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Use Lean Six Sigma to Improve Your Real Estate Investing and Be More Efficient

by Tom Sylvester on December 2, 2013 · 14 comments

  
Lean Six Sigma

“Measure twice, cut once.”
Proverb

I am a “Lean Six Sigma” Green Belt.  

While I did take karate as a child and won a fair amount of medals, this green belt has nothing to do with ninjas or breaking boards with my fist (although I have been known to do that on occasion) .   Lean Six Sigma is the combination of 2 different ideas:

Lean

A view that time and resources are either value-add or waste, and set of tools/process to help maximize the value add pieces while eliminating/reducing the wasteful pieces.  Wastes are broken into 7 categories:

  1. Transportation - Unnecessary movement of people or parts between processes.
         Why It is Waste: When things are moved without making them more valuable, they are extra steps that cost time and money but do not lead to additional profit.
  2. Inventory – Raw material, work in progress or finished goods which is not making money.
         Why It is Waste: Every dollar tied up in materials, work in progress or finished work has a cost until it is sold or rented.
  3. Motion – Unnecessary movements of people, parts or machine within a process.
         Why It is Waste: The more movements done, the more unnecessary time spent instead of working on value add tasks.
  4. Waiting - Idle time between tasks.
         Why It is Waste: The old adage “Time is money” is true.
  5. Overproduction - Making too much of a product or making the product too fast.
         Why It is Waste: Making more than needed or at a higher level of quality than required will lead to inventory and additional costs without additional profit.
  6. Over-processing – Putting more time in than is valued by the customer.
         Why It is Waste: When we do more than needed, those extra processes cost time/money but don’t lead to additional profit.
  7. Defects – Issues with quality or items that need to be done two or more times.
         Why It is Waste: Doing the same thing more than once is inefficient and costs time/money.

Six Sigma

A set of technique to improve quality by removing the causes of defects and standardizing processes (reducing variability).

So having a green belt is not as cool as it sounds, but it can definitely save you time, money and make your real estate business more productive.  The general theme of the items above is to do things with the least amount of waste as possible.

The 7 Wastes & Real Estate

For each category above, here are some example of where waste may be potentially lurking in your real estate business and how to remove/reduce it.

  1. Transportation
    -Multiple trips to get materials.
    -Contractors making trips out for lunch.
    -Multiple trips to show a property.
    -Materials delivered out the property that need to be moved inside the property.
    -Materials stored in one room then needing to be moved when that room needs to be worked on.
    -Moving resource between multiple properties.
    -Part time work.
  2. Inventory
    -Owning more houses than you have the ability to work on at a given time.
    -Having more material than you need for a renovation.
    -Having many renovations in progress but none complete.
  3. Motion
    -Tools not organized to be found easily, resulting in extra time spent searching.
    -Searching for paperwork in your office.
    -Checking your post office box each day.
  4. Waiting
    -Not managing a project properly leading to contractors waiting on other contractors.
    -Having a property sit on the market after the rehab is done.
    -Having a rental unit sit vacant until a qualified tenant is found and moved in.
    -A 3 months rehab taking 6 months to complete.
    -Sitting at an apartment waiting for a potential tenant to show.
  5. Overproduction
    -Using materials too nice for the price range.
    -Making 100% of improvements upfront (in a buy and hold example).
    -Buying houses in an area where there is not a demand for houses, such as people leaving the area (ex. Detroit)
  6. Over-processing
    -Painting an area that will never be seen.
    -Using a specialized contractor for something a handyman can do.
    -Having extra steps in any of your processes.
  7. Defects
    -Poor quality work.
    -Missing a step/part when installing a product.
    -Redoing a step.

Practical Ways to Use Lean Six Sigma Techniques in Your Real Estate Investing

Here are a few of my favorite ways that I incorporate these Lean concepts into my business to save time and make it more profitable.

Apartment Showing – We schedule one apartment showing and have all interested applicants attend at the same time.  It reduces our transportation waste (only visiting the property once instead of multiple times), saves the motion of having to go through the showing steps multiple times and reducing waiting for tenants (and no shows).  In addition, it builds some excitement and urgency for the apartment since people see that multiple people are interested.

Automated Rent Collection- When we first started we accept rent any way we could get it.  Some tenants dropped it off at my father’s store.  Some dropped it off at his house.  Some mailed it.  Some paid cash, others with check or money orders.  One of the best changes that we made was to change our policies force people towards automated rent payments.  We pay our bank $10/month to be able to automatically debit our client’s account on the first of the month for their rent.  We get our rent on the first, it is automatic and there is much less chance of late payments or “lost in the mail” excuses.  It also reduces our motion and transportation of having to visit our post office box multiple times.

Standard Materials – Most of our investing focuses on buy and holds.  We have standardized most of the materials that we use (ex. paint color, flooring, hardware).  This reduces motion since we don’t have to think about what materials we will use for a new unit or when renovating a unit after a tenant moves out.  This also allows us to buy in bulk (which is anti-lean because that means excess inventory), which allows us to save some money on materials and know that we can use any leftover for the next project.

Paperless Office – As much as we can, we go paperless.  If we can get something electronically (ex. delivered in an email or text message), we do that over snail mail.  This means that we have less paper to process and file away.  It it also much easier to search and retrieve paperwork.  If we do get paper, we scan it into Dropbox/Google Drive and shred/store the original.

Clean, Organized Office – We relocated our office last year and spent a lot of time looking at the flow of our work and how we could configure out office to align.  We have a place for everything and have everything in its place.  This reduces the motion in finding items that we need and performing office tasks.

Clean, Organized Material/Tool Storage - We have a space for tool and material storage.  We try to only keep what material we need on hand so we don’t need additional space to store materials.  Additionally, we have organized the space so that is is easy to find the tools we need and to see what tool is missing.  We use labels on the shelves and a trick to trace the tool in the spot it belongs.  That way is a tool is missing (ex. a hanging 6 ft ladder), we can easily see what was there by looking at the label/outline.

Quarterly Inspections – One of the shifts in utilizing six sigma is to shift from fire fighting to fire prevention (basically fixing problems before they become an emergency).  So instead of waiting around for an $800 water bill (which we had), perform a quick inspection of your property each quarter.  This will allow you catch small problems before they turn into big problems (and fires that you have to put out) as well as check up on the tenants.

Advertising Properties Ahead of Time - When we know a lease is coming up (which Google Calendar reminds us of), if the tenant does not want to renew the lease, we begin marketing the property 45-60 days from when the lease is up.  This allows us to secure a tenant well ahead of time, reducing the cost/impact of vacancies.

Conclusion

Above are just a few of the tips and tricks that we have implemented by thinking about Lean Six Sigma and how it applies to our real estate business.  Being aware of common areas of wastes can open your eyes to opportunities to improve your business, save time and increase profitability.

What tips or tricks do you use to make your real estate business more profitable?
Photo Credit: Rayz Ong

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{ 14 comments… read them below or add one }

Yvette December 2, 2013 at 1:17 pm

Excellent article! Great application of Lean Six Sigma. I am Lean Six Sigma trained as well and it really does help you to be more proactive in your business!

Reply

Tom Sylvester December 3, 2013 at 6:25 am

Yvette – Thanks! Once I became trained, it was like the matrix in that everywhere I looked I saw waste. My wife wants to kill me at times because I am always asking why she is doing something to see if we can eliminate it from our process.

Reply

Douglas Dowell December 2, 2013 at 2:10 pm

Epic post Tom,

I am a huge proponent of Lean Six Sigma…combined with Theory of Constraints you can achieve the maximum performance. Thanks for the great read!

Reply

Tom Sylvester December 3, 2013 at 6:28 am

Thanks Douglas! It is a great day when my post is described as “epic”. Agreed on Theory of Constraints. Maybe I’ll add a post in the future with how to add that.

Reply

Douglas Dowell December 4, 2013 at 9:29 am

Your welcome my friend! I would love to hear more about your experience with TOC. I have to come to believe the three pillars of TOC – Lean -Six Sigma are a way to be world class.

Reply

Dan Thompson December 2, 2013 at 3:19 pm

We all know, where the U.S. Economy went at the End of 2008, Don’t we Guys!!! In the Dump. This was Caused by Lots of Exceises Folks. So now, almost 5 Years later, we are Starting to come out of this Mess now. You can get some of those Old Programs back now, at Higher Rates for some of them, but you can get them at Least!! Give Us a Call Today, to find out what you Qualify for too. Some Experts now, are Predicting Us going Back to the Value Levels we had back in 2006 here even!! That is Crazy, because I had a House, I Bought for $225,000 then, and in 2006, was Worth $486,000. Mind Blowing! So, give Us a Call Today! There are some Great Programs coming back though now, so Check Them Out Today! Guys, Let’s not get into that Mess again!! And get Better People in Public Office for sure.

Daniel Thompson

Reply

Dennis December 2, 2013 at 4:10 pm

In the sheet metal fabrication business we like to say “Measure once, curse twice”.

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Tom Sylvester December 3, 2013 at 6:29 am

Great quote. I could probably have stickers created and put that on each job site I work on.

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Roy Schauer December 3, 2013 at 10:05 am

Great article! May not be glamorous, but its very important.

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Tom Sylvester December 4, 2013 at 4:58 am

Thanks Roy. You bring up a key point. Many aspects of real estate (and business) are not as flashy as you may see on the house flipping shows or the Trump shows, but those aspects can set apart successful from unsuccessful investors and have a large impact on profits.

Reply

Kevin Dickson December 4, 2013 at 6:33 pm

“it builds some excitement and urgency for the apartment since people see that multiple people are interested.”

This backfired on me one time because my favorite candidate saw so much competition that he assumed he wouldn’t get it, so he didn’t apply. So now, at least I make sure I have everyone’s phone #.

Reply

Tom Sylvester December 6, 2013 at 10:06 pm

Kevin – I have not had that happen but it is good to point out the potential. I try to get applications ahead of time/at the showing and speak with each applicant that day.

Reply

Andrew Joseph December 5, 2013 at 7:48 am

I really like the data analysis portion of Lean Six Sigma (“LSS”). LSS requires benchmarking of the correct KPI’s in order to determine if progress is being achieved.

Benchmarking for long-term investors includes: days between tenants, maintenance capex as % of rent (or CPI index), and number of showings before accepted application.

Reply

Tom Sylvester December 6, 2013 at 10:07 pm

Andrew – That is a fantastic point that I did not touch on very much in this blog and will have to on a future post. Understanding some of those metrics and calculating them definitely helps identify where and how to improve.

Reply

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