In the previous article, Jake and I discussed incompetent team members and signing an exclusive with a broker. In this article, we are going to tackle two problems and one potential value-add that we faced early on in our investing career. One situation was unavoidable, and the other could have been avoided if we planned correctly. We stumbled upon the value-add with utilities, nevertheless, it has been a vital component to our success as multifamily operators.
Let me recap the 13 mistakes:
If you own an extensive portfolio of properties, chances are, at some point, you’re unfortunately going to have to deal with this sad situation. We’ve dealt with it ourselves; we just didn’t expect it to happen with our first deal.
The tenant had been living at the property when we acquired it. We owned the property for only six months when the property manager entered the apartment and found the tenant deceased in the living room. We were completely shocked and saddened. The police were called, the woman was taken away, and we were told not to allow anyone in the apartment until after an investigation was completed.
All of a sudden, family members started coming out of the woodwork trying to lay claim to this poor woman’s possessions, but we were adamant that no one was allowed to enter. We waited for a judge to award custody of the belongings to the rightful owners, and then we proceeded to clear out the remaining items before performing a total rehab on the unit. This is an area that you must be mentally prepared for and understand the process, even if you think it’ll never happen to you.
We recommend that you contact an attorney who is familiar with the tenant laws and ask him what procedure to follow. We tried to have the utmost respect for the tenant’s belongings, and allowed her family to rightfully claim her possessions once they were awarded. Our advice is to take your time and follow all the tenant laws in your state. If you need to clear out the apartment, make sure you take pictures of all the possessions and then store them somewhere else. DO not throw anything away.
We purchased our first investment with great terms, and that allowed us to put down only 10% of the purchase price. Our cash-on-cash return was phenomenal, but we didn’t deposit enough money in the bank account to complete the deferred maintenance. We could only perform the repairs in drips and drabs, and when the septic system failed, things weren’t looking good (they weren’t smelling good either).
Our luck turned when we hired a plumber who gave us a terrific price and would be able to perform the repairs quickly. He also allowed us to pay him in installments, which saved us from coming out of pocket for the repairs. We repaired the system and were able to avoid a potentially disastrous situation.
When you’re buying a property, always make sure to add an additional 1% of the purchase price as a safety net. The extra cash will allow you to complete the deferred maintenance and protect you against any unforeseen happenings.
You can also request a repair allowance from the seller to use as additional funds to rehab the property. Either way, make sure to have a surplus of funds in the bank for any unforeseen events. Another strategy that investors employ is to secure a line of credit from a bank for those unforeseen events. There are banks that will have lending products that are specific to an investor’s needs. Jake & I would have really appreciated a line of credit that was interest only for two years. Get in touch with your banker and find out what products they can offer you.
We learned very quickly how profitable it is to address utility consumption at your property. It is one of the pillars of profitability for our real estate company. You need to explore your options when dealing with utilities. Utilities will only continue to escalate, and your cash flow will be doomed if you can’t control your utilities.
One of our major value plays is to locate properties where the landlord pays all of the utilities. This is commonly referred to as all bills paid. With some properties, the landlord has metered off electric and water to each unit so that the tenant is responsible to pay. However, many of the older buildings utilize only one water meter and one electric meter for the entire property. Having the tenants pay serves a dual purpose. First, it will lower your operating expenses tremendously, thus allowing your net operating income to rise along with the value of your asset. Secondly, usage will decrease once tenants are being billed directly.
With our properties, we institute a Ratio Utility Billing System, which calculates a resident’s water usage and garbage costs based on occupancy, square footage, number of occupants, or a combination of these factors. It’s a very beneficial system. Not only can it be installed quickly and property owners can recoup a large percentage of their utility expense, but there’s no capital expenditure involved. There are several companies that will handle all of the calculations and bill the tenants monthly so you don’t have to. Click HERE to read our article that describes our three-step repositioning framework and how you can implement RUBS into your investment.
Before you incorporate this system into your own property, make sure that the rest of the local market is already doing it. If you’re the only complex utilizing the system, you’ll lose tenants because they can rent your competitor’s apartment for a cheaper price.
Begin to shift your mindset on how you view problems. Every successful individual views problems as opportunities, and the bigger the problem, the bigger the opportunity. It definitely takes time, but I want you to raise your level of awareness, acknowledge the “problem” and attack the problem from a positive angle. Try to look for anything good that can come out of the situation. For instance, when we lost a key employee, we felt that something good had to surface. It was a short term hit, but it ended up being a blessing in disguise. We ended up hiring a rock star employee, promoted another employee and have witnessed a dramatic increase in our results.