Climate change (really global warming with a better brand name) has been in the news these past few decades with dire warnings. Climate models have underestimated the warming trend.
The old story of the frog tossed into boiling water and immediately jumping out comes to mind. With climate change the warming is so gradual (and sometimes welcome) we don’t notice we are getting boiled. Yet the temperature inexorably continues to climb. Like the frog, we will stay in the stew until the meat pulls away from the bone.
Fresh faces periodically jump onto the scene. Al Gore made a big splash over a decade ago with his Inconvenient Truth documentary.
This past week a new face entered the drama with Greta Thunberg scolding Congress. After delivering a groin kick to deserving members of Congress she met with allies in Congress and told them, ” I know you’re trying, but just not hard enough.”
As much fun as it is to watch a 16 year old girl knock Congressmen around, the most important point has been missed: Greta “is” the problem.
Same Old Tactics
“The world is coming to and end!” It has been the battle cry of environmentalists from the beginning. Scare tactics worked when pushed hard enough and often enough in the past. Now, after hearing this battle cry for longer than most readers have been alive the echo rings hollow.
Climate change is a money issue. Those against taking action do so on financial grounds. “It will cost too much for something we are not sure will really happen and even if it does it might actually be a good thing,” is their battle cry. And it is easier (and cheaper in the short run) to do nothing.
Then we come to Gore and Thunberg. Remember I said they ARE the problem.
All the while I watched and read about the smack down in Congress I couldn’t help but think about how much CO2 Thunberg dumped into the atmosphere flying* to Washington to give Congress a piece of her mind. Thunberg is right; she needs to try harder.
If the people most concerned about climate change are injecting the most most amount of greenhouse gases into the atmosphere, is there any hope to solve the problem?
Actually, there is.
Re-framing the Argument
Fear stalls people in their tracks. This accountant has strong beliefs about climate change and prefers to call it what it really is: global warming. Gore showing charts of CO2 rocking to the moon did little to move the deniers. It’s not that climate deniers believe climate change is a hoax; it’s that they believe it isn’t a serious problem compared to the costs of mitigation. A warmer winter is welcome in their minds and the negative consequences will not affect them (in their minds).
Continuing to bash on deniers will not work! I’m sympathetic to the cause and know the problem is serious and needs immediate attention. And even I am exhausted by the constant assault by climate doomsayers. If it is so bad and their is no hope, why bother.
There is a solution, but it requires a radical rethinking of the climate change rhetoric.
Cutting greenhouse gas emissions is a good goal that can satisfy climate change crusaders while appealing to the pocketbook of the deniers. In other words, if we reframe the issue as a win/win the message will resonate with virtually everyone. The best part is nobody even has to mention that four-letter word: climate change or global warming.
Solutions that Work
Every time a new solar or wind project is proposed it lists the amount of CO2 that will not be emitted into atmosphere. That is a massive mistake!
Green projects have to be proposed with economics in mind.
This wind farm will drive down costs to local businesses, increasing the competitive advantage of our community in the world market.
Who is against that? No mention of climate change. Politics is removed. To be against this is to be against jobs and local economic growth. Not one mention is made about climate change.
A local town hall meeting might sound like this:
CROWD: Is this wind farm going to help climate change?
PROMOTER: Screw the climate. We are about business and economic growth. This will create jobs and increase business profits. Our cost advantages after this project comes online will make us a world leader in multiple industries.
The Republicans will snicker after the event about how they pulled a fast one over on the Democrats. Citizens concerned about climate change will have a similar, yet opposite, conversation in private.
Your favorite accountant is sick to death of good ideas getting shot down because climate change was attached to it. Want to kill a good idea? Say is will lower CO2 emissions. Doesn’t matter how good the idea is. Could you imagine tax cuts associated with reduced greenhouse gas emissions? You’d never see another tax cut in your lifetime.
Businesses understand this. Doing environmental good CAN and frequently IS good for the environment. Both sides of the debate are really in the same room, only they got comfortable bashing each other’s faces in and don’t know how to change their behavior.
It is self-defeating to frame trillions of dollars in spending as a climate change expense. Even those who know the problem is real have a hard time wrapping their head around seriously higher taxes to pay for something that will help other nations and people of the future. The “What’s in it for me” thought is strong. It is unfair to complain some are shortsighted on this issue. We all are to some extent.
Solutions where many will lose (taxpayers and business owners) will always have a problem getting their message across.
Changing the Way We Think
Business owners understand the power of changing the way they think in problem resolution. Individuals need to do the same.
Buying an electric car is NOT about saving the environment! It might be a status symbol. But in the end it should make economic sense. If the cost of owning the electric car is less over its entire life than an internal combustion engine (ICE) vehicle it is a logical choice even if the up front costs are higher.
The opposite is also true. There will always be a limited number of people willing to shell out for an expensive car that costs more than similar ICE alternatives. This limited demand will not be enough to reverse the global warming trend.
It smacks me as insane when some lowlifes rejig their truck to belch more smoke or keys an electric car when walking past. The smoke is a different kind of pollution and actually is better for the environment since it settles out of the air reasonable fast. (Think of that if you rigged your truck this way. You actually are saying you are trying to help reduce climate change emissions. Makes you look foolish, doesn’t it?) And keying someone’s car is not only stupid, but ignorant. You are better than that.
Current thinking is politically charged. Greta Thunberg made a splash in the news. Yeah, she got a good one on Congress. And nothing will change. You don’t make friends or solve problems by finding new ways to insult people you need to help you solve a problem.
Instead of focusing on what is in it for us, we need to highlight the advantages to our opponents.
Electric vehicles will give America a competitive advantage.
Changing the electric grid will create jobs.
Businesses will generate an estimates $868 billion (this number is illustration only, not a fact) in additional profits if electric vehicles are fully implemented.
This solar field will reduce reliance on foreign oil, create 328 new jobs, lower utility bills for businesses and consumers and lower taxes over the next decade.
Of course the losers haven’t changed. Big oil is behind the fight against climate change initiatives for good reason; they stand to lose a lot. I don’t like leaving businesses or people behind even if they were part of the original problem. Remember, oil was a solution to a problem a century ago.
The synergies created by good economic policies can be used to create incentives for businesses and individuals negatively affected by the changes.
Big oil should receive serious tax credits when pushing into these new areas of business. The transition will be painful, but manageable if proper consideration is given.
Self driving trucks will not need to convince business of the value. Trucks able to run 24 hours a day without payroll expenses is all business will need to hear. Once self driving vehicles are safe enough they will happen. Just as climate change causes issues so will self driving vehicles.
Every problem has a solution that eventually leads to more problems. As long as the improvement overall is steady we are golden. Truckers losing their job will need tax incentives to get them from where they are to where they want to be in a world with out truckers.
Gas stations will always have a place as long as people are on the road. Electric vehicles and people still need to fuel up. Gas stations will need help with the expensive conversion to electric charging stations.
These are not insurmountable problems! We HAVE solved much worse than this. Climate change is real. Unfortunately we are the frog in the water getting cooked at a slow simmer.
Finger pointing is wrong. It never works. You never convince someone of your viewpoint by starting with, “You’re an idiot!”
We must reframe the way we look at climate change. We must change the way we think. This is not us versus them!
Change can be good. And profitable! If only we have the will. Otherwise another kid with a cute message will get a good jab in on Congress thirty years from now when the problem is still unresolved and much worse.
* Some comments argue this statement isn’t fair since she used a “zero emissions” boat to get here. No word on how she gets home after her 5-man team brings the boat back without her. Many reports and newscasts have stated the large carbon footprint of her journey. Thunberg has a 5 man team delivering the yacht back home and some of them presumable flew. At this point we still do not know with certainty if she will fly home or use another source. What is certain is the greenhouse gases emitted from this publicity stunt is reported to be greater than the emissions from a village in India over the course of a year. I stand by my claim.
More Wealth Building Resources
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Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.
QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.
A cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.
Residential investment property is forgiving for the most part. Professional managers exist in most markets and except for the very worst of conditions it is possible to fill most apartments even if it is not at a profitable rate.
The number of residential properties available is large and unloading a single family home or duplex is fairly quick and simple. Many economists consider a six month supply of homes on the market a healthy balanced market.
Things get slightly less forgiving when you graduate to multi-unit apartment complexes. There are fewer to select from, they cost significantly more, there are more tenants to manage and it usually takes longer to sell the more expensive buildings. Not as many investors can swing a multi-million dollar deal or even finance one.
It might not be intuitive, but the more expensive the property the more likely it will be purchased as a cash deal. Big buildings carry big responsibilities and risks, but also are coupled with larger rewards.
Generally the rules are straightforward with residential rental properties. Lease contracts are generally standardized in most states and the landlord/tenant rules are clearly defined. The laws tend to protect the tenant more than the landlord. Still, the landlord, if she bought right, should turn a tidy profit.
Real estate investors usually start small, a single family rental or duplex, moving up to multi-unit buildings later. Most landlords stop at the duplex level with maybe a 4-plex or so tossed in for good measure.
The next leap takes courage. Financing a large deal is more difficult. Only a select number of banks are willing to fund a seven figure project. You need good credit, experience and a documented plan. At the end of the day the multi-unit complex is still a forgiving animal in the real estate world.
Then there is the commercial property.
Investment commercial property is a whole different animal. Commercial property spans a wide range, including: land, farm land, land for development, parking lots, storage units, malls and strip malls, gas stations, office buildings and on and on and on.
All real estate must be purchased right to yield a respectable profit. I encourage you to read this article I wrote on the math of buying residential real estate correctly. Rather than repeat what I already said we can move forward.
There are significant differences in buying and managing commercial real estate. The linked article above is accurate with one caveat: vacancies. It is unusual for residential real estate to remain vacant for more than a few months. Commercial real estate can remain vacant for much longer periods of time, even years.
The office building I own for my accounting practice was empty for a few years before I purchased it. The previous owner was willing to sell or lease the building. It just sat empty.
My personal experience in real estate centers on residential properties. Most commercial properties were purchased for use by a business I own. I love my landlord; I love my tenant. Rarely do things work so peachy when you are not on both sides of the deal.
Without personal experience in commercial property I still have plenty to share. Many clients over the years engaged my services to buy, sell, and negotiate leases for their commercial properties. So I may not have had much commercial property in my personal portfolio, but I have plenty of experience with the mechanics of profitable commercial property investments.
Risks and Rewards
Financing: Once you own commercial property for a while you either go broke or make so much money you tend to pay cash for additional properties. In the beginning you will probably need a bank or seller financing. Commercial loans tend to require a larger down payment (20-30% or more), have a higher interest rate and a shorter amortization period. Many banks have a balloon payment rather than play out the entire amortization of the balance or require refinancing of the existing loan every five years or so. Some of this is specific to certain markets and the lender. The type of commercial property also plays a role. Farmland generally needs 50% down or some other collateral. Office buildings may need 30% down while developments may require bank refinancing on a regular basis.
First you find the right property at the right price then you finance it. BUT, it would be in your best interest to have financing available in advance. If the seller demands they finance the deal (for tax purposes) you are still covered.
Lenders will pick a commercial deal apart and for good reason. The money involved is usually large. Using the above link as a guide to ensuring you purchase a profitable property will help in the process. Payments will be higher due to the higher interest rate and shorter amortization. Since vacancies tend to last longer in commercial property the lender will require greater resources to survive any drought.
Leases: Residential rental rules are standardized with laws slightly favoring the tenant because legislators assume the landlord has more resources, hence the advantage. Not so for commercial real estate.
The landlord and tenant are on an equal footing in a commercial contract. No longer do you have standardized rental rules. Commercial leases are business contracts. Both parties need to lawyer up.
Typically the landlord has her attorney write the lease and the tenant’s attorney reviews the proposed lease before requesting changes. Many of the details of the lease are known in advance because the prospective tenant starts the process by providing the landlord with a Letter of Intent outlining the property they want to lease and the terms. Negotiations take place before the lease is written. The LOI looks a lot like a legal contract, but is not binding on either party.
Commercial leases frequently are triple net or nnn-leases. This means the tenant pays the property taxes, maintenance and building insurance in addition to utilities. This is something you never see in residential rentals.
Triple net is nice for the landlord. Once a property is leased the only real expense for the owner is the mortgage and maybe the property manager. Major repairs such as the roof, HVAC, parking lot or other major repair over a certain value may still be the responsibility of the landlord.
Commercial leases tend to be for a longer period. Whereas residential rentals are generally handled with a one-year lease, commercial leases frequently extend five years or longer, sometimes much longer. The longer term lease allows the tenant to feel comfortable they have continuity for their business and the landlord is happy because she has a long-term tenant.
The one thing to remember about commercial real estate is that business law applies. I cannot express strong enough the need for legal counsel in managing a commercial transaction. As smart as I think I am when negotiating a multi-million dollar deal for a client, I know my legal team must be involved every step of the way.
All this said, not all commercial real estate is equal. Farmland will not follow the above facts I list. Most farmers rent land for a set rate per acre and the landlord pays the property taxes, or, if agreed, the property taxes are included with the lease payment. Farmland rent is usually paid once per year or semi-annually at most.
Storage units look and act a lot like a residential rental unit, but it is still a commercial lease. There is no triple net with storage units. The biggest difference between a residential rental and a storage unit is that storage units are generally month-to-month leases.
With a storage unit your attorney will probably draft a template lease which you can use with each lessee without going to the attorney for each unit.
The larger the office building or leased space the more elaborate the lease can become. An experienced negotiator should be involved in the process. Small strip malls and office complexes are handled by a property manager specializing in such properties. Large buildings require an experienced team handling the process from beginning to end. You will usually not be involved in the actual negotiation; your team handles that.
It is vital you have an experienced team on your side. I have played point in negotiations where several accountants and attorneys are sitting on opposite sides of the table. My ability to see the big picture inside the negotiation has earned me the trust to lead teams in these matters. However, I always have counsel available to me.
The Good News
Commercial real estate looks like a lot of work. It can be. Usually you have a team in place to handle most of this stuff for you. Your job is to buy the right property and let the professionals handle the rest for you.
Commercial real estate has its unique challenges, but the rewards are worth it. A fully leased commercial building can pay the owner the value of the property every 7-10 years. Since many leases extend this long, one tenant can buy your entire building for you, cash, and you keep the building so you can do it again. The downside is the thing might sit empty for three years before the money starts rolling in. Commercial is unforgiving to the ignorant.
Reserve requirements for commercial property are larger. Most repairs are paid by the tenant, but when a repair bill is the responsibility of the landlord it is usually a very big amount involved. Resources are also required to handle the long periods of vacancy.
The best part about commercial property is that once it is leased you don’t do much. Lease payments are often times paid by EFT; you don’t even have to go to the bank and cash the check. A property manager handles finding a tenant and your accountant or attorney handles the transaction. As unforgiving as commercial real estate can be, the only real work involved is buying the right property at the right price. Professionals handle the rest.
As a final note: Don’t rush to buy commercial property. It might be best to start with a small commercial property or have an experienced partner early on before going out on your own. You will need a local attorney, accountant, banker and property manager. A lot of money is involved. Do it right and you should be very happy with your commercial real estate investments.
Do it wrong and you could end up bankrupt.
Owners of real estate purchased for $250,000 net of land need to read the following posts I wrote previously:
The best part of owning real estate is the tax advantages. Most investors leave tax dollars on the table. If you want to discuss cost segregation benefits contact my office (there is a consulting fee) using the contact link on this page or call Randy. His contact information is provided in the above linked posts.
My previous post on delegation had a comment from John McCarthy with the following request for advice:
I would be interested in some of the behind the scenes (nitty-gritty) detail of the things you are now delegating. Like you, I am running a tax preparation firm. For the past 15 years it has been a side business, but now I am putting my full effort into marketing and expanding it. I spent a year building a financial planning practice at XYPN but decided I could do more good in the world by helping other financial advisors as a tax consultant and a safe place for them to send their financial planning clients to for tax preparation. I am really enjoying working with financial advisors to provide proactive service to their clients.
If you were advising a new business owner of a tax practice, what would be your top three pieces of advice? Would love to hear your perspective!
I felt my answer would serve more readers than just business owners and the answer in rather long so I decided to make it a special post. (Two posts in one day! Wow Mr. Accountant, are you on something? Why, yes. Yes, I am.)
First, let me address how I structure delegation in my office. Delegation is more than just taking stuff on my desk and throwing it on somebody else’s. If you want work done right you need to delegate to the proper people. The best delegation keeps projects from your desk in the first place.
I will use tax returns as an example. When clients bring in their tax return the front desk scans all the paperwork and puts the return in one of three drawers marked: A, B, and C. “A” tax returns are easy and any preparer can do them. A limited review of these returns is conducted before distribution to the client. Advanced preparers (that means me and any high-paid employee) never touch these returns. “B” tax returns make up 60% of the work load. Advanced tax professionals handle these returns with review, except for me. Novice preparers (do I have any of these?) can data enter these returns, but an advanced preparer finishes the return. The “C” drawer contains the most complex tax returns and comprises 25-30% of clients. Anyone can data enter the material, but an advanced preparer finishes the return with a review by me. If I prepare the “C” type tax return, my work is also reviewed.
Bookkeeping and payroll never enter my office; I have a massive allergic reaction to that kind of tedious work. The truth is I can hire bookkeepers and payroll clerks all day long. So I keep control of my time by never accepting recurring work on my desk. A steady flow of bookkeeping or payroll will tie me to my desk with low margin workload. I will do the “real” retirement thing if I am ever forced to handle such work.
Karen, my office manager, and Ashley, my administrative assistant have authority to make decisions. Every phone call does not have to reach my office. By granting authority I create a shield between me and nuisance sales calls.
Phone calls can destroy your life. My cell phone is usually off unless I expect a call. Sorry. At the office, notes in my mail box pile up. I handle phone calls in blocks so I spend the least amount of time on the phone.
Another thing my office started doing to save time is screening new clients. Below I will show you how to get lots of news clients. These new clients will wear you out if you don’t control the flow. Karen and Ashley contact most new clients and pre-approve them. Most of the time they can handle all the setup work the client has, eliminating any need for me to be involved. Consulting appointments are set up on my scheduler so I can plan and control the time involved with each client I must work with.
My clients rarely face a tax audit because we audit proof every tax return (I guess I have another post to write). However, we take audits from off the street and from other accounting firms. When you are in over your head and every accounting firm in town sent you away and law firms say it is hopeless then we are your guys. In other words we take the worst of the worst audits. Our success rate is pretty good considering the type of audits we handle.
Three Pieces of Advice for Business Owners
There are a lot of moving parts to a small business. I’ll try to stuff as much as I can into three nuggets of advice while keeping this post reasonably short.
- Get more clients than you want and then fire the ones who don’t fit in. Sounds brutal! It is. Clients leave for a variety of reasons. Having a few too many clients allows you to pick the easiest clients to work with (and the most profitable) and firing the rest. Be gentle when you fire. I usually send a letter stating I have too much on my plate to handle their account in the manner it deserves. Sometimes I find another accounting firm who will take the client and provide an introduction. My competitors know I am not out to harm them; I am a source of new clients. Clients from hell never get a referral. To date I have never had a client complain about being let go or beg to stay. Also, don’t take every client who walks in the door. If something feels wrong, walk.
- Focus on the type of client you want. If you want business clients give presentations to the local Chamber of Commerce, Optimist Club, et cetera. Go where your client is. You don’t talk about taxes if you want golfers as clients; you only attract other tax people. (Witness this blog.) You can’t be a master of the entire tax code. (Only I am that good!) A great demographic to chase outside business owners is landlords. These taxpayers need a good tax professional considering all the new cost segregation and tangible property rules. Lots of good speaking material there to acquire new clients. Focus on certain taxpayers and get good at that area of tax code, including reading regulations and tax court rulings.
- Learn to say no. This is really hard. You want to help and you know how to help, but you are only one person. Over-extending only means all your clients suffer; a lesson I had to recently relearn. This past tax season I had close to a thousand ex-pats contact me to prepare their return. I said no to all of them. I can do the returns and know how. My problem is time. I want a life outside of work and have a family. Ex-pat returns do not fit nicely into my office structure. My focus is on small business, landlords, and investors. That is a full plate for a small accounting firm.
- Under promise and over deliver. As an accountant I sometimes have willful math difficulties. I promised three pieces of advice and here we are on four. It is not always possible to over deliver, but I always try. When it doesn’t happen I review my office workflow processes and modify until I keep my promises and give a little something extra.
There many are more tips on how to run a successful business that one small blog post cannot cover. Each business is different. Always keep your eyes open for new ideas to improve your practice. Read. Read a lot. The library, and even investing in a few books, is a great investment. Your time is valuable. Control it. If you lose control of your time doom will follow. Good luck. (Luck has nothing to do with it.)
When it comes to passive income, real estate is king. A small investment can be leveraged into a massive cash cow. This is the second in a series of posts on lessons learned. Some lessons in life come from clients or from watching clients deal with issues. With investment properties I pull from personal experience. Over the years I have owned over 100 single family homes, numerous duplexes, a few multi-unit buildings, a storage facility, commercial property, and farm land. The lessons I have learned buying, selling, and leasing real estate over the last 28 years should provide a few nuggets of wisdom you have not read before. This added wisdom hopefully flows to your bottom line.
Residential Real Estate
We will start with residential investment properties because I have more experience in this arena and most readers own/manage the same; I will address commercial property in a future post. The issues I raise are only a sampling of the issues I find most relevant; a full review of investment property issues is beyond the scope of one blog post. The best approach is to start from the beginning and move through the lifecycle of an investment property, from purchase, to renting, to eventual sale.
Buy Right: The first step is the most important. Buying the right property at the right price will determine the profitability of your investment property. This is a good time to research rent rates in the neighborhood. Many landlords use the 1% rule to determine if a property is worth buying; I use a different method.
The 1% rent rule simply states rents should be 1% per month of the purchase price/value of the property. This is a good starting point. Low interest rates today turn more properties cash flow positive under this rule.
My rule is a bit more involved, but provides more assurance you have a good property. First, I only use the current rents of the building. Sellers always point out the ability to raise rents. If rents should be higher the seller should have raised them. I also check rents in the area to affirm the current rent rate is sustainable. Once I feel comfortable with the rental income situation I look at expenses. I always assume a no-money-down deal even if I pay cash for the property. By assuming the property is leveraged to the hilt I can determine if the rent minus expenses supports the property’s value. My calculations always include a 3% miscellaneous expense to cover deferred expenses such as a roof, furnace, siding, flooring, or improvements unless a higher percentage is warranted due to the condition of the property. The formula looks something like this:
- Annual rent income, minus
- Mortgage payment as if 100% leverage used,
- Landlord paid utilities,
- Management fees, if any,
- 3% miscellaneous deferred maintenance
- Other known expenses
Once all known expenses are deducted from the annual expected rent you get a number that must be positive. A negative number is a money loser before you even start. If the number is above water you have a decision to make. It is enough? Remember, a breakeven number means your cash investment portion is earning what a mortgage would earn. That is why I assume 100% leverage. If I pay 100% cash I expect my money should earn at least what the bank charges in interest. Of course a cash deal will cash flow if you do not consider your cash investment as worth anything?
The real trick here is determining any special events. Road construction or other city improvements can cause cash flow problems down the road. Research before you sign.
Finding the Right Property: Many communities have properties where the rent does not justify the property’s value. Still, deals can crop up here and there even in tight markets. Buying right takes time. It is easy to lower your standards when ideal properties are scarce. Bad idea! I would rather miss a deal than buy the wrong property. Remember, there will come a day when you want to sell. Issues when you buy frequently stick around and bite you when you sell.
Here are a few ways I found a large quantity of prime properties. My first rental property was a two-unit townhouse on 833 E. North Street in Appleton, Wisconsin. The owner was a man in his young 30s. He died of an aneurism. The family did not want the property so the bank got it back. I made the bank whole by paying $50,000. The rent was $485 per unit. I made money on the deal. Two years later I sold for exactly $75,000. I think we can agree I had a wonderful introduction to the investment real estate world.
I found the above deal because I introduced myself to half the bankers in town. I tend to be a bit obsessive-compulsive when it comes to numbers. I talked with bankers every day. The North Street property turned a $10,000 down payment into a $25,000 capital gain and over $400 of positive cash flow per month. Nice. The only reason I got the sweetheart deal instead of someone else is because I was in the right place at the right time. I was in the banker’s office when the property came in.
My biggest source of reasonably priced properties was Veteran’s Affairs. Back in those days landlords could only get adjustable mortgages on rental properties and interest rates were close to 10%. The VA offered 7% fixed with only a small down payment. The buildings were also priced to move. The best news was I could buy the properties even though I was not a veteran. It was normal for us to buy 3-5 properties per month from the VA.
The only way to get the VA properties was through a real estate agent. My agent, in his infinite wisdom, bragged to the VA office in Milwaukee about my large profits. Within a few months the rules were changed. Now more money is needed down and only veterans need apply. The rules have probably changed again since those days, but it outlines how a great property source can be screwed away by an idiot.
There are many ways to find awesome properties. Always do the math. My own rule is: Never chase a property. It’s a rental; they will make more. No one property is worth chasing.
Saying No to Bad Deals: Pressure will be applied to convince you to buy. Real estate agents get paid when you open your wallet, not before. Sellers have a long line of BS to move their property. Learn to say no. Take your time in reviewing the property. A bad investment gets worse the longer you own it. A negative cash flow only increases your original investment in the inappropriate property. “No” is the most powerful work in the English language when it comes to investing in real estate. It is normal to review multiple properties before buying. As good as the VA repo deal was, we did not buy every property dangled before our eyes.
Sellers say a lot of things when it is not in writing. Get it in writing! And a property inspection is a must unless you are qualified to do the inspection yourself.
Determining Rent Rates: Before purchase you should have a good idea of the range of rents in the neighborhood and how they match the target property. Craigslist, newspapers, “You’re Renting” and similar magazines are a good place to start your review of local rents. The real estate agent is also a resource with one caveat: the agent may pump you full of it to make a sale. You have to determine if the agent is honest; most are.
The rents for my buildings were always on my mind. A good tenant may face fewer and smaller rent increases. Tenants that pay on time and keep the place well maintained are a bonus for landlords. Bad tenants did not face larger rent increases; instead, I refused to renew their lease.
Finding the Right Tenants: I was picky when I rented my properties. I did a background check and verified income. Compared to the banks before the financial crisis in 2008, I was a tough nut. The alternative is more damages, unpaid rent, evictions, and court costs. My time was worth too much. An investment in time now paid off later a hundred fold.
Evictions: Late rent is never tolerated. Follow the laws of your state/city when involved in an eviction. Whatever the law allowed I used. The longer a bad tenant stays in your property the greater the damage. In some cases you may need an attorney. When you owned as many investment properties as I have there are eviction stories to tell. I will leave them for another day.
Regulations: Local governments have rules regarding landlords. Smoke alarms and lead paint in older building are all considerations. Your local apartment association is a great resource into the rules in your market.
Property Managers: Property managers should handle the regulation issues. Verify your manager is screening prospective tenants adequately without discriminating. Owning properties in outside markets requires a local manager. Income properties are considered passive income for tax purposes, but any landlord can tell you the work involved is anything but passive.
Hiring a property manager eliminates most time issues with your property. The manager should screen prospective tenants, collect rent, evict when necessary, pay the mortgage and other bills, and submit the remainder to you monthly. There are times when you will need to cover a major expense like a roof or furnace out of pocket.
I used several managers at a time. When you own over 100 properties across a metropolitan area you will need help. I screened and reviewed my managers on a regular basis. Most were good, but a few were not. Investing time up-front before you hire a manager cannot be understated. Property mangers usually have contracts locking you in for a period of time. It is a relationship. Make sure you want to be in the relationship before you make a commitment.
Maintenance: Money is saved when you handle maintenance on your own. To actually save money you need to know your limitations. Roofing was my favorite work; flooring was a disaster. I installed carpet once and realized it would be easier, faster and cheaper to hire a professional. I am okay at drywall and painting. A large portfolio of real estate will require an army of contractors. I spent as much time checking prospective contractors as I did researching a property prior to purchase. Every job was in writing.
Major maintenance issues are reduced when handled before they become large. A roof replaced when shingles were thin beat waiting a few more years and then replacing roof boards, too. Regular painting keeps properties looking nice and rents where they belong. My properties were always improved. Buyers of my properties received nicer looking buildings than what I originally bought. I also had better rents, better tenants, and a better sale price. Maintenance does pay for itself.
Selling Right: Selling is buying in reverse. Before listing or offering a property for sale you need to research your market. Pricing a property for maximum gain without a long duration on the market takes legwork prior to listing. Review other properties in the neighborhood. A real estate agent can help. Today, online resources are numerous. Realtor.com, MLS, Zillow, Homefinder, and Trulia are good research tools in determining a good selling price. These are the same tools used in your property purchase search.
A realtor is a valuable asset in selling your property; they also have a fee, normally a percentage of the sale price. Selling on your own is more work, but you save the fee. The choice is personal.
Debt Issues: Debt was a tool when I owned a pile of real estate. I rarely came to a purchase closing with money. The bank covered the entire amount, using equity in other properties, so closing went faster. Then we paid down the mortgages fast, building equity. I understand investors want to juice their percentage return with leverage, but leverage also brings risks. Investment property should have at least 20% equity from day one. Once you own the property for a few years equity should be larger than debt. Also, debt-free rentals really cash flow. A cushion shields you from unforeseen market forces and vacancies. Real estate is a great source of passive income as long as you are not mortgaged to the hilt non-stop. High debt is an accident waiting to happen. The winners of the housing crisis a decade ago were the people with cash ready to buy when opportunities presented.
Partnerships: Yikes! I owned income property in a partnership with my dad and brother. I knew going in I would do 99% of the work. The partnership worked, but that is the exception to the rule. Most partnerships are woefully lopsided. The one doing all the work get grumpy when the other partners want an equal share without doing the work. Partnerships can work, but remember you are married to your partners and divorce is messy.
Entity Selection: Real estate should never be held inside an S-corporation; only rarely inside a regular corporation. Liability protection, tax advantages, and ease of transfer are available with a LLC. Due to local laws and regulations a real estate attorney should be engaged. Real estate held in an LLC does not require preparation of an additional tax return; a box is checked in the tax software informing the IRS the property is held in a single-member LLC as a disregarded entity. In the future I will address entity issues in greater detail as they pertain to real estate.
Training Courses: The Wealthy Accountant is a lucky guy. He gets to see all the crazy stuff floating around. Expensive investment real estate courses are all the rage. Many of these programs sucker you, ahem, cost $25,000 or more to teach you how to make a killing flipping real estate. All I can say is “don’t.” There might be a good program out there, but the ones I have seen are junk. Worse, they turn you tax work into a nightmare. I’m busy enough. No more free seminars offering a free meal, guys. They cost too much.
Clean Up Crew: I did my best to stay brief, but investment properties have too many issues. I will break down the issues into small, more easily digestible bites, in future posts. Commercial property, farm land, and land held for development are different creatures from residential investment property. Most readers here are interested in residential property so I stayed on point.
Real estate investing has great opportunities for wealth creation and steady passive income if proper planning takes place prior to investment.
There is an interesting stream of questions hitting my mailbox. My recent suggestion to cut back and retire early has led to one interesting question. I recommended cutting back to a part-time seasonal job and enjoying all the free time. I used tax preparation as a business idea perfect to live the relaxed lifestyle. CPA’s and other tax professionals came out of the woodwork with the same question: How do you get clients?
Getting clients has always been the easy part for me; finding qualified people to help me with the abundance of clients is a different story. What I am sharing today is something I charge a minimum of $3,000 for a personalized plan to increase your clientele. For free I’ll share my business growth story and few example businesses to help you create your own growth plan.
In the Beginning
Starting a business is always the riskiest time. All the start-up costs strain working capital while you have the least community recognition and the fewest clients or customers. Advertising can be a budget killer which leads us to:
Keith’s Rule # 7: If somebody is selling you on a great advertising idea it rarely works and costs plenty, while your own cheap promotional ideas frequently work.
There are plenty of salespeople and companies willing to tell you how to promote your business. They are all expensive with no real thought on how it will drive business in your door. If I had a dime for every time I was told I’d be out of business if I did not advertise with their company I’d have, well, about thirty seven and a half bucks by now. It is still a lot of predictions of my demise and after 30 years of hearing it I am coming to the conclusion they don’t know what they are talking about.
We will start with my tax practice as an example of how to do it right. In all the examples I will assume a small to medium sized city for business location; the rules could change a bit for businesses in major city centers. If you understand my thought process I am certain you can duplicate the results anywhere.
My original intention was to retire before I started working. (More in a future post.) Tax preparation appealed to me due to the seasonal nature of the work. I prepared taxes for a few people part-time for years before going full-time so I understood the business in the way only a greenhorn can be confident in his expertise. I also worked for a year at the church where my wife went and where we got married. After a year of doing the Lord’s work I gave my tender for January 31st. Here it was, February 1st and I was in business as a real tax preparer.
My plan was simple, everybody needs their taxes prepared and I have experience so if I hung a sign outside my house and put an ad in the paper so I was good to go. As I would explain to business clients decades later, “Everybody has to eat, but not at your restaurant,” I learned a valuable lesson. Here it was, April 15th, and all was quiet. I had a total of 48 clients, mostly simple, low-fee, tax returns. I stared out my bay window on April 15th and thought, Oh sh . . .
Let me share how bad it was. My revenue was $3,000. Sure, it was 1989, but $3,000? I had money packed away and was not in fear of starving. Still, I needed more income or I would eventually run out or my spending would stay permanently low. It was in this moment I learned a skill that has served me well. I learned failure is the best teacher in the world and desperation a hell of a motivator.
Expensive advertising was too much of a risk and hit working capital too hard. I decided I would spend the summer building a client base and even considered working during the summer doing bookkeeping, payroll or other accounting work. Several low cost ideas helped (business cards with my puss on it, business card magnets) brought in a few clients the following tax season and a few late filers over the summer. There was one more thing I did. I created a flyer on my own computer and printed out 2,000 copies. The local newspaper I noticed delivered the paper in these neat plastic baggies. The newspaper was willing to sell me a box of 10,000 for about $50. Over the New Year’s holiday I stuffed 2,000 flyers into the baggies and over the next week Mrs. Accountant and I walked the street hanging the flyers on the 2,000 closest doors.
The efforts paid off. The next tax season saw a tripling of business to a few more than 150 clients. The average prep fee increased too. My revenue approached $12,000. Better, but not enough. I rolled up my sleeves and decided I needed a new approach. I owned a few rental properties at the time (how do you think I was living?) and joined the local apartment association. Each month the association brought in a guest speaker. Well, I had the perfect presentation for my fellow landlords. It was then I learned a massive number of organizations are hungry for speakers, the perfect venues to ply my trade.
For some strange reason apartment association members did not flock to my door when I sat with them in the audience. A few were clients, perhaps five. I researched and rehearsed my presentation for over a month in advance. I must have practiced that first speech 100 hours. It paid off. In less than an hour I had the audience eating out of my hand. I fielded question after question and answered like a pro or offered to find the answer after the meeting. That night I went home with over thirty new clients and they all owned rental properties, a higher fee tax return.
Speaking in front of a group does not bother me in the slightest because I think I have something important to share. Some people get the jitters when faced with public speaking, not me. The trick to speaking to a group is to treat it like you are talking with a group of friends that need your help. After that it is a piece of cake.
I searched out more speaking engagements the remainder of that year. The following tax season ended with over 500 tax returns and I had to hire Mrs. Accountant to help out. I hired a tax preparer for the following tax season and have been a job creator ever since. By my fifth full-time tax season I was knocking out over 1,000 returns and was forced to move to a commercial building I bought near my home. A few years later I pushed past 2,000 tax returns, and payroll, bookkeeping and consulting took over my life. Business was too big. By the year 2000 I started pruning the client list to keep my sanity and now enjoy a 900 return practice. The returns are usually much bigger and include a full line of business services.
There are a lot of ways to promote your business with a small investment. Speaking engagements are the cheapest and best. Sometimes you even get paid to talk about your business. Sweet! When I speak to a group I focus on an area of tax law that affects the group. Taxes are boring until is puts a bigger refund in your pocket. It is rare to speak and leave. More often I am surrounded by an eager group of people looking for answers. My business card is always handy and I encourage them to call my office and set an appointment.
But how do you use the speaking idea if you are a car mechanic? Or a restaurant? I would recommend talking to groups around town about better gas mileage or increasing the value of your car for resale. A restaurant can give a presentation about healthy eating or organic food. Never talk about you. Don’t treat it like a sales call. Talk about them! Give them value! When you do that they will ask to be your client. Talk about the ultimate soft sell.
If someone is happy with their accountant I tell them, “Why change?” If they are unhappy with their accountant I am more than happy to welcome them into the company. There is no need for a hard selling style when you use my method. My way is easier, fun and people and businesses ask to be my client; much better than putting on a full-court press to snag one.
A Few More Ideas
Every business is unique in how it must be presented. Speaking works for most businesses, especially service businesses. I helped a small restaurant triple sales in less than three months with one simple idea: coupons. Not any old coupon, mind you. I had him get 250 flyers printed at a local print shop for under $100 and hand them out to the closest businesses to his restaurant. Each flyer had a coupon for a free cup of gourmet coffee and a simple $1 off a lunch item. The employees of the nearby businesses started to come in for the free cup of coffee. I told the restaurant owner to keep breakfast sandwiches on hand and breakfast sweets. When people got their coffee they bought a sweet roll, cinnamon role or egg croissant sandwich with it. The best part was his restaurant could not handle all the business, but since so many were carry-out it did not matter.
Then came lunch. Think about this for a while. Employees are always looking for something good to eat for lunch. A dollar off a pizza or a sandwich is all you need to draw people in. Employees need something fast so they can get back to work. The restaurant was not only full for lunch, but take-out orders were massive. People don’t just buy lunch for themselves when they have a flyer with $1 off, or some other special, they buy for the whole office. Think of it. Here is a small, struggling restaurant with an average ticket sale of $10 and he now has people ordering over the phone with tickets sometimes over $200. Another bit of advice: Don’t take the coupon. Give the customer the discount and encourage them to reuse the coupon. People love it!
Do It with Passion
One final thought. Business is hard, we all know that. If you start a business I’m going to assume you love what you do or you are playing our Chump’s Game. And if you love what you do, do it with passion. Act like your clients are long lost friends. Have an up-beat attitude; share stories; make your clients feel welcome. When people think you care you will have more clients or customers than you can serve. And really care. No faking it. Remember:
Keith’s Rule #8: Too many customers is a good problem to have.