1201: Season 12 opener: Improving underperforming assets and planning exit strategy
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Welcome to episode one of Season 12 of the Growing Empire Show. This is our season opener. And the theme for this season is strategies for improving your underperforming assets as well as planning for your exit strategies. So what can you expect from this season? Well, you can definitely expect a lot of tips and tracks and if you currently own properties now, you don't want to miss this season. Make sure that you stay tuned so that you can hear all of our industry tips and tricks on how exactly to get those underperforming assets to be performing assets.
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Welcome to Growing Empires. Hosted by real estate entrepreneur and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.
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We will have special guests, I will have our usual question and answer segment. But I'm going to jump right in here and discuss a little bit about what we're going to talk about this season. And what does it mean when you're trying to improve an underperforming asset as well as when you should plan for your exit strategy. So let's talk about those underperforming assets. So, most of the time, if you're buying value add, you are buying underperforming asset. And that asset can be underperforming for a variety of reasons. It could be underperforming because the lack of rental history, it could be underperforming because you have rents that are far below market. It could be underperforming because the building is very high and maintenance dollars or turnover costs or capital improvements. But it could be a variety of reasons why something would underperform. And each one of those challenges is going to create a pathway for you to improve that asset. But the key to knowing exactly what to do to improve your underperforming asset means that you got to know what is causing it to be such. So let's take the example of a property that is not performing from an income perspective because the rents are far below market or you have a building full of tenants that are potentially not paying rent. In either of these situations I'm going to tell you that the most critical thing that you can do is not allow people to live for free. So if you have people that are living far below market, the key here is understanding that, especially in markets like we're currently in, you should not assume that somebody cannot pay more. And I think that people sometimes avoid raising rents as a whole because they're afraid that the tenant cannot afford it or the tenant will not pay it. Well, the easiest way to find that out is to ask them for proof of income. But secondarily, you want to also keep in perspective the market that you're in. In a market as such where rent prices as well as the market is still growing every day and rents as well as prices of properties are out of control, you can assume that that tenant is very well aware that they have been living far below market. In addition to that, it is highly unlikely that that tenant is going to be able to move to another location in a cost effective manner. The cost of moving is extensive, then you've got to put your security deposit down, potentially a first and last month's rent. So from the tenants perspective, staying put in the unit is going to be likely their very first choice. So when there is a ton of inventory on the market and there's a lot of competition, you're going to want to relax a little bit on the amount of aggression you put toward raising rents. However, in a market as such, where there's very low inventory, you can definitely feel safe to be a little bit more aggressive with raising rents. The first thing I would do is just literally have a conversation. I always advise to landlords to never just send out a rent notice. Like, don't ever send out your rents increasing, send out a forum, post it on their door, whatever it may be. Never use email and postings as a way to communicate with people, especially if you want to get something out of them. My suggestion is for you or for your management company to do is have a conversation with the tenant and the conversation would go something like this. Listen, Susie, you know, you've been living here for quite some time, and we very much appreciate your tenancy. However, I'm sure you are well aware that you have been living in this property far below market rents for quite some time. So the good news is that you've been lucky all this time. But we're now in a position where the owner, the landlord of the property, really needs to consider this apartment in this building as an investment. And therefore we have to hit a certain rental rate that's going to allow them to continue to stay in business. I'm sure you can understand that. So what we’re proposing is a rent increase to X amount of dollars. And you always want to wait to hear what the tenant has to say you don't want to give any additional reasons why. But you want to listen to what they have to say. And if they come back to you with a lower number, perhaps you go back with, you know, again, another counter offer, or you add in utilities, something like that. Either way, your goal is to increase that rent. And it's okay to say to a tenant look, the reality is, I'd love to keep you as a tenant. But if you're not willing to come to this rent, I'm going to have to ask you to leave because I do need to make sure that this building makes money. And the only way that I can do that is making sure that everybody is paying a fair market value for the apartment that they're living in. Now, I'd love to save you the cost of moving and I'd love to save you having to come up with a security deposit. And I'd love to save you all that hassle. But the reality is, is that I can't let you live here for this rate. Because it no longer makes financial sense. Now with that being said, if there's some things in your apartment, that you would like me to potentially look to upgrade for you, I'd be willing to consider that. Because I would like you to make this home your home for a very long period of time. But I think that there's a give and take in this situation, right? So the method is to really just have a conversation, people respond to conversations, they do not respond to do this, or else or postings or notices left on their doors or, you know, something like that. So if you're looking to increase rents, do not just assume that the tenant that is living there is not capable of paying the rent because they very well are. And secondarily to that, you want to make sure that you have a conversation instead of just, you know, an email or a notice stating that something is going to happen. That way you open the dialog, and you will allow there to be a discussion about these things.
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As an investor, we know it's important to stay on top of market trends and real estate opportunities that add value to your portfolio. We also know that having a trusted source of reliable information to help you stay a step ahead of other investors is critical to your success. If you're interested in having these types of resources, as well as access to me and my team, I invite you to join the Empire Investment Club. A free service that gives you an easier way to make sense of today's and tomorrow's real estate opportunities. As a member of the Empire Investment Club, you'll get access to relevant resources and investment focused experiences such as live interactive webinars, market trend presentations, and investor socials designed to equip you with what you need to succeed. So whether you're an active investor, passive investor, a combination of both or just starting out, the club is where you'll get what you need to build a portfolio you love. To join, just head over to JenniferdeJesus.com, sign up, and we'll see you in the club, where everyone's on a journey to becoming a better investor.
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Maybe you're trying to increase the rent $500. And the tenant is not willing to pay $500 more, but they're willing to pay 300 or 400. More. Well, now you're in a position where you can go back and think about does this make financial sense for me. Because if this tenant Susie leaves, who's been here for 10 years, I can assume that I'm going to have to do renovations to this unit, because quite frankly, 10 years worth of living in some place means that I probably have to paint the apartment, maybe replace the floors. There's going to be wear and tear. So you're going to have to do work to get it to the standard that a tenant that is looking now would expect of your unit. So when you're trying to improve underperforming assets, and you've got tenants that are otherwise decent tenants, you're going to want to give them some kind of dialogue to see if you can work out some kind of collaboration where it makes financial sense. If your challenge is that your tenants are not paying rent or not paying rent timely, my guess is that in addition to that, they're probably also not at market, you're gonna want to make a swift move to get them out of the apartment. You never want to let anybody live rent free. And there's really two keys to improving underperforming assets. One is increasing the income. But the other piece of that is decreasing the expenses. The two of those things need to work together for you to really be able to improve that asset and to make that asset cash flow. And if you're unable to increase the income as well as decrease the expenses at the same time, you're not going to get your biggest bang for your buck. So you're going to want to make sure that you're making strides to do both. Another example of something that you could do is maybe you increase the rent a little bit but maybe then offset that by asking the tenant to pay a portion of their utilities even if they're not sub metered in Pennsylvania, you could do something like ratio billing. So something to think about as far as increasing income. Some of the other things you can do to increase income are, besides turning over the utility cost or some of the portion of the utility costs is look for other rentable spaces. Do you have areas like in a basement or garage or storage areas where you could rent out those spaces to tenants? There's no secret that every tenant needs more storage. So that might be a good option for you. Additionally to that, could you add things like coin operated laundry, or any kind of off street parking, to the cost of the rental. That will also allow you to improve the income for that building. And from the expense perspective, you really just want to analyze the details on where all your money is going. So if you find that your utility costs are exorbitant, or they're uncontrollable expenses, like water, those would be key items for you to turn those expenses over to the tenants, even if you made them pay a portion of it, which would allow you to offset that expense, therefore giving you additional income every single month.
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There's many other things that we're going to talk about this season regarding underperforming assets, and how to plan for capital improvements and exit strategies as well. When we're talking a little bit about exit strategies, we're going to tell you how to put your best foot forward and how to make sure that you can maximize the return on investment that you've had in this property,thus far. We'll tell you what improvements to make and not make. We're going to talk to you about what to do with problem tenants in the event that you need to plan the exit strategy. But most importantly, what I want you to understand is that the time that you plan, your exit strategy is really at acquisition, you want to know what you're going toward whether your plan is to sell two years from now, five years from now, or 10 years from now, you want to make sure that every asset that you acquire allows you to exit immediately should you have to. And if your property is not going to perform unless you held it for three to five years, you may not want to take that risk. Because markets shift, and you're gonna want to be able to take advantage of those up swings in the markets as those shifts happen. And if you're buying assets that really are going to take a lot of seasoning, you're going to have a really hard time having that exit strategy work for you. But this season, we are going to talk about exactly what to do to maximize your return on investment, maximize your exit strategy, what to do or not to do when you're getting ready to potentially exit a deal. And we're going to help you know how to make the next move and to really do that analysis properly to make the move at the right time. Should you again try to exit any of your assets. So until next time, take care.
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For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio visit growingempires.com