Turnover rates

Retail stores have ways of tracking what is selling. One is dollars / sq. foot. You look at the items in one area over a certain amount of time. Take the amount of sales in that time and divide by the square feet of floor space they take up. Then compare to other items in other parts of the store. This way you can get an idea of what is making you the most money.

Another tracking statistic is turnover rate which has more application to real estate investing. Let’s say you have two products and product A has a \$1 profit and product B has a \$2 profit. Which is better? It is not necessarily B.

What if you only sell one of B a week and you sell 100 of A a week. So on a weekly basis, Product B has a turnover rate of 1 and product A has a turnover rate of 100. A is far outperforming B even though you make less per sale.

Banking and Finance have similar concepts and since their “product” is money, it involves how often do they reuse or re-lend their money but that is a whole other discussion so we will leave it at that.

Turnover in Real Estate

Many people who start investing in real estate have some connection to it, such as being a plumber, a contractor, or an electrician for example. They figure they will save money by doing as much of the work themselves as possible.

That is fine if you are looking to just supplement an income, but isn’t good if you are trying to grow this into a business so you don’t have to work everyday.

An Example of Turnover

Let’s say that it normally takes you 4 months to rehab a house when you are trying to do a lot of the work yourself. (Sometimes these types of projects take a year or two instead of 4 months. Then you have to factor in carrying costs as well.)

Let’s also assume you usually make \$30,000 profit on a rehab.

Now, if you were to hire other people to do the work, who weren’t doing it nights and weekends, but full time, they would get the work done a lot faster. We will assume the rehab will be done in a month and a half and the extra cost is \$10,000 so your profit is only \$20,000.

Conclusion on Turnover and Leverage

So in one case you take 4 months which means you could do 3 rehabs in a year and you make \$30,000 profit on each for a total of \$120,000.

In the other case, it takes 1.5 months which means you can do 8 rehabs in a year and make a profit of \$20,000 on each for a total of \$160,000 in profit.

So by hiring other people and leveraging their services for time, you can make more money and grow faster if that is what you want.

The numbers will vary, but you get the concept. Be aware of time and do some calculations to see if it makes sense to do some tasks yourself and what you will hire others to do.