Episode 12 - Expanding A Small Business Intelligently

All right, welcome back everyone. We are here with Owner Occupied Episode 12. I'm really excited for today's episode. Russell and I really get into some great discussions today. So we talk about first I'm closing on a warehouse. We're moving our office to a flex office warehouse space. So Russell kind of grills me on kind of my thinking behind that and why we're doing that, some of the opportunities we see there. And then we talk about Russell's printing company. He's closing on a printing company tomorrow. It's a big week for Russell and I. So we talk a little bit about that and we get into a great discussion after that around the concept of chopping wood, meaning How do you know when's the right time to move on from what you're currently doing and is working, uh, versus when does it make sense to just keep going because you found something that works? And then finally, we wrap up with a discussion around hiring. Uh, as a small business owner, it's hard to know sometimes when do you need hands and when do you need brains and what's the appropriate kind of pay range for that and how do you get comfortable with, you know, when it's time to pay up for the big bucks and bring in someone who really knows what they're doing. So Russell and I have a great discussion today, and I'm excited to bring it to you. Let's get right into it.

Hey, Peter, how's it going today?

Hey, it's going great. How are you, Russell?

I'm doing well. We're both in the middle of transactions, and my sense is anyone listening to your podcast is interested in that kind of thing. Yeah. One of the hallmarks of your business is— that I've always appreciated— is the precision with which you think through all of these decisions. So you're in the midst of moving your company into a new building. Why don't you tell us about that?

Yeah, so a little bit of background. We've been in our current office around 5 years, and it's, it's rented. So we rent it from a local landlord. And it served us well. It's about 2,400 square feet. But it's an old home. So it's, it was converted into an office, who knows when. It's on two levels. And of course, it's laid out like a home. So it's kind of, you know, it's not ideal for a modern office. So we've been looking for a new office for years and years, even going back before the management company, we've been looking for warehouse space. Because we had always had ideas about having like a little car repair/storage area because my business partner and I are both into cars. So Just coincidentally, we finally found a flex warehouse space that's going to kind of fulfill both of those needs. And so we close tomorrow, which is Friday, May 30th. I'm sorry, April 30th. And we're really excited about the new space. It's almost 7,000 square feet of, you know, flex office warehouse. It's a 2001 build, so it's in really good condition. And it's already got a really nice office build-out that's fairly recent, which is very well suited for us. We're pretty much going to be able to move right in. And it has, of course, a huge warehouse area. So I think about 2,500 of the square footage is office, the remainder is warehouse. The warehouse, of course, has a big, you know, bay door. And it's, it's just got tons of space for, you know, I've got a couple different ideas. Maybe we can talk about that as to what we're going to do with it. But Yeah, so we're thrilled. We're going to be moving in over the next few weeks. We actually can kind of take our time because our lease goes through July 30th here in our current space. And so yeah, we'll have a lot more room to expand and grow. We're going to kind of combine that with bringing the team members back into the office from working remotely due to COVID. I'm really excited about that because we've kind of been feeling a little bit of the strain from having everyone be remote.

It's—

it has some advantages, but there's a lot of disadvantages too. So yeah, a lot, lots going on, but I'm really excited about it.

Was there something in particular that prompted, after being in your space for 5 years, that, that prompted it? Or what was the— what was the catalyst to actually pursue a transaction?

Well, we have been casually looking the whole time, so it was mostly about just finding the right space at the right place in the right location. But there were a few other things sort of that all came together too that sort of pushed us over the edge. One is that we are getting toward the end of our lease. And so, you know, there's going to be some price increase on the rent. The parking situation here has always been a little iffy. There's a lot sort of behind the building that's behind our office. But the lot itself is in horrible, horrible condition. I mean, it's completely deteriorated. You can't even see the stripes anymore. There's potholes everywhere. And it's used by various other just businesses and residences and, and public agencies and all kinds of different— so it's always kind of chaos in that parking lot. It's kind of right in the city here, and I don't love having our team kind of walk back and forth almost down the street to get to and from the office, especially when it's dark. Um, and I think 2, we were outgrowing this space. We're pretty much at capacity here. In fact, we've got some folks starting to share offices. We sort of were able to extend that timeline with COVID and more people working from home. But with people coming back, and it's like, okay, it's time to get serious. We need a real office. That's not just like an old house that was converted. And we need some more space for our maintenance team and for their materials and stuff.

Yeah. So is the— is your business going to own the the building, or is your business going to rent from a different entity that owns the building?

Yeah, so the, the entity that's buying the building is RL Partners, which is the entity that my business partner and I own all of our real estate under. We own some rental properties and stuff. So RL Partners is buying it, and then RL Property Management Group is going to lease it from RL Partners.

Perfect.

So yeah, it's kind of a standard set up there, I guess. Yeah, so we set the rent, essentially, it's, it's a triple net lease, and our property management is going to pay a rent to our property management, such that our partners will get like a 10% return.

Yeah, you'll structure that so that it maximizes the, maximize the benefits, right? I was looking and actually signed an offer on a very similar size property. And, and maybe it's listening to some of you real estate guys on Twitter, but I absolutely love warehouse space and the flexibility and delivery options for last mile delivery options and e-commerce explosion. I look wistfully at roll-up doors now in a completely different way as I drive around town. And I I'm convinced there's more opportunity there than people sniff out today, that e-commerce is going. I suspect you're less far down the road on that thinking, but I maybe, because I tend to be out there on the edge a bit. But what are some of the reasons you wanted warehouse space instead of just a pure office?

Yeah, so it's a combination of a bunch of different things. You know, one was, as I mentioned, we've always wanted a place to kind of store our— my business partner and I both kind of have like a third vehicle that we use for summer, like sports cars that we drive in the summer, and we do some like track day events with them. And we've always wanted a place to store those that would be easy and secure and a nice place to be able to work on them. So that's kind of been going on then. With the management company, we really want a space for our guys to be able to store materials. So we stock certain items like air filters and smoke detectors. But we've always been limited on space to do anything more than that. So this will allow us to do things like start taking on more and more of the improvement work at the properties we manage. Because we'll be able to purchase materials ahead of time like cabinets and appliances and actually store them while we're doing the turnover work and then deliver them to the property when they're ready. Uh, and you know, we'll be able to build out a little, uh, wood, uh, workshop in there, uh, cuz we do these wood window restorations and, uh, we have a kind of a makeshift workshop in the basement of our current office, but it's never, you know, it's tiny and it's not really set up. So we'll be able to set, you know, a nice, a wood shop for the guys to be able to not only do the wood windows there, but also have for their use, either in, you know, sometimes you need a little bit of a workshop where you can do some carpentry work to get something ready to take it back to a property that we manage, or even just for their personal use. I think it would be a nice benefit for the employees to be able to have access to some tools and equipment if they're doing work, you know, carpentry work and things like that for their personal use.

This sounds like a nice synergy between what's good for your business and what will ultimately be good for your for your customers. And it's strange we're into this. When I say customers, do— are your— the owners, the property owners are customers, but you've also— what's the phrase you use for your— the tenants, the residents?

You—

yeah, you sometimes think of them as serving them as well.

So they're both customers, you're right. And we call the owners, we call them clients, and then we call the tenants either tenants or the residents. Yeah, but we consider them both customers.

That's part of the whole That's one of the big challenges with property management is you have, you really have two customers serviced by this, by having this, the warehouse and, and these additional features that you're able to provide, you're able to deliver service to both.

Exactly.

Renters and landlords.

Yeah. And give some value to the, to the team as well, which is really important too. Yeah.

So yeah, that's the— so you take care of, take care of your employees, your clients, and your residents, which will enable you to give better service to everybody. That sounds, sounds like a, like a no-brainer.

Yeah, the nice thing about flex space too is if we outgrow the office portion, we can always build out further into the warehouse space. The warehouse space is huge and there's plenty of room there if we wanted to, you know, if we needed to add a row of offices or a bigger conference room or something.

Easy enough to, easy enough to manage the the HVAC and heating and cooling in flex space is— can be, can be a challenge. Is the office insulated differently or built substantially differently than the warehouse?

Not really, since it's a fairly modern build. And it's actually, it's part of a condo. It's like a condo industrial space. There's like 20 total units, kind of similar to ours. So you benefit there from it not being a freestanding building. You've got shared walls. And then since it's a fairly newer build, the insulation seems quite good. Um, there's some rooftop units that handle heating and cooling for the office. And then the, uh, the warehouse has two large gas-fired, kind of ceiling-mounted industrial-looking heaters. Um, so yeah, I We'll have to see how efficient the HVAC is for the office there, but it really just has a drop ceiling, which of course isn't much insulation value there from the warehouse space. But, you know, we'll probably be able to keep the warehouse space fairly warm because gas is cheap here in Ohio.

So, right, right. It's a different space and the different systems for warehouse versus office. But if it's been there for a while and it's a modern build, that can be a scary challenge. I'm warning you, I think it also fits with potential add-on business.

I know.

'Cause you have that space.

Yeah, I have John Wilson's—

You can learn and store.

I've got John Wilson's words ringing in my ears and yours as well. Yeah, and I have been giving more thought to the add-on or bolt-on home service businesses as this opportunity to move into the warehouse has gotten closer. And kind of combined with the fact that we'll be talking more about this in future episodes, but my business partner who was the co-founder here and the 50/50 owner with me, he's going off to run an engineering company that we're buying. And so we're having to hire a director of maintenance operations to backfill his role. And I'm considering, you know, we're interviewing right now and I'm looking at potentially bringing someone in for that role who has experience in running a home service type business with the idea that it'd be very easy for them to take and just, you know, reproduce what they've previously done and start maybe buying some trucks and we're going to have space for equipment and it seems like an opportunity. To bring someone in who has done that before and just, they can use our existing business as a platform. So yeah.

I ultimately made the decision in the transaction that I close tomorrow, signed, sealed, delivered. The checks have been signed, most of the paperwork's been signed, but it's final, final tomorrow. But I ultimately made the decision to rent for 2 years And I think partly I didn't find the building, the perfect building in the transaction window to move and everything else. But part of it, and this is maybe for the next part of our conversation, and the reason I ask you the question, is, is understanding your existing skill set and the value of your existing skill set and how you actually, in pulling off this transaction, you just applied things you had learned and know and expertise in one area and applied it to a new area and you felt comfortable doing that. And I think when I listen to and learn from really high-caliber talented people, I'm— I think of, and I think you've shared this meme before, but this idea of focus on what you're good at and chop wood and it's working, keep doing it, don't get distracted. And that is some real value and I think I've sharpened and focused on and thought about my numbers and I'm doing so good in this area, don't get distracted. But I also think because of the way my brain works and I see opportunities and I'm dealing with smart people from different industries and I have to think through how to solve their problems all the time, that I think, man, you're chopping wood in this area or this, on this issue, and you're missing the fact that because you're really good at this, there's better logs right next door. Do the same thing, just do it right here. And so I wouldn't push you out of what's working or, And I thought about it in the idea of a previous podcast where, where John and I were pushing you to explore. But I feel pretty confident that if for some reason you were forbidden from working on property management, I doubt you would then say, you know what, I'm just gonna go back and I'm going to work as an engineer. I can earn a living doing that. And It may not be your first choice, but I suspect your, your business skills would translate, if that makes, makes sense.

Yeah, yeah, it's— yeah, it was Moses Kagan who tweeted recently about, you know, if you, if you find something that works, uh, keep, keep going basically until you're rich. Keep chopping, um, don't get distracted by the next shiny thing. And, and I think you're right, there is a tension there. There's a balance between keeping chopping wood, the wood that you're familiar with, and the axe handle that you get to know and everything, versus going and getting a chainsaw or something, right? How do you know when it's time to move on from something that's been working for you, but, but maybe your skills, you know, have kind of exceeded what's there? Yeah, that's something I'm still—

a good example of this, though. And I think I see some of his peers At success level and the Twitter interaction that they have where they're trying to pull him out of being— you are an LA resident expert, and I— if you found something that you said was going to work in your wheelhouse, I would believe you like that. Yeah, but I refuse to believe that if you took him and said, you're not allowed to invest in LA, and all right, I'll give you 3 months, but you've got to go hunting in the Sacramento area, that he couldn't apply that skill and invest comfortably in Sacramento if he, if for some reason he had to. And he might find that returns and the same level of effort and skill and wood chopping applied in a better market would just produce better returns. I wouldn't say that, hey, ditch everything you know about this area and go figure out how to sell silicon chips in San Jose.

Yeah, I think what we're discussing here is like the value of your domain-specific knowledge versus your sort of generalized business or investing skills, both in the case of Moses and, and what you're saying earlier about me. Um, and it's— I think it can be hard to know when you're in it how much of my success is, is attributable to my domain-specific knowledge, which for me is, is property management, and for Moses is LA real estate, and how much of our success is due to the fact that we've— we have a, a broader or a more general set of principles that we're working from that is just making what we happen to be working on right now successful. And to your point, if someone barred us from working on that any longer, we would actually find that we could go into something else and be just as successful or even more successful. So it's— you're finding that line between the fear of going out and trying something new that you might fail, and then you have the opportunity cost of giving up what was working versus, you know, the value of kind of getting kicked off your horse and, and going and finding out what you're made of, you know, kind of in a different area. It's a hard thing. I think when you're in it, it's hard to know, uh, where to attribute your success. Um, yeah, that's, that's really interesting.

And maybe peers, maybe peers or people who know you well or understand your skill set, um, maybe different mentors or people might be able to say, I could see this applying in other ways, but it could just come up if you're open to asking the question and you start looking at opportunities in different ways. That's, that's— I would say my advice would just be, if you, if you answer that question or think about the question and start to apply it, I would never tell you to, to stop chopping wood, I think would be my advice. It would just mean I would bet on you if If you said, I have to, I have to do appliance repair. And then I could offer my, I could offer my tenants use this brand of washing machine and this brand of dryer. And I've got staff that can maintain those things. And you know what, I could then run a coin-operated laundromat that runs those same washers and dryers. And Yeah. Is that chopping wood? Is that a different business skill set? Is that a bolt-on? It, it might— there might just be opportunities there that, um, that, that present themselves, uh, more than— but I would never say I'm advising you to pursue all these other things away from the wood chopping.

Well, and I think part of the journey as an entrepreneur is you get to the point where the wood can continue chopping and you can go explore other things too, right? And that, and that means bringing in— and John Wilson's been doing some deep dive discussion on this on his podcast. Um, I always forget the name of it because it's so similar to ours. Ours is Owner Occupied and his is Owned and Operated. There we go, Owned and Operated. Great podcast, by the way. Go check it out. If you like this one, you're gonna like that one. He talks a lot about how to hire and train up what he calls operators, which I kind of think of as like a general manager of a business or a business line. You know, there's really no reason I couldn't bring in, if I wanted to, a CEO or a president of RL Property Management. It had to be the right person, of course, and you have to set up the incentives right, but they could continue to grow and operate this business while I go and pursue asymmetric bets in other areas where there's low downside but high potential upside. So I don't know that I'm ready to do that just yet, but I sort of think of that as sort of the way out, I guess, without that, because that way you don't really have to stop chopping.

It's funny, it's, uh, and I, I don't mind talking about this, and I haven't talked about my partner much. She's, she's not, uh, not as public, uh, but my business took off when I hired a 6-figure person. Hiring that person and bringing her on, I delivered higher quality stuff to my clients. I am very confident letting go. I oft— sometimes I have— I had to transition somewhere we were on together, but my clients are happy working with Therese. And, and when I did more of what I'm good at and left her to do more, business took off. It was, it was great. And now I'm freed up to explore some of the other opportunities. We've added clients, and I can devote time to some of what we call bolt-on or, or places where I was spending a lot of money in my business that I think I could make money because competitors and colleagues in the space where I can offer them a service either either they're hiring me to sub out to do some of it, or I hire folks to do that work. I can turn each of those expense items into a revenue business if I can find the right operator underneath. And so, and I, but I'm taking the learning that I'm doing and trying to apply it in a different space. And I particularly picked one that was really small. That I could, I could, I could fail. It could not work and it wouldn't, it wouldn't ruin the core business. It wouldn't. I'd be very disappointed. I'm not, I don't have money to burn and I think it's going to work. But, but I definitely for that bolt-on in listening and learning and the systems and the KPIs and some of the other stuff we discussed over the past few weeks. I'm definitely implementing and pursuing a system and a rigor in the new line of business that I never would have thought about in my original business and syncing all this stuff up. It's intellectually challenging, that's for sure.

Yeah. Well, it's really interesting you say that about your partner. You know, we're in the middle of hiring, as I mentioned, this director of maintenance operations, which is It's a very high-level position. This person is going to work alongside myself and the director of property management to really set the vision and the culture and the direction of the company. And they're going to have 6 or 7 direct reports. And, you know, my, my wife reminded me of something the other day. When it comes to hiring, you need to know, are you looking for hands or brains? When you're hiring. And it sounds harsh to put it that way, but there's, there's something there. I think there's a reality that entrepreneurs have to be, have to face. And I need a brain in that role and you have to pay up for brains. I mean, and you were talking about a six-figure and that's, you know, we're right on the cusp of that with this role. And it's, man, I'll tell you, it's hard to get comfortable committing to that kind of a salary. When you're used to paying half that for your kind of run-of-the-mill office employees. Um, so yeah, I'm, uh, I'm trying to wrap my brain around that and trying to get comfortable with, you know, the old price is what you pay, value is what you get. What's the value I'm going to get out of someone with that, those types of capabilities, having them on payroll? And how do I make sure that I actually get somebody who does have those capabilities and isn't just, you know, collecting a paycheck. So yeah, I'm, uh, it's something that's consuming a lot of my, my brain right now.

If I'd looked at it on paper, um, there was a risk associated with committing, uh, where I was. Uh, in hindsight, it, it's easy to validate. At the moment, it was all right. I was— I knew that if it didn't work, I would be okay. It would have hurt. It would have been bad.

That's kind of how I feel too.

But it wouldn't have been, it wouldn't have been, it wouldn't have been enterprise threatening, but it would have been a big owie. But it would have been a, it would have been a big owie. And it turned out, it turned out multiple, I'm multiples bigger today because of that risk that I took. I think if no one would care, but if I were writing the history of it, it would, that would have been a big turning point that's worked out.

Yeah. Well, it's reassuring to hear that. I'm gonna have to pull the trigger sooner or later 'cause I'm gonna get overwhelmed with work if I don't hire someone soon, so.

Well, hopefully you get the right hire, you've got the right, you've got a space and you've got some flexibility and if all of these things come together, we could, your business could be in a different place 3, 6 months from now as the best. Correct.

Yeah, that's exactly what I'm thinking too, yeah.

Do you, when you, and we can, unless there's other things you want to do, we can wrap up with this kind of thought. But is, did you have by building on part of sort of a, a 5-year plan, a 2-year plan, a stretch goal kind of thing? Is this executing on the plan or is it more of an opportunity that, that's come up and with the lease that you pivoted from what your plan was?

It's more toward the executing on the plan. It's something that we've known we've wanted to do and we've been looking. I mean, we've toured— I think my business partner tallied it up— we've toured almost 25 different warehouse office type spaces over the last 10 years. So yeah, it was definitely kind of checking off something on the long-term plan. It'll really set us up well for future growth. And it's just one less thing to worry about with, you know, the lease and the parking and the weird layout of our current office. It's just, it's one less distraction that we'll get in there. Moving will be chaotic. We'll get all set up and then it's okay, what's next?

All right. That sounds like another good episode of Owner Occupied with Peter Lohmann.

Yeah, this has been great. Thanks, everyone. Just a quick reminder, go ahead and subscribe to the podcast if you're not already. That really does help us out. And share it with a friend, you know, another business owner or someone in property management or real estate. We'd love to hear and create more of a conversation around the episodes. And you can follow Russell and I on Twitter. You'll find that in the show notes, and we'll see you next week.