Budgeting with Dareck Chojnacki
Darek: Actually, I have a music business degree from U Mass Lowell and I just got into the entrepreneurial realm, helping business owners since my family came from Poland, owned businesses their whole lives and just helping people out as much as possible, know the numbers for their business.
I do have links to a few spreadsheets, some printable PDFs you can use. It’s at my website. You can read it there. It’s businessrunway.com/april2017. I’ll have it up at the end of the presentation as well, but if you like some resources, a copy of the presentation, some slides, some Excel spreadsheets, some exciting stuff that you can use, it’s going to be located right there.
Really quickly, we’re going to talk a little bit about me, a little bit about business owners, what you should be looking out for. Start with why — why is it important to know your numbers. We’re going to talk about the cost of ownership — what does it cost to actually own properties? We’ll go over a little bit of that. Budgets versus projections, and tracking and measuring.
For business owners, one of the things is you got to learn to speak the business language. A lot of people don’t understand that. A lot of people don’t go to business school just to know the lingo, but just like musicians, you’ll learn sheet music. Scientists, they have their own language that they speak to one another.
Learning how to speak the language of property owners, owning properties, what’s a Title 5. It’s going to pass the subject. what’s your late fees. Knowing that lingo and training yourself on a lot of that information, that separates the professionals from amateurs. Being part of a group like this shows that you’re taking this stuff in the right direction, so knowing the business language is very important.
A little bit about me. I own Green Tree Insurance, also Business Runway, which is a business coaching-consulting company, manager of Eagle Trust Apartments, that’s located in Dudley, South Central Massachusetts. I’m a certified SCORE mentor.
Who’s heard of SCORE in this room before? They provide free business mentoring, so there’s Worcester chapter. It’s located in the 446 Main Street building. If you need outside perspective, the thing about Score is they have a community of typically retired executives that want to give back, volunteer at a time, help business owners kind of grow their business and take it from it currently is to where they want to grow. A lot of different backgrounds, so I definitely recommend checking that out.
A QuickBooks Pro Advisor and I’ve been a small business relationship manager at an international bank as well, so I’ve looked at many Schedule E’s, purchase and sale agreement, knowing the numbers at a certain point when it comes to that stuff as well.
Why are numbers important? Why should we talk about numbers at all?
There’s typically three different areas if you’re looking at cashflow.
If you have properties, you’re just looking at how much rent is coming in and how much money is going out. At the end of the day, you want to keep as much money as possible, at the end of the day for that.
Are you looking to purchase? Are you looking to purchase additional properties of 15 to 25 units or looking to sell?
Having the Schedule E’s, knowing your numbers ahead of time before you sell is very important. A lot of buyers, they need the last 2, 3, sometimes 5 years of Schedule E’s to see if the property is actually profitable. At the banks, they start dissecting the property, and if it doesn’t make sense, you may not be able to go through a traditional lender. If you’re planning to sell property within the next 2 to 3 years, now is the time to actually start planning that process just to make sure that numbers make sense on the tax returns.
The basics of business, this is kind of how I break it down. This initial cost, which is the acquisition, the raw materials, so in your situation it’s purchasing the property whether it’s for rental, whether you’re going to own it.
Then there’s equity part. There’s 3 parts to that: time, money, and energy. Who has more money than time and energy here? Nobody has money.
Female Audience 1: [unintelligible 0:04:40].
Darek: [laughter] That’s what it comes down to.
Female Audience 2: This one is saving money.
Darek: [laughter] Whoever is trying to sell some properties right here. A lot of people, they put the sweat equity in, so you’re putting your time, you’re putting your energy in. Like I said, my dad is a contractor. Over the last 30 years, I’ve helped him build many houses. I mean if you want to do the work yourself, you’re going to improve your bottom line by how much time and energy does that actually take. Does it make sense to actually pay somebody to do a task instead of you doing it personally? Those are things you want to kind of look at when you’re purchasing properties.
If you’re buying a property for X amount, how much time, money, and energy do you have to put into a property in order to build the value? What’s your return on investment, whether it’s going to be rented out or you’re going to be building it, then just flip it?
You want to think of these things and every business follows the same formula for this. Say if you’re buying raw materials, if you’re buying plastic to create foam, you’re going to be buying the raw materials, how are you going to design it? What’s the value that people are going to see at the end of the day? How low can you purchase those raw materials for? How much time and effort can you put into it to get the value that you’re getting back? That’s the basics of any business and translates to property owners as well.
How many people can add more titles to this? How many different roles do people have as a property owner? I know Rich’s favorite is parking lot attendant.
Darek: [laughter] Circuit breaker switcher. “Hey, my power is out.” How many people spend time going to properties just to take a look at the circuit breaker box and flipping the switch and resolving all the problems. It happens all the time.
Male Audience 1: Counselor.
Darek: Counselor, yeah. There’s a detective. “What’s going on here? Who’s doing what?” You got to sell it to the people. What’s that?
Female Audience 3: Cleaner.
Darek: Yeah, the cleaner, yeah. That’s definitely an important one. Accountant, negotiator, therapist is definitely one. Safety manager, “What’s falling apart on the properties? What’s falling off the roof?” Home Depot regular – how many people can raise their hands and say that?
Male Audience 1: Landscaper.
Darek: Landscaper, there is another. We can keep adding to the list. The question is, knowing what you know now about being a property owner, would you still do it?
Male Audience 1: Absolutely.
Darek: That’s a good answer.
Rich: Would you put bearer of bad news on your business card as your job title?
Darek: Some people might have to. I mean, you got the Worcester Department serving the papers, I mean they definitely have to do that, so it’s a dangerous job. I mean it’s tough. How many people change codes? Is that the most common fear people have when buying new properties?
Darek: It’s not that painful or you hire plumbers, spend some money and get rid of it. That’s what it comes down to.
Budget versus projections, reality versus expectations. Yesterday was 80 something degrees. Who was out on a hammock relaxing? Who was running around with no money in their pockets, trying to fix some problems going on? That’s what it comes down to. It’s the gap between reality and expectations.
Male Audience 1: [unintelligible 0:08:05].
Darek: There’s lots of good furniture out there anyway, but it is that gap. You want to bridge that gap between reality and expectations, what comes in the way between those two and that’s what you really want to focus on.
Some of the things that we all do are the expenses. How many people actually track these on a regular month-by-month basis or pay somebody to? Then how many people scramble at tax worried about now to finish the Schedule E’s, and then get all the expenses, and get all the receipts to your accountant.
Male Audience 1: The same people.
Darek: The same people, that’s what it is. I mean hiring an accountant, that’s the expensive part of doing that. If you actually keep track of this on a regular basis, you can save a little bit of that money. You spend a little bit of time and energy, that was mentioned before, and that saves time in a long run. It saves you money in the long run.
The basic expenses, these are coming off the Schedule E’s, if you look at the tax returns, these are the basic things that are on there, and I’m sure there’s a lot of things that you come across. What are the most painful expenses that people have come across recently?
Male Audience 1: Plumbing.
Darek: When you’re buying a property, I mean you want to do the inspections, I know the speakers are going to be speaking about what to look for when you’re doing the inspections. I mean getting the knowledge and having the roles and the skills needed to be a property owner. You’re wearing a lot of different hats, and some of that is tracking these expenses, and the tighter you can watch these expenses, as in a day, you can be having more value. That’s what it comes down to.
The other factors – downtime. The downtime is between rents. I mean if a tenant leaves and how quickly can you get the next tenant. Do you have a list of people you can call up to? Use a realtor that can fill in those places. How many repairs do you have to do after a tenant goes in and demolishes the apartment, and then you have to spend a month or two just trying to fix it up? Take into consideration some of that down time. The nonpayment of rents – how many people are chasing people right now to get their rents? Not many? That’s great. All right, there’s a few hands.
Loss of business income due to a claim? How many people have claims experience over the last couple of years with snow or anything going on? I mean, again being an insurance person, I’m not going to talking about insurance here, but loss of income due to a claim. I mean review your policies. Insurance is just numbers and making sure that the right coverage is on there.
Tax credits and you’re going to take that into consideration different towns have different credits that you might be eligible for.
Energy costs – solar panels. Does that make sense to do that on any properties? I think it’s pretty early age on all that stuff, but if you’re getting some tax credits and breaks, it might be something to look into as well.
Being a part of this group is connecting with other people. What are the other expenses do you come across? You’re looking for a good general contractor in the area. You’re really doing your due diligence by connecting with everybody in this room because you have so much experience and connect to each other and just rely on each other for information. That’s where a lot of the value comes in for any of this stuff.
Determining the rental income – how many people have a tough time setting the rents or convincing the tenants for the rents? No? It’s set in stone, so you pay and you’re good.
I mean one thing I want to talk about briefly is the state of market rent and that’s basically what the owner thinks the rent should be, and then the most actual rent, so the last 2 or 3 months. The season’s actual rent is what’s a trend for the last couple of years? What if people actually have been paying you for the rents?
Then after-market repair. If you have a property, you’re going to be doing repairs and be like, “Okay, I’m charging $1,000 right now. I think I can get this up to $1,200. It’s that loss of lease. If you have a person that has a lease for a year, you got to wait until you can raise those rents. That’s what it comes down to. Rich has some information on this as well.
Rich: Yeah, I just have a line item in my budget, in my projections for the year called lost to lease. It’s especially useful when you inherit a property or when you buy a property and you inherit the tenants that are there. you can’t necessarily raise the rent right away in a lot of cases. Who’s ever bought a property where the rents were way below market? Most of the room, right?
Yeah, I was telling Darek, the first triple-decker I bought, the folks were paying $315 a month in Worcester for a three-bedroom apartment. Is that below market [laughter]? That’s below market, right? Until they moved out, that was a monthly loss on my budget because the apartment was worth at least $900, wasn’t it?
Rich: Yeah, at least. The other thing, stated market rent, obviously, we all talk to landlords. I talk to a lot of landlords. They don’t check up on what their rental market is. They’ve had their property for 20 years. They put the rents up every once in a while, but they might not realize they’re charging $850 for an apartment that everybody else is charging $1,350 for. I have this conversation with people all the time, so that’s a really important point that Darek brought up.
Darek: Thank you. Tracking and measuring – you can’t move what you don’t measure. A lot of the people like Rich is mentioning, you just leave it and you forget about it. To have an outside perspective come in every once in a while, “Hey, what are you charging for this area? What kind of units? What are you charging for it nowadays? Are you going to be increasing the rents?” It’s having that insider information again, connecting to one another, they can find a lot of this information.
A simple thing is tracking. How many people use a simple pen and paper just to track all their expenses on a month-to-month basis? It’s a basic thing. I mean you’re spending a little bit of time and effort, but there’s so much money involved in printing on a piece of paper. You can get a little more complicated Excel spreadsheets, depending on how well you are in computers. There’s a lot of landlord software, QuickBooks, and then bookkeeper and accountant if you want to spend more time and money getting that information to them.
It really comes down to tracking and measuring. How many people think that if they had a better idea of how much they’re spending per month, they can predict where they’re going to be going in the future? A lot of people over here.
But if you know that you’re just focusing on cash flow, maybe you should know what cash flow is, you have to manage on a month-to-month basis. If you’re going to sell properties, again you have to make sure you position yourself to be in a position to sell, and in the next couple of years, as I say, make sure the numbers look good on the paper.
Then if you’re looking to purchase, keep stockpiling as much money as you possibly can and improving your cash flow, so when the opportunity comes to buy those properties, you’re going to be in a position to jump on them because if somebody is looking to sell quickly if you’re in a position to get the property because you planned ahead of time, you got the advantage at that point.
Rich: Darek, can I interrupt you really quick? You were talking about planning in advance to sell properties.
Rich: You want to make your numbers look good for the last couple of years, your tax returns show a good profit, right?
Rich: Obviously, that helps you sell the property for more.
Rich: But what does that do for the buyer when they’re trying to get it financed?
Darek: Well, the bank looks at it if it’s profitable, if the numbers make sense. That’s what the bank is all – sometimes they just look at the Schedule E, so it that makes sense, then the deal looks good. If they don’t, then you might have to go to a private lender or to a bank that can do a little more creative underwriting, to say, “Hey! The rents were a little bit low, we’re going to be doing this. These are leases we’re going to put forward.” You can make the numbers work, but if you’re planning ahead of time, that’s what really gets the deal done.
Sample, I mean print this out. Again, it’s on the website. It’s income and expenses each month. What’s the rent for this property, what’s the income, what’s the expenses, what’s the mileage? It’s the things your accountant maybe asking. Again, it’s just tracking, measuring, knowing your numbers, that’s what it comes down to.
That’s all I have. Any questions?
Rich: All right, I am going to go around here. Here you go.
Male Audience 2: How do you determine what the market rent is?
Darek: It’s looking at the other properties in the area. That’s what I would recommend if you know any realtors or any other landlords with that properties. I think that’s the best thing. That’s how you would go about it.
Male Audience 2: There’s also a website called rentometer.com.
Darek: What is it?
Rich: Rentometer is what it’s called. If you Google that, it will come up. Because I’m a little bit more anal retentive to that, I actually paid somebody to follow Craigslist for half a year and make a note of every single apartment that was for rent in every single city in Worcester County. That’s another way to do it.
Male Audience 3: You were talking about preparing for sale and things of that nature.
Male Audience 3: What if you are able to show a minimal profit intentionally? Where should you be as far as your profit line because obviously nobody wants to show too much profit and give away too much of what’s left?
Darek: It depends on what the mortgage would be for the purchaser. That’s what it really comes down to, so if you’re showing enough wiggle room for the banks to say, “Hey, if the profit margin is X, if the mortgage is going to be $1,000 per month,” if you can show $12,000 over the year, that makes sense for the bank. A lot of the underwriters for the bank, they think inside the box. If the numbers work, the numbers work. It depends on the bank. There are smaller banks, you can talk about the underwriting and put more of the down payments, talk about the cash flow, the rents if you have long-term leases, sometimes that helps.
A lot of the banks like to see at least a 1- to -2-year leases. Most them are 1-year but if you can show a history of the rental income over the last years, if they see an upward trend, that’s an important factor. If you own multiple properties, talk to your accountant. Maybe you can have some of these expenses rolled into another property instead of that property. Again, I’m not an accountant, but having a person to take a look at the numbers to make sure they do make sense, like I said 2 to 3 years, that’s what usually the lenders look for those tax returns.
Rich: Optimizing properties on tax returns is especially easy to do if you have multiple LLCs and they’re all in the same tax return.
I’m going to open up a question to the group and I’m also going to go around and take more questions for Darek, but who has an example of an expense that they think that they either used to overlook and was kind of in aha moment when they start tracking it or perhaps something they want to see just other people that they might not have thought of? Brian has one. I’m going to come up to him.
Male Audience 4: Cellphones and mileage.
Rich: Tell us about that.
Male Audience 4: Cellphones, obviously, you’re tenants are calling you all the time and you’re using your cellphone, which becomes a business expense. Mileage you’re running back and forth, you should know how many miles it is to your property and track how many times you go there.
Darek: All the runs to Home Depot especially as well.
Rich: Yeah, absolutely. While I’m here, is anybody in the back? I know you people are waiting for me to get to the front, then you’re going to raise your hand [laughter]. I’m just asking you to show me a little bit of mercy here.
Darek: [laughter] Behind you.
Rich: Okay, behind me. Where?
Male Audience 5: In front of you.
Darek: In front of you.
Rich: You know what, I’ve got some things, I mean not everybody has a pest control contract. I have a line for that that’s separate from regular repairs and maintenance. I have lines for snow removal. The plow company is one thing that I track and I also track how much it costs to shovel sidewalks and stuff like that, so I can kind of project what that stuff is going to be year over year.
It sounds like common sense but when I talk to a lot of people, some people have very, very basic budgets where they only track like the water and sewer and their taxes and insurance and they leave out a lot of the things that inevitably come up that might be worthwhile to take a look at.
Brian: Absolutely on the mileage. We did our taxes yesterday and just deducted $13,000.
Brian: So if you’re not deducting your mileage, you’re leaving money on the table. But my tip is the utilities in your building. If you pay any heat or utilities, get those regulators on. There’s a little kit you can get for about $1.30. We put those regulators years ago, and we saw a $5,000 decrease. Also, go around. Check out your buildings. Do you have the old fluorescent lights? I mean the bulbs aren’t cheap anymore. How many people are paying $5 a bulb?
Brian: But if you put them in, you can get these 10-year, 20-year bulbs and we see our utility expenses coming down, so take a look at your utility expenses. If you’re heating apartments, put regulators on those thermostats and put clauses in your lease that if they tamper with them, they have to pay for the plumber to repair it.
Darek: It’s those little things that have a compound effect, those little things do add up if you’re in the long-term game. I mean if you’re buying a property and flipping it, it’s not really a big deal. You’re doing build and grade stuff for every unit, but if you’re in it for the long term, the LED light bulb adds up. It’s tracking and measuring those little things, $13,000 for mileage, I mean if that’s not a line that you’re tracking.
Brian: That’s for every truck.
Darek: That’s for every truck, exactly.
Rich: Yeah, I actually found a leak in my building by keeping track of my water bills and saw that it went up higher. Who’s ever found something like that before? Yeah. Every quarter, my water bill is actually going to a spreadsheet because I’m a total nerd. You already know that [laughter]. It divides the figure by the number of people, the number of actual human beings who live in the building, and we kind of keep track of how much the water costs per person, so if one building is higher than the other building, we try to find out why that might be.
Male Audience 6: You talked about energy, Mass Electric. Everybody pays electric bill and they automatically take out $3 on your electric bill whether you know it or not, and they will give you a free evaluation of your house. They will come in. I just had done right up the street, and they came in all three apartments, and they replaced all the light bulbs and the thermostats free of charge, but just watch out for that little gimmick at the end because it’s an independent person that does it working for Mass Electric.
When they left, they said, “You need $3,000 worth of energy-efficiency material in your building. I know it’s super energy efficient, super.” What they were going to do is spray maybe 3 spray cans of expandable foam around some piping. That was $3,000 worth, so don’t fall for the gimmicks afterwards.
Darek: Get what you already paid for. That’s what it is.
Rich: Yeah, we have a lot of great suggestions in this room. I’m going to go back to Peter as we start to wrap this up. By the way, who was the genius last month who mentioned the Red Cross and the smoke detectors? Give me a fist bump right here. I got 72 smoke detectors last week.
Male Audience 7: Wow! Awesome!
Rich: Yes, very cool. It’s totally free, so they will actually come to your building and install them. I had too many apartments, so they just gave me boxes of them and told me to do it myself [laughter]. But they’re 10-year smoke detectors. They gave me —
Male Audience 8: [unintelligible 0:24:22]
Rich: From the Red Cross. For every apartment, they gave me two 10-year smoke detectors.
Male Audience 8: What else [unintelligible 0:24:27]
Rich: Just smoke detectors. They’re not –
Male Audience 8: [unintelligible 0:24:30]
Rich: Both. They gave you both kinds, so they gave you 3 smoke detectors for every department, two 10-years and another one that’s 9-volt battery, and they gave you the batteries. It’s awesome! Everybody should call.
Peter: Something that’s been going around, very controversial lately, I don’t know if it’s appropriate for you to answer this, but the difference between LLCs, umbrella policies, and land trust, etc., what’s the best thing you have when you’re an owner? I know the George – I’m talking about George Valeri who recently died, he switched from LLCs to umbrellas, so I was wondering if you had any comments on that?
Darek: Yeah, I’m not an attorney, so I definitely can’t comment.
Peter: You’re an insurance guy.
Darek: The insurance —
Rich: Yeah, just go over umbrella insurance.
Darek: The umbrella, I mean you can package the policies together, so say you have a commercial property, you can have your whole portfolio under one umbrella policy for the liability purposes, but if you have separate LLCs for each property, then you’re going to have separate policies at that point.
Male Audience 8: Let’s talk about LLC.
Rich: LLCs don’t have anything to do with insurance. That’s a legal entity for asset protection.
Rich: Yeah, he’s not trying to be evasive by not answering the question, right [laughter]?
Peter: You’ve come under fire lately.
Rich: What’s that?
Peter: You’ve come under fire a lot lately. I know some people have moved from LLC who have bought this umbrella.
Rich: Okay —
Peter: They thought they were [unintelligible 0:26:05].
Rich: There is something I’m not understanding about that.
Darek: Are you talking about one general company having all the properties under that one or having separate LLCs for each property?
Peter: They’re separate, most of them are legal and separate. Now they’ve gone to umbrella.
Darek: It depends on the risk because if there is a claim, again I’m not an attorney or anything like that, but say if there was a claim against you, if it’s all under one umbrella, they can go after all the properties. It’s all bundled together. If you have separate LLCs, if one LLC is sued, they’re not going to be going after all these separate LLCs. I mean that’s just from my – again I’m not an attorney but…
Rich: Right. Outside the scope of our talk.
Darek: Yeah, absolutely.
Rich: Thank you very much for touching upon that. Anyway, we are going to move along to the next part. Let’s hear it for Darek. Was that pretty good [applause]?
Darek: Thank you.
Rich: That was great. Thank you, thank you very much.