We do a lot of things that aren’t convenient or fun in the short-term, but that help us in the long run. Exercise, dental checkups, flood insurance, and life insurance are among many examples of “preventive” investments we make to help ward off bigger (and costlier) problems later.
We also try to diversify in order to mitigate risk. Companies regularly back up data to different physical locations; in case one location goes out of service, another can keep the business up and running.
That kind of discipline applies to home building and development, too.
While it might be a tough pill to invest now to guard against a future threat, perhaps at the risk of short-term profitability, doing so will pay off when the rainy days (read: the next recession) comes.
And it will come.
(After all, you reserve money out of profits for warranty work and litigation, right? Same concept, except those risks can be mitigated up-front, whereas a down cycle in housing is just a question of when.)
An often-overlooked hedge against that inevitable down-cycle is to develop and offer single-family homes built specifically for rent, either within your existing for-sale communities or in stand-alone single-family rental communities.
Here’s why: For-sale gives you great profitability in good times, but forces draconian measures in slow times; a for-rent division provides slightly less or even profitability in good times and much-needed mailbox money in bad times … with the option to liquidate those assets when the time is right for your business and the market.
That being said, and even if the homes themselves look and perform the same, for-sale and for-rent are two very different business models.
What and how quickly you build, how it’s financed and managed in the short-term and long-term, and the customer profile and relationships are like cousins--related, but just different enough.
It doesn’t mean you can’t do both businesses at the same time; in fact, a few of your peers are doing just that, displaying both the discipline and the business acumen to set up, invest in, and manage two distinct business units that may share some stuff for efficiency’s sake (like design and production), but otherwise operate all but autonomously.
So, while your for-sale competitors are destroying their organizations during the monsoon season and struggling to build them back up when the clouds part, you’ll always be in prime position to quickly scale up or down (or sideways) and achieve greater profitability regardless of the weather.
Sounds pretty smart, doesn’t it?
About George Casey
With decades of deep hands-on experience in operations and processes, business consultant and keynote speaker George Casey brings unparalleled insight to a variety of businesses to streamline operations, increase profits and long-term sustainability, especially to the residential development and home building industries.
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