Increasing Profit Potential Through Standardization

Nearly every property I have purchased required an extensive rehab.  Rehabs are complicated and no two are ever the same, making them perhaps the most difficult and costly aspect of this business.  Adding value through a rehab, despite the difficulty and cost, makes these properties profitable to us.  But, our goal as investors and entrepreneurs is not to just do a rehab for profit; it is to run an efficient business that increases the potential for making a profit.  Increasing profit potential through standardization, especially rehabs, is one way to do that.

Standardization helps to reduce the difficulties and the costs of doing a rehab.  All businesses should strive to standardize their processes, to streamline and make things as repetitive as possible.  Standardized and streamlined processes save valuable time, and time as they say is money.  Use time wisely and the reward will be more money in your pocket.

The Perfect Example

McDonald’s is a perfect example to use.  McDonald’s was my first “real” job and before they let me do anything, I had to go through training.  I watched videos, read manuals and followed checklists on how a hamburger patty was to be properly grilled.  I had to learn the exact amounts of lettuce, pickle, etc. that went on a Big Mac.  Everything was spelled out in detail so the process of making a Big Mac could be repeated over and over, not just at the restaurant where I worked, but also in Chicago, Memphis, Paris, Tokyo, wherever.  It was this standardization that in part made McDonald’s so successful.

Rehabs are not Big Macs however so they are much more difficult to standardize.  This difficulty stems from the facts that every property is different and needs differing amounts and types of repairs.  Throw in the turn of the last century construction that is common in my market and rehabs become even more complicated.  Despite my best efforts, every time I do a rehab job there is a new issue that gets overlooked because of these differing factors.

Keys To Standardization

One key towards standardization is the use of materials.  Just as McDonald’s uses the same pickles over and over, we real estate investors can use the same paint colors, ceramic tile, plumbing hardware or ceiling fans over and over.  Doing so will lessen difficulties at the property in the future and left over materials can be used on the next project to reduce waste.

Another key to standardization and thus a more streamlined business is the use of checklists.  A checklist assists in ensuring that the same standardized materials and processes are used and repeated.  Checklists help guarantee that easily overlooked items are not.  They are also valuable tools to keep you on track and within budget.

Without standardization and checklists too much is left up to chance.  The chance of you forgetting something is high.  The chance that you will spend more on materials than is necessary is also high.   Your contractors will miss things as well.  There are just too many moving parts in a major rehab.

It Always Evolves

Standardization and checklists in the real estate business are constantly evolving.  The differences in properties will always ensure that, as will the desired outcome of acquiring the property.  The rehabs for your buy and hold properties will likely be very different from the rehabs for properties you wish to resell on the retail market.    This however does not mean that standardization cannot be done; just that it is an ever changing process.  Checklists for example are never set in stone, but are constantly revised as new problems are raised or as new processes and products make things easier.

I’ll talk more about what I do to standardize things in my business and some of the things I have experienced in future posts.  For now, if you have not before, take this opportunity at the beginning of the New Year to begin to think about what can be standardized in your real estate business.  Start making lists and keeping track of what it is you do.  Knowing where you are now is the first step towards moving things forward.

What have you been able to standardize in your real estate business?  Was it materials, property inspection procedures or even just how the phone is answered?  How has this helped you’re your business more profitable and manageable?  Please add to the discussion with your comments.