You’ve likely heard the term “KPI,” which stands for key performance indicator, thrown around the business world. It seems like every successful investor is using KPIs and has nothing but great things to say about them. If successful investors are using them, we know they must be good for us, too, but actually putting KPIs into practice is a different story. So, let’s start from the beginning.
What Are KPIs?
According to the Oxford Dictionary, a key performance indicator, or KPI, is “a quantifiable measure used to evaluate the success of an organization, employee, etc. in meeting objectives for performance.”
Simply put, KPIs allow you to measure how productive you and your team are in achieving your goals.
Why Are KPIs Important?
In any business, if you’re not meeting your objectives, your work can be largely (or wholly) useless—it is imperative to know whether the things you’re doing are effective and, therefore, a good use of your time and effort. Otherwise, you’ll find yourself spinning your wheels, making it only a matter of time before you burn out, quit, or get fired.
How to Create KPIs That Drive Success
A simple Google search can provide various examples of KPIs, but you, your team, and/or your business leaders will need to develop those specific to your objectives. Every organization is unique—your KPIs will be, too.
As a real estate investor, begin by laying out each stage of your strategy—from deal acquisition through closing—whether you’re wholesaling, building, or purchasing a dwelling.
Each of these has quantifiable outcomes, and these outcomes can be optimized with appropriate KPIs. KPIs allow you to track these quantifiable outcomes, so you can determine where you currently stand and what issues your organization may have.
Before you begin actually creating KPIs, you need to wrap your head around the two broad types of indicators: lead indicators and lag indicators.
What Are Lead Indicators and Lag Indicators?
A lead indicator is something you can control and something that can create change. A lag indicator is essentially the result of your actions.
As a real estate investor, whether for commercial real estate or residential properties, finding a deal is often the first stage of our strategy. Let’s look at a scenario that starts there.
In this case, the lead indicator is making an offer, while the lag indicator is an offer being accepted.
You can completely control when, how, and how often you make offers, but you cannot control whether those offers are accepted. Furthermore, if you do not make offers, you will not gain accepted offers.
This is important to note because your leading KPIs need to be achievable and actionable. If your KPI is to have three offers accepted per week, you could offer 10, 100, or 1,000 times and not get a single accepted offer.
On the flip side, you could make three offers and achieve three accepted offers. The point is, the lag indicator, or accepted offers in our example, is the result or the goal, and not an action or activity.
Five Basic Steps to Develop KPIs
Step 1: Clearly Define the Problem
What is it that you and your organization are trying to solve? What issues are you having? What obstacle do you need to overcome to achieve your goals?
Scenario: You have a hard time finding properties to analyze. You are spending hours each day searching for properties to analyze.
Problem: You are not generating enough property or seller leads to achieve your goals.
Step 2: Lay Out Exactly How the Solution to the Problem Will Be Measured
How will the solution be measured?
Scenario: Your ultimate goal is to close on four deals per month, or one deal per week.
Measurement: One accepted offer per week.
Step 3: Figure Out How to Achieve These Results
What needs to happen in order to get to the solution you are measuring?
Scenario: To get to one accepted offer (and ultimately one closed deal) every week, you first need to know how many deals you will have to analyze, as well as how many offers you will have to make to achieve one being accepted.
You know from experience that you have to analyze seven properties in your market before you find one that could work and is worth offering on. Of those, one out of every three offers is accepted. Therefore, you have to analyze 21 properties for every accepted offer.
Since you’d like to close on one deal per week, you have to analyze 21 properties every week, or three properties every day.
Action: Analyze three properties every day.
Step 4: Determine Exactly How Success Is Measured
Now that we know what needs to happen to drive results, it’s time to get to the root of the problem. In this case, we aren’t getting enough leads each day. To put it more simply—we don’t have enough deals to analyze.
In order to impact results, you have to nail down the exact solution. You already know that you need more leads, but “find more leads” is not exactly measurable.
Scenario: How will you get to your baseline of three deals per day?
If you need to get three deals to analyze every day, you need to find the source of these deals. Deals can be found in a variety of ways—agents and wholesalers, driving for dollars, direct mail marketing, cold calling, auctions, etc.
Action: Your network of wholesalers and agents will send at least one deal to your inbox every day. You will find the third deal, or however many you still need, by driving for dollars every afternoon.
Step 5: Refine and Adjust
Once you’ve developed your KPIs, schedule time to refine them regularly and routinely, understanding that KPIs are a baseline. They are the bare minimum that you need to do and achieve every day to be successful and to stay on track for your goals.
Keep this in mind when preparing KPIs—you need to be able to accomplish these on even your worst, busiest days. On days that you have more free time, you can double or even triple your KPIs to more quickly reach your goals.
Scenario: You originally had to analyze seven properties before you found one that worked. As you get better at analyzing and figuring out what you’re looking for and where to find it, this number will go down.
Furthermore, you will get better at writing offers and negotiating deals. Your track record for accepted offers will improve, as well.
Adjustment: Eventually, you’ll only need to analyze five properties before finding one worth making an offer on. And one of every two that you offer on may results in an accepted offer. Now you have to analyze 10 properties for every accepted offer rather than 21.
You’ve become twice as efficient simply by practicing your KPIs every day. You can now double your goal, or enjoy the extra free time.
If you’re still struggling, check out KPI templates online. And remember, this practice isn’t something you will do once and be done with forever. It is an ongoing process that also needs to be optimized for maximum results, leading to greater success over time.