Don’t Ignore Your Internal Customers
June 8, 2023
are you an IMPOSTOR?
August 2, 2023
I’m an avid reader of Entrepreneur Magazine, which often features lists of the top franchises in the world. After seeing one of their most recent lists, I was surprised by how much money it takes to start each franchise. Of the top 10 franchises in the world, the lowest start-up cost was $45,000, and eight of the top 10 had start-up costs ranging from $100,000 to $500,000. The top honor, though, went to a taco franchise that cost a lofty $3.4 million to start a single restaurant.
This got me thinking about how franchisees often put their entire life savings on the line to open a franchise and how different that is from real estate investors, who often spend very little money to start their businesses.
The REI industry generally touts how even broke people can get rich without risking hardly any up-front cash. Some investors might have to dig into their pockets to finance their first property purchase, but many don’t even do that. Instead, they find ways to creatively structure deals, so they don’t have to risk their own money.
While building something out of nothing is a great and true testament to the American dream, there is a noticeable difference in the level of success that real estate investors, with no personal stakes in their businesses, can achieve. Very few who risk nothing to build a business find great success, earning hundreds of thousands or even millions annually. Those who do are willing to work tirelessly and refuse to accept failure - no matter their obstacles.
However, most people don't share this same level of commitment when they have nothing at stake. The majority won’t go all-in to ensure their business succeeds. Instead, they treat their businesses more like a hobby and fail as a result. Make no mistake – if you invest $250,000 in a franchise, you will go all-in to make it work. You will quit your job and start out working your franchise full-time right out of the box. You will put up whatever money the franchisor says you need for their system to work. You will invest heavily in marketing to ensure customers come through your door because you know that without customers – your business will fail.
A real estate investor might not need to invest in renting space, building restaurants, and buying equipment. But one critical investment will significantly affect their business's profitability. That’s spending money to find prospects for potential deals. We call that marketing.
Unfortunately, most real estate investors don’t treat their marketing spend as seriously as franchisees would. Most wouldn’t take out a $100,000 loan to finance their marketing budget for the first year to ensure a steady stream of leads come in the door every month. They’re more likely to invest in seminars and hire coaches to give them all the tips for success instead of going all in on marketing their business to get the steady stream of prospects they need to close deals and succeed. Why is that?
While I can’t answer that question for them, I can talk about why investing in marketing is a brilliant move if you’re serious about succeeding in real estate.
Marketing is essential for any business but is especially critical in flipping houses. You see, you must find off-market properties to find the best deals. Unfortunately, they’re not easy to find. But direct mail is one of the most effective ways to locate these properties. To close deals, you need to start with an inflow of interested prospects. Those prospects come from marketing. Some investors who feel financially restricted and can’t borrow money for marketing may attempt to use sweat equity to build up their prospect list – but it's hard work and takes a ton of time. Instead, our clients wisely choose to let us use our expertise in direct mail to send mailers to targeted lists with the hope that a small percentage will respond with interest. Then they'll contact those leads and try to turn them into deals.
Sounds easy. Right? It is for those willing to stick to a consistent marketing plan and continually follow up with their leads in a timely and relentless fashion. Yet most investors won’t invest in and then stick to significant expenditures like consistent marketing because they're not truly serious about succeeding in their business. They're not all-in. Sure, they'll make an attempt with a few calls and a direct mail campaign here and there, but it's not an “all-in-succeed-at-all-cost” effort. Most also give up far too soon and don't give their marketing system a chance to deliver enough leads over time to allow them enough time and opportunities to master the art of deal-making.
Why not? I can't answer that. But I would bet that if they had a significant financial investment at stake, they would take it much more seriously, and their success rate would dramatically increase.
How much should you invest in marketing? That depends on where you are in your business. We have some clients who do 100 deals a year, investing $2,500 to $3,500 per deal in marketing. That's $250,000 to $350,000 invested annually on marketing to close 100 deals. They’re willing to invest that kind of money in marketing because they’re making more than $1 million in profit as a result. However, if you're a beginner, you might have to invest more per deal simply because you’re still learning how to negotiate and close deals. While fine-tuning your skill set in this area, you’ll need to cast a wider prospect net. For example, let’s say you want to close two deals per month and assume it might cost you $4,000 per deal in marketing to get enough prospects to close those deals. That means you’ll need to consistently invest $8,000 per month for at least 12 months, which amounts to an annual marketing investment of $96,000. That's a serious commitment, and if you do that and do everything you can to work those leads relentlessly because your investment is on the line, you’ll likely reach your goal.
And what does reaching your goal mean? Most investors can earn at least $15,000 profit per deal. When you do the math, that's $15,000 gross profit per deal - $4,000 spent on marketing = $11,000 net profit per deal.
Now let’s look at the math for what this looks like if you invested in the consistent marketing needed to close two deals a month for a whole year:
$360,000 in gross profits ($15,000 profit per deal x 24 deals a year)
- $ 96,000 in marketing spend annually (average of $4,000 per deal x 24 deals)
= $264,000 in net profit at the end of the year!
Does making that kind of money make you think twice about treating your business like franchise owners investing their life savings in getting started would? If it does, I suggest you consider what it will take for you to go all-in like a franchisee.
