You’ve played Jenga, right? The object of the game is to raise up this huge tower out of blocks by pulling out select blocks already in the tower’s foundation. If you pull out a block and it causes the tower to collapse, game over, you lose. No pressure!
Get good at Jenga. Rentals, if you do them right, are a business. Even if you’re just living in one half of a double-block and renting out the other, it’s a very small business. It’s pretty easy to run at that scale. We started with six apartments in one big house, and that was pretty simple, too. Then we added a double-block. Then another six unit apartment building. Then another double… and that started feeling like an actual business, apart from ourselves. That double we put under a different LLC than our first 3 buildings, because we got some legal advice that we should do that for liability protection. Then there was another double after that, and another, and another, and still another! Then we flipped that house in Swoyersville and decided to move into it instead of sell it, and the half-double we were living in became our 23rd rental unit.
At this point, we had four different LLCs holding the rentals. Some legal advisors will tell us we should have nine – one for each physical building. Others will say that’s not necessary and only complicates your income taxes. We took a middle ground. One of my New Year’s Resolutions is to finally get an answer as to how this corporate structure should finally be set up. Because it gets even more complicated!
I started GPGH Management, LLC to make it easier to operate the rentals, which are held under four different LLCs. GPGH Management collects all the rents and pays all the bills and property taxes.
Then my husband started an LLC specifically for wholesaling properties to other investors and flipping houses. Inadvertently, that LLC ended up owning some property as three of the single-family properties we purchased ended up being rent-to-own.
Another LLC Steve started buys, fixes and sells mobile homes in parks. Some are sold outright, some are rent-to-own.
Another LLC owns the parking lot across from one of our six units. That’s strictly for liability reasons.
We sound like real estate moguls, don’t we? I was at dinner with a friend from my former life in radio, who called me a mogul. Me? A mogul? I kind of liked it, but I know too much about the reality of our situation to let being called a mogul go to my head!
The reality is Steve and I were a couple of num-nums who got sick of working in the real world and decided rental real estate was the best path to financial freedom. We started with one six-unit apartment building and quickly grew. We made some good decisions and some bad ones over the last eight years, and got exponentially smarter.
Don’t quit your day job… well one of you might have to!
If you think getting into rentals will mean you’ll be able to stop working, please think again. It’s work on a whole new scale, and if you still have a day job it can be overwhelming. With all your expenses, you’ll have to grow your rental business pretty big before it’ll pay more than your day job. Steve and I have the philosophy that we’d rather make 50-cents working for ourselves than a dollar working for some asshole. Plus, for practical reasons, we split it up – he works the business full-time. I work it part-time while keeping a day job.
Build the team
We were stuck in the mud a couple years ago and decided we needed to bring on a property manager to deal with the human factor. Tenants, being humans, come with a lot of drama. To you, that rental unit is a business investment, one you’ve put a lot of time and money into, and your deepest dreams hang on its success. To your tenant, that rental is their home. There are a lot of emotions involved in this combination. Having a property manager separates us from the ensuing drama. Drama that was distracting us from being able to do the activities that would grow our business. I’m so glad we did this job ourselves for the first few years, and would recommend that to anyone. Because we did that, I’m confident we found the right manager for us.
Slowly, we’re building up a list of reliable maintenance people. Our manager knows quite a few – she’s a landlord herself. We found a great electrician through her. We have a good plumber as well, who knows a thing or two about furnaces. There’s a very experienced handyman/carpenter we call in for bigger jobs. Believe me we had to kiss a lot of frogs before we were able to come up with even this very small list!
We have an immediate need for an all-around handyman, someone we can send out when a tenant calls the maintenance line. We seem to have a hard time keeping those guys in stock. I’m thinking about contracting with a handyman service – I heard a property manager in Lackawanna county does that. It’s a bit more expensive but at least it’s on them to keep those guys in stock. We were kicking around the idea of starting our own maintenance company to fill this need, and then when it’s perfected contracting it out to other landlords. Another business growth idea for the new year!
We have a good accounting firm that understands what we’re trying to do – HMS-CPA in Forty Fort.
We have a great relationship with Luzerne Bank, where we have most of our accounts. Their customer service is unbelievable, and I don’t think I could play this Jenga game without them. We also have relationships with Honesdale National Bank (our first bank, who gave us that first mortgage on the six unit back in 2008) and two bigger, out-of-town banks: First Niagara in the Lehigh Valley and Capital One, both offer great small business lines of credit. I can fund my Capital One checking account by snapping a picture of the front and back of a check with my smartphone – very cool!
The next member of the team we need to add is a good lawyer. Up until now we’ve consulted with attorneys on an as-needed basis, to write up agreements, close a deal, etc. We don’t have a regular lawyer on speed-dial, and we’re at the point now where we need one. We need advice on how to properly set up our corporate structure. We need to find out what is the best way to set us up for liability protection – then we give a blueprint of that structure to our accounting firm and have them figure out the most tax-advantageous way for us to run our business.
We need a solid estate plan – what happens to me and Savannah if Steve drops dead? I want to make sure we’re set up for a seamless transition without any interference from the government. If one of us dies, the other keeps the business going or sells the buildings off at their discretion. (Of course we have a life insurance policy on each of us that will pay off all the debt should that happen.) We also want to make sure Savannah’s taken care of should both of us croak – income from the rentals or proceeds from the sale of the buildings will go into a trust fund for her, cutting supplement checks to my brother who would be raising her.
Aside from all that, we’re looking for an attorney who will kick ass and take names for us when we need them to. 2015 was a rough year, and there are a couple of unpleasant disagreements we’ll need an attorney to resolve in our favor, because frankly we’re sick and tired of getting screwed. In the beginning years of our business we got screwed a lot due to our naivity. This time it was different – we did our due diligence and had written agreements in place. Time to bring in the lawyer!
We have a meeting after Christmas with an attorney recommended by a friend who is also a real estate professional. This law firm could handle all of our pressing needs, and he sounded enthusiastic about meeting with us when we spoke to him on the phone last week. Keeping my fingers crossed!
All of the real estate gurus will tell you that building a solid team is the only way to succeed. You can only go so far and grow so big on your own before the Jenga tower falls.
So I found myself, the week before Christmas, playing Jenga with my laptop open to Excel on my dining room table, bankers boxes full of file folders lining the walls behind me. We were leaving town for ten days to visit extended family in New England for the holiday. I had to close out the year financially.
I enjoy my position as Chief Financial Officer. It was a promotion I got when we replaced me as Property Manager. When you run a small business, you play all the roles yourself until you replace yourself. My plan is to first master our company finances and create a system I can understand myself, and then hand this job over to someone else.
I have bigger visions for our company. I want to make a positive difference in the communities where we own properties. I want to help Steve with his vision of connecting investors with each other and with team members with his InvestorsNetworkNEPA.com. I want to do more with this blog than just have it be a weekly diary of the realities of small-scale real estate investing. And I want to do much larger scale investing!
All in good time. Build a strong foundation under that Jenga tower!
Merry Christmas everyone.