August 3, 2023 • 29 mins
Massively Increase Your Net Operating Income™ with The TCO Method™
Andy discusses systems and controls on a much larger scale and dives into building a tool that most large operations who scale have already implemented - a standards guidebook.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
[MUSIC]
(00:24):
Welcome to The TCO Method, the only show focused on helping you massively increase your net
operating income.
I am Andy McQuade, and thank you so much for tuning in to the Thursday episode of the podcast.
This is my second take of this particular podcast because the first one, I decided it
didn't like.
(00:44):
So here I am, re-recording it, 20 minutes after I started it, I'm starting from scratch,
but I want to talk about a couple things.
The first one is the website is done, it's open to the public, you can go see it, check
it out, please, TCO method.com.
(01:04):
You can support the show on TCO method.com, you can also check out some announcements
about the upcoming book and stay tuned for some courses.
There's an announcement on there about Yonah Weiss' episode that we filmed on Tuesday,
which was awesome.
It's a great information, that will be out on Saturday, looks like Saturday the fifth,
(01:26):
right?
Yes, Saturday the fifth.
Tons of good information on cost segregation, no matter what your experience level is in
real estate.
I wanted to make sure that people had access to some of the resources and stuff, so I will
be releasing some information.
There will be a newsletter with updates and best practices and stuff we talk about on
(01:48):
the show, but also like, for events and what that means for the industry and other things.
Also how is done at TCO method?
I think it's going to be a sub-stack.
Go sign up for it, please.
Anyway, the show today, sort of related to the show from Tuesday, but not really.
So in the show from Tuesday, we talked a little bit about having controls on your inventory
(02:16):
and how having standards matters because your standards in your inventory can reduce the
amount of inventory you have to have from a management standpoint.
The fewer skews the better, the ability to buy more, to leverage buying power, the better,
right?
And there's something to be said for vertically integrating your construction rehab crews
(02:41):
into your operation.
Somebody asked me that today on another podcast that I was interviewing on.
And when the time comes, I will announce it, but the time is not now.
It's probably about four weeks away before it gets released.
So we're going to wait a little bit on that one.
There was an interesting conversation about warehousing centrally, vertically integrating
construction on both labor and supplies.
(03:05):
And then the purchasing products and bulk in containers from China and inventorying them
and warehousing them here.
And the controls conversation really comes into that because you want to make sure that
you're, if you're going to do that and you're going to put that type of capital out there,
(03:28):
that the amount of money you're going to save is going to offset what you're going to
spend to manage that process.
Sort of a tangent, but there's a lot of operators out there currently who are spending their
capital to order product from China, ship it in and then they're warehousing it.
(03:48):
All of that costs money.
At the 3% 3.5% interest rate, 4% interest rate, it makes some sense to do it then.
If you have the industrial space, you have the storage space.
You bring the product in, you save money because it's your product, right?
You set the specs, the design, you control it, you're buying it, not as cheaply as the other
(04:14):
companies that do that, like home people and lows and minards and all the other players
that order stuff from China because you're not buying the same volume, right?
So you still have that same volume, volume, buying power conversation there.
But you're bringing it in from China.
You're saving money there.
But then you're trading that off for having to handle it, right?
(04:35):
So designing the spec takes time.
Ordering a product takes time.
Waiting for that to be produced and shipped over here takes time.
Paying for that product to be produced and shipped over here takes money.
Then it gets here and you have to truck it from wherever it lands to wherever your warehouse
is.
So that's time and money.
(04:57):
And then you have to put it away in your place, whatever it is, warehouse and store it.
So you have to make sure it's not getting stolen.
It's not getting damaged that your guys are taking care of it and keeping an accurate inventory.
You have to make sure you got what you ordered.
The quality is good, right?
You don't want to just receive a container and never open, open anything to see if it's
(05:21):
actually what it's supposed to be.
And then you have to take it from whatever your central warehouse is, repack it and send
it to wherever the work is being done, right?
And maybe you're packing it by the door.
So each apartment has its own list of goods and you're centrally compiling them and shipping
(05:43):
them as needed or before the subs get there to do the work or whatever.
All of it is fine.
It's a perfectly valid business model and people do it.
However, it needs to pay for itself.
Doing that gives you control.
Recourse is tough because that factory in China, something goes wrong.
(06:07):
Even if they agree to fix it at their cost to maintain a relationship, how long is it going
to take to get the stuff here to fix it?
You don't have somebody to fall back on and then you're going shopping with no buying
power outside of your normal supply chain to get somebody to bail you out and expecting
it to be relatively the same cost.
(06:27):
So you lose there, right?
You're also losing the ability to respond quickly to changes because you're stuck with all
this product.
It's tying up a ton of capital.
Whether it's financed capital or not doesn't matter.
It still needs to pay for itself.
You still need to employ people to manage that process.
(06:48):
You still need to pay for the space.
Some of the most successful jobs I've ever been on have vertically integrated their supply
chain and their labor for a project.
Times are different now because all of that stuff costs money.
(07:09):
Are you going to work out your numbers based on old math?
Are you going to be able to pivot and go, okay, we're not going to buy this stuff from
China and inventory or house.
It'd be responsible for it anymore because the math doesn't work anymore.
Cost of capital has doubled.
Cost of labor has gone up by 30%.
(07:30):
And I can lease that industrial space, that storage space where all of that stuff is, or
twice what it was worth when I was doing that.
So there's an opportunity cost play there too.
You have to take the opportunity cost of leasing that space out and how that's going to
cash flow in your business versus keeping it as part of your operation.
(07:51):
It doesn't matter what your actual cost is.
If it stops paying for itself because other things are better like going out and using
other providers and making them own that supply chain, right?
Out sourcing it isn't always a bad thing.
For us to the show, I want to talk about not the controls and systems so much, but the importance
(08:18):
of building the specifications for what you use and how that helps you scale and why it
works and why it's so important.
All right, so what do I mean by specifications?
Total noobs when you're building specifications, it's when you take the visual style that
(08:41):
you're going for and combining it with actual products that exist that meet certain requirements
thresholds and goals for the business.
Normally, the industry that produces the goods will have a lot of that information readily
(09:02):
available that you can just use as like a copy paste.
There are certain things where stuff differs.
They'll have different warranties.
They'll have different types of finishes.
They'll have different materials used in construction that can impact how long that product
lasts or how it holds up to certain types of abuse, how resilient is it.
(09:22):
All stuff we've talked about on the show already, but when you build a spec for your business,
for your visual style, that your end user, right, whoever is going to move into that space
that you're going to offer.
This is not, we're not talking like custom commercial spaces right now where the end user
(09:43):
is going to come to you and have a certain list that they require.
This is literally, I'm flipping a property.
I'm upgrading so I can charge more rent.
I'm going to do C's or B's or A's or luxury or whatever in this neighborhood.
We're going to do this visual style because it's current and it's modern and it's whatever.
(10:06):
You start with the look and then you want to find the products that meet the look.
Sometimes, the look isn't going to be attainable at the price you need.
That's reality.
Niners and architects are a nightmare to work with on investment properties because they
will recommend five and six hundred dollar late fixtures.
(10:28):
I've seen it.
It's a nightmare.
Not just like, as a sales guy, it was cool because it was like, "All right, we're going
to do the light fixtures."
Not so cool when you've got a budget that you need to hit and you still want to have
a level of resilience and quality in the product so that you're not back doing this in two
(10:49):
or three years.
You want, when you're spending money on a Renault, CapEx project, you want to make sure
that you're not going to go back and do that again in a couple of years.
Capital is expensive again.
Interest rates are not zero, which means it matters.
(11:11):
How you build your spec?
The best operators out there have a book that they provide to their subs with a not-escopal
work necessarily, but if this is what we expect to finish product to look like, here is the
specs for all the things we use.
(11:32):
So they have these books that allow them to scale their business.
And it goes into detail on not necessarily the dimensions, but the construction of the
product.
Every space is slightly different, right?
Even in the cookie cutter apartment complex, you might have three or four different floor
layouts, four three or four different types of units that are there.
(11:54):
You might have a townhouse and a three bed, a two bed and a one bed or a two bed and a
one bed and a studio, something like that.
So you're going to have different things, but you want the finishes and the finished quality
to be the same when it's all said and done.
So when you're looking at building your spec, you're looking less at sizes and more at design,
(12:21):
look, curb appeal, availability, price, and then what gets overlooked a lot of times is
how resilient and is it?
How sustainable is it?
Not just in the green crunchy sustainable, like actual sustainable.
Like, is this something that we can continue to use?
(12:44):
Is it going to be available in the future?
Is it going to do the job it needs to do repeatedly for a long period of time?
Right?
Sustainability, not just catch phrases for the green movement, like actual functional,
usable, repeatable things that you put into place in your business.
(13:11):
So you don't have to put them in your business again in a couple of years or address it again.
Sustainable business isn't green and crunchy.
Sustainable business is making sure that you can cash flow and that your NOI is secure at
whatever level you project it to be for a long period of time.
(13:33):
That sustainability.
Resilience is how long does this survive against some outside force?
Whether tenants, sustainability and resilience are very important and you can really leverage
those to max out your NOI when you're doing a rehab, when you're doing the capital improvement.
(14:00):
You can avoid costs in the future and use that capital to do other things that can help
you make more money.
Very important overlooked part of the business, but it's because of the constant drive for
the race to the bottom.
(14:20):
People just use suppliers to hit goals without necessarily finding out what that stuff they're
buying from those suppliers will do three and four and five years down the road, talked
about a ton, without actually discussing building a specification for your product, whatever
(14:46):
it may be.
When I say the larger players, the larger companies that are out there having these already,
they have them.
Some of it is regional, right?
Some of it is because what looks good in New England doesn't necessarily look good in
Florida, doesn't really look good in Arizona or California or Texas or Idaho, South and
(15:12):
North Carolina.
They all have their own market-specific, finished quirks that people like to see.
Like HGTV has created the biggest issue for landlords and it's all because of these, I don't
(15:32):
say unrealistic, but unrealistic, finished quality that they show on the show.
But it's at the moment of completion.
All those projects, they don't show what they look like after a tenant has lived in them
or two or three different tenants have churned through them over seven or eight years.
(15:53):
Paying attention to the resilience and making sure that whatever you're putting together
will meet market demand from a curbapile standpoint is super important.
So you've got to stay regional, you've got to stay very market-specific when you're doing
these types of specs.
What you don't need to go market-specific on is quality standards.
(16:16):
You're not going to just say, "Yeah, go ahead and put that piece of crap in that fails
any year in South Carolina because whatever, it's South Carolina."
But in New England, nah, it's got a lot for 10 years.
That's not how that works.
Many scales without systems because it's chaos and you can't keep control of the controllables.
So building your specs, building your specifications is important.
(16:40):
And it's not just about the look necessarily, right?
Like having a finished guidebook is a good idea.
Like we want all of our cabinets to be shaker style in white or dove gray or whatever
the hot color is today.
I think we're going back to wood grain now in some markets.
I don't really care what you use.
But make sure that it meets the requirements for the class of property.
(17:02):
Every project is going to be a little different, but don't let your product quality suffer.
Like just because it's a C or a D doesn't mean you put a cabinet in that's going to fail
in two years.
You have to plan and make sure your spec meets that level for the tenant that's going to
be in there.
Not just in look, but in function.
(17:24):
In the head, always plan for the lowest common denominator.
I have one apartment complex owner who stopped buying self cleaning stoves because when it came
time for the tenant to move out, they didn't want to pay the cleaning fee.
They wanted their security deposit back.
They'd lock the oven and turn the self cleaning on.
Meanwhile, they've lived in that unit for four years and never cleaned the oven once
(17:46):
and poof kitchen fire.
But these operators that do this all the time where this is how they make their money,
whether they keep the unit where they keep the building to cash flow off of or the complex
to cash flow off of or whether they sell it, right, with meat on the bone or complete
turnkey, doesn't matter.
They all have systems and part of those systems is already established relationships with
(18:08):
vendors for discounts and rebates and pricing and bulk buying.
They're controlling their own supply chain.
They have that all figured out already.
They have their standards booked out so they know, okay, well, these are C's.
Here's my book of standards for C properties and here's the finished guide that I want
these to look this way when this is done.
Here's the book for B. Here's the book for A. Here's the book for, you know, luxury.
(18:34):
And then they just make changes like sometimes A's and luxuries will have the same stuff in
them sometimes they won't.
Sometimes they're going super modern or it's a historical build out like there's market
specific project specific details that get changed.
The thing that doesn't change is how they build those guides and why they choose the things
(18:56):
they choose.
So when you're building a book for a C property, it's going to look different and the price
of the products that are used is going to change.
But that doesn't necessarily mean you're compromising on the quality of the product or how long
(19:20):
it lasts in the unit from a resilient standpoint may look different, may have different features.
It may not be as nice and feel as good for the tenant as it would in a luxury property.
But that doesn't mean that you're going to use, you know, a piece of cardboard for a counter
(19:41):
top in a C or a D property either like you're going to put the quality of product in there
that minimizes your costs and doesn't break your budget.
All your turns have to meet your budgetary requirements for how those units are going
to cash flow, how much money you're going to make every month.
If you're in the industry and you're listening to the show, I'm hoping you're listening because
(20:03):
you want to pick up some tips.
The first tip that I'm going to give you is it relates to product specifications and
building systems is to start.
You need to know why you want to use certain things, how you want to use them, where you're
(20:27):
going to go to get them.
And you want to make sure that they meet all of those other business goals, right?
You want to reduce costs, avoid costs, avoid breaking any laws.
So there's compliance stuff.
You want to make sure that there's going to be a less of an incident.
You don't want to use flooring in your unit where as soon as it gets wet, people fall in
their faces.
(20:47):
Right?
So there's business goals which sort of go unspoken, but I have seen people fail at their
specifications and they use stuff that quite frankly is just stupid that costs them a ton
of money.
If you're using battery-operated 9-volt and double A smoke detectors, I put you in that
(21:08):
category.
Those are stupid decisions because they cost you more over time, then the actual product,
the alternate product cost you because time is money.
Money is money, but time is money.
And the more time you have to spend maintaining something, the less money you make.
(21:31):
It's pretty simple math, but people don't always put it in that bucket.
So the business goals as you're building your spec list shouldn't just be curb appeal,
shouldn't just be cheapest price.
It should be highest value, greatest value for your operation, for your company, for your
organization.
However you want to say it.
Highest value means you need to understand what the implications are for the products you're
(21:56):
using.
Data helps you figure that out, right?
I have the luxury.
I have a run-quote luxury, air quotes if you're not on YouTube.
It's not really a luxury.
I had a lot of people calling me yelling at me for stupid stuff that I had to figure out
what the problem was and why it was going sideways.
Now I don't have people calling and yelling at me, but I still have to help them figure
(22:19):
out what the stupid stuff is so they can avoid it.
The point is of this long-winded tirade that I'm on is that you want to understand the
product and what it means.
So back to prior episodes talking about collecting data on failures.
(22:40):
If you're not collecting the data on what's going sideways, like yes, you have maintenance
orders and it can tell you in the maintenance order what that's for.
But what specific part is that for?
Is that being booked to the job?
Because if you start to see patterns of very specific failures, right?
Like we've seen batches of refrigerators that timers go bad on and it's a lot of them all
(23:02):
at once.
We've seen issues with water and ice makers leaking on floors when the refrigerator gets
moved out so people who are anal or tend to about cleaning.
When they pull that fridge out it breaks that tube because there's just little plastic
tube, it's not metal.
In most cases, I don't know any brand that uses metal still for that elbow.
(23:24):
There's stuff that like tile.
Is it a non-slip tile or people going to step out of the shower and fall on their face?
How do you know?
Is it something you're checking when you're building, when you're buying the product?
You're just buying what's cheap off the shelf.
Same thing if you have tile in an entryway or any type of vinyl flooring.
There's vinyl flooring out there that is not slip friendly.
(23:47):
There's not a lot of it left.
There's not a lot of manufacturers who are out there making it that cheap but there are
some.
You go to Mr. Seconds, you can find it or whatever they're calling themselves now in 2023.
I have no idea.
But the point is that data is your friend and if you collect the right data, you can start
to see the products to avoid.
You can start to see the stuff that you don't want to use in your units because of resilience
(24:12):
issues or compliance issues or exposure issues or labor issues or whatever.
That data will help you but for new people getting into it, you don't have that data.
How do you get it?
As much as I would like to say, I have a crystal ball and can tell you what fails and what
doesn't.
There's always going to be a brand of product or a batch of product that comes out that's
used that fails because of a manufacturing problem and they'll stand behind it.
(24:35):
But you need to listen to this show for one and maybe pick up some resources on how to
quantify what your total cost of ownership would be for a particular product.
Like when you do a total cost of ownership analysis on a smoke detector and you look at
(24:57):
the battery operated 9 volt or AA compared to a 10 year sealed lithium, there's not compliance
stuff but some compliance stuff is in there.
There's risk management stuff, there's cost avoidance stuff because there's maintenance
costs, there's product costs for batteries, there's all sorts of things and when you look
(25:18):
at the life of that item, the 10 years that it's good for or 7 if it's a CO detector, you
see a very clear picture of what costs you more money over that period of time.
You do that for everything and you start to raise your own alive because you're starting
to cut out these incidentals.
(25:38):
That's all that low hanging fruit at the bottom of the tree where the tree is broadest
that costs you the money and so having visibility and having data and having numbers to avoid
that will keep all that low hanging fruit from costing you a ton of cash at the bottom
of that pyramid or the bottom of that tree.
(25:59):
But talk to other people in the industry, find out what they're using and what they're
having issues with and don't talk about the issues that are happening like yes, it's
important to know if something dies within like three months of install, that's important,
you'd want to know that so you can avoid it.
But really, you need to be looking at how does this impact your business four years down
(26:21):
the line like people who have actually used a product whether it be flooring your cabinets
or lighting, whatever, anything that has to last for four to seven to ten plus years,
look, how is this doing for you?
Is this, are you having issues with this or is this still going strong four years later,
(26:42):
eight years later, ten years later?
Tell me the story.
I want to know the details in the dirty laundry that takes time.
That's where I commend because I see all this stuff and I've been seeing it for 25 years.
So anyway, a lot of time, way over time.
Thank you so much for listening.
Please go check out the website that is out tco method dot com.
(27:06):
Tell me what you think.
I paid a lot of money for that website.
It took a whole crap load of time to get done with a bunch of delays.
Beat the crap out of it.
I want to know your thoughts.
If it's hideous, I'm not a fan necessarily of the color scheme that was not my choice,
but I'm using it because yes, it's done and the content is mostly there.
(27:28):
You can watch the podcast that's on YouTube there.
You can listen to the podcast that's everywhere on there.
And soon you'll be able to read some stuff there and download some resources, some case
studies, probably some white papers and other things that will also be duplicated over on
my company pages, but those are a little bit more boring.
(27:50):
So we're going to keep the tco method tco method and we're going to just roll a bunch
of the stuff there.
And honestly duplicating stuff across websites means that I have to do less work generating
content.
So works out great for me.
Thank you so much for listening.
Please hit that bell if you're on YouTube and subscribe.
Leave me a comment.
I will respond if it's on YouTube.
(28:12):
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Thank you so much for listening.
Please leave me a review if you can.
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(28:41):
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(29:04):
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And I'm going to stop talking.
Have a great rest of your day.
Enjoy your weekend.
(29:24):
Thank you so much.
[MUSIC]
[BLANK_AUDIO]
[MUSIC]
(00:24):
Welcome to The TCO Method, the only show focused on helping you massively increase your net
operating income.
I am Andy McQuade, and thank you so much for tuning in to the Thursday episode of the podcast.
This is my second take of this particular podcast because the first one, I decided it
didn't like.
(00:44):
So here I am, re-recording it, 20 minutes after I started it, I'm starting from scratch,
but I want to talk about a couple things.
The first one is the website is done, it's open to the public, you can go see it, check
it out, please, TCO method.com.
(01:04):
You can support the show on TCO method.com, you can also check out some announcements
about the upcoming book and stay tuned for some courses.
There's an announcement on there about Yonah Weiss' episode that we filmed on Tuesday,
which was awesome.
It's a great information, that will be out on Saturday, looks like Saturday the fifth,
(01:26):
right?
Yes, Saturday the fifth.
Tons of good information on cost segregation, no matter what your experience level is in
real estate.
I wanted to make sure that people had access to some of the resources and stuff, so I will
be releasing some information.
There will be a newsletter with updates and best practices and stuff we talk about on
(01:48):
the show, but also like, for events and what that means for the industry and other things.
Also how is done at TCO method?
I think it's going to be a sub-stack.
Go sign up for it, please.
Anyway, the show today, sort of related to the show from Tuesday, but not really.
So in the show from Tuesday, we talked a little bit about having controls on your inventory
(02:16):
and how having standards matters because your standards in your inventory can reduce the
amount of inventory you have to have from a management standpoint.
The fewer skews the better, the ability to buy more, to leverage buying power, the better,
right?
And there's something to be said for vertically integrating your construction rehab crews
(02:41):
into your operation.
Somebody asked me that today on another podcast that I was interviewing on.
And when the time comes, I will announce it, but the time is not now.
It's probably about four weeks away before it gets released.
So we're going to wait a little bit on that one.
There was an interesting conversation about warehousing centrally, vertically integrating
construction on both labor and supplies.
(03:05):
And then the purchasing products and bulk in containers from China and inventorying them
and warehousing them here.
And the controls conversation really comes into that because you want to make sure that
you're, if you're going to do that and you're going to put that type of capital out there,
(03:28):
that the amount of money you're going to save is going to offset what you're going to
spend to manage that process.
Sort of a tangent, but there's a lot of operators out there currently who are spending their
capital to order product from China, ship it in and then they're warehousing it.
(03:48):
All of that costs money.
At the 3% 3.5% interest rate, 4% interest rate, it makes some sense to do it then.
If you have the industrial space, you have the storage space.
You bring the product in, you save money because it's your product, right?
You set the specs, the design, you control it, you're buying it, not as cheaply as the other
(04:14):
companies that do that, like home people and lows and minards and all the other players
that order stuff from China because you're not buying the same volume, right?
So you still have that same volume, volume, buying power conversation there.
But you're bringing it in from China.
You're saving money there.
But then you're trading that off for having to handle it, right?
(04:35):
So designing the spec takes time.
Ordering a product takes time.
Waiting for that to be produced and shipped over here takes time.
Paying for that product to be produced and shipped over here takes money.
Then it gets here and you have to truck it from wherever it lands to wherever your warehouse
is.
So that's time and money.
(04:57):
And then you have to put it away in your place, whatever it is, warehouse and store it.
So you have to make sure it's not getting stolen.
It's not getting damaged that your guys are taking care of it and keeping an accurate inventory.
You have to make sure you got what you ordered.
The quality is good, right?
You don't want to just receive a container and never open, open anything to see if it's
(05:21):
actually what it's supposed to be.
And then you have to take it from whatever your central warehouse is, repack it and send
it to wherever the work is being done, right?
And maybe you're packing it by the door.
So each apartment has its own list of goods and you're centrally compiling them and shipping
(05:43):
them as needed or before the subs get there to do the work or whatever.
All of it is fine.
It's a perfectly valid business model and people do it.
However, it needs to pay for itself.
Doing that gives you control.
Recourse is tough because that factory in China, something goes wrong.
(06:07):
Even if they agree to fix it at their cost to maintain a relationship, how long is it going
to take to get the stuff here to fix it?
You don't have somebody to fall back on and then you're going shopping with no buying
power outside of your normal supply chain to get somebody to bail you out and expecting
it to be relatively the same cost.
(06:27):
So you lose there, right?
You're also losing the ability to respond quickly to changes because you're stuck with all
this product.
It's tying up a ton of capital.
Whether it's financed capital or not doesn't matter.
It still needs to pay for itself.
You still need to employ people to manage that process.
(06:48):
You still need to pay for the space.
Some of the most successful jobs I've ever been on have vertically integrated their supply
chain and their labor for a project.
Times are different now because all of that stuff costs money.
(07:09):
Are you going to work out your numbers based on old math?
Are you going to be able to pivot and go, okay, we're not going to buy this stuff from
China and inventory or house.
It'd be responsible for it anymore because the math doesn't work anymore.
Cost of capital has doubled.
Cost of labor has gone up by 30%.
(07:30):
And I can lease that industrial space, that storage space where all of that stuff is, or
twice what it was worth when I was doing that.
So there's an opportunity cost play there too.
You have to take the opportunity cost of leasing that space out and how that's going to
cash flow in your business versus keeping it as part of your operation.
(07:51):
It doesn't matter what your actual cost is.
If it stops paying for itself because other things are better like going out and using
other providers and making them own that supply chain, right?
Out sourcing it isn't always a bad thing.
For us to the show, I want to talk about not the controls and systems so much, but the importance
(08:18):
of building the specifications for what you use and how that helps you scale and why it
works and why it's so important.
All right, so what do I mean by specifications?
Total noobs when you're building specifications, it's when you take the visual style that
(08:41):
you're going for and combining it with actual products that exist that meet certain requirements
thresholds and goals for the business.
Normally, the industry that produces the goods will have a lot of that information readily
(09:02):
available that you can just use as like a copy paste.
There are certain things where stuff differs.
They'll have different warranties.
They'll have different types of finishes.
They'll have different materials used in construction that can impact how long that product
lasts or how it holds up to certain types of abuse, how resilient is it.
(09:22):
All stuff we've talked about on the show already, but when you build a spec for your business,
for your visual style, that your end user, right, whoever is going to move into that space
that you're going to offer.
This is not, we're not talking like custom commercial spaces right now where the end user
(09:43):
is going to come to you and have a certain list that they require.
This is literally, I'm flipping a property.
I'm upgrading so I can charge more rent.
I'm going to do C's or B's or A's or luxury or whatever in this neighborhood.
We're going to do this visual style because it's current and it's modern and it's whatever.
(10:06):
You start with the look and then you want to find the products that meet the look.
Sometimes, the look isn't going to be attainable at the price you need.
That's reality.
Niners and architects are a nightmare to work with on investment properties because they
will recommend five and six hundred dollar late fixtures.
(10:28):
I've seen it.
It's a nightmare.
Not just like, as a sales guy, it was cool because it was like, "All right, we're going
to do the light fixtures."
Not so cool when you've got a budget that you need to hit and you still want to have
a level of resilience and quality in the product so that you're not back doing this in two
(10:49):
or three years.
You want, when you're spending money on a Renault, CapEx project, you want to make sure
that you're not going to go back and do that again in a couple of years.
Capital is expensive again.
Interest rates are not zero, which means it matters.
(11:11):
How you build your spec?
The best operators out there have a book that they provide to their subs with a not-escopal
work necessarily, but if this is what we expect to finish product to look like, here is the
specs for all the things we use.
(11:32):
So they have these books that allow them to scale their business.
And it goes into detail on not necessarily the dimensions, but the construction of the
product.
Every space is slightly different, right?
Even in the cookie cutter apartment complex, you might have three or four different floor
layouts, four three or four different types of units that are there.
(11:54):
You might have a townhouse and a three bed, a two bed and a one bed or a two bed and a
one bed and a studio, something like that.
So you're going to have different things, but you want the finishes and the finished quality
to be the same when it's all said and done.
So when you're looking at building your spec, you're looking less at sizes and more at design,
(12:21):
look, curb appeal, availability, price, and then what gets overlooked a lot of times is
how resilient and is it?
How sustainable is it?
Not just in the green crunchy sustainable, like actual sustainable.
Like, is this something that we can continue to use?
(12:44):
Is it going to be available in the future?
Is it going to do the job it needs to do repeatedly for a long period of time?
Right?
Sustainability, not just catch phrases for the green movement, like actual functional,
usable, repeatable things that you put into place in your business.
(13:11):
So you don't have to put them in your business again in a couple of years or address it again.
Sustainable business isn't green and crunchy.
Sustainable business is making sure that you can cash flow and that your NOI is secure at
whatever level you project it to be for a long period of time.
(13:33):
That sustainability.
Resilience is how long does this survive against some outside force?
Whether tenants, sustainability and resilience are very important and you can really leverage
those to max out your NOI when you're doing a rehab, when you're doing the capital improvement.
(14:00):
You can avoid costs in the future and use that capital to do other things that can help
you make more money.
Very important overlooked part of the business, but it's because of the constant drive for
the race to the bottom.
(14:20):
People just use suppliers to hit goals without necessarily finding out what that stuff they're
buying from those suppliers will do three and four and five years down the road, talked
about a ton, without actually discussing building a specification for your product, whatever
(14:46):
it may be.
When I say the larger players, the larger companies that are out there having these already,
they have them.
Some of it is regional, right?
Some of it is because what looks good in New England doesn't necessarily look good in
Florida, doesn't really look good in Arizona or California or Texas or Idaho, South and
(15:12):
North Carolina.
They all have their own market-specific, finished quirks that people like to see.
Like HGTV has created the biggest issue for landlords and it's all because of these, I don't
(15:32):
say unrealistic, but unrealistic, finished quality that they show on the show.
But it's at the moment of completion.
All those projects, they don't show what they look like after a tenant has lived in them
or two or three different tenants have churned through them over seven or eight years.
(15:53):
Paying attention to the resilience and making sure that whatever you're putting together
will meet market demand from a curbapile standpoint is super important.
So you've got to stay regional, you've got to stay very market-specific when you're doing
these types of specs.
What you don't need to go market-specific on is quality standards.
(16:16):
You're not going to just say, "Yeah, go ahead and put that piece of crap in that fails
any year in South Carolina because whatever, it's South Carolina."
But in New England, nah, it's got a lot for 10 years.
That's not how that works.
Many scales without systems because it's chaos and you can't keep control of the controllables.
So building your specs, building your specifications is important.
(16:40):
And it's not just about the look necessarily, right?
Like having a finished guidebook is a good idea.
Like we want all of our cabinets to be shaker style in white or dove gray or whatever
the hot color is today.
I think we're going back to wood grain now in some markets.
I don't really care what you use.
But make sure that it meets the requirements for the class of property.
(17:02):
Every project is going to be a little different, but don't let your product quality suffer.
Like just because it's a C or a D doesn't mean you put a cabinet in that's going to fail
in two years.
You have to plan and make sure your spec meets that level for the tenant that's going to
be in there.
Not just in look, but in function.
(17:24):
In the head, always plan for the lowest common denominator.
I have one apartment complex owner who stopped buying self cleaning stoves because when it came
time for the tenant to move out, they didn't want to pay the cleaning fee.
They wanted their security deposit back.
They'd lock the oven and turn the self cleaning on.
Meanwhile, they've lived in that unit for four years and never cleaned the oven once
(17:46):
and poof kitchen fire.
But these operators that do this all the time where this is how they make their money,
whether they keep the unit where they keep the building to cash flow off of or the complex
to cash flow off of or whether they sell it, right, with meat on the bone or complete
turnkey, doesn't matter.
They all have systems and part of those systems is already established relationships with
(18:08):
vendors for discounts and rebates and pricing and bulk buying.
They're controlling their own supply chain.
They have that all figured out already.
They have their standards booked out so they know, okay, well, these are C's.
Here's my book of standards for C properties and here's the finished guide that I want
these to look this way when this is done.
Here's the book for B. Here's the book for A. Here's the book for, you know, luxury.
(18:34):
And then they just make changes like sometimes A's and luxuries will have the same stuff in
them sometimes they won't.
Sometimes they're going super modern or it's a historical build out like there's market
specific project specific details that get changed.
The thing that doesn't change is how they build those guides and why they choose the things
(18:56):
they choose.
So when you're building a book for a C property, it's going to look different and the price
of the products that are used is going to change.
But that doesn't necessarily mean you're compromising on the quality of the product or how long
(19:20):
it lasts in the unit from a resilient standpoint may look different, may have different features.
It may not be as nice and feel as good for the tenant as it would in a luxury property.
But that doesn't mean that you're going to use, you know, a piece of cardboard for a counter
(19:41):
top in a C or a D property either like you're going to put the quality of product in there
that minimizes your costs and doesn't break your budget.
All your turns have to meet your budgetary requirements for how those units are going
to cash flow, how much money you're going to make every month.
If you're in the industry and you're listening to the show, I'm hoping you're listening because
(20:03):
you want to pick up some tips.
The first tip that I'm going to give you is it relates to product specifications and
building systems is to start.
You need to know why you want to use certain things, how you want to use them, where you're
(20:27):
going to go to get them.
And you want to make sure that they meet all of those other business goals, right?
You want to reduce costs, avoid costs, avoid breaking any laws.
So there's compliance stuff.
You want to make sure that there's going to be a less of an incident.
You don't want to use flooring in your unit where as soon as it gets wet, people fall in
their faces.
(20:47):
Right?
So there's business goals which sort of go unspoken, but I have seen people fail at their
specifications and they use stuff that quite frankly is just stupid that costs them a ton
of money.
If you're using battery-operated 9-volt and double A smoke detectors, I put you in that
(21:08):
category.
Those are stupid decisions because they cost you more over time, then the actual product,
the alternate product cost you because time is money.
Money is money, but time is money.
And the more time you have to spend maintaining something, the less money you make.
(21:31):
It's pretty simple math, but people don't always put it in that bucket.
So the business goals as you're building your spec list shouldn't just be curb appeal,
shouldn't just be cheapest price.
It should be highest value, greatest value for your operation, for your company, for your
organization.
However you want to say it.
Highest value means you need to understand what the implications are for the products you're
(21:56):
using.
Data helps you figure that out, right?
I have the luxury.
I have a run-quote luxury, air quotes if you're not on YouTube.
It's not really a luxury.
I had a lot of people calling me yelling at me for stupid stuff that I had to figure out
what the problem was and why it was going sideways.
Now I don't have people calling and yelling at me, but I still have to help them figure
(22:19):
out what the stupid stuff is so they can avoid it.
The point is of this long-winded tirade that I'm on is that you want to understand the
product and what it means.
So back to prior episodes talking about collecting data on failures.
(22:40):
If you're not collecting the data on what's going sideways, like yes, you have maintenance
orders and it can tell you in the maintenance order what that's for.
But what specific part is that for?
Is that being booked to the job?
Because if you start to see patterns of very specific failures, right?
Like we've seen batches of refrigerators that timers go bad on and it's a lot of them all
(23:02):
at once.
We've seen issues with water and ice makers leaking on floors when the refrigerator gets
moved out so people who are anal or tend to about cleaning.
When they pull that fridge out it breaks that tube because there's just little plastic
tube, it's not metal.
In most cases, I don't know any brand that uses metal still for that elbow.
(23:24):
There's stuff that like tile.
Is it a non-slip tile or people going to step out of the shower and fall on their face?
How do you know?
Is it something you're checking when you're building, when you're buying the product?
You're just buying what's cheap off the shelf.
Same thing if you have tile in an entryway or any type of vinyl flooring.
There's vinyl flooring out there that is not slip friendly.
(23:47):
There's not a lot of it left.
There's not a lot of manufacturers who are out there making it that cheap but there are
some.
You go to Mr. Seconds, you can find it or whatever they're calling themselves now in 2023.
I have no idea.
But the point is that data is your friend and if you collect the right data, you can start
to see the products to avoid.
You can start to see the stuff that you don't want to use in your units because of resilience
(24:12):
issues or compliance issues or exposure issues or labor issues or whatever.
That data will help you but for new people getting into it, you don't have that data.
How do you get it?
As much as I would like to say, I have a crystal ball and can tell you what fails and what
doesn't.
There's always going to be a brand of product or a batch of product that comes out that's
used that fails because of a manufacturing problem and they'll stand behind it.
(24:35):
But you need to listen to this show for one and maybe pick up some resources on how to
quantify what your total cost of ownership would be for a particular product.
Like when you do a total cost of ownership analysis on a smoke detector and you look at
(24:57):
the battery operated 9 volt or AA compared to a 10 year sealed lithium, there's not compliance
stuff but some compliance stuff is in there.
There's risk management stuff, there's cost avoidance stuff because there's maintenance
costs, there's product costs for batteries, there's all sorts of things and when you look
(25:18):
at the life of that item, the 10 years that it's good for or 7 if it's a CO detector, you
see a very clear picture of what costs you more money over that period of time.
You do that for everything and you start to raise your own alive because you're starting
to cut out these incidentals.
(25:38):
That's all that low hanging fruit at the bottom of the tree where the tree is broadest
that costs you the money and so having visibility and having data and having numbers to avoid
that will keep all that low hanging fruit from costing you a ton of cash at the bottom
of that pyramid or the bottom of that tree.
(25:59):
But talk to other people in the industry, find out what they're using and what they're
having issues with and don't talk about the issues that are happening like yes, it's
important to know if something dies within like three months of install, that's important,
you'd want to know that so you can avoid it.
But really, you need to be looking at how does this impact your business four years down
(26:21):
the line like people who have actually used a product whether it be flooring your cabinets
or lighting, whatever, anything that has to last for four to seven to ten plus years,
look, how is this doing for you?
Is this, are you having issues with this or is this still going strong four years later,
(26:42):
eight years later, ten years later?
Tell me the story.
I want to know the details in the dirty laundry that takes time.
That's where I commend because I see all this stuff and I've been seeing it for 25 years.
So anyway, a lot of time, way over time.
Thank you so much for listening.
Please go check out the website that is out tco method dot com.
(27:06):
Tell me what you think.
I paid a lot of money for that website.
It took a whole crap load of time to get done with a bunch of delays.
Beat the crap out of it.
I want to know your thoughts.
If it's hideous, I'm not a fan necessarily of the color scheme that was not my choice,
but I'm using it because yes, it's done and the content is mostly there.
(27:28):
You can watch the podcast that's on YouTube there.
You can listen to the podcast that's everywhere on there.
And soon you'll be able to read some stuff there and download some resources, some case
studies, probably some white papers and other things that will also be duplicated over on
my company pages, but those are a little bit more boring.
(27:50):
So we're going to keep the tco method tco method and we're going to just roll a bunch
of the stuff there.
And honestly duplicating stuff across websites means that I have to do less work generating
content.
So works out great for me.
Thank you so much for listening.
Please hit that bell if you're on YouTube and subscribe.
Leave me a comment.
I will respond if it's on YouTube.
(28:12):
If you are on a podcast platform like Spotify, Apple iTunes, SoundCloud, wherever you're
listening to this I heart radio.
Thank you so much for listening.
Please leave me a review if you can.
Four stars, five stars, leave me a comment.
I appreciate it.
The only way that YouTube shows YouTube podcasts and regular podcasts get traction organically
(28:41):
is if people leave comments and like episodes and like the show.
They don't have to share it on their social media.
They don't have to do any other stuff.
Five stars leave a comment.
That drives it into people's organic feeds.
So if you do that, you're helping me.
You listen to other podcasts which I assume you are.
You need to do it for them too unless you hate them.
(29:04):
If you hate them then I don't care what you do.
But if you want to help the podcast grow, you want to support the podcast, the best thing
you can do is leave that four or five star review, leave a comment, review the episodes
if you can because Spotify lets you do that now.
And I'm going to stop talking.
Have a great rest of your day.
Enjoy your weekend.
(29:24):
Thank you so much.
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