The SFR Show

In this episode we run through Emil's year end financial report and see how his 3 property portfolio performed last year. 

Emil's Blog: https://emilshour.com/blog/

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. On this weekend wisdom, we're putting a meal on the hot seat. He just finished an exercise of looking at his year in financials and we're gonna ask him about how his portfolio did. Alright, let's do it.

Emil, end of year, how'd you do?

Emil:

Yeah, so I run a personal blog where I talk about real estate investing and stuff. And at the end of it every year, I do like a full rental income report where I look at how much money came in how much money went out. So how much do we make at the end of the year. And so this is our 2020 rental income report. So total, we had we ended the year with four properties, six doors total, so three single family rentals, and one triplex and our gross rent was 44,788. But that's just gross rent.

So let's dive into all the other numbers. So operating expenses, which is things like I put property tax insurance, any owner paid utilities, property management, hoa, repair, maintenance, all that stuff goes into my operating expenses that came in at 17,464. And then my mortgage payments total on those properties came out to 17, zero to 117 $1,000 21. And so my cash flow, so 44,788 minus my expenses and debt payments, our year end profit came out to 10,300.

And, and a couple quick things to note on that we had a property that we sold about midway through the year. So we had another single family rental that we sold in May. And then the triplex we bought at the end of November. So the triplex really didn't have much in terms of cash flow. Actually, it had negative because we had to come in and make some repairs right away. So that's basically on like three and a half properties that we made last year. And last year was a pretty no big expenses, no turns. So this was a pretty good year for us to have $10,000 in cash flow on basically three and a half properties.

Michael:

That's amazing. Just one thing I want to point out to everybody listening is you said your operating expenses were like 17,000. And your gross cash flow was roughly 44,000. Right?

Emil:

A gross rent 44,000. Yep, yep.

Michael:

So if we take 17,000 divided by 44,000, to determine what your expense ratio is, you're down to like 38 and a half percent, which is pretty stellar. When most people we talk about that 50% rule, we throw away 50% of the expense, excuse me throw away 50% of the income just to expenses before the mortgage, you cut that down by 11 12%. so nicely done. And that's awesome.

Emil:

Well, thank you. But it's not really me. We've talked about this offline. I think real estate is a lumpy business. Some years you'll do well another year, you could have to replace an HVAC and have two turns and then you're having a not so great year. So 2020 was a smoother year for us. And that's why the ratio is good. The 50% if you probably look at a lifetime, you know, maybe you own a property for 10 years. I bet you that 50% is much closer.

Tom:

Peanut Butter bread.

Michael:

Do you guys know what Maltomeal is? Just real quick side tangent.

Emil:

Maltomeal?

Michael:

molto meal. It's like, like Quaker Oats kind of like oatmeal. But I think for more older people, I used to eat it all the time as a kid and my dad like you have to pour it in with hot water. And if you don't like stir it, it gets really lumpy. And so anytime It was like, really lumpy, I just think of like, eating maltomeal meals a kid and my dad made that was gross. Alright, thanks for coming on that ride with me guys.

Emil:

And then you found $20

Michael:

Yeah, it was great. And then I took the gross multi meal wasn't such a big deal. So that 10,000 in cash flow. Can you share with us how that represents a cash on cash return metric for you?

Emil:

Yes. So if I'm looking at just last year, it's a across my portfolio to 7.7% cash on cash. And the reason it's seems low for that good cash flow is that triplex I bought I'm looking at my total cash invested was $47,000. So that was basically $47,000 at the end of the year with no cash flow. So that's gonna bring my my cash on cash average down.

Michael:

So if you got rid of that, yeah, that's gonna skyrocket.

Emil:

Okay, so if we take out the triplex from the cash invested and just look at the three single families as a 17% cash on cash return,

Michael:

WOOOH yeah, buddy, yeah, yeah, that's awesome.

Emil:

Yeah, so Goodyear and Goodyear won't always look like that. But Goodyear?

Michael:

No, of course not. What is your triplex projected to perform and if everything goes according to plan? What type of cash on cash? Are you expecting to expect?

Tom:

Great question Michael.

Emil:

Yeah, on the pro forma once we get rents up to where we want them to be where we think market value is it'll probably be in nine to 10% on pro forma.

MIcheal:

Okay, awesome. You'll be sitting in the double digits likely from a portfolio cash flow perspective.

Emil:

Yeah, depending on the year again, I don't want it to this is like this is what you should expect every year when you have a portfolio. It's like this is what a Good year on a small portfolio can look like three three properties is nothing. So I mean, you think about like, where a lot of people have 50 plus units like, that's where I'm really interested to see what is this thing look like?

Michael:

Yeah, but don't sell yourself short. I don't think three properties is nothing I think three properties is a huge deal. And so I think people who are just starting out look at three and think Holy crap, that's light years away for me. So you just happened to start that journey? A little bit sooner than that. I think you're selling yourself mega short. Nicely done.

Emil:

You're right. I shouldn't belittle three. I remember when I was at 0, 3 seemed like a lot. So thank you for calling me out. You're right. It's just like, I think with any business as you start growing it you just look at the next goalposts.

Michael:

Right. You're growing into it.

Emil:

Right. But you're right, you're right when you're at 03 seems like a lot. So I won't belittle that

Michael:

Tom beat up Emil a little bit. Give ask him some tough questions.

Tom:

I know. Come on. Take the gloves off, Tom. All right. So Emil, what are you gonna do at that 10K.

Emil:

Okay. So for me, it just sits we've talked about in previous episodes, for me just sits in my real estate checking account, and anything over a certain threshold that I think will cover any major expenses that could happen. That just goes back into reinvested into new acquisitions. We haven't touched a single penny of cash flow since we started our portfolio.

Tom:

Awesome. Long term greedy. Is those new acquisitions continuing down multifamily line?

Emil:

Yeah.

Tom:

What are you thinking about for your next acquisition?

Emil:

I'm probably next going into the five plus unit multifamily. I want to test that out. So going into the commercial multifamily. I was talking to my wife about this this morning. I don't know if it's the property we bought, or if you know, it's a very old property built in like 1908. But every single month, there seems to be way more expenses than with my single family. I don't know if that's just a, you know, classy multifamily. That's just how it goes. You know, people talk about that. And so we're experiencing it.

But I want to probably look at a full year and see what does that look like even with the increased expenses? Is the cash flow still better than some of the other places I'm seeing? It's also just, you know, for me the size of portfolio I want to get to, it's just harder doing a lot of single family people do it and they do it? Well, but yeah, I'm gonna keep messing up multifamily, probably for the foreseeable future.

Michael:

Hey, Emil, pop shot, multifamily question for you. Unit 2 has a furnace down, you can repair fe hardbox, replace over 1800. What do you do

Emil:

Depends on how old it is. If it's 15, 20 years, I know that thing is just gonna, I've experienced this in my own, like, we bought a home and the entire HVAC system was like 15, 20 years old. And so we kept putting money into fixing it, and it would break in six months. And I wish I had just replaced the thing. So depends on how old it is. If it's 15, 20, and it's past its useful life, I will probably replace it unless the tenant is like, I don't know, if they're way under market and we're waiting to get a new tenant into like, fix a lot of things. Maybe I'll just do it on a turn or something.

Michael:

Sure. Cool. Reason asked. I just got a text. It's from this furnace from 1994. So I think it's a replacement for the good call.

Emil:

Yeah, I think it's time man. We sunk like $1,000 into fixing our h back and it was 6K to replace it. I wish I had just used that 1K to replace it. Yep. Cuz fixing an old thing. It's once it's replaced money down the drain. Basically, just kick the can down the road. So replace it.

Michael:

Yep. Okay, I think that's what we're gonna do.

Emil:

Do it.

Tom:

Awesome, guys, any final weekend, wisdom thoughts.

Nah, Thanks so much for sharing. This is really great insight. And you just use Excel to track all this?

Emil:

I do. But I'm probably going to be switching things over to stessa which is like the QuickBooks of rental properties. Probably going to move these things in a stessa because it's becoming a nightmare to manage in a spreadsheet.

Michael:

Mkes sense. Oh, this is great, man. Appreciate you being so vulnerable with us.

Emil:

Yeah, happy to this is the good stuff. You know, I think this is what people want to see like, okay, we can talk about performance and stuff. But how do portfolios actually perform and I always wanted to know when I was getting into investing, so it's always nice to see when people just share the numbers.

Michael:

Yeah, getting into the guts. No this has been great.

Tom:

Awesome, everybody. Well, hope you enjoyed this episode. And thanks again to Emil for land lifting up the rug for us. If you enjoy the podcast, we'd love it. If you guys would subscribe. Leave us a rating wherever you listen your podcast and as always, happy investing.

Michael:

Happy investing.

In this ask us anything we cover questions from a recent webinar on funds needed to get started, different tax treatments from state to state, loan specifics comparing local to national lending and the topic of getting a loan after you have 10 open, and finally COVID related tenant issues.

Submit Questions here:

https://linktr.ee/remoterealestateinvestor

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. On this episode, we're doing another ama. We recently did a webinar with roofstock and got a ton of great questions that we weren't able to get all of them. So we're gonna do it right now. All right, let's do it.

Gentlemen, co hosts What's going on? Who do I have on the line with me now,

Michael:

Michael Albaum,

Emil:

and Emil shore,

Tom:

Before we get into the AMA, what's what's going on, guys? Is everything going?

Michael:

Everything's good. I got my six unit that I've been trying to sell for well under contract out in the Midwest. Finally, that's super exciting. And then I'm just about to list a Southern California condo for sale as well on the MLS. So that'll be very exciting as well. And the list price that we're going out on is pretty strong. So I'm, I'm excited about all of those things, and then trying to get the I also got on the Portugal property, we're getting 3d renderings done to show furniture as opposed to just buying and spending a ton of cash to buy furniture or rent furniture. So hopefully, the renderings are going to work because nobody can travel anyhow. So fingers crossed, that gets listed and sold quickly as well.

Tom:

Very cool. So they superimpose the furniture on the property when they're marketing

Michael:

exactly as let's just do like a 3d rendering. So people can do like a 3d walkthrough and see furniture and then those will be the list photos will look stage. But that'll be not real furniture. It'll be CGI, so they can do like Jar Jar Binks sitting in the living room.

Tom:

It’s like, it's like Farmville.

Emil:

Congrats on the six unit. That's that one's been a long time coming.

Michael:

Yeah, it's been a long time coming. So it's been cash flowing this whole time, which has been helpful, but excited to get that under contract. And on to the next endeavor.

Emil:

Yeah, good luck, man.

Michael:

Thanks, appreciate, I'll keep I'll keep you all posted. It's a 60. Day close. So a lot can happen in between now and then. But I'm hopefully optimistic.

Tom:

So that seems like a little bit of a longer closer, I guess, is that common?

Michael:

It is a little bit common. I was pushing for 45 days, but the buyer is seeking this up with another purchase. And so they're getting financing for both simultaneously. So that's why

Tom:

I got it. Awesome. And yourself Emil?

Emil:

I am the only activity for me right now I am actually in the process of changing property management companies in St. Louis company I started out with on that three unit I bought, was not very happy with their service. And they were charging me all these weird fees. And I'm about jumping ship. So identified someone new in St. Louis, that I'm much more hopeful on and will transition the three units to them at the end of this month. So working with them to make sure that goes smoothly.

And then my property in Indianapolis, I am also looking to change property management companies there so that while we're not doing Oh, we're looking for acquisitions, just doing some housekeeping stuff with property management companies that I haven't been super happy with for a while. So using the downtime to make those moves.

Tom:

Also good podcast episode fodder. So we're, we're talking before we started recording meals, like I got, I got an episode idea changing property managers

Michael:

How to fire your property manager.

Emil:

Yeah, I mean, we talk a lot about how do you find one but like, you know, it doesn't always work out. So yeah. What does that look like? I think all of us have done it for one reason or another. So I think it'd be cool to go over. Why were we unhappy? What were the things we saw that we didn't like, and how do we go about finding a new property management?

MIcheal:

I love that idea. Let's totally do that. Another episode.

Emil:

Let's do it. What about Tom? What's going on?

Tom:

Oh, what's going on with me? Not a ton. I Oh, I just had a fairly short vacancies, like roughly 30 days, I'm one of the properties and the rent came back. And it's like $200, higher, they went from like $100 to 14 something. So honestly, one of the best things as an investor, having your basis stay flat, and your yield jump up by like a pretty significant margin. So Yippie!

Still working on my reinsurance, I guess from a while ago, but I have my insurance in flight of updating those. So I've just to hold myself accountable. will want to talk about next week that I have confirmed my new property insurance.

Michael:

Oh, good. That's exciting. Tom, you tell us what the turn costs on that unit was?

Tom:

Oh, I think it was like the property was in reasonably good shape. So I think it was 20 $500 maybe $3,000. I don't have this specific number off the top of my head. But I start kind of like ticking my head up and making note of it. Like when it starts heading north of five for the turn cost just in budgeting roughly 500 bucks a month, and my dog, Bodie. He heard that high number so he’s getting fired up!

Michael:

It's like, get out of here.

Tom:

Get out of here. No. So But no, the term cost was I think fairly expected fairly proforma

Michael:

Okay, cool.

Emil:

Did you guys make improvements to the property to get $200 more in rent, or was it just a property that you had a tenant for a while didn't raise rent on them and now that it's vacant, you're bringing it up to market?

Tom:

You know, I think there was a weird bump. I didn't have a tenant They're for that long, you know, two years.

But I mean, I guess there's been a lot of rental appreciation over the past two years, but something about just a lovely little pop and it was in eastern Atlanta kind of in the woods, that stone Stone Mountain area. Yep. And just had just a man north of 10% bump in rent. So anyways, fired up about that.

Emil:

That is awesome.

Michael:

Way to be.

Tom:

Way to be alright guys, let's jump into the AMA part of the episode The meat of it. So, as I mentioned, we had a webinar a little bit ago, a lot of great questions, and we're gonna try to tackle the ones that we didn't get a lot of these questions, I'll put in a couple of categories. One is more starting out, some are lending related, some are strategy related. And then we've got a couple on Roofstock Academy that we'll touch on at the end. So the first one, I'm going to send this to a meal, what's the average initial investment for a first time investor?

Emil:

Oh, that is probably a…

Michael:

1 million dollars!

Emil:

That is a it depends question. Are you investing in the Midwest, the southeast, if you're investing on the coasts, it's obviously going to be, you know, making your first investment in Los Angeles is going to be way different of a cost than if you're investing in the Midwest. So I don't have a good answer. I don't have like a 50,000 bucks. I mean, if you look at a lot of people on roof stock, and the properties on roof stock, most people's initial investment with down payment closing costs, all that is probably 25 to $30,000 is where people are starting.

Michael:

Could you do it with less?

Emil:

The thing is like once you start getting into properties that are like let's say 60 or $70,000 or less, there aren't many banks, where you know, where your downpayment would be, what's what's 20% of that 15 k ish 1215 K and then closing costs are like 20 K or less 1520 k all in to start and a lot of banks aren't going to even lend on a on a loan that small, right? If it's a $70,000 property, your downpayment 14 K. So like a $56,000 loan.

Actually, I bought a $63,000 property, and I found a bank that would loan on it, but you just have to call around. Not all banks will do it. But yes, you can. You can buy homes for maybe like 20, k all and 1520 k all in as your down payment and closing costs.

Michael:

Awesome.

Tom:

I like it.

Michael:

I love how you have a personal experience that immediately contradicted yourself.

Emil:

Yeah, exactly. That's the fun thing about doing these live right. Like, Oh, wait, I'm actually sorry.

Michael:

Keeps you on your toes.

Emil:

Actually, what am I saying? He has a property we sold. So it's not really in my like, front of mine? Yeah, exactly. I don't think about it too much anymore. But yeah, good question.

Tom:

Yeah, I'd say the same for a lot of investors that you know, 20%, down on a 100 or 150, or an $80,000 property, or you can buy all cash and make it a lot more. Go ahead, Michael, I hear you're wiggling around.

Michael:

Oh, just something else to think about is I know a lot of first time investors house hack. So they'll buy owner occupant primary residence and then rent out the other rooms. And there's all kinds of programs out there to help limit the amount of downpayment you need FHA is one of those programs where I think it's three and a half percent down, you have to put so if you're buying $100,000 house, you could be in at 3500, which is pretty amazing. So all kinds of things to look into, based on what type of investing you're doing and geographically where you're located as well.

Tom:

And I know that we have some military listeners of VA loans. I mean, I think you can go 0% so with a house hack, like whoa, yeah.

Michael:

Pretty amazing stuff. Alright, so

Tom:

The next question, I'll pass this over to Michael, this is related to taxes. How do we find out if the state charges higher property taxes for non residents, so not getting that owner occupied? tax benefit?

Michael:

Yeah, this is a great question. And something I talked about with a lot of students in the academy, whenever we're talking about property taxes, is call the county assessor. Call the county assessor call the county assessor call the county assessor for whatever county you're interested in investing in because property taxes are levied. at the county level, not at the state level, the state might set a minimum threshold like California, for instance, minimum 1% of the sale price, and then counties can have an excess above that.

So you just want to look to understand how it works in your specific County. And if there is an owner occupant exemption, or what you know how property taxes are calculated, so call the county assessor and ask them how you calculate your after sale property taxes as an investor, because there's often a big distinguishment. Between owner occupant versus investor. Great question.

Tom:

I think for most of them….

Michael:

No no no, I think Emil  has something to say.

Tom:

Okay, go ahead. I'll get the back of the line.

EmiL:

No, I was just like me raising my hand, like to call on me. There's another thing I'm finding after years of ownership also very important to ask how often is your property tax reassessed. There's some places where whatever you buy it at, okay, here's your new property tax level in California. I'm pretty sure it stays at that level until you sell right a new person takes over

Michael:

Yeah, there's like minor increases incrementally.

Emil:

Exactly. But Indianapolis I believe does every year they reassess Okay, what is the property value now and what does that mean for property tax? St. Louis, where I invest, I think they do it every other year. So if property value goes up, they're charging you more in property tax. This is something you probably don't think about when you're first getting started. And it's, you know, it's another variable to consider and would probably stop, a lot of people are just, I don't know, make it more confusing and harder to predict. But something to know as well with property taxes. So ask the county assessor how often they reassess property value and change the property tax on there as well. It's good to know.

Michael:

Great point.

Tom:

Excellent, I'd say the most of the properties that I own would have a homeowner's exemption. If I was a homeowner, you know, I'd say most areas do offer some sort of like, owner occupied discount. So when you're looking at last year's taxes, that can definitely be confusing. If there is like a, you know, an owner, discount owner occupied discount.

Okay, now on to the next one. So this is a lending question. I'm going to circle this back to Emil. When applying for a loan out of state property, a remote investor, are lenders weary of out of state property owners? Can we use local lenders to buy properties in other states? Emil, why don't you take the first job of this one?

Emil:

It's a good question. I am sure there are some lenders who don't want to lend to out of state if they're local. I've never had it be an issue personally. I talked to them. And they're like, oh, you're out of state, sorry, as long as the property is in that state where they lend. It's okay, if you live in another state, right. So it's like, if you talk to St. Louis, a bank that will lend in Missouri, they won't lend in Indiana, but they don't really care where you are. So that's the only thing I've run into. See, they're like national local lender, Michael wagging your finger.

Michael:

Haha. Yeah. See, I have had that unfortunate run in where they said, Oh, where's the property? locally? Where are you California? No, thank you. So those tend to be smaller, more community banks, credit union type of institutions

Emil:

Was that conventional or commercial?

Michael:

Conventional, I think I don't really remember that specific instance. But I wasn't gonna say I did just run into this with a commercial loan as well. There was an out of state buyer looking to buy my six unit, and they reached out to actually a national bank. But because they didn't have a footprint in this local market, the bank wasn't willing to lend to them. And I think that they've become more stringent with their lending practices and criteria because of COVID. And so I think that could be a big part of it. But I was quite surprised that for a commercial property with a national lender, that they wouldn't lend to this person, because they were not local, there didn't have a local footprint.

So it's hit and miss. So just ask the question. And the fact that there are banks and lenders that exist, that will lend to you even out of state just means you have to go find them. So if it's not the first one, or the second one, a third one, just keep calling around and ask for recommendations from either, you know, your local network or from other investors.

Tom:

There's a lot of lenders out there. Yeah. I mean, there's local, there's national, and I think that's an important part of the process is on turning those rocks and having those questions to ask, and being transparent, and all that good stuff. So yeah, hit and miss.

All right, Michael, I got the next lending related question for you. You have some experience with this. Can you explain how commercial loans work a bit more? Do all have balloon payments?

Michael:

No. To the first part, I can't explain. Yeah, of course.

So there's all kinds of different products out there, there's probably I would gather that there's more types of variables with commercial loans than there are with traditional residential loans, traditional, you know, being fixed debt, over 15 or 30 years commercial, you can have all kinds of different stuff. So I've got commercial loans. I'll give you an example. I have one that's fixed for 10 years on a 25 year amortization. And there's a balloon payment at the end of that 10 year period.

I also have another commercial loan, that's a 20 year amortization, fixed for five years, and then resets every five years with a minimum floor. And so those are two different types, the balloon payment loan, I'll obviously have to refinance, because that loan is essentially due in full at the end of 10 years. And so unless I have the cash sitting and want to pay that off, I'll need to refinance that at some point in between now, and then, versus my other loan that's not fully due, there's no balloon payment, that'll just readjust. And assuming that the interest rate that that current lender gives me at the end of that five year period is still reasonable, no reason to move or jump ship, but something I just did recently, actually was I was looking at refinancing a portfolio loan I have that sits across two properties. And the rate was, I think, four and three quarters. And so I reached out to a commercial lender and I said, Hey, this is what I've got what you do. And so they were going to give me a seven one arm, amortized over 25 years, which means it's fixed for seven years, then it'll adjust every year after that at four and a quarter. And then there was all these fees and points associated with doing that. And it was going to be a whole thing.

And so I took that back to my current lender, I said, Hey, I got this quote, can you beat it? And they said, Yeah, we'll just drop the rate to four and a quarter for like 2000 bucks for a one time fee. I was like, sweet, that's like a six month payback based on that loan size. And now that's fixed for this. next five years. And so that'll adjust again at the end of that five year period, but there's no balloon payment on that. So that was a super long rant. I know. Hopefully that answers the question.

The short story long is that no, not all commercial loans have balloon payments? Some of them do some of them, don't, you just need to understand the terms and intricacies of your specific product that you're either have or investigating.

Tom:

That's great. And, yeah, definitely a more advanced topic where it's not necessary. If you're kind of earlier in your days of building your portfolio. Speaking of building your portfolio, Emil next question for you. So within the webinar that we receive these questions, it was about building a passive income flow of $100,000. And in that process, you're going to go well over 10 properties. And the question is, how do you get so many loans when you get above that magic number 10, which is limited by Fannie if you're just getting standard loans, go ahead Emil.

Michael:

Before you jump in, I will just say, Tom, that we just had Chad Carson on the podcast recently, and we were talking about going lean and small as opposed to big and deep in your portfolio. And I think that you can absolutely structure a portfolio with paid off properties and only need 10 to hit your $100,000 passive income. So I think a lot of people get disgruntled or disheartened when they see the amount of leveraged properties that they need to purchase or having their portfolio to hit their income goals. But I would encourage people to look at the unleveraged amount of cash flow is the number one concern, and you're less concerned about the return metric itself, it can totally be done. So I would say look to structure what makes the most sense for you as an individual investor.

Tom:

Great point. Shout out Chad. Yeah, front of the pod. Go ahead Emil.

Michael:

Friend of the pod sorry Emil, all you man.

Emil:

That was a great episode, good shout out.

So one thing you can do is if you are married, your spouse can start taking on loans, right. So like, what I've been doing is, you know, is buying properties even before we were married. But now even though we're married, I still get these loans in my personal name. So it doesn't go my wife's name at all. The reason for that was, we can get more loans together if each loan goes on one person's name than if every loan goes on both of our names. So my plan was to load up on loans in my personal name. And then once that, once banks are like, Nope, sorry, we won't give you any more conventional, start putting them in my wife's name. So that's, that's one way people get around it.

The other one is you just start going into different loan products. I was listening to a BiggerPockets episode recently. And they were talking about this how everyone asks this question, what do I do when I get to 10. And once you get to 10, everyone realizes it's not as hard as you think, to go out and just you go get a commercial loan, you talk to private banks, you just get a different loan type, you're not going to get the amazing terms. But it's not hard to go out and get loans on cash flowing properties.

Tom:

We've had a couple of episodes interviewing private lenders, and that industry has come such a long ways of like a meal said, where it's not that daunting to get these private loans. So yeah, check out some of the I think I've been our two episodes ago, or actually might actually be coming out this previous episode. I'm sorry, I'm in a time warp right now thinking about when we're recording goes out.

Michael:

Back to the Future.

Tom:

All right. So my next question I have is COVID related. So we had a couple of questions. Are you guys having tenant rent payment issues during COVID? tenants are protected from eviction in many areas? Michael's turned to take the first stab at this question.

Michael:

Yeah, sure. So I've been very fortunate knock on wood, that I really haven't experienced the mass lack of payments that I think everybody was anticipating in March and April, I have had one tenant stop paying in a Southern California property that I own, which is a higher end rental, and so they lost their job. So actually, two rentals in Southern California, one stop paying almost entirely close of job, another Ask for rent reduction, just kind of indefinitely, which I was happy to accommodate both of those things.

Thankfully, there was some rental assistance programs that my property manager helped the tenant who stopped paying qualify for it. And so we've been able to recoup some of those. And then I think there was just some new legislation passed recently, that is also going to allow some rental assistance funds to be made available. And so we'll likely be able to take advantage of though well, but by and large, I just haven't seen people stop paying you do here every now and again of people trying to take advantage of the system because they understand or they're professional tenants. That's more so in my experience been the one off by no means is that the vast majority.

So I consider myself very lucky. But I think we've been proactive with working with our tenants and trying to stay ahead of the eight ball as opposed to trying to be reactive finding out Oh, by the way, I'm not paying. Yeah just for whatever that's worth just haven't seen that come to fruition. Thankfully. What about you, Tom, have you?

Tom:

I haven’t, you know, of the bigger companies that manage a lot of properties I've heard there's like, maybe been like a little bit of a downtick in vacancy. I guess that would be an uptick of more vacant homes, but it hasn't hit quite as hard and I think single family rentals is has been a little bit insulated. from some of the challenges as well, this is just my personal opinions and talking to people. But I haven't been hit. As I mentioned, I did have a tenant move out, but it wasn't necessarily COVID related, and I have a new one coming in. So at least so far knock on wood, like you said, it's been kind of business as normal, haven't been impacted by it or really much at all.

Go ahead Emil.

Emil:

Same, I think I had one tenant who they were always on time with payments. And now they're a little bit behind here and there, but they're always catching up and making payments. Michael, it's funny that you mentioned California because I watch Michaels Zuber’s, YouTube channel a lot. And he's mentioned, a lot of hit, you know, a section of his point of I don't know what it was, like 510 percent of his portfolio has like stopped paying, and his whole portfolio is in California, too. So I don't know if it's more a California thing. And maybe in the Midwest where, you know, rents and everything aren't as high. It's not being impacted as much. But that was interesting that you mentioned that your California stuff is what's been impacted the most.

Tom:

Okay, so who's up? Now? I think a meal is up. This is a acquisition underwriting question. Do you advise on buying properties when the existing tenants are behind on rent?

Emil:

That's a good question I have bought.

Tom:

And as always, these are all just our personal kind of opinion, this is not investing advice. Go ahead.

Emil:

I have bought properties where the existing tenant was late or like, you know, you can see the rent ledger, and they were consistently late, like if they haven't paid for two months, okay, now, now, that's something but if it's like, they're consistently late, but they always end up paying, that doesn't determine too much, especially if it's a property where I'm like, oh, man, look at market rent is way higher than it is with the current tenant. And they're three months away from renewal. So like, you know, maybe we'll just get a new tenant in here once that's time, so doesn't usually deter me. How about you guys?

Tom:

Michael, I thought…

Michael:

Kind of was interesting to note, it depends how habitual The problem is. I had a tenant that was late every single month, and so paid me an extra $100 a month, that's an extra 1200 bucks, cash flow on that property. So that was like, Alright, and once I learned that, that he was gonna make rent, he just stopped worrying about it his Yep, it's gonna be late this month. Okay. If someone hasn't paid at all, that's probably a bit more of an indication that there's a bigger issue going on. And so buying a property with that tenant in place would be a bit cause for concern. In that instance, I might ask the seller for some concessions, like, hey, pay me three months rent in advance, or put it in an escrow account. And you know, guaranteed me that this renter is going to make rent. And if you put your money where your mouth is, if they pay rent, great, you don't lose anything. But if they don't, now you've got me covered. So I'll only buy the property under that circumstance.

So the kind of things like that you can be a little bit creative with hedging your bets a little bit.

Emil:

It's a little bit harder to do that right now, just given how crazy the market is an unlimited supply is.

Michael:

Things are flying off the shelf. So contingencies tend to steer sellers away from going towards those offers. Absolutely. I mean, it's all one of those things, you got to be as aggressive as whatever makes you comfortable, but fully understand the market conditions and where you're operating in. You might be a bit unrealistic for your current market, given the situation we're in.

Tom:

Yeah, I’ll add in a couple of comments on that on tenants being late to as a meal was alluding to like looking at the kind of history one thing that's cool with Roofstock, at least you can see that ledger. And when the ledgers are ran, sometimes there can be a delay of when payments are processed. So the process so I'm looking at a ledger that was pulled on the fifth of the month, but the payment hasn't been processed yet, it could be kind of misleading. So like knowing that.

And looking into the history, there's this term and tax called Sally same as last year, I think I said that right, you can kind of think of when you look back at month after month after month, you can kind of infer some similar things. So if there's a history of late payment, or inconsistent, or what they call not secured NSF funding, like that's a bit of a red flag. But if someone is oftentimes a little bit late, and perhaps they're incurring a late payment fee, and another potential upside in that, if that's what you're about.

So I would say, I look at the payment history. Also, how long have they been living there could be telling if they've only been there for a little bit, and they're already having some late payments issues, that could be a major issue, because what I think about is a big risk costs outside of property condition is kind of going through an eviction. So doing what I can to avoid going through that legal costs and all that rigmarole. So at a high level, like a lot of these questions, it really depends and looking at the context of the situation.

Excellent. So we just got a few minutes left in today's episode, so I'm gonna hit real quick, some of these Roofstock Academy questions just talk about those. So someone had asked is that is Roofstock Academy at one time fears that a subscription model is a one time fee that is backed by a lifetime full refund guarantee, so have a risk free. It's not a hotel ballroom where they bring you in and keep upselling you new things. It's your pay once in your in.

And somebody also asked is the cost of Roofstock Academy tax deductible? I'm not a tax advisor, you should talk to tax advisor we did an episode with a tax advisor who mentioned that, you know, there's ways that he has put these type of costs either as business develop Men are startup costs. So again, I'm not giving you tax advice with this, but we have heard from a tax advisor

Michael:

They said yes!

Tom:

But yeah. Talk to your tax advisor, talk to your tax advisor. So another question for roofs Academy Can I buy now and take the course in a few months? I'm going through a bunch of stuff right now. But I want to like kind of lock this in at the current pricing? And the answer is yes, you can sign up and almost all of the aspects of it, you get lifetime access to it, lifetime access to all the lectures, all the group coaching Slack channel, the one thing we do limit is the one on one coaching and what's for a year, and we start that when you do your first coaching session, so you can sign up, you're in awesome access to everything. But if you you know, want to get started in like a month or two months or three months, whatever, you can start the clock on the coaching when you do that very first session.

So yes, other questions is do you get access to the Roofstock Excel export so this is one of the cool little hidden features about resect Academy where our members can export the full listings on the retail side on rootstock into evaluate an Excel which me I like working in Excel, you can evaluate a ton of properties and whittle down a list to a more manageable ones to go in and, and dig into the specific listings.

Alright, guys, I think we I wanted to get to those ones real quick. But I think we got a good episode. There's still actually quite a few questions. So we'll have another ama for us soon. Any final thoughts? Emil, Michael?

Michael:

No these are all great questions. So keep them coming, please. And leave us a rating review comment. If you have additional questions as well. It's a great way to get in touch with us for the podcast specific.

Emil:

Yeah and an even easier way. We have a link tree link in the show notes where you can click on that it'll take you to a couple different places, but one of the links will be where you can submit questions if you want to stack on a future episode. So that's another easy way to send us questions.

Tom:

Awesome. Thanks for listening. Happy investing.

Emil:

Happy investing.

Michael:

Happy investing!

In this weekend wisdom, we discuss whether or not we speak directly with the tenants of our properties.

---

Transcript

Michael:

Hey everybody. Welcome to another episode of The Remote Real Estate Investor. I'm Michael album and today I'm joined by

Tom:

Tom Schneider,

Emil:

Emil Shour.

Michael:

In today's weekend wisdom, we're going to be talking about a semi sensitive topic and that is talking directly to your tenants as an owner. So we're going to be talking about who does this who doesn't do it, things to be aware of. Let's just get into it, guys.

Alright, so before we started recording this episode, I was talking about the idea and Emil's like oh, yeah, I'd never do that. So Emil, tell us why you haven't done that. Or why you are actively choosing not to talk directly to your tenants.

EmiL:

Yes. So if I'm being just blunt and honest, I think most people just don't like their landlord.

Michael:

Speaking from experience?

Emil:

Recently, my dad bought property. So I know what it's like on the other end, people think you're just rolling in dough and like you do nothing. And you're just I don't know, driving lambos. And what they really don't understand is most people are mom and pop this is their livelihood, like this is their retirement, this is how they live their twilight years, whatever it is.

So you have bad landlords, and those guys suck. But most landlords, like they aren't that bad. Everyone just thinks like, Oh my God, my landlord raise my rent $25 How dare they not realizing that their insurance costs went up, or their property taxes went all these things that raise their costs, too. And so again, this is someone's livelihood, they charge you more at the grocery store. Like this is just how the world works.

Michael:

That's such a good point about the grocery store. like nobody complains, like grocery store is the corporate man trying to take, you know!

Tom:

Go ahead Emil, you were complaining about owning houses, go ahead and keep going.

Emil:

I think most people listening to this show get it because they're trying to buy rental property. But if you're on the other side, and I don't know, you've never thought about it really, I think there's that's why there's this negative stigma towards landlords or whatever.

But anyway, most tenants, I think, have this negative feelings where there's a landlord, and for me, the property manager is my boots on the ground there the person who knows everything, there's no reason that the tenant even needs to know me, right? They need to know the property manager and feel good with the property manager. They don't need to know that some guy in California owns his property. I think if they knew Oh, the owner like lives in California, whatever, I don't know, I think they may try to get away with more stuff, or whatever it may be. I don't think it would lead to a positive result. I'd rather they just think the property manager is basically the owner of this property. They're local, they handle everything. And that's why I choose not to make any direct contact with my tenants.

Pierre:

Would they get away with something like throwing away your HOA notifications for about a year?

Emil:

Yes Pierre. Wow, pure listens to our shows.

Michael:

Yeah, you tell us you don't listen.

Tom:

Snipers in.

Michael:

That's so good. Yeah.

Emil:

That's okay. that's a that's a one time painful thing I'll have to live with.

Michael:

And for those of you who aren't familiar with a Pierre was referencing a meal was receiving at his rental property address his Hoa notifications for a year, which his tenant had thrown away or decided to not pass along to a meal or the property manager. So you got slapped with a pretty big late fine and see for not having patriots away for a year, right.

Emil:

Yeah, it's probably just the tenant is like, Who is this Emil guy and just threw it away.

Michael:

Right! He doesn't live here anymore.

Emil:

Yeah, exactly. So Oh, well, my fault for buying a property with an HOA and not doing my homework to say, How do I make sure this gets paid every year? So silly Emil.

Michael:

Pierre, that was so good.

Emil:

Lesson learned. You just wait Pierre, I'll roast you, your time will come.

Michael:

All right, Tom, do you talk to your tenants directly? Why or why not?

Tom:

I do not. If you're self managing, obviously, you need to talk to your tenants. But that's just like some extra stuff that I don't really want in my life. And there's a reason why I will my property manager gets paid that percentage of the rent that they collect is they just handle all of that, especially as you start scaling your portfolio, it's like, I don't know, if you necessarily want to build that type of relationship with the people that are living and and you think about it, it's kind of a business relationship, and that you have a house that they're renting. And I think it just gets a little bit more complicated.

I've thought about sending like some sort of like Christmas card or like, like a, you know, something would be like a gift card or something at the end of the year, I haven't done it yet. I've kind of like maybe just send it through the property manager just as like kind of a thank you for being a good tenant. I haven't done that. I think that's the extent that I would make of my relationship with the tenant is maybe not like from me, but just send them that like as a nice gift, maybe give the property manager credit for it. But the idea of having these relationships isn't necessarily something like a reason that I'm doing it with the tenant.

So I'm kind of rambling on a little bit, but I pay for the property manager to manage that relationship for me to simplify my life and to make this more more passive and if things come up where perhaps it's a little bit like contentious or something like rent collection or whatever. It's better not to be in a position where the tenant will like want to reach out to me, it's like, you're almost making it harder for the property manager to do their job by building that relationship with the tenant, because they may think, Oh, I have a way to get around. So I think you can do you know, nice things if you want to be nice and do that like through the property manager, but you want to put your property manager in a good position to be successful. So I will not establish that relationship with the tenant or know them. I've never talked to any of the tenants that I've had.

Michael:

Great points 99% of the time, I don't I've had a tenant reach out to me directly, they somehow got my contract. Well, I know what how they did it. Because on the lease, it was my name before I moved the property into the LLC. So they reached out to me and like all your property manager, criminal, all this kind of stuff. I was like, oh my god.

So I did have some direct contact with them and tried to smooth things out a little bit, but I much prefer not to. And then there was another instance when we're doing some construction and having to raise rents. And the tenant wanted to talk to me directly. And so the property manager said, this is what they want. And I said, Okay, let's all get on a call together so that everybody hears the same things. Because I think that there is definitely some liability exposure when you talk to a tenant directly, and you aren't very well versed in the local laws and rules and regulations governing what you can and can't do with regard to tenants.

So just being aware of what you can and can't say and what you should and shouldn't say I think are really important. Also, having written communication, if there is going to be any form of communication, I think is helpful so that there's a paper trail of exactly what was said, of who and when. And so in this particular instance, I got on the phone with the property manager and the tenant, we talked through what their issue was, and we were able to come to resolution. And that was great. But that's once in a blue moon, I really, really prefer to run things as you both do, and letting the property manager do what they do best and be that recognizable face and voice for that tenant, there's not much value I can add by having those conversations or sending those emails at the property manager can't do themselves, especially because I'm often telling them what I'm wanting to have done or said they're just able to put their own spin on it to make it more local.

So I avoid it.

Emil:

Solid. Three interesting approaches to the same topic.

Michael:

Alrighty everybody that was our episode. Thank you so much for listening. We really, really appreciate all of the love support and feedback, comments, ratings reviews we've been getting over the last couple weeks. Please Please, please keep them coming. We're going to pick one to give a shout out to on the next episode. So feel free wherever you listen to your podcast to give us a rating or review and we'll give you a shout out and potentially some swag. We have been known to be doing some swag giveaways over the last couple weeks. So we'll have to get back at that. Thanks again for listening, everybody. We look forward to seeing you on the next one and happy investing.

Emil:

Happy investing

Tom:

Happy investing.

In this episode, we cover how to set up your accounts to easily track your expenses and simplify your tax process.

---

Transcript

Emil:

Hey everyone, welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour and today I'm joined by my co hosts,

Tom:

Tom Schneider,

Michael:

and Michael Albaum.

Emil:

And today we're gonna be tackling getting your financial house in order. So a friend of mine hit me up on Twitter asking for accounting best practices. So we're gonna read his question and start tackling it piece by piece to show you how we do our accounting and keep everything in order. So let's hop into this episode.

Emil:

Alright guys, so I'm going to read Alvin's message to me and then we'll start tackling it.

So, hey Emil, fan of the pod think y'all are doing some awesome work there. Thanks, Alvin. One potential topic to consider for an upcoming podcast is accounting best practices. I'm just getting started with my first property in one area that I'm wrapping my head around is how to best set up bank accounts, like operations, reserves, etc. credit cards, all those things. So I'm not dealing with a tax nightmare next April. Thanks for considering and keep up the awesome work.

All right, Alvin, this is a great question. I think we, I think we covered it inside of an AMA. But we wanted to break it out and dedicate its own episode, because it's definitely a good topic and something to think about, especially as you're you're just getting started. So do you guys either one of you guys want to start just mentioned how you set up your financial accounts, either checking savings, things like that

Tom:

I’ll lead the way, so I probably have a super simple structure. So I have one separate bank account that I took out through one of the big banks and with that account, I to connect my mortgage payments to it. So I do an automatic withdrawal to pay that within the mortgage accounts themselves, I will have an escrow in there where they'll take out a little bit extra every month to manage my taxes and insurance. So I don't have to worry about that throughout the year. But if I want to be more proactive and not let them have my float of escrow account, I could pay that you know when it's due, but I like the past 70 of just setting up that impound account.

So you know, checking account automatic payments in and out to the mortgage and kind of a similar structure with my individual property managers where I have my bank account connected with my property manager, and they hold a little impound account where with each property that they manage for me, depending on how many that property manager manages, they'll keep a couple extra couple $100 if any maintenance or issues come up, and I set up with them a not to exceed limit. So if the price of any work that they're going to do is over 200 bucks, I want to know about it. If not I trust my property managers with most of them. I've been using them for over a year. So I feel okay about them making decisions on some smaller stuff.

You know, I never thought about until this episode that with both of these sort of key partners that I have I let them both have a little bit of an impound account. So I have, you know, my main checking account where funds are coming in funds are going out. And then both with a lender as well as with the property manager, they both have little escrow accounts to manage the stuff that they have to pay via insurance or taxes or any maintenance stuff.

Beyond that I don't have a credit card that I use for any real estate stuff that I do the most of the transaction that I'm making. Personally, you know, outside of the initial acquisition and end and downpayment in acquiring the property, there isn't really a lot of transactions that I make that would be manual, everything is is pretty automatic set and forget it, you know, monthly money in pumping money out and then these two little separate escrow.

Emil:

It's basically what is your financial house look like? Do you have a separate checking account? Good mention of like the the impounds with property manager and lender, which is very common, it's nothing unusual. So yeah.

Tom:

And I heard the question before within Academy members asking, Hey, do you set up a different checking account for every single property if you have multiple LLC? Sure, do it for each LLC. But for me, I don't get a unique checking account for each property. And also, what I love about that as having a separate checking account for my rental properties is I know that money's in that bank account, I'm not taking it out. And it gives me a really good finger on the pulse on where cash flow is going month over month as funds are going out and funds are coming in. So I like that canary in the coal mine of the checking account balance level that I just look at pretty regularly.

Michael:

That’s great.

Emil:

On the same note, I have a chase personal checking account. And when I started, I created another checking account that all of my rent goes to any expenses come out of so it's just completely separate from my personal. I just use chase because I had them with my personal banking and I manage it the same way. Just keep them separate all properties go into this one checking account, nothing fancy no credit card or anything like that so far.

Michael:

Sweet, nice, simple clean. So I started very similarly to you both just having a separate checking account and then I had two properties that both went into that account. And then again, just like I mentioned, I kept it very separate, very unco mingled. And then I add my third property purchase. I started an LLC and so I moved everything over to an LLC account. And so then I need to open up a new LLC bank account. And have everything flow through, they're still keeping it totally separate, no commingling and so everything just got paid out of that account. Really the only difference in operation was that it had a different name. And it was a business checking account rather than a personal checking account with the name of the LLC. But from an operational standpoint, it was still handled in the same fashion to was handling it previously.

And it wasn't until this past year, because I've opened up several more LLCs over the years, as I've purchased new acquisitions in different parts of the country. And so this most recent year, I've been working on this massive rehab and my contractor started accepting credit card payments. So I just applied for a business credit card this year got approved and got that and that's been awesome, because it's money you're spending anyhow. So this has a 0% interest for like the first 12 months so I can carry a balance on it if need be. The problem is that it's a super low balance, and I'm constantly paying for rehab. So for that purposes only make a lot of sense. But there's cashback incentive, which is nice, because again, it's money I'd be spending anyhow. So it's kind of a nice perk.

But Tom, kind of like you mentioned, there's not outside of that rehab and…

Tom:

Getting some airline miles there?

Michael:

Yeah, that's it. I mean, I get…

Tom:

Cashback, at restaurants, Starwood Hotels?

Michael:

That's, that's right, we get my Marriott points...

So yeah, so outside of that, you know, there's really nothing I put on credit cards for the business or the LLC expense. Most of that stuff, I could pay directly added that the debit account, by property taxes and insurance, I could set up to be pulled directly from that account, all the mortgage stuff went directly from that account, it was very little that I would need to be spending on a credit card anyhow, so it just didn't seem worth it to have the extra overhead or extra tracking to have a credit card for each LLC. So I only have one for one of my LLC.

And then as far as tracking the expenses. I think that was part of Alvin's question too. I personally, I just use Excel, I have an Excel sheet. And I think we've talked about it in a prior episode, like you're mentioning me on one of the other ama is where I just have it broken down by LLC at the top, whatever LLC it is, and then all the different properties within that LLC. And whatever the expenses are associated with that LLC. I track the date, what the payment was, what the expense was, and then how much I paid. And then I sum everything up at the property level and the LLC level. And then I just send that file to my accountant at the end of the year.

And there's not a whole lot that actually has to go into that because like I was mentioning, I pay my property taxes separately, I don't have them impounded. And so for a lot of my stuff for some I do for most I don't so I don't impound my taxes, I pay it off separately, I pay my insurance separately, and then any kind of rehab stuff that I have to pay that gets all tracked on that sheet.

So at the end of the year, I see okay, how much did I pay for this property outside of what the property manager paid, because the property manager gives me a summation, a year end profit and loss statement that shows Okay, you paid this much in management fees as much in repair and maintenance this much in whatever snow removal. And so I just said everything to my CPA, and he's like, great, here's your tax return

Emil:

Perfect. And some property managers will like literally pay all of your bills for you. So it's tracked in this system that Michael mentioned, in St. Louis, I own a single family home. And St. Louis is weird in that they split the water bill from the sewer bill. And so the water bill is under the tenant, but the sewer bill goes to me and I have a property manager who will take over all my bills, so I can tell them to be the name on the sewer bill, they pay it directly right out of the rent. And then I get my profit and loss like Michael mentioned right out of their system, because they handle accounting much better. And I don't have to like, you know, think about how much I pay and sewer bill times 12 track that in Excel blah, blah, blah. So that's another option you have is talking to your pm seeing if they can take over your bills.

I guess if you didn't do this proactively, what would you do? Maybe print out your checking account for the entire year, look at all the money going out and maybe say like which property it was assigned to and what it was for? I think that's maybe like, but that's kind of the nightmare that Alvin was talking about that you probably don't want to do.

Michael:

Yeah, that becomes a pretty big lift, especially trying to keep track of like what the expense was and on which property? Because you definitely I've been told what to keep everything on like a per property basis. And so like whatever expense associated with property a key with property a and so if you've got everything in a single account and aren't tracking it, that becomes Oh, where was that $57 expense, which property was that for? becomes pretty, pretty confusing pretty quickly.

Emil:

An awesome tool I want to shout out here that can help people not have to do what Michaels doing in Excel.

Michael:

If you want to be way smarter than me,

Emil:

I need to do it too. Because I haven't been doing a good job of this, I need to go sign up for is Stessa great tool. It's like the QuickBooks for your rental property. It'll see all the you know, you'll tie it to your checking account. It works with all the major banks tie it to your checking account, it'll look at each thing coming in and going out and you can just assign those to a specific property and a specific expense. I can say this is the St. Louis property and its sewer bill right and then it's all tracked. At the end of the year I get a nice easy export that I can send to my accountant. So definitely check out Stessa if you want to make this make your expense tracking much easier.

Tom:

I use Stessa, I like it the document it's like simple but just effective and we've talked about it For the podcasts and documents, storage, you can connect your bank account to it as well. But it's a very cool tool.

Emil:

Absolutely. Another part of Alvin's question, which I think is is really interesting. And I want us to tackle a little bit harder, you'll see a lot more different stuff is in terms of reserves. So I'm curious, do you guys you know, a lot of times you look at a pro forma, or how a property expenses and everything should look like and you'll see an item for cap x or things like this, like money, you're gonna put aside for major repairs. And I'm curious if you guys like, actually on each rent check that comes in? Do you take a amount or a percentage or whatever, move it to a different checking account? Or how do you guys handle your reserves.

Tom:

I know that I have this pool of money within this checking account once they're coming in. And I already know that I have these escrow accounts I talked about before that the property managers are holding based on the number of properties in the portfolio. So I'm not doing any extra work, once the funds are coming in and moving them to a separate bank account, I'm getting that fool of the main bank out is as fat and happy as it can and then use it to reproduce to make a new property to feed the beast.

So you know, I know roughly how much money I want to have in that general funds. And once I get to the point where I can acquire another property all take money out of that pool, buy another property and just plug that into the system and then let it run. So I'm not moving on a monthly basis. Now I'm not moving moving into any separate checking accounts.

Michael:

It was the same for me when I was first starting out, and I didn't touch any of that money, like what would be cash flow. And I just left everything in the same checking account. But what I did do is as I started to want to use that money for things other than just investing, I like open that faucet a little bit. And so I based on my pro forma and based on past history, I would say okay, well, I made about 200 bucks a month cash flow per property. So if I had three properties and call it 600 bucks a month, so I would just set up an auto transfer for like 400 bucks from my property checking account into my personal checking account. And so that was like my portion, that was my cash flow. So everything else stayed in the account. So the reserves, everything else that wasn't cash flow just stayed in that account. And so whenever I needed to do something, I would just dip into that account and pay for whatever capex item was needed.

But I was starting to feel the effects of the cash flow. But I just made it a smaller amount than I had anticipated for it in case I made a mistake somewhere. And at the end of the year, if there was a ton of money leftover in the account, I could square up with myself, so to speak, and give myself an extra pay.

Emil:

Solid.

Michael:

How do you handle it Emil?

Tom:

Putting it all in GameStop Emil?

Emil:

I take all my money and I put it in whatever Wall Street bets tells me to know what I what I did is when I first started, I basically have a minimum balance that I keep based on unit count. So when I bought my first property, I think I put $3,000 in this account, where did I come up with that number, I don't know, I just kind of arbitrary, it was like a 3000 that should cover any like minor expense. And if I have anything big, I'll figure it out.

As I bought subsequent properties, I just made sure that minimum went up higher and higher. And basically anything above that minimum, I would like you Tom, that's just funds to go help with the next acquisition, right. So if I say my minimum is 10 K, and I have 17 k in that account, I know that seven k delta I can go use when I go buy another property or whatever, or that's available to me to for acquisitions.

So that's kind of my strategy right now I don't set it aside, it just stays in that checking account. But it's just a minimum based on unit count. And it just goes up a little bit more with each subsequent property. But this is just my personal opinion, I don't think it needs to be linear. So let's say you started with three K, right? It's not like you need three k for every unit. So when you're at 20 units, you don't necessarily need to say I need 60 k in that account. The reason being is is like I think ownership is lumpy, you'll have expenses on property one year and then expense on another property another year, it's not like five roofs could happen. But it's unlikely that five roofs are gonna go out same time. So just allows you to have an expense kind of build up the reserve again, and then another expense comes in like that.

Michael:

It makes total sense. And I think about it the same way, like what's the statistical likelihood of having those five roofs go out on the same year across all five year properties is pretty low. So yeah, I think like you mentioned lumpy is a great adjective to use. And so you have expenses pop up on one property. And so the other properties can support the payment for that. And so they all just look to to keep each other afloat, so to speak. And the more properties you have, I find that the smaller dollar amount per property needs to be kept in reserve.

So if your number was 3000 per property, maybe if you have one property, you keep 3000. If you have two properties, you keep 5500. So your next property might be an additional 2500. So like you said the sum total is going up with each subsequent property, but the dollar amount per unit is actually decreasing. That's how I think about it.

Emil:

I think we we covered most of Alvin's questions. So

Michael:

I got a quick question for you both and I think I know the answer. So I think I asked you all you both probably about a year ago. Do you guys track your depression? And mortgage pay down on any kind of calculator sheet

Emil:

In my spreadsheet where I have all my properties, and I'm looking at all the numbers on a yearly basis, I calculate all my cash flow. And on that yearly anniversary or whatever, I'll go look at the estimated property value and update on my sheet. And I'll go in and look at my outstanding loan. So it will like, you know, calculate how much equity am I sitting on in my portfolio? So I'll do that once a year.

Michael:

But you don't have to, like the depreciation for most of us is going to be a straight line depreciation same amount every single year. Do you have that calculated or written down anywhere to see, okay, am I gonna be paying taxes on this income on this cash flow income? Or am I totally covering it?

Emil:

I do not let my account handle that.

Tom:

Trying to try to make us feel bad Michael trying to put us on the spot.

Michael:

No, I was just I just curious.

I try to figure out how big of a nerd I am. No, no,

Tom:

You're up there. Man. I love it. I am as well. But I have not done that exercise. I mean, I'll take a look at end of the year when the CPA fills it out. But I like the exercise. I like the exercise a lot. I personally don't do it, I take advantage of it and have a CPA who has that type of expertise to do that. But I haven't How do you do it Mike, why don't you work us back?

Michael:

Michael:

Sure, yeah, I'd be I'd be happy to use it's a fun exercise. For those of us that are numbers driven, which I think many of us real estate investors are. So basically you can only depreciate the land portion of the purchase. And so that typically works out to about 80% of the purchase price. But if you look at your property tax bill, it'll say land value and then building value. And so you can only depreciate the building value of that. And so you take that value, residents property depreciated over 27 and a half years, you just take that value divided by 27 and a half, and that's your annual depreciation amount. So we'll make the numbers fairly easy on $100,000 property, if I assume 80% is in building value, that means I take 80,000 and divide that by 27 and a half years and I can depreciate $2,909 every single year on a straight line depreciation and so if your cash flow is less than 2900 bucks, you likely are going to have a negative or paper loss for that given year with the depreciation covering your all your cash flow.

So I think you have to remember, though, about that is that your your principal portion of the mortgage payment is not a deduction, I think only the interest is and so you have to get add the principal portion back in and then look at the total. But at the beginning of a loan, the principal payment contribution is so small, especially on like $100,000, or an $80,000. mortgage, you know, it's probably going to be 100 bucks or so you can look at an amortization schedule to see what it is.

But add that back into the equation and then take out your depreciation and see if you are still negative in terms of cash flow. And if you are, you know, it's highly likely that you're not gonna be paying taxes on those dollars in your pocket, which is a pretty amazing phenomenon.

Tom:

Love it. And then any, you know, costs that come up. So yeah, that's your depreciation schedule, but any deductions you have so some R&M, your property management costs isn't up to you pay for some nice education through Roofstock Academy. This is not tax advice, please talk to your tax advisor. But that is, from what I've heard is doable.

Michael:

Absolutely. Emil. you like that rant?

Emil:

Yeah,

Tom:

I love a good rant, I love it.

Michael:

The other thing to keep in mind too, is chatting with your tax professional and strategizing a little bit if you have major repairs to make at the end of the year, you know, that year or at the beginning of next year, because that could have an impact on your taxes. And so I think to be more strategic and proactive can be really beneficial. And so talking about these types of questions and strategies with tax professionals is a super good use of of time and money.

Tom:

Yeah, that's a that's a great way to you know, interview tax professionals that you're potentially using them as needle them on some of these different questions. I was just speaking with my tax professional about building a small office like unit and I was interesting learning about it like to be able to use that as a deduction of the costs of building that and again, this is please check for yourself, this is not tax advice, yada, yada, yada, all that preamble, you can only use that space for that particular activity that you are, you know, assigning it for and as soon as you do something else in it, it's violated, right? It's totally not the right way to word it. But there's a couple of very specific rules on building little little offices of being able to deduct that

Michael:

Don't let anybody catch you playing fool in that space.

Tom:

That's right or whatever working out. Yeah, that's right. Cool. We have two little rants out of that two little baby rants out your answer. Mine a little bit less in depth and technical. Yeah,

Emil:

What would an episode of the remote real estate investor be without a couple rants? Guys?

Michael:

That's a really great question. Boring.

Emil:

Very, very boring. Not entertaining at all. Alright guys, let's end it here. Thanks, everybody for tuning in. Hope you guys got some value out of this one. And like Alvin did, hit us up on Twitter. I'm at Emil Shour. Michael, your at AlbaumMichael and Tom. You're at

Tom:

TSchneido. I think I came up with that when I was like 16.

Michael:

Like how you give out your email like skater do 27 Yeah, I made that when I was 16 like there's embarrassing. Yeah.

Tom:

I just think it's the better things to say but funny names but yeah, nope, not gonna say them out loud. Keep em on the inside.

The old AIM names that are just so ridiculous thinking back to like those and the names my friends had it was ridiculous.

Alright, so that's our episode. Hope you guys enjoyed. Hit us up on Twitter if you have a question we'd love to tackle on a future episode. And we'll catch you guys in the next one happy investing

Tom:

Happy investing.

Michael:

Happy investing.