Finance Roll

Identifying your Goal

Often a project begins with a vague statement that goes something like this, "I'm going to buy and renovate a house for $100k". By itself there is nothing wrong with the statement. However, what is lost in translation is exactly how this will happen. Stating the known and unknown specifics early in a project's life cycle can help an investor avoid creating a money pit that becomes a drain on any resource that comes within view of the mail box. When creating a project plan for the purchase and renovation of a new project, investors should seek to be as specific about their goals as possible. A more concise statement might look something like this:

"My purchase and renovation project is to purchase a single family home with at least 3 bedrooms and 2 bathrooms in the Parkview elementary school district. With a purchase budget of $90k and a renovation budget of $40k. The expected completion of renovation will be 90 days from the date of closing."

Creating a statement in this manner begins to clearly set expectations and shape the methods by which you will make your decisions. It will also provide the framework for the criteria you set for vendors who will be doing the work. Naturally, tighter timelines make for more expensive projects. While limited budgets reduce product and labor options. All of these factors will play a part in quality and timeliness of transitioning from an account receivable to an account payable.

The Theory of Setting Goals

Goal setting on an investment project is just as unique as the property being renovated and the person renovating it. These projects are like snowflakes, each one is different. With that said, there are a number of items that can be "scripted". Many investors tend to prefer to purchase properties in the same general vicinity. This strategy works well when dealing with the administrative processes of obtaining permits, working with vendors, and providing a close proximity when managing multiple projects. Additionally, building strong relationships with vendors provides a level of consistency with the work you can expect as well as with pricing for labor. Utilizing these two simple strategies can go a long way to mitigating costs and delays in your project.

Let's say you are a little loose with the dice and you are willing to roll them on a good deal. In this case you can expect a number of variables to invade your project like an army of ants to a picnic. But that's not to say you shouldn't pursue these projects. High risk tends to lead to great rewards. However, it is important to be specific with your goals, but flexible with your implementation. You will need to pay close attention to the cause-effect relationship between unknown risks and known variables.

How you react to these unknown variables early in the project will impact your decisions down the road. Simply put, higher risk ventures require stricter project statements, and should be broken into several projects that can be dependent on each other or run concurrently. For instance, one of the projects of your rehab project may entail managing the administrative processes of permitting, variances and zoning. The remaining projects will be dependent on the results of the administrative process. On the other hand, the projects for repaving the driveway and fencing the yard may run concurrently based on approved permits in the administrative project. Essentially, the key is to take smaller bites of the total project with the big picture in mind.

Choosing your Team

One more major, but brief point in the planning process relates to choosing vendors and partners. First I will start with partners. I've heard all kinds of stories about partnerships and renovation projects going to Hades in a hand basket. When working with partners it cannot be stressed enough that the partnership be in lock-step about the direction of the project. Otherwise it is INSTANTLY (yes, INSTANTLY) doomed. Even if the goal setting and planning process takes more time to complete, it is better to arrive at a consensus BEFORE cutting checks than after. And like Bubba from the movie Forrest Gump, "That's all Imma say about that".

Working with vendors is a much more fluid operation. Taking bids is the most "efficient" way to get rolling on your project. But as the saying goes "you get what you pay for" in many cases, so the cheapest isn't always the best. Since you have built your plan around your stated goals, you have the foundation for stating your constraints to the vendor and providing them with the criteria required in order to call the project a success. We will discuss this subject more later, but suffice it to say that choosing your vendors using expectations and timelines is a much better method than price alone. Remember, each day that your project is delayed results in money out of your pocket. A good vendor will recognize this, they will work within the constraints you set, or provide alternate timelines that you can make informed decisions on.

Recognizing Risk and Constraints

Finally, identifying constraints exposes the hurdles, troughs, bushes, barbed wire, and landmines you will have to negotiate to arrive at a successful project. I mention this last instead of first not due to lack of importance, but to spike an exclamation point into the planning process. Vendor availability, material availability, financial liquidity, and time management all play a role in the feasibility of a project. Recognition and adjustment to these variables will have a strong impact on the success of your project and on the costs associated with it. Utilizing the planning processes previously mentioned will help provide the insight needed to expose the constraints that will cost you money later in your project.

The easiest way to identify and quantify constraints is to list out activities that you as the investor have little or no control over when or how it is completed. For example, required inspections, connections to municipal utilities, availability of materials and labor are all examples of risk that lead to constraints. You should seek to plan contingencies and prepare for delays due to timing with these types of events. Recognizing outside influences that can impact your project will help keep things on track.