A reader who goes by the handle “Max” made a comment the other day that got me thinking. There’s a concept in pop business theory called the Peter Principle which states that managers tend to get promoted to their point of incompetence – taking on bigger and bigger responsibilities until they eventually get to the point where they’re over their head. And this, ironically, is the point where they tend to stick.
In discussing the concept of leverage, where an investor builds a profitable portfolio of investment properties over the year by occasionally executing a 1031 exchange, the Peter Principle might be relevant. As Max points out, you don’t want to get in over your head.
There’s something to this. There’s an implicit assumption that over the course of your investment career your ability to manage the complexities of larger properties and a greater number of tenants will increase. Additionally, you will also put yourself in a position to make judicious use of property management services. But at some point an investor needs to know how to say “enough”. Smart investors need to recognize when they’ve gotten to that point.
But often they don’t. And if you can find one who has gotten beyond his comfort level then you may be in a position to negotiate a great purchase. There’s a phenomenon I’ve noted which I call the “two-fer” sale – keep your eyes open for these. From time to time I’ll notice two similar properties which hit the market simultaneously. Sometimes they’re FSBO’s, and you’ll notice them if there are two identical FSBO signs on the same block. In my experience, this is a sure sign of an investor who paid for some expensive Rich Dad type motivational seminar, and in a wave of enthusiasm and empowerment hit the streets and bought the first two houses he could get a mortgage for. Essentially, this investor hit the Peter Principle very early in the game. He wants out.
Two-fer’s can be a great opportunity. If you can find a reluctant landlord who’s struggling with the negative cashflow drain of two vacant properties, you negotiate a great bargain by saying you’ll take both of the properties off his hands: I’ll take ‘em both for $XXX,XXX. And that should be a really low combined price. But the reason that this tactic works is that you’re making the seller’s problem disappear in its entirety. This can make the seller shift into “cut my losses” mode in one fell swoop.
This is a tactic that works. This is how I bought the two properties (FSBOs) a few years ago that I’ve recently vowed to sell as my New Year’s resolution. And on the buy side I’m looking at a couple of similar opportunities as we speak.
So the Peter Principle is a sword that cuts both ways – so make sure you’re on the right side of this trade.
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