1204: Strategies to Control Expenses & Planning Exit Strategies-EIC Zoom-Part 2
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00:01
Welcome to Episode 4 of season 12 of the Growing Empire Show. Today we are going to talk about strategies to control your expenses on your investment property. And you are going to hear excerpts from one of our recent investor club meetups from the Empire Investment Club, so stay tuned.
00:17
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.
00:37
Welcome back, you're going to hear today, part two of our most recent Empire Investment Club meetup where investors like you got together to network and share stories regarding improving underperforming assets and planning for exit strategies. Today, we're going to specifically talk about how to control your expenses on your investment property, as well as planning that exit strategy. So let's get started.
01:05
You know, part of making a building more profitable, it's not always just about creating more rent collection, it's also about decreasing the expenses simultaneously, right? Because I can keep increasing my rent. And if at the same time, my expenses are still increasing, I'm not actually making more money, I need to actually have my rent going up and my income going up, but I need to have my my expense is going down simultaneously to really create the profit,
01:36
Jen, what would you do in the case of when let's say you have it all planned out, you've got your strategy or budget, you're increasing your rents? Should there be some sort of like buffer or allowance for a potential tenant issue where they stop paying rent or something like that? I mean, should you build that in? Or is that being like over, like protective of the cashflow?
02:00
It should be budgeted in for sure. So a lot of times when people are analyzing properties, they’re analyzing them with some sort of vacancy factor, we recommend 5% that's built in and just kind of put away for those those events. Because, you know, I'm a big believer that nobody ever sells you their best investment, right. So you have to plan for things, things will happen. Now, the extent of what's going to happen, and how how much is going to happen all at the same time is certainly anybody's guess. But you should definitely have reserves set aside for vacancies, you definitely should have money set aside for capital improvements, general repairs and maintenance. Because, you know, if we're talking like a 5 unit, 10, unit, 12 unit, whatever, you know, you have one or two vacancies, and likely the cashflow of the building will still be profitable. But if you have, say, a two or three unit, and sometimes even a four unit, and you've got one or two units that are down, that does not mean that you're going to be profitable if you're doing any type of renovation. So you do need to kind of plan based on the size of the building and what you're anticipating. But you do need to have reserves set aside for the what ifs, you know. Just some things that we've experienced that, you know, people never actually plan for, right until they actually happen. Fires, floods, right? You never know when those things are going to happen. But all of a sudden, you can be down a couple of units, because there was some kind of extreme circumstance in your building. We've had sewer line cracks sewer line buildups sewer line backups, we've had all kinds of things right. And depending on the extent of them depends on whether the tenants are still occupying the property or not. But if you're shutting off, let's say water to a building, because now they've got to excavate the street and tear out the water lines or tear up the sewer line, those people are displaced. They're out of the unit. And depending on the term of the lease, they may have just cause to terminate the lease immediately because they were displaced from their home. So you have to be kind of prepared for the what ifs. I don't think that you ever in any kind of inspections or any kind of analysis, I don't think that you can ever be so diligent that you predict everything that's going to happen. But you do need to prepare for the what ifs, and you need to have money set aside for those things. A couple of sessions ago, Simon actually talked about the amount of reserves you should have on each of your buildings as a kind of a general rule of thumb and then after the first year or so when things start to die down as far as expenses on the buildings. Then if you have extra reserves, you could use that to invest in other buildings. But he suggested that the number be pretty high for at least the first year because of that J curve and because of the fluctuation until you get a good handle on the maintenance of the building the time units in the building and you have more control, those things could vary greatly. So a really good question. What other ideas do you have for increasing those underperforming assets,
05:10
Making sure that you're maximizing all the utility benefits that you have in there. So if you have the opportunity to sub-meter, or you can use ratio billing, I would suggest doing that that's an additional income that you can have. And then again, up to your point, reduce your expenses, which I think is really, really helpful.
05:28
So let's talk about those two, what is the difference between sub-metering and ratio? And like, how do they actually work?
05:33
So ratio billing is, we'll do sub-metering first. So sub-metering is essentially on each meter or on each utility. So whether it be he or the oil, or the gas, or whatever it is, there's a separate meter that reads for each apartment. For ratio billing, it would be one of those readers essentially. But the bill is split based on occupancy and square footage. So it's based on a ratio of that tenants usage, essentially, and then it gets charged back to them appropriately.
06:09
Ok. Pros and cons for both.
06:11
So the Pro for the sub-meter is that there's no question about it, everything is legit. If you go to court, you can say these are the bills that you have, because they're in your name. And that's what you'd be due to pay. For the ratio billing, the expense stays in the owner's name. If they don't pay for whatever reason, the onus is still on the owner. And then sometimes it gets a little bit wonky in court, the judge may say, how do we know that this ratio is correct. So on and so forth. It's very, very slim that that happens. But it could.
06:39
And ratio billing, though, is not legal in all states. Correct ratio, billing is not legal, but it is it is legal in Pennsylvania. So you can't do ratio billing at every location. That's right. Okay, let's talk about the installation cost, though. Because for ratio billing, there's no there's no installation, you get the bill, and you just divide up the bill. That's right. Sub-metering now requires an installation of a sub leader,
07:09
Right, and you have to be costly. So for instance, if you have a property, that's a two unit, and they both are service off the same gas boiler, what you would need to do is find another means of heating for one of the units. So oftentimes, what we would do in that case, is to maybe do electric baseboard heating and one of the units. And typically that could be depending on the square footage, if it was like a one bedroom, that could be like 5 to $7,000, depending on the square footage of that unit. If you were to put in another boiler, you would need to separate the lines put in a new boiler, the boiler would probably be about 7000 bucks. And then you would have to adjust the input of the first one that you have in there as well. So it can be costly.
07:51
Okay, so when we're talking about electric, or we're talking about heating, we're talking about literally separating the units.
07:59
Same thing with the water with the water can be costly to especially if they're buildings that are 100 years old.
08:03
Except with the sub-meter, right, it's only added on to the cold water side of the line. So I guess the biggest limitation is finding all those cold water lines that go up through the building.
08:15
Yeah, so there is a couple other vendors that have come out with things that will allow you to put a meter specifically on each usage point. So for instance, there's a company called True sub meter. And what they do is they have meters that are read and numbered, so that if you had a shower, a toilet, a sink, and then the bathroom sink in one unit, they would all be linked together. They pull via Wi Fi, that data and then they create a bill for your tenant as well. They aren't incredibly expensive. But you do need to have Wi Fi running in each of your properties. And that's an additional cost that you wouldn't have it was just generally metered. And then you would have to just get those bills sent out to them as well.
08:59
I see Christian has a question.
09:02
In terms of the sub-metering, we've never actually done that. But my concern has always been with that, like how do you prevent tenants from tampering with those devices? Obviously, you try and put them somewhere where they're not easily accessible, or maybe there's even some sort of lockout mechanism with them. But I was wondering if the tenate found it, would they just disconnect it? Because they know that, you know, that's directly affecting their costs.
09:30
So the sub-metering companies will generally reach out if they're having an error reading. So it's like a daily feed. I mean, they pull in a bill on a certain period of time, but at any one time, anybody can go in and log in and see that one of the meters is not reading correctly. So I believe that there's enough like checks and balances in place to prevent it. But that's a great question. Honestly, we've never had that. Yeah. And we have sub meters. We definitely have had people separate utilities just bear the cost of stuff. writing that utility, which is far more expensive than sub-metering. But we've had people do that. And then we also do a bunch of ratio billing. Do you hear like pros and cons of like, who loves what better? Or is it just a preference per building?
10:13
I think it totally depends on the building. Okay, it really depends on the building, I've had people that really prefer to have all the utilities separated by each of the buildings. And if it's not incredibly costly to do it, they think that that's the best way to move forward. When you have these buildings, that kind of these intertwined layouts, it gets a little bit more complicated, and then RUBS would probably be the easiest way. Some people like the true sub meter or those other outside organizations that do it because the tenant is then prompted with a bill. And essentially, it becomes free to the owner at that point. Because there's like an admin fee on there that gets billed back to you. So you're billing back to your tenant that admin fee as well as like your Wi Fi, you can build that in as well. But some people aren't crazy about that, because they don't want to give an additional cost of attendance for something like that as well. So the ratio billing isn't what they would choose.
11:00
Okay. But in in, in a cost perspective, ratio, billing doesn't cost you anything, no, but you could potentially have costs that are not transferred over to the tenant. And you could potentially get hung up in court, if you get a judge that just wants to follow their own set of rules.
11:17
Yeah, the ratio billing or RUBS billing is essentially free. But it comes with the gamble.
11:23
Sub-meter is the cost of the installation of the sub-meter. But you can build back the fee for the sub-metering company to do the billing, and you can build in hopefully, your Wi Fi connection to it right. But the installation cost is on the owner correct. And then of course, separating the utilities is the most costly, but at that point, you're now putting the utilities in the tenants names, right.
11:47
The episode will continue in just a moment.
11:50
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.
12:49
So let’s talk about the choices of these if you’re selling a building now. Would you gravitate to one or the other if, in a year or 2 from now, I am thinking of selling the building?
13:01
Yeah, I think that it's probably cleanest, although we could do anything that we need to it's probably cleanest if everything was separated. The bank is like great, perfect, this is not on the onus of the owner, you'll never be responsible. So probably full on separation is the best way. However, I don't think that the other ones are maybe like a B and a C class on that. But I don't think that it would be a huge issue. On the cash flow statement it will all read the same way regardless.
13:31
And you would you say that the most likely misunderstood is the ratio building when it comes to financing and bank leverage? Yes, sometimes they do. And sometimes they don't actually recognize ratio billing,
13:42
Right. Because that ratio billing can be applied or not applied. You're only as good as your your management, with that ratio building. So that would be a deterrent, maybe for a financial institution, because they don't know if you're actually going to follow through with that on the sub-metering, for instance, is something that would be a little bit more automatic.
14:02
So when you're going to consider raising rents changing over these leases, potentially at the same time. Are we then also considering the utility responsibility at that same time? And are you picking one over the other? Are you maybe not increasing the rent in lieu of the tenants taking all the utilities a combination of both?
14:24
Sure. So I think it depends on how far below market all these tenants fall. I think that when you're at market and you have a really great tenant, and maybe they've already expressed that they are, you know, feeling the crunch, it might not be the best time at that time to take over the responsibility of the utility. But in the same breath, if you have a lease renewal, it may make sense to do a little bit of both. Maybe we increase them, for instance, as a scenario that we have recently we had a building that we had just taken over. The owner was looking for an $1,100 rent, but we had settled for a $1050, and then at that point the tenant was taking over the water.
15:04
I was literally gonna just say that. So in my experience, I have always found selling the utility expense is easier is way easier than selling a $50 increase, or $100 increase. When the reality is, is that the utility is likely way more expensive.
15:25
Way more expensive. But the tenants have more control over that utility. They can determine how much water they use, they determine essentially how much sewer they use. So they have the opportunity in that in that seems to be a little bit more conservative. So I think that in some instances, tenants prefer that because they know their usage.
15:42
Good point. Okay. Let's talk about other ways to either reduce expenses or increase revenue. Any other tidbits I mean, we talked about ratio, billing, we talked about utilities, we talked about increasing rents, a lease renewals, staggering leases, sure. Anything else regarding expenses or income on the property that maybe we're not thinking of to maximize?
16:06
Yeah, if there's parking spots, make sure that you're renting those. Make sure that they're in your analysis. If it makes sense that you're advertising with a parking spot? Does your rent accurately reflect how much parking would costs? Same thing with storage and laundry. Do you have the opportunity for laundry on site? Does it make sense to be coin operated? And if so, how much do you increase your laundry cost to?
16:28
So if I was looking at a building, and you told me you had laundry in it. Yep. And you were making x amount of dollar and all that laundry, I would ask you to prove it. Otherwise, as a buyer, I would not be building it in my analysis. Correct. Fair? Would you agree with that? Absolutely. So let us the flip side, we're now representing a seller who is trying to maximize the profit of their building, what would be the recommendation for things like your parking spaces, your laundry, your garages, storage to maximize them, but also give something as like proof, would you just include it in the lease?
17:07
So they can be included in the lease that I would give a numerical value to it. So for instance, laundry should be collected, and it should be reported monthly, so that when you prove on that cash flow statement, or your trailing 12. This is how much I've collected, you can see that in December, they did a ton of laundry, and in November, they must have done it on the first and 15th or whatever. Same thing with the parking spots, we add it for how we would do it and we would record it for our clients would be based as a rentable item. So it would be a different line item and would be GLed separately.
17:38
okay, they would have done fi that it's rented.
17:40
This way it's reportable.
17:42
So do you ever recommend just including like, sometimes you see leases where they included storage, they included the parking.Would you always put a monetary value to it?
17:53
Well, I would I just think for ease of a record keeping. And I think to gives you more opportunity, if you do want to do a rent increase, you can tell your tenant, for instance, your storage is staying the same, your parking fee is staying the same, but market rents have gone up. So we are going to increase that portion. So at the end of the day, they're paying in the same amount of dollars. It's just that where we're allocating it to on that spreadsheet would be a different locality.
18:19
Okay. What else would you be thinking of? So now for the plan for that exit strategy, what are some of the other things we talked about increasing the revenue for holding in decreasing the expenses? I know I'm going to sell in the next six months to a year, what am I focusing on right now? What should I be doing and not doing if I'm if my intention is to sell?
18:41
Sure. So what you should be doing is making sure that all of your finances are allocated correctly. Because people are going to ask for that group. So make sure that all your ducks are in a row there. I would make sure that all of your leases are current. And if they're not just make sure that you have either a renewal built in or a plan, a succession plan for what's going to happen to those to those leases. So for instance, if someone was leaving what would be the next rent so you would know how to price it and of course, you would help them with that. And other things that I would do is just to think about maybe some deferred maintenance that may or may not need to be done. Sometimes it makes way more sense to make sure that your CO is completed. It makes sense to make sure that your deferred maintenance is taken care of so that you can get to the top dollar. But in other cases, it makes sense depending on what you're going to price it for to eliminate those expenses as well and say, forget it. This is going to be on the onus of somebody else. But to bear those things in mind as you're listening.
19:38
It's funny you said about deferred maintenance. We just produced an article a few weeks ago, I don't know exactly when it was about curb appeal. Yeah. About You know, I think one of the worst deterrents to an investment property is somebody pulling up on Google Earth Day or driving up to the property. I mean, there are no shortage of people that will look at something from the outside and be like, absolutely not. Right now, some people are inviting that that level of deferred maintenance for a discounted price. But you know, you think about that when you're thinking about selling your own residential home, but it's, it's insane. And yeah, the building looks like a complete mess from the outside. You are you, the person is going to instinctively assume that the inside is just as much of a wreck.
20:23
Yeah, I've seen properties that are like fundamentally flawed, fundamentally flawed that I'm like, I would not buy this if my world depended on it. Like it's so beautiful. Like, okay, cool. Cool. So it's important that, you know, you make it look nice. Because people are they like to see it look nice. Now, does it need to be perfect? Absolutely not. Do you want to have a hole in the ceiling? No, get rid of those things. Because people will think if that is an issue, what are the other issues that I'm not seeing. When in other cases, like I said, everything looks really, really good. There are no issues, except for the giant one that everyone's avoiding. Because maybe it's not as apparent or obvious, and they'd be willing to go forward with it.
21:06
So let's talk about, just quickly, and then I'm going to open this up to questions because we're right at the top of the hour, but let's talk about our plan for capital improvements that we just never got to but now we're thinking of selling. Do them or not do them? And how would you determine?
21:21I
think that it would depend on what you were planning to list the property for how quickly you needed to sell. What you want to be your profit at the end. And if that repair or capital improvement makes sense to do for the price that you're willing to sell it for? Okay? improvement will be found. So it's a matter of if you're paying for it, or if you're having somebody else pay for it.
21:48
But if you're paying for it, I would assume you're also assuming that you can increase the value of the property by current offset, minimum price. So if if, let's say a new roof is going to cost us 20,000. But we're not going to be able to increase the price $20,000 And do not do it. Don't do it. Right. Just price it right. And hopefully, if somebody buys it. Would it be safe to say that your general consensus is that most people still don't want a ton of deferred maintenance that even investors that are looking for value add want to know that the majority of the bigger expenses were taking care of?
22:23
Yeah, yeah, it's important to have heating systems that are functioning correctly. Roofs that don't have holes in them. Foundations that don't have water pouring into them every time it drizzles. Those are the things that make people very nervous about purchasing. In terms of an exit strategy
22:39
Thank you very much for all that
22:41
You're welcome very much.
Thank you for listening to the second part of our two part segment from our recent investor meetup from the Empire Investment Club. I hope you got a lot out of these two episodes and have new tips and tricks for how to improve those underperforming assets and what to think about one planning your exit strategies. If you have not done so already, please make sure that you go to Jenniferdejesus.com and click sign up on the Empire Investment Club. It is a free membership for you and provides a lot of great details and information for you as an investor. You will get to have access to hot properties that we pick and give you access to, just as they hit market, real estate market news economic impacts. We'll have insights and case studies from our investors all over the globe. We'll give you some passive investing tips and opportunities. You'll have live calls with me and of course our empire investment club member socials. So until next time, take care.
23:45
For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio visit growingempires.com