Josh Cantwell: So, hey, guys, welcome back to the Accelerated Real Estate Investor podcast with Josh Cantwell. Today, I want to talk to you a little bit about optimizing your capital improvements. There are five things in this discussion in the solocast that I specifically want to talk about. Number 1 is the delivery of materials to a job site. Number 2 is how those materials are stored. Number 3, making sure that every contractor has a detailed scope of work. Number 4, making sure each contractor is only assigned a maximum number of units. And number 5, making sure that there’s a runner in order to go get things if a contractor is missing them. So, these are five concepts that we’ve had challenges with in our own business. We’re going to talk about those today on this solocast. Thanks for joining me today on Accelerated Real Estate Investor. I look forward to sharing with you some real insights in my business, some real challenges that I’m experiencing right now. Ready? Here we go.

[INTERVIEW]

Josh Cantwell: So, hey, guys, just wanted to jump on today and do some training and a little bit of a solocast for you on some of the challenges that we often face when we’re turning a bunch of units and running a big capital improvement budget at our buildings. Right now, we’ve got about $3 million in capital improvements scheduled just in our Northeast Ohio, Cleveland portfolio. And of course, with that, we run into various challenges, various roadblocks and hurdles for us to get through. And I want to tell you about those. 

Our VP of construction is a guy named Dave, and Dave is constantly working to help our contractors be more efficient, be more effective, turn units faster, and have less hiccups and headaches. Dave also orders all the material that they need to make sure that they have the stuff on site so we get the best pricing. So, when contractors show up, all they need to do is the labor. All they need to do is actually do the work. So, we pay for the labor piece, buy our own material, source our own material, store our own material. And then we have outside contractors come in that actually do the labor and turn the units.

So, there are five things that I mentioned in the introduction that are challenging for us. So, number 1, let’s talk about this, is the delivery of materials. So, when we are turning a unit, we’re also usually ordering sticks of trim or ordering paint, primer, or ordering LVP flooring, toilets, vanities, vanity lights, tub surrounds, the plumbing that goes in the tub. We’re often ordering cabinets, hardware, countertops, appliances, plumbing that goes in behind the cabinets. And we’re also ordering the remaining hardware and fixtures, like ceiling fans, light fixtures, doorknobs. We’re often also ordering panels. Sometimes we’re buying these apartment buildings that have old knob and tube electrical. So, we’ve got to replace those with updated panels in the units.

As you can imagine, the delivery of all these materials is often kind of chaotic. We order like, let’s say, a shipment of 10 units to be stored on our site. We order them. We try to get as much of the material from one vendor as we can to try to get the best pricing. And that material gets delivered while our contractors have in their scope of work and in their contract that they are supposed to receive these materials. So, imagine you’re a contractor, let’s say you’re painting or let’s say you’re laying flooring, and all of a sudden, you get a call from Dave. And Dave says, “Hey, we have a delivery.”

Well, that immediately right there presents a challenge because Dave knows that the delivery is coming, but Dave usually knows within a window, like between 8:00 in the morning and noon or one o’clock and five o’clock, we’re going to get this delivery from one of our vendors, could be Lowe’s, Home Depot, National Design Mart, you name it, we’re going to be getting that delivery, but Dave doesn’t know the exact date and time.

So, when Dave does get the notice that the truck is on-site, then he’s got to ping the contractor. The contractor is going to stop whatever they’re doing and immediately go find the truck and offload the truck and put the stuff in the Mobile Mini unit. So, that in itself is a problem because we don’t really want the contractor to be dropping a project when he’s in the middle of painting or in the middle of flooring or in the middle of painting cabinets. Okay, so how do you solve that problem? Well, we solve that problem with a runner where our vice president of construction, Dave, and our runner, his name is Kenny, they work more in the office, in the corporate office. Kenny does some plumbing for us, but he also helps with maintenance and he also helps with receiving deliveries. And he also runs to Home Depot when we’re short of any kind of small materials that we might need. So, we’ve solved that problem by having our runner basically received the delivery. That way, the contractors just can keep working in the units.

Challenge number 2, the materials need to be labeled and stored in the same place every time. So, we have these Mobile Minis that are essentially large containers. We have two of them on-site at one of our properties. And we’ve created a system so that every time the materials are brought in, they’re stored in the exact same place because there’s a difference between, let’s say, an 18-inch cabinet, a 24-inch cabinet, and a 32-inch cabinet or a 36-inch cabinet. Okay? There’s a difference between five-and-a-half-inch trim and two-and-a-quarter-inch trim. There’s a difference between the plastic vinyl trim. All this stuff needs to be labeled. There are different sizes of P-traps. There are different sizes of granite countertops. There are different types of doorknobs. There are different types of light fixtures and ceiling fans.

So, in the past, if you get this stuff delivered, you really also don’t want to notify or have your local building department know that all the stuff is being delivered, even though we don’t need permits for the stuff, you just don’t want these guys kind of snooping around. So, the Mobile Minis, these big storage containers, they obviously give it away that we’re working on the units. And you don’t really want the inspector from the building department kind of floating around your building. So, we want to make sure now that if the inspector does show up, that all the materials are labeled. So, we have labels above all the different types, so everybody knows. This is where the 18-inch cabinets go. This is where the 32-inch cabinets go. This is where the five-and-a-half-inch sticks of trim go. This is where all the LVP goes. This is the color of LVP because we have a couple of different types. That way, when a contractor needs material, they just walk in and grab it so they can run it right back to the unit and slam it in.

Number 3, one consistent challenge that we have is every unit must have a written scope of work.  So, the way we run our business is that Freeland Properties is the investment, the company, that’s the company that’s buying the apartments. And Freeland Construction is essentially– we also own that company, but Freeland Construction is essentially a third-party construction company. So, Freeland Properties is the client. Freeland Construction is the contractor. Freeland Properties hires Freeland Construction to do the work.

So, Tyler, who’s one of my partners, he must sign a written scope of work from Freeland Properties and hand it to Dave or email it to Dave with a signed authorization to start the job and exactly what needs to be done. We don’t want to change orders in the middle of a deal. We don’t have to change orders in the middle of a job. So, we can’t text the scope of works, can’t text change orders, all need to be in writing. This way, everybody knows exactly what was paid for and supposed to be done. You’d be surprised when you’re turning a hundred units at a time like we are right now with a hundred units that we’re turning, how quickly it can spin out of control and turn into a disaster situation where people are texting back and forth to change orders. I realize it’s faster. I realize it’s more convenient, but it’s much less efficient.

Number 4, each contractor must be assigned only two units at a time. So, the way we figure a group of four guys can turn a unit in a week. So, remember that, a group of four guys, a couple of carpenters, somebody laying flooring, electrician, plumber, four guys can turn a unit, literally hard turn, which is usually $7,000 to $10,000, can turn that in basically a week. So, we’re not going to give a contractor any more than two units at a time, so they have work for this week and they have work for next week. So, if they’ve got a group of four, contractor, they got a team of four, you get two units. When you’re done with those two units, you get two more.

If you’re a general contractor, let’s say you have four crews, those crews are full time and each one of those crews has four guys, then each one of those crews can have two units, so that’s a total of eight, okay. But we’ve realized that knocking out these units can become a challenge when any group is assigned more than two units at a time. Also, let’s say you have 40 vacancies. You buy a building, you have 40 vacancies. I would say it’s a 400-unit, you got 10 vacant units. You’re going to turn those units. Well, I would rather have the first two units done and leasable and have that done in two weeks than have 10 units and have those 10 units take 10 weeks. It just doesn’t make any sense to do any more than two.

And finally, number 5 is contractors, no matter how much stuff you store on-site, you’re always going to have some parts that are missing, the exact parts, the specific size of the faucets, the specific size of the P-traps, the specific size of some of the plumbing fixtures, the specific size of the doorknobs and handles, the specific size of almost anything, depending on the unit, can be different. So, you’re going to store a lot of it, but at some point, the contractor is going to need something that’s not sitting in your storage locker. You’re going to need it from somewhere else.

And so, again, Kenny, this is where Kenny comes back in. We want the contractor to stay in the unit working. We don’t want them making a run to Home Depot. So, again, Kenny becomes a valuable part of the team because Kenny, as soon as he finds out that we need some sort of customer-specific item, he can run to Home Depot, Menards, Lowe’s, typically find that, grab it, and then run it right back to the shop so the contractor can quickly install it. So, these are literally five specific issues that we were just working on the last two weeks, trying to keep the contractors in the units so they can make the most money as possible. They can knock things inside as fast as possible so we can release them as fast as possible and keep our costs down.

So, these five challenges now have five solutions. That’s my job as a CEO and as an executive in the company to determine what the challenges are and create solutions. I don’t work in the unit. That’s a specific job, and I have a lot of respect for the guys that are in the unit. My job is to find the blind spots, the holes, the problems, and fix those. It’s a different type of job. And so, we have to have a lot of mutual respect for each other because my job is no more important than the other guy. The other guy just is actually doing the work, or I’m trying to be outside and above the business trying to figure out what’s wrong.

[CLOSING]

Josh Cantwell: Okay, guys, well, there you have it. Those are some very specific five items to optimize your CapEx. I appreciate the opportunity to share that with you. And again, I’m always so grateful to come into your ears, to come into your life, to share some of the actual things that are really going on from this kind of therapeutic to share it with you. Thanks so much for being here today. Don’t forget to hit the subscribe button wherever you get your podcasts, wherever you get your videos, whether it’s YouTube or iTunes, hit that subscribe button. And I would be so happy and honored if you would leave us a rating and review. Just open it up right on your phone, open up your podcasting or YouTube channel. Find a place to write a quick review. Give us a quick five stars. It would mean so much to me. Thank you so much for being here. And we’ll see you next time on Accelerated Real Estate Investor. Take care.

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