Why You Should Have a Business Plan For All Your Properties

Speaker 1: [0:02] Welcome to the Collecting Keys Real Estate Investing Podcast with your host, Mike DeHaan and Dan Austin. From wins, losses, horror stories, and tactics for optimizing your business, Mike and Dan take a real uncensored deep dive into the ins and outs of running a full time real estate investment and wholesaling business.

Dan Austin: [0:26] Hey there. Welcome back to another episode of the Collecting Keys Friday Focus, where Mike or I talk about something that's relevant to the industry, which is something that's top of mind for us in our business throughout the week. Today, I will be your host, Dan Austin, aka Investor Man Dan. And what is top of mind for me today is that yesterday was Thanksgiving, and it's like, holy crap, December's next week, which means it's time to start setting our twenty twenty three goals. You know, every year, Mike and I spend time kind of looking back and saying, what did we accomplish? Did we get to where we wanted to be? If not, why? And then we look forward and say, what do we want to accomplish and how are we gonna get there? And that really actually just thinking through that process of what we're gonna do this year really got me thinking like, there's lots of people out there telling you how to set goals. There's SMART goals, you know, be specific, all these sorts of acronyms and things out there. And I'm not here to preach to you about how to set goals, but what I do want to talk about is like, really, for it to be successful, it needs to be a business plan. So you set goals, you have this idea of like, Hey, I want to do a 100 transaction next year. We have to have a plan of how you get there. The goal is nice, seeing a 100 transaction, but then you need to build in milestones, you need to have some sort of financial forecasts and projections, and you need to have some sort of implementation plan and a strategy to get there, all which kind of align with what a business plan holds. And, you know, like I said, Mike and I get together and we always talk about these things.

Dan Austin: [1:48] I mean, one thing that we're going to do this year that we haven't done really in the past is looking at our portfolio. So typically we're looking at active business, active income, and once it's passive, a lot of us, we put it in the portfolio, we kind of forget about it as from a goal standpoint, and for a lot of us, the portfolio goals are around how much cash flow can I get this year and how many acquisitions am I going to make this year? But really, each property should have its own business plan at the start of every single year. When you look at large projects like a 300, 400 unit project, you know, the the asset manager is building a business plan for every single year of that project because they typically have investors that they need to provide a stated return to or or beat it. That's their goal, those investors keep coming back for more deals. But there's no reason we can't do that on our single family, on our small multifamily residential projects, or just individual projects that you might own. And really to maximize your portfolio, I really believe you should be doing this. So one thing I was going to do today was just go over, we have an eight unit building, Mike and I, it's been top of mind for us quite a bit this year. And I thought it'd be kind of fun to go through like some of the ways that I'm going to start crafting our business plan for 2023 for this this project. We've owned it about a year now.

Dan Austin: [3:08] So it's relatively new, we have stabilized it for the most part, it's fully rented. It's a good property that was built in the 70s. So it's not terribly old, but it's also, know, not terribly new. Either way, we want to maximize our net operating income from this property. For you owning a property, your goal might not be around actually maximizing the net operating income. Your goal might be, I never want to talk to a tenant ever again in my life. So that's going to craft a little bit different way than I'm going to walk you through here, but this is just one way that I'm looking at it from a net operating income standpoint, just an overall financial standpoint. And what I like to look at is, one, I just like to look at what are the givens, what are fixed, what's not going to change, what am I not going to change? Two, am I maximizing my debt? Three, am I maximizing my return on the equity? And then four, am I maximizing the cash flow? So going back to number one, you know, what are my givens? Really for this property, we're pretty open to a lot of different strategies. So the main given on this one is just depreciation. We know what we're going to collect this year for depreciation.

Dan Austin: [4:12] For those of you that don't know what depreciation is, the government essentially says, not the entire property, but the actual building on a piece of land is depreciable because basically things fall apart, you know, flooring wears out, roofs wear out. So they say on average for a residential project, twenty seven point five years and everything you needed would have had needed to be replaced at some point on that building. So from the day you purchase it to the end of twenty seven point five years, you're able to basically depreciate the entire purchase price plus any capital improvements you've made over the years, meaning, hey, if you added a roof that costs $10, that actually increases your basis. So for example, say you bought a house for $275,000 you have to subtract the land out because the land isn't depreciable. So maybe it's 50 ks. So now you're down to $225,000 basis, but then you do a burn, you add 50,000 in capital improvements. So now it's back up to $275,000 capital value. Divide that by twenty seven point five years, and bam, you get $10,000 a year in write offs through depreciation, which means if you cash flowed after all of your expenses, 10,000 on this property, that $10,000 in depreciation offsets that and you pay zero tax on the cash flow. That's why we love it. For this property, it's a given, we're not going to have any major capital improvements that's going to increase the basis.

Dan Austin: [5:32] We're not going to really change that because we're set and fixed on this one we didn't do and we're not going to do any accelerated depreciation or do any cost seg on this one, just we're just not going to. So that really that given is just the depreciation for us on this property. The next thing, are we maximizing our debt? And on this one we are, but a question you might ask yourself like, am I getting the best pay down on my debt possible? Meaning if you have a high interest rate, could you refinance it and actually put more towards your debt every month? And that's really just mostly a debt servicing question you ask yourself, is like, how is my debt working for me on this property? Because you don't want to have unnecessarily high interest rates to where you're just not paying down your debt as fast as possible. Because debt pay down is a huge benefit of real estate. Number three, are you maximizing the equity? This is something you know, a lot of us, including myself overlook a lot of times we forget to take that look. That's why I really believe every year, take a look, start your business plan for each property. And that is, if you have a lot of equity in a property or even a little bit of equity, are you maximizing that? Meaning, you know, if you own a property outright, your return on equity is pretty dang low, because you have so much equity in this. So you had $275,000 you paid cash for that house, you're getting, you know, 10,000 in depreciation a year, and you're collecting all that cash flow outside of debt service. But like, you're actually not really getting a great return on your equity.

Dan Austin: [7:00] And so you talk to yourself and like, for me, would we have quite a bit, we have probably $3,400,000 minimum equity in this property as is, should we refi it? Maybe and then we could cash some of that equity out and redeploy it to another property, or we can get another return on that same equity. In this case, no, we're not going to do that because interest rates are high, we have a good locked in interest rate, we just don't want to do that for this property at this point in time. But we can and we are going to look at getting a line of credit on this property, meaning we can pull against that when we have opportunity and we'll pay a usually like a prime plus 1% or something like that. So say we're going to pay seven or 8% interest only per month on that money while we have it out. But once we pay it off, it goes back, disappears. So it's, it's a really good tool. And because we could get, know, say 2 or $300,000 of equity access to our equity on this property, that just makes it just an awesome possibility for us to go and pay cash for another house or a down payment on another big multifamily for us. So that's something we'll be looking at as far as a return on equity standpoint. And then lastly, and the one we all really look at is, am I maximizing the cash flow on my property?

Dan Austin: [8:05] Again, should I refinance, get a lower monthly payment? We're not going to do that on this one, as I've stated a couple times already. But expenses, this is where we always like to look at rents, but expenses, the devil's in the details here. So, you know, your maintenance, can you reduce that? What do you need to do to reduce that for us on this property? Actually, maintenance has been pretty low. We've had a couple of unit turns where we've, we've upgraded the units and all that. But outside of that, like a couple $2,300 a month maintenance, which includes like lawn care and stuff like that, we've been pretty good. Our sewer bill, it's fixed. We're probably not going to pass it on to tenants anytime soon. You could pass that and divide it by eight and pass that on to the tenants. It's a pretty high bill, but we're not gonna do that right now as part of strategy to reduce expenses. But what we are going to do is look at garbage. So our garbage just switched over from a city to a private provider and it doubled, Okay. So it's a little excessive at this point. So we're going look at passing on garbage to the tenants by getting each of them can get their own cans as opposed to us having a dumpster. And then also the water bill, there's just one master meter. So we will look at doing rubs basically where we just take the entire water bill and divide it by each unit and they each pay an even amount. I don't love that. So we're also going to look at seeing if we can sub meter these and people pay exactly what they use.

Dan Austin: [9:19] So yeah, that will be our strategy to reduce our expenses. Again, look at the water and look at the garbage. Basically, just those general expenses. We'll also look at our insurance and see if we can get a better provider for that. Do have kind of high insurance on this one, but that's any expense you have, you should just go and look and see if you can change any of those things. Our property management expense on this, for example, we're not going to change it. There's only one provider in the area and they're actually doing a really good job for us. That expense is going to stay, you know, paying a flat 10%. We like it. It's okay. And then the other side of this cash flow equation is the rents. Looking at your rents, looking at market rents, are you above market all of a sudden? Because you know, rents are going down, or are you below market rents and you can increase them. For us, you know, on this one, we have two units that are renting at $7.50, And then we have the rest are at 700. So we know our benchmark is $7.50. We know we can get $7.50. So we have some room to increase there. But can we go above $7.50 will be the question. And then the strategy of how you do that. Do you do them all at once?

Dan Austin: [10:16] We've tried that before. And sometimes that creates a little bit of chaos. And as long as you're okay with a lot of vacancy, go for it, rip the bandit off. I like that strategy. Do one at a time. Do you pick like the worst tenant that you don't really like, and you're hoping that that'll encourage them to leave? Like there's a lot of strategies around how to just increase your rents. It's just not a given, you don't just go in and increase them right away. You can, but again, expect a lot of vacancy. Anyhow, that's what we're going to be looking at to build our business plan. There's one other element to this, and that's capital improvements. Talked about maintenance and reducing maintenance, but also like making your property more desirable and nicer so that people want to rent from you. You know, we have a duplex that needs a fence, something bad in the backyard. We took down the old one, we haven't put a new one up. We're budgeting on that duplex to put in a fence. We're also going to budget in putting a sprinkler system because right now it just goes in sprinkler, the tenant has to move around. But that makes it much more desirable. A, the grass will look better. B, the backyard, it'll be secured and safer because it has alley access. Having a nice six foot fence there will give us some privacy and some security.

Dan Austin: [11:18] Sprinkler system will make the yard look great. The tenants won't have to move a sprinkler around. It's just overall that those two items aren't going to keep the property in good condition, but they are going to increase the value to the tenants, meaning we can increase rents for that. So don't just look at what you have, look at those capital expenses as well. Sometimes it's to avoid something, right? So you know your roof's end of life, you might want to start budgeting for that next year, so that you know you're just going to have that expense. And that's just part of your business plan. And so going back over all this, just to summarize it all, you know, what are your givens? What are you not changing? Are you maximizing the debt against that property? Are you maximizing your return on equity? And then are you maximizing your cash flow through your expenses and through your rents? And then lastly, are you planning and strategizing capital improvements on your property? That's really the business plan. I do believe you should have on all of your properties. Just take the month of December and look forward, look at what you're going to do, go through your portfolio, work with your property manager, your asset manager, if you're doing it yourself, just kind of focus on what you want and look at your goals. Is your goal to maximize NOI? Is your goal to never talk to a tenant again? Is your goal to have just pristine properties that don't have maintenance issues? Pick the goal and then build a plan how you get there.

Dan Austin: [12:34] Anyhow, you'll be much happier if you do that. It'll be a lot less stressful, so you don't feel like you're getting your ass kicked every other week when you have all these property issues coming up and vacancies and maintenance issues, because you'll have a plan and then you can work that plan. All right, that's all I got for you this week. I hope you had a good Thanksgiving, and we will catch you all next week.

Speaker 1: [12:54] Thanks for listening. Please leave us a review on iTunes or wherever you get your podcasts, and check us out at collectingkeyspodcast.com for tips and guides on starting your own real estate investment and wholesaling business.