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With the costs of labor and materials increasing, investors and contractors are constantly searching for ways to lower the cost of doing business when it comes to renovating or rehabbing their rental properties.
The key to keeping costs down is to remove waste from the process, according to one expert on Tuesday at the Rehab Lab in the inaugural Five Star Institute [2] Single-Family Rental Summit [3] in Las Vegas.
"The price of labor includes the processes, so if you can streamline your processes and take waste out of the processes, and cut your overhead costs or pass that on to a client," said Steven Helser, CEO of ASONS, a panelist during the lab. "The other way to look at this is the materials. By only buying the level of materials you need at the right quality, you get massive discounts for national material suppliers like Home Depot and Lowe's. Leveraging off of that, you can save that and pass that onto the client."
One way to keep costs down is to convert fixed costs into variable costs, Helser said.
"If the client has a rehab team that goes out to do their renovations or their flips, they can get rid of that rehab team, and we as contractors can come in and take that fixed cost and make that a variable," Helser said. "So if they're not buying, they don't have that labor cost. So it's on our dime. And if we're not performing for them, we're out performing for somebody else. So we're able to take and use that labor efficiently across multiple clients where one client would say 'I have 10 or 15 people over here to do rehab or maintenance, and now I don't have that anymore. I just pick up the phone and we know I'm going to have the right level of labor and performance and my costs are going to be lower.'"
"We take waste out of the system and we minimize the time from the time we get a purchase order to the time we invoice the client. So we're moving that waste and making processes more efficient both inside and outside with our own performers or contractors."
In order to remove the waste from the processes, Helser said his company uses the Six Sigma approach, which was famously utilized by Jack Welch during his tenure as CEO of General Electric.While not many real estate investors or contractors are current utilizing this approach, more and more are coming on, Helser said.
"We take waste out of the system and we minimize the time from the time we get a purchase order to the time we invoice the client," he said. "So we're moving that waste and making processes more efficient both inside and outside with our own performers or contractors. It allows us to have a complete hold on those overhead costs so we can take them down to a bare minimum. You match your labor with what business you have and it seems to work out. Same thing with materials."
While keeping costs of labor and materials down is an ongoing challenge for contractors in the single-family property rehab space, the availability of labor has also been an issue.
"If you're not self-performing with the way construction is going nowadays, all of the labor is going to the next job, like the big commercial jobs," Helser said. "Having that labor available and keeping that labor engaged in this environment is very tough."
Editor's note: The Five Star Institute is the parent company of DS News, DSNews.com, The MReport, and TheMReport.com.