Like any organization, your real estate investing business has certain metrics that indicate the overall health of your organization. Commonly referred to as “Key Performance Metrics ” (KPIs), these figures are almost limitless and are often difficult to prioritize. Entrepreneurs can spend hours analyzing data without having a clear vision and strategy as to how to improve their operation. All too often, real estate investors pay too much attention to the wrong metrics.
Your KPIs should influence you to make decisions about your business. Sometimes this means making changes, while other times it means simply staying the course. It’s important to understand that your KPIs should be prioritized so that the most actionable KPIs are at the forefront of your business dashboard. These actionable KPIs are often referred to as “leading indicators.”
Differentiating Leading vs. Lagging Indicators
Most entrepreneurs are familiar with lagging indicators. These KPIs are tracked and used on a regular basis. Gross profit, net income, vacancy rate, budget variance are all common examples of indicators that can be categorized as “lagging.”
These KPIs will generally provide information about the past or present. For example, your 2015 net income will show how your business performed in 2015. You could also pull your year-to-date net income — this will show you how your business is performing so far this year.
Therefore, net income is a lagging indicator. Lagging indicators are a result of a set of inputs and variables within your business. When you measure these lagging KPIs, you are generally unable to make adjustments to these inputs.
The measurement and use of leading indicators is less common among small business. Leading indicators can be categorized as any input, variable, or data point that impacts the overall performance of your business. It’s common for leading indicators to be related to and influence lagging indicators.
Some examples of leading indicators include:
- Number of sales calls made in a day
- Number of times employees check email throughout the day
- Maintenance request response time
Perhaps the simplest non-business example of a leading/lagging relationship can be found within a common new year’s resolution: weight loss.
As you move through your weight loss journey, you measure your weight on a daily basis. This is a lagging indicator. You could also record the number of times per week that you exercise. The leading indicator has a direct impact on the lagging indicator: The higher your rate of exercise, the more weight you lose (in theory!).
The key difference between leading and lagging indicators is that leading indicators are clearly actionable.
Prioritize Your Leading Indicators
As you grow your real estate business, make an effort to focus more on leading indicators the you do on lagging indicators. To start, keep it simple. Try to identify the one leading indicator that matters most within your business.
As yourself the following questions to determine your highest priority leading indicator:
- What is my business’s biggest source of profit?
- What is the biggest factor influencing this source of profit?
- What actions does my business take to influence these factors?
- What action is most important/crucial?
Once you have your answer, develop a way to track and improve upon the most important actions within your business. This tracking mechanism will become your highest priority leading indicator.
Below are a few examples of leading and lagging indicators that are often found within a real state investing business:
- Leading Indicator: Percentage of tenants using auto-debit payment
- Related Lagging Indicator: Percentage of on-time rent payment
- Relationship: The more your tenants pay via online auto-debit, the greater your percentage of on-time payment.
- Leading Indicator: Average time to return lead call
- Related Lagging Indicator: Lead conversion rate
- Relationship: The sooner you call someone back, the greater chance that they will become a qualified lead. Decrease your average return time, increase your lead conversion rate.
- Leading Indicator: Number of mid-year property inspections
- Related Lagging Indicator: Amount of post-lease damage
- Relationship: The more you check in on your property, the less likely that damage will go unnoticed and/or be made worse by tenants.
Create Business Goals to Align With Your Most Crucial Leading Indicators
You have greater power to take action on your leading indicators than you do for lagging indicators. You can use this to your advantage as you set goals for yourself and for your company. Goals should be set based on the actions you can take that will result in positive lagging indicators.
Goals based on lagging indicators are often influenced by outside and/or unknown factors that are difficult to manage. On the contrary, leading indicators will typically be easier to track and control.
You’re sure to gain a certain sense of clarity when focusing on the right metrics for your business. With a focus on the most crucial leading indicators, you can mold your business to be more proactive and better suited to control its own success.
What are some examples of leading/lagging indications within your business?
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.