Construction is a very important component of a successful real estate investing business.
Whether you are a house flipper or a long term buy and hold investor, as a real estate investor you will be adding value through cost effective repairs to increase your profit margins, decrease tenant turnover, increase rental rates and the achieve full market value sales for your properties.
Whether you have a background in construction or have never been a part of the trade, implementing systems for each step of the process will allow your rehabs to run on schedule and on budget while also allowing you to do more volume to add to your total revenue.
By creating these systems you will now be able to delegate pieces of this department of your business to a project manager who can now better manage subs and self-perform laborers while also mitigating risk for your investments.
When evaluating properties, the only true unknown comes from the rehab costs on a specific project. If we create systems that allow us to be more organized while gaining specific details on the budget, schedule and scope of work, we will begin to see increased profit margins on each project.
Having effective and efficient systems within each department of your business is extremely important, but the construction department should be one of the first elements you systematize.
Before we get into some of the systems that we implement to benefit our construction department, we want to let you know that some of these systems are used prior to actual construction and are a part of our acquisition departments role.
6 Ways To Systematize Your Real Estate Investing Construction Department
1) Pre Acquisition Task List
We get a lead, we reach out to that lead, we qualify the lead and determine this is a property we want to take a further look into. Our next step would be to set up a meeting to visit the property and meet the homeowner. The main purpose of this meeting will be to get a better understanding of the repairs involved in the project.
We use a tool, called our pre-acquisition task list to allow us to jot down details of the repairs that will be needed for the project. This task list will give us a good document to better understand what the project will consist of. This will allow us to feel comfortable putting the property under contract and moving forward.
Our pre-acquisition task list is basically a less detailed, preliminary scope of work. This is a single page document that we created for our project manager and acquisition managers, so when they walk a property we can easily document tasks based off of:
Division
Amount of Work
Brief Description
Quick Estimate
This document is the first step in organizing our construction department and formulating the systems to come.
2) Due Diligence Scope of Work
We finish our walk through, we crunch the numbers, we make an offer, we negotiate and purchase. Our next step would be to do our due diligence during our inspection period.
No matter if you are purchasing the property as-is or with cash, you still need to include a contingency that allows you at least a 5 day inspection window to finalize tasks, numbers and make sure you did not miss anything important from your first walk through.
This is the second step and may possibly be your final step in creating your scope of work. We are going to use the information that we produced from our first walk through to further validate and expand on our first walk through of the property. We will get a more detailed look into what the exact tasks are that are going to be involved in this project.
Through this due diligence scope of work we produce, we should have a very detailed look into exactly what this project will entail broken down by each division or component of the rehab.
This detailed document will allow us to know which portions of the project we can do in house, where we need to use subs, what material is needed for the project, the budget and how long it will take to complete (the schedule).
All of these documents work off of each other to allow you to create the next document in line.
3) Sub Contractor Price Comparison / Estimates
Unless you have a large self-perform construction team who specializes in several different trades, you will need to sub out certain tasks on your projects in order to finish in a reasonable time. From our scope of work, we will have a better understanding of what tasks our self-perform team will take on and what tasks we will be looking to sub out and receive estimates on.
This document will help us organize which tasks we will be subbing out, which companies we will be receiving estimates from, allow for apples to apples estimates and track the prices that come in from each subcontractor. Over time, you will begin to build relationships with certain subs that do high quality work for reasonable prices. However, with that being said, we still recommend that you get anywhere from 3-5 estimates for the tasks you intend to delegate.
This will ensure that you are getting fair pricing. From this document we will be able to choose which subs we want to hire for our job based on price, reputation and their current work load. This is an important document that will be generated after we do our due diligence and before we close on the property.
4) Material List Catalog
When we first started our real estate investing business, one of the major complications we had was choosing material, estimating material costs prior to work and getting material on site for our laborers to continue work. This would hold up jobs, affect our budget and make us rush into design choices. So we knew that we had to create a system to help organize this portion of our business.
To do this, we created a material list catalog. What this material list catalog does is organize all of the material we want to use for all of our rehabs. An example of how this is set up:
Interior Paint - 3 / 4 choices
Toilets - 2 choices
Front Doors - 2 / 3 choices
Interior Doors - 1 / 2 choices
Bathroom Flooring - 3 choices
Kitchen Flooring - 3 choices
Hardwood Flooring - 3 choices
Laminate Flooring - 3 choices
Tile - 3 choices
Cabinets - 3 -5 choices
Counter tops - 3- 5 choices
and so on
This binder will consist of the specs for all of the material you choose along with the item #. This material catalog will allow you to systematize your approach to your rehabs and allow you to easily put together material lists for each one of your projects.
By creating this material catalog, you will be able to have all of your material on site the first day the project starts, allow your projects to stay on schedule and eliminate most difficult design decisions.
5) Schedule
Every project you take on needs a schedule. This schedule should be created prior to you closing on the property. This will give you a better idea of how much money it will cost you to hold the property and when you can expect the funds from the sale of this project. A schedule is very important to keep your projects on or under budget and to better coordinate the use of your construction team from project to project. A schedule will also allow you to coordinate work with sub-contractors and know specific dates as when you will need them on the job.
We use a simple software called smartsheets. This software allows us to schedule each task of our projects and associate them with specific dates and who will be responsible. We then take this schedule and blow it up to poster size to hang on the wall on all of our projects. This way everyone on site is aware of start and completion dates for specific tasks and the total project. Once you begin to implement a schedule system on your projects, you will immediately reap the benefits of efficient and organized rehabs.
6) Budget
Putting it all together. The budget is one of the last documents that we finalize after we understand all of the tasks involved (scope of work), how long the project is going to take us (schedule), what material we will be purchasing, what subs we will be hiring and the labor costs associated with our self-perform work. Once we understand all of these working numbers we will then be able to finalize a total budget number for the specific project we are working on.
By creating all of these systems, we will be able to produce very accurate rehab costs to associate with this project. Although, we have done all of our homework. We still like to include about a 10% contingency for any change orders that may arise over the course of the project. This will account for any unknowns that pop up over the course of the project.
The sooner that you can get all of these numbers together and compile a budget, the sooner you will know your profit.
A goal of yours for your construction systems should be to have all of these documents put together before your due diligence period is up. This will allow you to back out of a deal if need be and feel confident that you made the right decision.
Wrapping Up Your Construction Department Systems
We hope that over the course of this post we have helped you understand that implementing systems not only for the construction component of your business is important but also for your whole business. The systems that you are able to put in place for your business will determine how efficient your business operates. We want you to understand that all of your systems will be a working element to your business. You should continually try to strategically enhance your systems to allow your business to flourish.
In the comment section below, let us know what systems you have implemented within your construction department to allow your rehabs to run on budget, on time and under control.
We are always interested to hear about what other investors are doing to improve their business.
HS Property Funds
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(315)516-8023
www.hspropertyfunds.com