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You Bought It… Now What | International Residential Real Estate Investors Association
Monday November 20th 2017

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You Bought It… Now What

So, you identified the project.  The market research and other due diligence checked out.  You even reached terms that suited you.  So what now?  If you don’t create a successful management plan you’ll soon experience your first real estate failure.  Or, perhaps you’ve had several investments already.  Are you getting all from these projects that you should.  How do you achieve more?  What should you be doing to secure your asset?  How should you be driving value?

The answers to this are infinite.  Also, investors should consider their investment as a work in progress that can offer growing opportunity over the course of time.

With this in mind, the process is generally  straight forward and requires:

  1. Take  the correct first steps.  Take all the information from closing and pre-closing and set up an accurate initial balance sheet and income statement.  Ensure your accounting system and support are ready to go.  Collect all the files from the seller and ensure all closing documents, resident records, and resident leases are complete, accurate and as represented and warranted.  If not, protect your legal position by filing these documents formally through your attorney with the seller.  Assure all services, utilities, etc. are transferred to your name.  Assure all payments and especially taxes are paid per the closing statement (probably a HUD1).  Ensure all bank accounts are established, initial balances deposited, and deposit accounts are fully funded.
  2. Protect you asset.  Focus on cash flow, debt pay down, and strong reserves.  Assure that the bank has no incentive to consider taking the property by managing the default conditions and the position of the property versus the default conditions.  If you can move to a shorter term and lower rate you may pay slightly greater monthly payments, but you protect your asset against unfavorable banking conditions.  As we have all recently learned during the recession, this is a valuable consideration.
  3. Keep an eye on your assets’ loan due dates.  Develop and close financing far in advance (I recommend seek closing new financing at least 12 months prior to term) of the loan term always keeping an eye on preventing foreclosure loss.  This vigilance would have prevented many losses during the recession and  subsequent commercial property losses during the ongoing commercial property crisis.
  4. Identify your costs and continually re bid service providers, and seek alternatives to reduce material costs.  Assuming you add to your portfolio this is a combination of comparing servicing internally with your own labor or servicing with  outside sources.  Also, over the course of time, you can often find independent sources that will work for much less than larger contract sources.  Process can be a significant factor as you may determine methods that dramatically  reduce your cost.  For example, we recently  switched to a carpet type that absorbs odor and offers a 7 year life.  The reduction in long term maintenance was hundreds of dollars per year for a 1,000 square foot apartment.  Another means to reduce cost is to seek residents that will remain in place for a longer term.  This can reduce costs $1,000 or more per year in some markets.  Often elderly residents fit this category.  Finally, preventive maintenance can avoid needless expense and increase cash flow very effectively.  Build and expand your approach to preventive maintenance over time and you will net an ongoing reduction to your cost of operations.
  5. Look at options to increase revenue such as offering new services to your residents.  You have a captive audience and as your portfolio grows the audience grows.  Look at offering furnished units or alternative amenities like including cable and Internet or other services.  Some good options I’ve seen in the past include selling renters insurance and offering storage.  Accomplishing this end requires consistently checking your competition and considering ways you can broaden your attraction in the market.  For example, a property  in the correct location may be worth dramatically more cash flow annually  as a short term rental.
  6. Don’t allow residents to get behind on their rent and include strong enough deposits to get them out as early as possible should they fail to pay.  Also, spend time requalifying your residents periodically.
  7. Alternative uses are important to consider as well.  The opportunity  may  exist to add new revenue generating services if the property has excess land and if you are willing to rezone.  Or if the property has high traffic you may be able to add signage to gain new rental value.  Or, the property may offer the opportunity to convert part of the property to a separate apartment.  Could the property rent at a higher rate if fitted for roommate rentals with  individual leases?
  8. Make certain that you stay abreast of market value.  While relatively straight forward, you have to also consider alternative rentals as you may  find yourself incorrectly assessing your true competition.  For one property I held, the previous owners had failed to increase rents for many  years and had not noticed that they were $300 per month below their competition on closer analysis.
  9. Be conscious of all the aspects of your asset including separate buildings, separate plaths, available acreage.  In one case, we had determined keeping the separate plaths. When the county moved to install water we were able to charge for the loss of a develop-able lot vs. the .2 of an acre they had valued at $1,500 and gained $17,500 instead.
  10. Maintain the  right insurance and re bid the insurance regularly.  Avoid too low of a deductible and in general if possible make repairs without relying on insurance as this drives cost up.  Insurance is a major cost and methods to reduce cost can save significant cost.
  11. Do not simply accept tax value increases.  Follow the market and look for comparable properties to support and always appeal the tax value results that government officials attempt to apply.  This implies following recent sales, knowing per square foot sales values, and other details you can use to your advantage on appraisal.
  12. Hire good accounting, legal and tax support.  A good book keeper dramatically reduces tax preparation cost.  A good accountant and tax lawyer will likely save you significant cost over the project.  Specifically, include the accountant in all year end activity.  Include your attorneys in all transactional activity including refinancing, restructuring the operating contracts, or sales.

A project may seem quite limited in the beginning and overtime with careful review offer a wide range of possibilities.  Attention to the asset can go far to protect the asset and increase cash flow and value over the course of time.  Remember, investing is a team sport.  If you fail to play with the team, the results can be painful and even disastrous.

These tips can add 10s of thousands of value to the final position of the property, practically prevent project loss risk, and can increase month over month results.  Additionally, the steps you take with each project will improve your ability and efficiency with new investments in the future.  Can you afford not to exercise this diligence?

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