On today’s show we are talking about erosion. But not the usual form of erosion that happens when it rains. I’m talking about the factors that erode your business. When we encounter erosion, the natural reaction is one of dismay of disappointment. This shouldn’t be happening.
So what could erode your business?
These are the small things that you hardly notice. These are the inefficiencies that individually are hardly noticeable.
On today’s show we are covering the top 5 sources of erosion for many businesses.
- Contractor theft. This is when your subcontractors order a little extra material. It’s natural that you need a little extra tile to handle the waste that results from cuts at the edge of the room. But general materials like lumber and drywall, fasteners, that you purchased often aren’t returned at the end of the job.
- Subscriptions. These are the software services that might have been ordered a few years ago. Today you would not subscribe to that same software. I’m actually guilty of this one. I have several examples of staff that are no longer part of the organization. But it’s important to keep an archive of their email. Our email is hosted by Google. The cost is $6 per month for their business suite. It would take about 15 minutes to shut down that specific user account and create an archive file. But before you actually delete the account and save the $6 per month you want to make sure that the archive is readable in the future should you need to access it. That process takes about another half hour or more. As you can imagine, saving those $6 hasn’t come to the top of the priority list this month anywhere in the organization. It wasn’t a priority last month, and it probably won’t be a priority next month either. So we have $6 of erosion every month. It’s been over a year.
- Increasing your tenants rent. In some cases, if your property is rent controlled, you might only be able to increase your rent by 2-3% per year. Sometimes, I’ve seen property management fail to increase the rent because it’s only an extra $22 a month, less than $1 a day. Increasing the rent isn’t urgent. You’ve got other more important things to work on. You have investor reports and accounting deadlines and the lady in unit 30 who wants her blinds repaired.
- Property tax appeals. Everyone who owns property needs to pay their fair share of property tax. But the property tax assessment process is not perfect and there are numerous examples of assessments that are out of whack with other comparable properties in the area. I know one investor with a large portfolio. The savings in property taxes are sufficient to justify a full time employee salary in his case. That’s all that person does. They appeal tax assessments.
- Insurance. Insurance prices and coverage vary widely. The easiest thing to do is to pay the same insurance company upon renewal. I have several recent examples where by shopping around I was able to save anywhere from 25%-65% on my insurance bill. I’m not talking about reducing coverage. I take the time to read the insurance policy and understand the coverage. In fact, many brokers are surprised when I request a copy of the policy. I’m told that I can get the policy after it is issued. But that’s like buying a brown paper bag and the salesman tells you that you can only see the contents of the bag after purchase. But trust us, you will like it.
All of these things are small on their own. But when your cash flow is a subset of your profit margin after debt service, that 1-3% erosion of the gross revenue can over time accumulate into wiping out a large percentage of your cash flow. Cash flow is the most important metric for a real estate investment business. It means that you need to pay attention.