One major problem that entrepreneurs and real estate investors have is that it’s difficult to evaluate exactly how well you did or how well your staff or vendors are doing. On some things, it’s rather easy. Say on a flip you can tell how much you earned and judge how well the project went. But what if that number is bad? Was it because you went over budget on your rehab, took too long to rehab it and ran up the holding costs, couldn’t sell it for as much as you wanted, or something else entirely?
If you don’t know why something went wrong, you’re not going to be able to know how to fix it.
In addition, without hard numbers to evaluate how you are doing, you will often have that feeling in your stomach that something is wrong, but you’re not quite sure or at least you’re not quite sure what is wrong. First, you will think that it was your contractor that screwed up, then you will talk to him and then think it was several of the other vendors, such as the painter or electrician. Or maybe it was your real estate agent. Maybe you should sell the property on your own to save the commission. Or maybe that’s a waste of your time and you would still likely have to pay the buyer’s commission.
These thoughts will tumble around in your head without hard numbers. A nagging self-doubt will eat at you unless you have something to point to and evaluate.
Furthermore, with regard to employees, bad employees are often experts at gaslighting their employers and either making you think it’s your own fault or someone else’s. Indeed, they don’t even need to intentionally do this. One employee we let go was convinced we didn’t give her a chance to succeed and didn’t work closely enough with her to teach her her job. This is despite the fact that we met with her regularly for months and went over our expectations in detail before finally cutting the cord because none of the things we said needed improvement changed. Everyone is the hero of their own story, so there will always be an excuse. Sometimes those excuses have some truth behind them. But how will you know without numbers?
So, going back to that flip that didn’t go so well, it is highly advisable to start with a budget—but not just a raw budget, a budget that breaks down your estimated:
- Construction expenses
- Other vendor expenses (i.e. painting, electrical, plumbing, HVAC, etc.)
- Holding time during construction
- Holding time while trying to sell
- Sales price
Then you can compare the actuals to those numbers and see what went wrong (or right) so you can fix it and improve it for next time.
Key Performance Indicators
Key performance indicators are the numbers you will want to keep and evaluate. The whole point behind key performance indicators is not to measure something against a specific number, but to have a concrete idea of where you’re starting so you can measure improvement (or the lack thereof). As Jeff Hoffman and David Finkel put it in their book Scale:
“Don’t think of KPIs [Key Performance Indicators] as absolute numbers, though. Think of them over time as levers you can pull to fine-tune your business. If I double this number and lower that one, does my business perform better or worse? It’s important to use KPIs as a way not just to measure your current performance, but also to shape and enhance your future performance” (Hoffman 217).
Then they note some of the best qualities a KPI should have. Good KPIs:
- “Measure the most meaningful leading indicator in that area of your business, or in a specific team member’s area of responsibility.”
- “Are either automatically tabulated or self-scored so that they give you accurate feedback on a timely basis.”
- “Make the score easy to understand.”
- “Are leading indicators, as opposed to trailing indicators” (217-218).
It’s also important to note that “having too many KPIs is counterproductive.” You want simple measurements that tell you how a department is doing even if you don’t know whether the initial number is good or bad. You do know that if you do better with that number, it’s better, and that’s what’s important.
Related: Search track How Using a Score Card Can Keep Your Real Estate Business on Track
So, for example, Hoffman and Finkel mention a dry-cleaning company that used “…the number of enrollments her counter team secured in their ‘concierge’ level of cleaning” (219). For real estate, all of the items mentioned above for a flip are KPIs. For buy and hold properties, KPIs could also include comparisons between the estimated and actual:
- Rent-to-cost ratio
- Estimated cap rate
- Time to lease
KPIs are also a fantastic way to evaluate employees. As I mentioned earlier, many bad employees will try to gaslight you with excuses. And it’s never easy to fire someone. But if you have numbers that show either 1) that the employee isn’t doing well or 2) that there isn’t any improvement in how they are doing, letting someone go becomes much easier. It also is more justifiable, especially if you keep records, give performance reviews with written feedback (and make the employee sign the review), and give the employee a write-up if they break a rule or do something wrong (like unannounced absenteeism, curse at a tenant, etc.).
These records both make it less likely that you will be sued and easier to win an unemployment claim if need be.
But tracking KPIs also makes it easier to evaluate employees in general. It makes it easier to know who to let go, who to keep, and who to promote. Furthermore, it gives your employees something to aim for which can be very motivating. Some examples for various real estate-related positions include:
- Maintenance Technician: Call back percentage, customer complaints
- Leasing Agent: Showings per application, showings per lease
- Property Manager: Physical occupancy, economic occupancy, maintenance expenses vs. budget
- Collections: Dollars collected vs. dollars outstanding
- Contractor: Total cost vs. budget, total time vs. budget
There are many more such examples and they can also be applied to 1099 contractors as well.
Whether you have a huge staff or are working for yourself, tracking your results is critical. This goes for mailings, leasing, rehab, maintenance, etc. Key performance indicators are a critical component in systematizing your business and then scaling it.
How do you use KPIs in your business?
Let me know your experiences with a comment!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.