804: Analyzing Your Portfolio Each Year
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Welcome to Episode Four of Season Eight of the Growing Empire Show. Today we're going to talk about how to analyze your portfolio. So stay tuned.
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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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I often talk about analyzing portfolios, and sometimes I have people look at me like I'm completely crazy. But when you own investment properties, it is really important to analyze your portfolio each year. And what you need to be looking at is, is my property growing in income? Is it profitable? If it's not profitable why is it not profitable? What is causing it to not be profitable? Did I spend too much money? Did I not have good tenancy throughout the year? And that is something that you should really be planning out with your property manager to discuss how you're going to attack the next year. It's almost like you're setting goals each year. This is something that I do with all of our investors every year because I think it's a really key part of owning investment portfolios. If you want these investments to grow year over year, you've got to make sure that you're analyzing that data year over year to make sure that you're making the best decisions. And sometimes your decisions are not easily seen in terms of numbers. It does take time. So what are we looking for specifically? Well, we want to look at was our income consistent throughout the year? Did we have dips, highs and lows? And if we did, what was the cause of that? Did we have a vacancy problem? And if we had a vacancy problem, why did we have a vacancy problem? Why did the original tenants move out? Were they evicted? Do we potentially not choose the best tenants to begin with? Or did we have tenants leave because the maintenance of the building was not up kept and they got frustrated? What caused the vacancy issues? And if we had the property or the units on the market for rent, why would they not being rented? Was your property manager letting you down? Were you trying to self manage and to try to save a buck by renting out your own units? All of these things are things that very much could happen and do happen in investment real estate. When you're analyzing your portfolio, you also want to look at your expenses. Where did you spend money? Did your mortgage change? Did you have a variable rate interest and all of a sudden that interest rate has spiked? If that's the case, you might want to consider doing some sort of refinance and maybe even pull out equity to be able to purchase additional properties. Look at your utility bills, were they consistent? Did you have a fluctuation of say water bills? Is there, or was there, an indication of some sort of water leak? Were you able to jump on that problem immediately or was it something that went on for a long period of time that you had no understanding of until it was a big problem? If that's the case, you're going to want to figure out how to make sure that that doesn't happen again. How can you stabilize your utilities? I want you to look at the difference between what the tenant is paying for utilities and what you are paying for utilities. Is there any way for you to turn over that utility responsibility to that tenant? Part of your profitability of any investment property is twofold. It's not just always about increasing income, it is also about decreasing expenses, or turning those expenses over to the tenant for their responsibility to pay. And you can accomplish that in so many different ways. Certainly the most obvious is if your utilities are separated, you certainly can tack that on to the responsibility of a tenant. But let's say that your utilities are not separated. And maybe you've done the analyzation of the cost to separate a utility and you figure it out that it's just not worth the investment. That I can completely understand. But that also doesn't mean that you automatically are required to pay utilities. There are other ways that you can go about being creative, to have the responsibility be on the tenant, with the utility still being in your name. So how would you do that? There's two very specific ways that you can accomplish something like that. One is called ratio billing. And the second is called adding a utility fee to the lease. So one of the things that you could do is increase the price of the unit and say that you're including utilities. But you have to make sure that if you're going to use this method that you truly are turning over some of that responsibility to the tenant. So let's just say we're talking about a gas bill for heat, so that we have an example here. And let's say that that gas bill is $1200 for the year. Well $1200 for the year means it costs me $100 for that gas bill every month. And if I have five tenants in the building, that means that I need to charge each tenant an additional $20 to be able to make up the difference of what the gas bill is for me as the landlord. And if I'm successful at doing so, I will turn that utility charge over to the tenant and not have to worry about getting reimbursement because the tenant is paying $20 more than they normally would pay, because I've included the heat. But let's say that you're not able to do that. Okay, the other thing that you could do is you could just add a utility charge. You could tell every tenant, I'm going to be charging you an extra $25 for water every month. And you can add that into their lease. Now the problem with doing this option versus the first option that I suggested is that tenants don't always have a good grasp on what their utility costs are. So it sounds far more appetizing to a tenant for you to say your rent is going to be this, but I'm including your utilities, then to say your rent is lower, but I'm charging you $25 for the water. They may equate to being the same amount of money. But the first one sounds far more appetizing than the second one does to any tenant. So I always suggest that you err on the side of caution. And just assume that your tenants don't have a really good understanding of what utility costs are. And you're always better off, from a marketability standpoint, to include the expense of the utility into their rent. But you do have to have a really good basis to understand how much that utility truly cost you and how much it should be turned over to the tenant. The other option that I mentioned was ratio utility billing. And in ratio utility billing, what you're doing is you're essentially making a calculation of how much usage a tenant would assume to have based on the occupancy level of their unit, the square footage of their unit in relationship to the other units, as well as the deduction of the common area spaces for those units. And that ratio billing allows you to charge a fair price for utilities based on the occupancy and the square footage of the unit that the tenant has in relation to the whole building. That is not necessarily legal in every state. So before you do any kind of ratio utility billing, you're going to want to make sure that you check with your legal team as well as your state laws regarding landlord tenant act and make sure that before you implement any kind of ratio utility billing that it is fully permitted in your state.
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The episode will continue in just a moment.
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If you're like me, you know the importance of diversifying your investment portfolio. Real Estate Investments, whether you're an active or passive investor, are a great way to add variety and reduce risk to your overall portfolio. But what about stabilizing that portfolio? If your portfolio is diversified through real estate, you still have to stabilize your properties with the right tenancy know when and exactly what capital improvements to do, and assess your entire property's portfolio to maximize property values and their income potential year over year. Yes, it's a lot. And you'll need help to make sure you're looking at everything as objectively and strategically as possible. Get the guidance you need to assess and make the right decisions that will stabilize and optimize your property. so their longevity is assured. Book a call with me and I'll guide you through the process and answer your questions. Go to growingempires.com and click on book a consult, and you'll be on your way to a healthier, more stabilized and diversified portfolio with real estate.
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Last but not least, for utilities, there is one other option that I have watched people do and that's called sub metering. So the benefit to sub metering utilities is that you don't have the full blown expense of the actual separation where we've got to separate water lines and different things inside the building. Some of the buildings are in many cases, older buildings and the how to navigate adding or taking away utilities. Sometimes it's very, very time consuming, which is why it's so costly to do. But sub metering especially when we're talking about water is a very easy thing to do. And water bills are always the bills that I find are the ones that are the most tricky for landlords because if you do not have control over your water usage, first of all, your tenant may not even notice that they are using too much water. For example, that toilet that keeps running that they don't bother to tell you about. Well if it was their bill that they were paying, I assure you that they care about it. But if it's your bill that you're paying and they don't even get to see it they might not ever mention for months at a time that they've had a toilet that's been running or filling and that is hundreds of 1000s of gallons down the drain that are not only wasted utilities, but going to be very expensive for you as the landlord. So how do you combat that? Well, you can consider doing sub metering. Now in sub metering, you still have one line of water coming into your building. But from that line where the first meter is read, there is a sub meter put on the line. And then those lines are run to each of the individual water sources, cold water sources for each unit, and I specified cold water, because that's where your water bill comes from, it doesn't come from hot water. Hot water comes from your boiler, from your water heater, there's no additional charge for that water, it's the cold water running to your building. That is where your water bill charges are coming from. So on the cold water line beyond the initial main meter of the building, they add sub meters and then they run lines to test the water usage in each of the individual units. And that sub meter then is usually read by a sub metering company, which just charge a nominal fee, and that nominal fee can be turned over to the tenant. But in that sub meter, they will give you an additional bill that tells you out of the main bill, how much proportion did each tenant use. And then those bills that are now broken down by usage for that tenant in that specific unit can be turned over to them. So if for some reason you're not in an area where ratio billing is an opportunity for you, you can always try to sub meter and that still will be less of a cost and expense to you than actually separating water lines as an example.
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So couple of options there. And that's how you're going to decrease expenses. When we're talking about other things regarding analyzing your portfolio, we're going to want to look at the market as itself as a whole. Not just your property, but your property in the context of the market itself. So are you in a depressed market right now? And if you are, it might be a really bad time to sell. Because if all the property values are going down, that's not going to be the most opportune time to sell your building. But what if you were in the opposite? What if you're in a marketplace where the property values are skyrocketing? You may be a bought your investment portfolio, or your investment property and thought to myself, I'm going to hold this until I retire, I'm going to live off this money. And that may very well be the thing that you need to do. However, real estate portfolio investments are very much like stocks. You've got to know when to buy and sell to make the most out of your portfolio. Sure, you could take that unit or that building and you could hold it for an infinite amount of time. And yes, you could live off of that retirement. But what if you could take that building, sell that building, take that profit and turn it into double? Would that make sense? And would that be appetizing for you to do? So now you're not just living off of one property, you're living off of maybe multiple properties. So let me give you an example of just a few recent investors that we worked with that have done similar things. I had a guy that sold six single family homes. The reason he had single family homes is because when he started investing, he was very much cash poor. He was a tradesman. So he, you know, didn't want to claim everything on his taxes. He had a very much of a cash business. So he was not really financial from the perspective of, you know, a bank. And, you know, he did what he could do at that time. And he bought one property, fixed it up himself, then did the next property, fixed it up himself. And it took him quite a long period of time to do that. Because he was just getting started. He had those properties rented for several years. And as the market started to shift, he reached out and said, Hey, you know, does it make sense to even think about selling these properties. So we analyzed his portfolio, and we analyzed what his plan was, what he achieved with the properties that he had. And we tried to figure out where he wanted to go. We took those six properties, and turned it into, I want to say roughly 24 units. We did a 1031 exchange. So we were able to defer the capital gains and reinvest that money. So going from six to 24 units in a very short amount of time, was definitely a very strategic and very smart move on the part of this investor. Because he was able to almost quadruple his investment strategy. And he was able to buy larger properties versus individual properties. And there's, you know, many benefits to that. Namely, you've got maybe one heating system to worry about versus six different. You know, you've got one or two roofs or three roofs versus six roofs. So just something to think about when you're looking at your investment portfolio, whether it makes sense to sell something and move on. It really depends on that marketplace. We had another investor that also had single family homes, and he had five single family homes. And we sold all of those at the height of the market, he made considerable profit on those he then exchanged using a 1031 exchange to defer capital gains. And he has turned that portfolio into 11 units. So he went from five to 11 units, again, doubling his portfolio size, and doubling the actual return on investment for each of those purchases. And those are just some of the recent ones that have been done. But you've got to really look at you know, when these investors bought these properties, I will assure you that they thought they were going to hold them for the rest of their life. They thought that they were going to turn them over to their kids or use them to live off of once they retired. But you have to look at real estate and you have to look at your investment as it is, its money. So although your plan may have been to hold for a long period of time, if the market is dictating that you have the opportunity to do something different, you need to be smart about it. And you need to look at whether or not that makes sense for you. Part of doing that is analyzing your portfolio. And if you're doing that portfolio analyzation year over year, you are going to be able to make the most strategic the smartest investment moves that you could possibly make. And then you're going to have a lot more money to retire on, a lot more passive income, and you're going to have a lot more financial stability overall. These are the types of moves that create wealth. And these are the types of moves that make people rich. So make sure no matter what you do, whether you self manage, you have a property manager, or you are using legal counsel for different pieces of the puzzle, make sure somebody is analyzing or helping you analyze your portfolio year after year so that you can make these most strategic moves and the best moves financially for you. I hope you got a lot out of today's show and 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