Oliver Foote, Author at Oliver Foote

Investing in Commercial Real Estate: Retail, Offices, Industrial, & Multi-Family

Why People Invest in Commercial

The commercial real estate rabbit hole is never ending. Depending on the situation commercial real estate can also provide better returns than residential real estate partly due to the fact that commercial real estate out the gate is viewed as an investment with a profit motive. Therefore, the only other people you are likely going to be competing against are other investors. Whereas investing in residential is a bit different because you are also competing with people who view it as a place to live not just a way to make money. Therefore, they may be willing to pay more in order to get what they want, meanwhile investors generally speaking are looking for a great deal, a high ROI, and may have a shorter timeline than someone who plans to live in their home for years. The owner/occupant might view paying a premium as a small price to pay for a great house they’ll live in long term.

Does Multi-Family Count as Commercial?

Before diving into the various categories of commercial real estate and the pros and cons of each and what to consider before investing. I want to talk about a category of commercial real estate that is sort of in-between commercial and residential, and that is multi-family commercial. Multi-family commercial is generally 6 or more units, this category of commercial also tends to be competitive with respect purchase prices. In larger cities cap rates (I’ll explain this in a minute) tend to be lower because if there is demand for rental units (e.g. big city = demand), the investment will provide a fairly consistent return without much vacancy or lost rent. Many investors who started out purchasing residential real estate as an investment will frequently work their way up to multi-family apartment buildings once they have the funds to do so, and may even get into construction and development or re-development.

More Competition in Multi-Family Space

However, as mentioned, there can still be quite a bit of competition for these kinds of investments. Although not as much as a typical residential home. On a quick tangent here, in the Greater Toronto Area multi-family investments are becoming harder and harder to find because we simply aren’t building purpose-built rentals anymore (another name for multi-family). In an attempt to make everyone feel like an owner, we have been building almost exclusively condo apartments, which tend to come with high costs, unnecessary expenses, and don’t tend to be all that affordable. Therefore, the price of purpose built rentals as investments have gone up (as have rents) in larger cities. In an attempt to alleviate some of the stress from underbuilding purpose built rentals are conversions of larger homes to 3+ units. This has become very easy to do thanks to recent changes in housing regulations, up to 4 units on a single lot. This presents opportunities for investors who have some skill in construction management, but they may still find it challenging to make the investment work due to the sheer amount of competition from owner/occupants who also want to purchase those homes. However, the amount of converted homes will likely increase over time as investors become more adept at doing conversions and homeowners themselves begin to add additional suites. This could also make these homes become worth even more thanks to the extra income, everyone seems to want an “in-law” suite. So the regulations could really benefit the investors or owners who are able to purchase and upgrade their homes which could benefit supply. But overall we won’t be able to exclusively rely on this method of adding housing supply as it really is a small drop in the bucket compared to building purpose built rental apartments like we did back in the 70s and 80s. Ok, now back to what you came for, talking about other kinds of commercial real estate.

Offices and The Pandemic

Firstly, lets discuss office buildings. If you’ve been following the news in the past 3 years or so we had a small little pandemic. The effects of the work from home shifts that were caused due to the pandemic, meant that a lot of office spaces were sitting vacant for a long period of time. Workers and companies moved to a hybrid model. Then all of a sudden they didn’t need as much space as before. Even the most expensive, sought after real estate 1 World Trade Center in Manhattan had some of it’s tenants downsize and sublease their rentals because they weren’t using the space anymore. The effects for smaller landlords in smaller cities were more significant. From an investors perspective, the high vacancy that office real estate has seen presents a big risk, if you choose to invest, you could face long vacancies and it could hurt your profitability, or ability to pay the bills. However, where there are problems there is also opportunity. Because of the high vacancy rates, you could purchase a “distressed” asset at a very good price (whatever that means in your market), and then come up with a plan to change its use, or change the type of professionals that you cater to. I’ve heard of people renovating their buildings and turning them into co-working spaces, residential apartment buildings (can be a big investment since fire code regulations tend to be different when kitchens and sleeping are involved) and various other conversions. I’m sure you’ve seen some of those old industrial buildings that get converted into extra high ceiling apartments with a rustic feel, generally called lofts, although people can be pretty loose with that term nowadays. But for the right person, and for the creative investor, an investment in office real estate right now presents a TON of opportunity.

Get Your Starbucks Out for Retail

Secondly, what about retail. Now that’s something you don’t think about. But yes, someone (or usually a company) owns shopping malls. Generally those large individual businesses that occupy them don’t own the real estate. They rent out the space as do other various businesses and due to a good location, or modern amenities or what have you, businesses lease the space and try to turn a profit of their own. Investing in retail real estate can be quite a bit more involved and may also require more scrutiny on what types of tenants you want and the tenant mix you are looking for. As an investor in retail, you have to take a different approach and you almost have to view the space you are leasing as a partnership with the businesses that will occupy them. Likewise, if your retail space is subpar, a tenant may choose not to rent there because they may be worried about the sustainability of their business. Both landlord and tenant in a retail situation benefit from a few main components. Traffic through the area. Are there lots of people? Are residences being built nearby? Is there a highway that people often pull off from? Are there any “anchor” tenants: these are tenants like your Walmarts, Tim Hortons, Starbucks, Big Grocery Stores etc. which drive traffic to the area. If you can get good anchor tenants, this may also attract other tenants to the area. Anchor tenants tend to have more bargaining power due to the fact that they will likely contribute a significant portion of the traffic. Economic forces are also a factor, if we look at the pandemic again there was a time and there were many businesses who went out of business because they were either unable or not allowed to operate their in-person stores. This is unlikely to happen again, but people’s expectations have changed and if businesses aren’t changing in line with expectations they could become irrelevant before long.

Light Industrial: Warehouses etc.

Thirdly, probably the most complicated form of investment in real estate, light and heavy industrial. Light industrial is a bit easier to manage, but may still require special considerations. Light industrial involves things like warehousing, small time manufacturing, and other types of businesses that involve warehouses to some degree. This could just be a kitchen, bath, tile warehouse, Costco and IKEA could both fall under light industrial, but since they are also retail it might be sort of complicated to categorize. Depending on the type of tenants that are interested in renting out this real estate you may have to make certain adaptations to the property, or the tenant may request adding more power or maybe a ceiling crane, or other larger things that are used in warehousing. In some ways this type of real estate can be easier to manage, but because every tenant will likely have different requirements you may end up spending a lot of time with engineers to see if the property can be adapted to what they are proposing.

Heavy Industrial: Probably Irrelevant for You

Heavy industrial on the other hand is extremely specialist, and frequently the companies involved in this type of work will just buy the land themselves when possible. This involves things like chemical plants, oil refineries, car manufacturing facilities etc. The big consideration for investors who are thinking about buying land that was previously used as a manufacturing facility is environmental concerns. Land has to pass multiple layers of inspections by the EPA (Environmental Protection Agency) here in Ontario. Often they will require remediation of the land before it can be used again or the land can be sold and remediation costs can go from hundreds of thousands to millions of dollars depending on the damage and requirements of the EPA. So once you start getting into industrial, environmental issues become more of a concern. On a smaller scale it is important to keep in mind environmental concerns when you are purchasing ANY commercial real estate that was either on or around a gas station, a mechanic shop, dry cleaner, certain farming operations, or any other business that heavily uses chemicals. You don’t want to find out when it’s too late that you have to remediate land. So it’s always advisable to research what prior businesses were nearby and to put in a clause to get the land inspected by the EPA prior to agreeing to purchase it. Next I’ll dive into what to do after purchasing land, and how commercial leases differ from residential.

The Commercial Property Lease vs. Residential

With all the examples of commercial real estate above we should talk about leases, since they can be quite different than what a residential investor is used to. First of all, the minimum lease term is generally 5 years with 10 year leases also being common. The screening for commercial leases tends to be more intense, since landlords are expecting the tenant to survive at least 5 years if not longer. The landlord will frequently pass on all the operating expenses of the building. But the tenant may also be able to negotiate that the landlord pitch in on some renovations to get their business operating quicker. There are all kinds of technical terms for commercial leases, generally a triple net lease (or net net net lease) is one where the tenant covers all expenses including large ones such as roof repairs, property taxes, snow maintenance etc. A single net lease (or net lease) is one where the tenant is responsible for it’s portion of utilities and the landlord takes care of the building etc. There is also double net leases, but these terms are somewhat loose and each agreement will be different.

Additionally, in most leases the tenant is able to make whatever renovations they want to a unit, there may be a stipulation that they have to return it to a certain state when they move out. But any renovations are usually the tenants responsibility (unlike in residential where the landlord renovates units for the tenants). Furthermore, there is no such thing as a “standard lease” in commercial real estate, the way that there is in residential. This means that generally a landlord can put whatever conditions they want in a lease, so it is important to read it in detail and have a lawyer review it.

Calculating Rent and Realtor Fees

Note that the realtor fee tends to be a percentage of the total lease which is usually the landlords responsibility to pay. I should also mention that if you are looking to rent commercial space, you will likely have noticed that the way the lease price is presented is quite different from residential. Rather than a per month amount, the price is per square foot. For premium downtown Toronto office real estate (Class A buildings) you may be looking at $40 per square foot, for suburbs it might be closer to $20 per square foot. Just as an example, lets say the space you want to rent is 1000 sq ft offered at $20 per square foot. When you multiply the numbers you get $20,000. That $20,000 would be the annual rent plus any other additional fees agreed to by the landlord and tenant. Each year, the price may change. So in year 1 it might be $20 PSF, then by year 5 it may go up to $25 PSF.

Calculating Square Footage, Useable vs. Non-Useable

Commercial real estate is also a bit strange in some ways because a portion of the common area may count towards the total sq ft that you are renting, this is usually the landlords responsibility to take care of for all the tenants in the building. But it won’t be useable sq ft for operating your business. So you need to make sure if you require a certain amount of useable space that you confirm and measure the space yourself and figure out how much of the sq ft the landlord is asking you to rent is common area square footage. This extra square footage may change your willingness to rent a certain space or to pay a certain price for that space. The idea for renting “non-useable” space is that it’s a nice lobby area for clients to wait in, or its a foyer that makes the building look nice at the street level, and it’s a value add to your business. Some businesses may see it as a value add, others may not.

Capitalization Rate or Cap Rates:

You’ll probably hear cap rate about a million times when you’re looking at commercial real estate as an investment. Essentially a cap rate is what the market requires the property to generate as a return on investment and determines the property value (most of it anyway). For multi-family residential in Downtown Toronto for example a 4-5% cap rate would be considered good. For example, lets say my multi-family building generates $80,000 net of expenses each year (operating income). Let’s also say the generally accepted cap rate in the area is 5%. You take the 80000/0.05 = 1,600,000 is the value of the property. Alternatively, let’s say someone is asking 2,000,000 for a property that generates 90,000 of income. You can find the cap rate by dividing 90,000/2,000,000 = 0.045. So the cap rate is 4.5% for this property.

Analyzing Your Commercial Investment

You do have to be careful when you are investigating a property since naturally the owner will do whatever they can to make it look as good as possible. Owners should have documents of all the expenses of managing the property as well as the rent rolls and vacancies of the property. Sometimes, they don’t and you’ll just get a bunch of estimates. Regardless, it’s important to do your own research and make your own estimations of how much the expenses would cost. Are there some changes, investments, or upgrades that you can make which will improve the cap rate of the property after purchasing? What are the opportunities available that the previous owner didn’t bother to take advantage of? This type of thinking is essential to making a good investment, because usually the market price of a property and the potential of that property can be quite different. It is also frequently the case that the current rents of the property will not cover the cost of financing so to make the investment work you will have to think creatively.

Internal Rate of Return (IRR) and Net Present Value (NPV)

There are other metrics that investors use as well, such as IRR, or internal rate of return, this takes the investments cash flows, purchase and sale price over a longer time horizon and gives an expected rate of return. Sometimes investors will go into an investment with the expectation of a certain IRR. If the investment meets the IRR, then they will go ahead, if not, they will pass. IRR is frequently used as a discount rate in calculating another number called the net present value (NPV). NPV is a way to discount future cash flows factoring in a discount rate. The discount rate, can be based on many things, generally the risk free rate (the rate that government bonds are paying) plus some other factors such as mortgage rates (the value you could get lending the money to someone else) and inflation (time value of money) are taken into account. Using a formula all the expected future cash flows are discounted using the discount rate and they yield a dollar amount. If the dollar amount is negative factoring in the discounted cash flows, this means that the investment will likely be worse than an equivalent risk free investment. If the value is positive it means the investment is better than a risk free investment (or it meets the investors required IRR). Generally the rule of thumb is that NPV has to be zero or higher to move forward with an investment. My explanation is not great, but I do have a video that does a better job explaining these things below, if you’re ready to dive into the technical weeds:

Property Management, Systems, and Employees

Lastly, what about management? Depending on how you set up your rentals you may need to hire an admin staff to manage it, cleaners to keep common areas or business offices in tip top shape, and have some tradespeople you trust to fix things when they break. As you build up a portfolio it might make sense to hire a property manager who manages everything. From finding new tenants to hiring the tradespeople and cleaners. For almost all types of real estate investing once you get to a certain level, property management becomes very important. There are property management companies which provide the service for a fee (usually around 10-20% of rent). This might make sense for you if you have one or two properties. But if you have a larger portfolio there comes a time where it makes sense to hire an employee to do this for you.

If you choose to go down this route, you’d be well advise to have a handbook that has phone numbers of tradespeople you trust, and step-by-step approaches on what to do in certain situations (or “systems”). It will be a lot of work, and you’ll learn as you go, but having a “run my life manual” can be extremely helpful for the people that work for you, and saves you the headache of having to approve a small expense, or screen every tenant, or deal with every small leak or lightbulb. I think building out this type of “systems” or “operations” manual early on is a very good idea, that way when you hire someone, or an employee leaves, you aren’t left hanging with no direction to give this person. Obviously, some situations are different but you can get as low level as you want, including the types of brands you trust or don’t trust when replacing broken components. Building something like this will make your life much easier before you hire someone, and will make the employees life easier when you eventually do.

Why Commercial is Worth it (Conclusion)

In conclusion, believe it or not this was a very brief and very light overview of how investing in commercial real estate works. The goal of my post was just to get you thinking about it and to somewhat de-mystify it. A lot of people will never invest in commercial real estate, or don’t even think about it, but it is frequently a better investment than residential real estate. But as with any thing that provides a higher return there is higher risk. It’s very mainstream to invest in residential real estate nowadays. The barrier to entry for commercial is a bit higher, and usually when there is a higher hurdle to jump over, that is the opportunity you should chase because it will keep your competition out. Simply by the fact that it’s a bit more challenging. Residential is quite frankly oversaturated with investors and the gaps in the market are very slim to the point where the only way to make those investments work now is to take on a lot more risk and oftentimes without a suitable upside.

No matter how you swing it nowadays, getting a profitable investment is going to take some work, and I hope that by bringing your attention to commercial real estate investing you might be interested in learning more about it. If you do I would highly recommend the b real estate podcast, they have a ton of episodes talking about commercial real estate, it is American so some of the rules will be different to Canadian rules. But just getting an understanding of the various ways people get creative with their investments is a huge leg up on the competition. Additionally, I would recommend talking to someone who is a commercial real estate owner and investor, they can be a bit harder to find, and I would recommend trying to find someone who is still active in their investments because they will likely have had to face recent hurdles that will be helpful to learn from in todays market. I’m also certain that there are Canadian real estate podcasts out there which have episodes talking to investors and they’re definitely worth checking out as well. As my final word of parting, if you do nothing else, you should just get started. People spend way too much time (myself included) over researching and reading for months or years without taking any action. Preparation is good, but don’t forget to put the things you learn to work! Thank you for reading and as always.

Keep investing,

Oliver Foote

“Do What You Love” is Backwards: Stay Focused, Learn to Fail

The Modern Challenge of Finding a Career:

Many young people, myself included, have a hard time trying to figure out what to do with their lives. I’m usually a proponent of try as much as you can until you find something that sticks, but this is much harder to execute in reality than it may initially seem. Changing from thing to thing to thing can be exhausting in the same way that just sticking with the first thing you find and end up hating going into work every day is exhausting. So what is the answer? If doing something you hate is exhausting, and trying to find something you love is exhausting, what are you supposed to do? That’s the topic I’m going to try and tackle today. Not necessarily an easy topic to discuss, but I think I have some insights that may be somewhat helpful to the directionless or those who want to change direction.

Why “Do What You Love” Sucks:

I’m first going to start with the common wisdom of “do what you love.” I’ve been hearing this for quite some time, and after trying to do just that, I actually think this statement is backwards and that “do what you love” is not great advice. Why? Well if you’ve ever tried to make a living off a hobby that you enjoy doing in the few spare hours off work, you’ll quickly learn that making money, and doing something for fun, for most of us, are two different worlds. When you try to make money off something you are doing for fun, it can often cease to be fun, and I think this is especially true for creative endeavours. If you are a painter, or you make trinkets or cookies in your free time, and you try to mass produce paintings and trinkets, you’ll soon find yourself burnt out from needing to paint every second of the day in order to keep up with the demand for your art (best case scenario). If you aren’t accustomed to the pace of painting all day long, and you don’t have a way of continuing to make it interesting for yourself, you may find yourself no longer interested in that thing. There are those few people in the world who make a living off their music, or their art, or some other creative endeavour, but there are thousands and thousands more who are “starving artists.” So unless you have an unrivaled thirst to out practice and outwork basically every single competitor, or some unrivaled business acumen, you might want to continue doing that thing as a hobby.

Why You Shouldn’t Start a Business Based on “Do What You Love”:

I spoke in my pervious article (Employed Vs. Self-Employed Work) about what people overlook when they are starting a business, and I discuss the huge challenges with being self-employed. If you do choose to “do what you love” as your own business, you need systems in place, you’ll spend a lot more time just managing the business than you want, and you’ll have to become a jack of many trades rather than being able to focus on your craft. This can be managed and software nowadays is a godsend, but I still caution people who want to leave stable work for effectively contract jobs because you really are going to be working 24/7 rather than just 9-5. I see these advertisements for Realtor school quite often on my Google ads (presumably because I spend a lot of my time looking at houses and economic data), and I always laugh at their tagline “escape your 9-5, take control of your own schedule”. Which loosely translates to, “you’ll now be working 9-9 most days, oh also doing open houses on weekends, and if you’re doing this business right, you’ll likely be fielding calls or making calls most hours of the day. You’ll have to try and find new business every day and you’ll spend the majority of your time just looking for clients rather than working for them.” If you want something to be completely engaged in, then by all means, do the self-employed game, maybe you’ll love it, but if you want balance in your life, maybe don’t. You can create some amount of balance once you’ve established yourself, have a client base, and know how to delegate, but at the start you will be working your butt off to make ends meet with lackluster results unless you’re truly exceptional. Usually it takes people 5-10 years before they can slow down a bit and take back some control of their schedule, and some people never manage to. So, don’t say I didn’t warn you.

How Building Your Skills Leads to Love:

Now, I’m going to somewhat contradict the above paragraph. Because I’m going to talk about the right way to “do what you love”. Since I mentioned this phrase is backwards you’re probably wondering what I think is the right phrase. I think it’s something along the lines of “work hard, learn a skillset, do disciplined practice, become an expert, and finally, love the result.” It’s so much easier to love something you’re good at, that you’ve practiced at, and that you want to keep pushing the boundaries in. This perspective is not new to me, but it has been reinforced by a few books I’ve been reading recently the first is The Algebra of Wealth by Scott Galloway, which I think is a great introductory finance book and money book in general. The second is Grit by Angela Duckworth (a bit late to the party I know). I think that both of these books overarching ideas when it comes to a career is focusing on becoming good at the thing you are doing, and reframing “failure” as something that helps you get better and better.

It’s Supposed to Be Hard:

Often when you are learning something new, it’s going to be hard, it’s going to suck, and you’re going to want to quit. In Grit Duckworth interviews many Olympic swimmers and one of them says (I’m paraphrasing), “honestly, going to practice is hard, and I frequently don’t want to go, and I often find myself thinking about quitting.” She then goes on to say that a top performer attitude is doing the hard thing anyway. They are focused on the top level goal of getting to the Olympics and winning medals. They have a compass that guides all of their lower level motives. She stresses the importance of finding your one overarching life compass that doesn’t change. When it comes to putting in the hard work that is hard to do every day, she stresses the importance of routine. It’s much easier to do the hard thing if you have a routine and do it at the same time every day, so you don’t have to “re-convince” yourself to do the hard thing. Just showing up is half the battle. Lastly, the importance of long term commitment. The good old 10,000 hours (or 10 years) of practice to become an expert is something that can be hard to remember when you’re in the trenches doing the hard work, but nothing replaces disciplined practice. Probably the most important trait or feeling you need to have towards the work you are trying to do is the desire to be constantly getting better. If you have no drive or “grit” to improve on the last thing you did then you’ll quickly lose the motivation you need to keep moving. This is where other people are extremely helpful and getting quick feedback on what you’ve done is extremely important too. You should have a coach or mentor figure who can help you set goals for disciplined practice, and then can give you feedback on what you’ve done so you can improve quicker. You should also spend some time reflecting on your practice and resting, don’t overdo it every single day. Even Olympic athletes have a daily training limit. If you do all these things, and are focused on challenging yourself, building a skillset though putting in multiple repetitions, getting feedback, and have an compass guiding your lower level goals. Then you are on the path eventually loving what you do.

Finding Your “Life Compass”:

Many people after reading this might say, “that’s great Oliver, but I don’t have a compass, and quite frankly I still have no clue what I want to do.” There are a few things you can do to try and some questions you can ask yourself to try and find your compass. Think back to what you enjoyed in high school, as this often tends to be the start of what people’s “career discovery” phase. Think about things that you are generally good at, ask friends and family if you can’t think of anything. If you are still having trouble this is where the exploring phase can work well. But you have to spend time actually trying things, not just reading about them. It can take a while before you develop a true interest in something so don’t give up on something after 1 day of it being challenging or not working out the way you thought. The most important thing, and this is advice I often struggle to follow myself, is to put yourself out there. If you don’t have your compass, you need to be spending time to find the compass. If you have the compass, you need to be spending time to build good habits and a system that will help you “train” in order to become a “professional” at your chosen career path. All of this is hard, all of this will be a huge exercise in failure. But if you work through the challenges, learn from your failures, and defeat the fear of failure (you don’t know till you try) you’ll make great progress towards you overarching goal.

Reframing Failure: Failing is Awesome!

As a side tip from another book, try to reframe failure as being “awesome”, like “hell yeah, that was hard as hell, I just fell flat on my face, I’m ready to get out there and do it again!”. I think the advice of finding what you love as a function of practice, training, and hard work, rather than simply a function of “do what you love” or “do what you’re interested in” is much sounder advice. In simple terms I think people should “do what they are good at, and practice to become an expert.” This advice builds resiliency in children, teaches them to have grit, and to not be afraid of failure (weird how that happens as you get older). I completely understand why many student nowadays are having a hard time unfreezing themselves from paralysis by analysis. They’ve learned to avoid failure at all costs, and especially with the internet and everyone’s lives being online, it can be extremely damaging and unforgiving to fail in public. If you fail a course at school, or do poorly on one test, your chances of not getting into the best university could be lost, so the pressure is high, and the consequences of failure are high as well. Which is the exact opposite approach we should be teaching. It’s good to experiment, it’s good to try new things, it’s good to iterate, and importantly one of the best ways to avoid a future failure when you need to perform, is by failing so many times in private that it’s unreasonable you’ll be unsuccessful (i.e. doing lots of math problems, or making hundreds of cold calls, or lots of songs, or lots of paintings). Fail so much, and become so good, learn from your mistakes, that when you do put your practice to work, even a bad day will still be a good result. We need to be providing more and more opportunities for students to fail in private, and more importantly emphasizing that practice is important in every aspect of life; a career is no exception. I even believe that failing in public can be a great lesson, but I think too much negative feedback when someone is just starting out can be destructive to the motivation to do that thing in the long run, and it can be hard to come back from too much hate about the path you want to pursue. So in the beginning maybe some sheltering from failure is justified. But over time, once they’ve built the failure muscle, and understand that failure is awesome, and decide to just give things a go and focus on constant improvement, the negative feedback becomes easier to deal with as competence grows, and funnily enough, the failures might decrease, at which point I encourage constantly pushing the needle to get better and better. I strongly believe that if we were pushing this kind of advice, rather than “do what you love”, people would be loving what they do a whole lot more, and the generation of directionless young people would have a much easier time finding their direction.

Thanks for reading, I hope that you found this article helpful or interesting. Feel free to email me, I’m always interested in hearing what other people think about these articles. As always,

Keep practicing,

Oliver Foote

Pros and Cons of Being Employed vs. Self-Employment

After having attempted to operate a few businesses over the course of my education and now post graduation, while also working some good jobs and some not so good jobs I have learned a few things that I thought might be interesting to discuss in this next blog post. What are the pros and cons to each way of doing things and what are some things that you should think about if you’re considering one or the other. Let’s start with the pros of being employed.

The Case For Staying Employed:

The nice thing about being employed, is that most of the time, someone else is telling you what needs to be done, depending on the job you can somewhat turn off your brain when it comes to deciding what to do day to day. When I’ve done self employed work, it becomes much more challenging to know what to prioritized, do you focus on marketing? Do you focus on building systems? Do you try to schmooze clients to make sure that you have clients going forward? The answer is yes, yes, and yes. You need to juggle many more priorities with self-employment that can compete for your time. When you’re employed, hopefully, you have a team to work with, while being self-employed inherently means that you are likely working solo at least in the beginning, so you don’t really have other people to lean on.

The Ugly Truth of Entrepreneurship

This goes well into my next point, when you are self-employed it can often be lonely work and this can be very demotivating, you need to build up a team of people or business associates who are doing, or trying to do a similar thing to you. No one can accomplish anything alone, so it’s important to get people on your team who you can consult with and bounce ideas off of, and often times that person will not be your group of friends who are working regular jobs and who aren’t concerned with what happens in a business. This doesn’t mean to stop hanging out with your regular friends, in fact, you’ll probably need them more than ever. It just means that you need to make sure that you are also building up a network of like minded people who can better relate to the struggles that you will inevitably go through while trying to launch a business. So lets call this a bit of a pro for being an employee, often the company is looking for a specific culture and if you fit in the culture you can make some great friends. At the very least you’ll probably be on ok terms with the people you work with and maybe even have a few people who are doing a very similar job to bounce ideas off of. Forced friends as I like to say. Obviously, if you don’t like the people you work with it can also suck just as much as having no people to work with, but at least in theory there is the option to find a new place of work that again doesn’t require you managing so many competing priorities. Regardless of whichever path you choose, I’ve learned it extremely difficult to go anywhere if you don’t build relationships or work on your ability to build relationships. In our current social media isolation era it’s easy to think all the answers are online, but the person to person component is still one of the most important factors in having both a successful business and a successful career.

Income “Potential” is Only Potential:

You will frequently see online that the way entrepreneurship or self-employment is sold nowadays is higher income potential. The important word in that phrase is “potential”. There is always potential, in whatever you do, but this seriously undersells the sacrifices that you have to make in order to reach that potential. The phrase entrepreneur comes from the phrase for someone who creates something new. So if someone is selling you on a form of self employment that is cut and paste, run away, every type of entrepreneurship is its own battle and everyone’s path is a bit different. I’m all for learning how people have come before you, but the most important thing in entrepreneurship is being a constant experimenter and being ok with constantly failing and trying something new until you find what works for you. There is so much free information, and so much information in books that you can read (for FREE, if you get it from the library) that you really should not be spending a significant amount of money when you are starting out to get your feet off the ground. The best use of money is running a short marketing experiment for the service or product you are selling for minimum a month and trying to learn from the experience and iterate.

Patience is Extremely Important

This brings my to my next point, specifically related to entrepreneurship, is that when you are trying something new, you have to accept the fact that it will take time to see the results of your experiments. You can’t expect an instant sale if you’re just running your first facebook ad, or after knocking on your first door. It’s a long, iterative, slog. A lot of entrepreneurship simply comes down to how many times you are willing to do the same thing over and over, rejection after rejection, until you finally see results. You have to be, or become someone who doesn’t give up easily.

The Rejection Goal – An Entrepreneurs Lifeline

I read a book recently, Million Dollar Weekend by Noah Kagan, in it Noah relates the story of his father who was a door to door salesperson and his frame of mind when it came to getting rejected was to set a “rejection goal” every single day. Inevitably, within that rejection goal, you may have one or two people who are actually interested in talking to you, and one or two people who are interesting in what you are selling. If you make the goal the number of times you can be rejected, rather than seeing rejection as having failed, you are much more likely to get somewhere with your business. Contrast this to a job in which your goal is to create something, or build something. The only person likely to reject you is your boss or manager. If you are somewhat more client facing then you may also have to face rejection every day, but it’s likely that your income doesn’t completely depend on this one single client. When you are self employed and looking for work, it can be easy to feel like your income does rely on one single client and this can put you in a mindset of scarcity and fear, and while a little fear might be good to help you get motivated in the morning, too much can be debilitating. So it’s important to approach a business with the mindset of working with multiple clients, and even before you start a business trying to see if there might be potential clients that would want what you are selling is a great idea to validate a business idea, even better if they give you a deposit for the thing you are selling. It’s important to not rely too heavily on one single client for all of your income for all the reasons I stated above.

Employees Can Be Self Employed Too

Another pro for being an employee is that, frequently, there is a path to becoming self-employed. If you work in an industry long enough or become respected enough in the skills that you have and the things that you do, and have people that you know would want to continue working with you specifically. Then you have the foundation of a good business, and you’d be doing what you are already doing which would reduce the overall amount of skills that you’d have to pick up that relate to entrepreneurship, and you may be able to avoid marketing altogether and simply operate off referrals. From this point of view being employed can be very beneficial, but you’d have to work in an industry where your skills are important to the job, not just being a warm body that most anyone can replicate. The more regulation, the more difficult, the more qualifications you need the better because it will make the work that you do and the skills that you have valuable. I’m going to point to something that doesn’t immediately jump to most people’s minds when they things of “business” and that is healthcare. Depending on your healthcare profession, there may be a path to either a very high income, or opening your own practice, and “professional” degree in which you can open a practice or some kind can be a good path to self-employment if you work in the industry for a while first because there will be demand for your skills.

No Matter What You Do You Can’t Do It Alone:

There is no real right or wrong way to start a business, but there is a right and wrong mindset to operate from, ultimately, you are going to be working with people, and people involve relationships, so if there’s any one skill you absolutely need or need to learn its how to be a relational person, everything other skill or talent you have is not useful if you have no one to show it or sell it to. This doesn’t mean that you can’t create a business from nothing, there are lots of software companies that pretty much exclusively exist in website or app form. But these companies are still relational companies because they are solving a problem for people, without the people there would be no company. So it’s fine to make software, to learn skills that you can sell, to do something similar to what someone has done before, but at the end of the day it will always come down to how do you reach people and get them interested enough to pay you for the thing that you are doing or the product that you are selling. I’ll leave the discussion here for now, I’m still learning and reading a lot about building businesses and becoming a better communicator and working to build better relationships. All of these little things are important in the grand scheme of life and in the grand scheme of business as well.

Keep investing,

Oliver Foote