By Fan Bi, CEO of Blank Label.
The world of real estate investment has been an interest of mine since I was young, spurred in part because of my parent's foray into buying and leasing properties. The lessons I learned as I dove deeper into the world of investment properties revealed to me that it has more than a little in common with my day job running a retail clothing company.
Spend a little to make a little, but be wary of letting it spiral out of control.
When you're trying to turn a profit on an investment property, spending money on some seemingly small upgrades can yield considerable dividends. You can also go crazy pouring money into each nook and cranny of the home and end up with comparatively few gains.
I have found that you run into similar situations in physical retail. Making certain improvements to your physical retail space or office can have a drastic effect on your brand perception. This effect can even be significant enough to allow you to market your brand as a premium offering, increasing the likelihood that you can charge more without disrupting your volume. We recently opened a new store in Denver, spent the most we ever have on the build-out (a little shy of $100,000), and it's the fastest start we've had to a new market.
However, you still have to be careful of falling into a never-ending circle of spending money and hoping it will yield more revenue. There always comes a point where your money would be better spent on other concerns, such as employee development or saved as an emergency cash reserve. Make sure you do as much analysis as possible to see if the payback period of the investment is reasonable. Anything less than a year is generally an automatic yes, while you should be cautious about anything longer than two years.
Start with desired margins and work from there.
Most experienced real estate investors understand that they have to attain a certain profit margin in order for the property to pay off. Many investors follow the 50 percent rule, which indicates that the property's operating expenses ultimately amount to half of its rental income. They then use this goal to dictate their strategies and choices for the property.
We take a similar approach within our retail company. Because we know from the outset that we need to attain a gross margin of greater than 50 percent, we can develop clear guidelines for spending on raw materials and product line pricing that allow us to hit the desired mark. For instance, when we added chinos to our product selection, we did market research on what our competitors were pricing chinos at, inputted our target gross margin and went to work investigating if the cost components could be workable. After finding different fabric options and workshops to make the chinos, we priced out our packaging, shipping and logistics and were able to achieve our desired margin to move forward.
Always keep one eye on your cash situation.
Most rental property owners can't afford to be lenient on their rent collection because they need consistent cash coming in to pay their bills on time. Expenses such as repairs, mortgage payments and taxes come like clockwork, and property owners have to be prepared with cash on hand when the need arises.
Retail business owners are even more beholden to the health of our cash flow statements than most. Rent and payroll are often among our most significant expenses and we have little recourse if we can't pay them on time. I've learned that a big factor in retail success, much like with real estate investment, is paying close attention to our cash flow on a frequent basis. We work to minimize our outstanding accounts receivable balances by taking meaningful deposits and not shipping until we've received full payment. Make sure you are on good terms with your accounts payable by building trust in your credit profile.
The retail and real estate investment businesses may seem worlds apart from a distance, but when you examine the specific factors of each, it becomes clear that they share some significant DNA. By taking some of the lessons I learned in real estate to heart, I was able to put sound principles to good use for the prosperity of my retail clothing company.
Fan Bi is the CEO of Blank Label, an award-winning custom menswear brand.