SS87: Maximizing Property Cashflow by Reducing Certain Expenses

Rental property expenses are commonly misunderstood. Many new investors incorrectly categorize expenses or they do not account for them when underwriting. In this episode, Charles explains the main operating expenses that are part of owning a rental property and how to minimize them.

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Talking Points:

I have found, that when I speak with new rental property owners; there are a number of expenses that are left out when they are calculating a property’s net operating income or they will grossly underestimate them. Especially with smaller property owners. When you are buying a property and you have never owned a rental in that area or of that vintage; yes, your underwriting will not be as accurate as this being your 5^th property in that same area but all of the operating expenses must be included when calculating your net operating income. Here is an overview of the main operating expenses along with a number of ways to reduce those expenses.
The main operating expenses are:
- Payroll (for properties with onsite management or if you own many properties)
- Administrative or HOA fees
- Maintenance (make sure to increase maintenance budgets on older properties. Speaking to new contractors is a great way of finding lower prices. Ask other landlords for referrals, speak to handymen for referrals, etc. I usually don’t get good referrals from real estate agents; their contractors are usually pretty expensive. Building relationships with these contractors will dramatically lower your expenses.)
- Marketing (for smaller properties you will start and stop marketing; for larger ones the marketing is continuous). There are many inexpensive online marketing tools that you can utilize. I know many realtors that rent condos and houses just by paying $10 or $20 and listing it on a website like Zillow. After it rents; they usually will get the 1^st month of rent as their fee.
- Property management (Property management depends mainly on the size of the property and the number of units. This is going to be a recurring expense. Make sure to know all of the management fees prior to hiring a management company.
- Property taxes (property taxes can vary wildly depending on the state, the city, the value of your property, etc. You can appeal these if you feel they are too high; there is no guarantee that your taxes will change though)
- Insurance (make sure you really understand your policy. Many people will get quotes for new insurance but they will not actually compare the 2 policies; just the premiums. Working with an insurance broker will help you find the best policy.
- Legal (this can be evictions or handling lawsuits like slip and falls etc. Yes, your insurance will cover most of these smaller claims but there might be additional costs to you. You get a letter from an attorney 6 months after an event that you never knew happened.
  - On a side note, if you are selling a property in an LLC or other entity. It is highly recommended to keep that LLC open for several months after. If you sell a property in March; maybe keep it open for the rest of the year. This just makes sure that no one slipped on ice in February and you don’t find out until August after your LLC has already been closed.
  - You will need a real estate attorney and a litigation attorney on your team.
- Capital expenses/reserves (this is a commonly misunderstood expense since it is a non-operational expense; these are not day-to-day expenses. This would include new; roofs, water heaters, appliances, HVAC systems, etc. After purchasing a property, you normally will be doing CAPEX work in order to correct issues and increase rents. You should also have a reserve going forward to cover these expenses when they come up.
Minimizing expenses is important but what we really look for are ways to increase revenue at the property. If you purchase a property and the previous owners were partially absent; chances are there was a lot of money left on the table. The contracts they have with their contractors probably haven’t been re-quoted in years and the rent is probably way under market. Their current management probably just keeps things running smoothly; not making too much work for themselves. This situation is very common with mom-and-pop apartment owners. When you underwrite this, you can figure on performing deferred maintenance and renovations in order to increase rents but you also want to review all of the expenses and start re-quoting all of the contractors and contracts. These properties most likely require work; in other words, they were not spending enough on maintenance in most cases; to maximize returns. Your expenses might be higher in certain categories after you take over.
My point is, to focus more on increasing the revenue than a business plan that is mainly based on lowering expenses. Operators that state they are going to make massive cuts to expenses in a particular deal are always a little bit of a red flag for me. Yes, if you have another management company you use on your other properties and they quoted a lower fee, great or your insurance broker quoted you a lower premium or you are installing water-saving features throughout the property. These are all great things but you need to make sure the property is increasing in value and increasing in appeal to potential tenants that will accept higher rents for a better place to live. You don’t want to cut too many expenses that actually harm the property in the long run.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing maximizing property cash flow by reducing certain expenses.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
I have found that when I speak with new rental property owners, there are a number of expenses that are left out when they’re calculating a property’s net operating income, or they will grossly underestimate them, especially with smaller property owners.

Charles:
And when you’re buying a property and you have never owned a rental property in that area or of that vintage, yes, your underwriting will not be as accurate as it’s being your property in that same area, but all the operating expenses be included when you’re calculating your operating income. Here is an overview of the main operating expenses along with a number of ways to reduce those expenses. So the main operating expenses are first off payroll, and this is for properties with onsite management to larger properties, or if you own many properties and maybe you have a part-time or full-time handyman, next is administrative for HOA fees, HOA fees, obviously being, if you’re in a a homeowner’s association, community and administrative fees being, if you have someone that’s assisting with accepting payments or with handling leases or doing bookkeeping maintenance, now make sure to increase your maintenance budgets on older properties.

Charles:
And this is a huge mistake with your investors. They are using what a normal budget would be on a normal property for maintenance. And that might just be set off a 20 or 30 year old property. If you’re buying 60, 70, 80 year old properties, the maintenance budget’s gonna be much different. And speaking to new contractors is a, is a great way of finding lower prices and ask other landlords for referrals to contractors. That’s usually the best speak to handyman for referrals as well to different contractors or different handymen for handling different needs and services around your properties. I usually don’t get good referrals from real estate agents. Their contractors are usually pretty expensive and that’s great. Maybe if you’re a homeowner and you just need something done, but if you’re have consistent people coming out to your property to do work you really want to get a discount and you really want something where you can, you can really build a relationship and building relationships with these contractors will dramatically lower your expenses over the lifetime, especially when you start buying more units and they see that, and they have more consistent work for you.

Charles:
They’re going to give you a better price, cuz they know that you’re gonna be calling them. And it’s a consistent source of income that they don’t really, really have to advertise for or worry about. Next is marketing and for smaller properties, you will start and stop marketing for larger ones. The marketing is continuous. OK. Cause there’s always gonna be vacancies at your properties and you always won have a pipeline of potential tenants. There are many inexpensive online marketing tools that you can utilize. And I know many realtors that rent condos and houses just by paying 10 or 20 bucks and listing it on a website like Zillow, renting it. And after it rents, they usually will get the first month of rent as their fee. So not too bad. And that’s a way that you can utilize it. And there’s a lot of websites out there that will post to all those online websites that list apartments or any type of rentals.

Charles:
And usually you can pay a fee to them. They’ll post down these dozens of websites and then when it rents, you can take it down or you can just keep it going and have it like a monthly fee of what you’re working on. But it really depends on, you know, you don’t want to be advertising one bedrooms. If you only have one, one bedroom and it rents, right. If you have a bunch and the majority of your units are two bedrooms, maybe you can let that continuously go on and you can just keep on getting new calls. You can also leave a sign in front of your property if it’s a, if it’s a good size property. So if you have something that’s like a 15 plus unit property, you can always leave a four, four rent sign out there. And that will get a lot of people that are just driving through, give you a call and you’ll definitely be getting phone calls definitely on a weekly basis that want to rent the property.

Charles:
And you can just hold their name. If you have vacancies that come up next is property management. Now property management depends mainly on the size of the property in the number of units. This is gonna be a recurring expense. So make sure to know all of the management fees prior to ha hiring a management company nexus property taxes. Now property taxes can vary widely depending on the state, the city, the value of your property, et cetera. And you can appeal these if you feel they’re too high and there’s no guarantee that your taxes will change. I’ve heard them go up before if somebody challenges ’em and I’ve also heard of them going down. So it really just depends on how long you’ve owned it. And and the municipality next is insurance. Now make sure you really understand your policy. Many people will get quotes for new insurance, but they will not actually compare the two policies.

Charles:
Just the premiums working with an insurance program will help you find the best policy because they’re gonna do that comparison for you. And they will most likely provide you with all the different approvals or they just provide you with the best one. And they’ve already done that comparison, but you can review it, but it’s one less thing you have to deal with. Now, I would caution when you’re working with multiple insurance brokers, UN unless you ask the first insurance brokers, what companies you work with, and then you can tell the second company that if they have different companies that will write or do write policy similar to the property, you’re trying to get insured. That’ll be great. Then they’re not doing the legwork again. Now legal is another one, and this can be for evictions or handling lawsuits like slip and falls, et cetera.

Charles:
Yes, your insurance will cover most of these smaller claims, but there might be additional calls to you. You get a letter from an attorney six months after an event that you never knew happened. You know, on a side note, if you’re selling a property in an LLC or other entity, it’s highly recommended to keep that LLC for several months after you sell, if you sell a property, let’s say in March, maybe keep it open for the rest of the just makes sure that no one slipped on ice in February that you don’t find out to until August after LLC has already been closed. You will need a real estate attorney and a litigation attorney on your team. So there’s a two separate PA professionals in the legal environment that you’re gonna have to hire or just have their contact information.

Charles:
So on a problem does arise. You can call them next is capital expenses in reserves. And this is a commonly misunderstood expense since it is not. It is not really an operational expense. This is a non operational expense, and these are not day to day expenses. This would include new roofs, water heaters, appliances, HVAC systems, et cetera. After purchasing a property, you normally will be doing CapEx work in order to correct issues and in increased rents. You should also have a reserve going forward to cover the expenses when they come up. Now, minimizing expenses is important, but what you really look for are ways to increase revenue and at the property, if you purchase property and the previous owners were partially absentee, which you’ll find a lot, especially with mom and pops or people that own property for like five, 10 years plus because now it’s just running.

Charles:
They did some work when they bought it. You know, they’ve paid down their mortgage. Property’s appreciated a lot. They’ve raised rents. You know what I mean? And they’re just, it’s, it’s really just kind of like a cash flow machine for them. But they’re usually leaving a lot of money on the table and the contracts they have with their contractors probably haven’t been re-quoted in years. And the rent probably is way under market. Their current management probably just keeps everything running smoothly, not making too much work for themselves. And this situation is very common, especially with the mom and pops as we spoke about earlier. And when you underwrite this, you can figure on performing deferred maintenance and renovations in order to increase rent. But you also wanna review all the expenses and start re quoting all the contractors and contracts.

Charles:
These properties most likely will require work. In other words, they were not spending enough on maintenance in the most cases to maximize returns. Your expenses might be higher in certain categories after you take over. So make sure that you’re underwriting for that as well. My point is focus more on increasing the revenue than a business plan that is based mainly upon lowering expenses, operators that state they’re going to make massive cuts to expenses. And a particular deal is always a little bit of a red flag for me. Yes, if you have another management company used on your other properties and they quoted a lower fee, great, your insurance broker quoted you a lower premium or you’re installing water saving features throughout the property. That’s awesome. These are all great things, but you need to make sure the property is increasing value and increasing in appeal to potential tenants that will accept higher rents for a better place to live. You don’t wanna cut too many expenses that actually harm the property in the long run. So I hope you enjoyed, please remember to rate you subscribe, submit comments and potential show topics at globalinvestorspodcast.com. Look forward to more episodes next week. See you then.

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