to listen to James get live coaching from Rich and Kathy Tke, and I learned a lot in that process. And I think one of the best points you made there, rich, was to having the core values and then hiring to the core values because then you’re bringing in people who are built. You want them to be built, you want them to be built for your business, and then you can train them on your processes. So I think that that is super valuable. One question I have for you both is I’m going to turn it back on you guys. Why build a business and scale it smart? What does that bring you? What’s the for what in scaling Smart?

Kathy:
It is such a great question and one that I lost track of as I started to get success. I mean, when Rich and I started real wealth, it was so that we could be with a family. Rich had had melanoma. The doctor told him he had six months to live. The doctor was wrong. But it was that moment of, oh my gosh, I never want to be in a situation where I haven’t lived my life. I want to understand this thing called passive income. I mean, if the doctor had been right, rich would’ve not had the past 20 years that we’ve had together, and that’s a possibility for everybody. So it was like, how do I live my best life? And then when as James said, I discovered real estate and started to have success in it, I got obsessed with that and forgot my why, and that’s when Rich came in and was able to bail me out of the messes that I had created by all the things we talked about, going too big, growing too fast, too many expenses, not having the systems in place, not having our buy box, and knowing exactly what we’re good at.
When he came in and coached me and became my business partner, which woo, that was a whole lesson right there of how to do that. Slowly he started to replace me and it was hard. It was hard to watch other people get hired and do the things I had done and had done well, and then all of a sudden they’re doing it better. And it came to a day where there was really all the jobs were taken and what was I supposed to do? And that’s when Rich was like, now you get to do the things you love to do. And that’s when BiggerPockets called and I became a host of on the market. That’s one of my strengths. So to just summarize it, to have a self-managing business where you walk in and watch these employees just rock in, it is one of the most exciting things I’ve experienced besides watching my own children launch and grow up and create. It feels like

Henry:
That. What about you, rich? How has having these smart scaled businesses, self-managing businesses benefited your life?

Rich:
Yeah, it’s like I love my job because my job is now leading a team, leading a team of really self-managing leaders, self-managing teams. And the cool thing about that is so many people will leave the nine to five and step into the world of entrepreneurship and then they’re on the 24 7.

Henry:
They’re like,

Rich:
What did I do here? But on the other side of that, when you start to put systems in place, when you get clear about what you want, you get clear on who do I want to hire? Who do I need to hire? You kind of design your business. You look into the future and say, what do I want my business to look like in three years, in five years, in 10 years? And then you come back to today, and this is what we did at Real Wealth. We really got clear on it probably about 15 years ago. We set the vision for where we wanted to be, and then we hit that vision within about 10 years. And it was just, what it does is it creates time freedom. You are focused on doing what you’re great at, what you love to do, and it creates a company that really will surpass you, whether it be your portfolio, when your team there or your real estate investing business.
It’s when you have a team that’s really running things and they can manage things on their own. And what you get to do is like watch your bank account grow. It’s really inspiring as it frees you up to be able to everything. What we’re looking for, everything that BiggerPockets is about is being able to live life on your own terms, and you can’t live life on your own terms. If you’re beholden to a business that’s taking all of your time. So that’s when creating a self-managing business for me, it’s inspiring, it’s fun, it’s fulfilling. That’s the positive side for me.

Kathy:
It’s kind of like you’re retired, but only retired from the things you don’t want to do.

Henry:
Yeah,

Rich:
Exactly.

Henry:
Well, this has been incredible. I have learned a ton just in this conversation, so I already know the amount of value that is in the book for people. If you guys want to know more about Scaling Smart, then go ahead and grab the book. You can do that at www.biggerpockets.com/scaling Smart. Thank you so much for imparting so much wisdom on us in a short period of time. And thank you so much for the time and effort you put into writing this book. And thank you everyone for listening. And as always, you can catch us on the next episode of On The Market.

Dave:
On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.