How to Set up Your Bank Accounts with a Growing Real Estate Portfolio
We answer a submission from Gary around banking and what we do with our bank accounts when our real estate portfolio is growing. When you have multiple properties and you have multiple joint venture partners, there’s lots of different things going on. In Gary’s case, he actually has what I deemed as a fairly complicated system of sub accounts of the sub accounts. And it got rather confusing for me. So this is for anybody out there that has more than one property and in most cases, if you have joint venture partners that you own the property with. We will be following the system that we use and that we generally recommend to most people.
A disclaimer, this does not include anybody that manages other people’s properties. They are only for properties that you own or you co-own with other people. I just want to make sure that you’re aware of that its not for property management.
What we do with our bank account systems:
It’s a main business checking account with a bank. It could be any kind of bank that you can do checks with, email, money transfers, that sort of thing.
Then we set up specific property accounts for each property. Example; property one, two, three, four, as many as you want. Each of those property specific accounts are just basic personal checking accounts.
I am personally on the account and his joint venture partner is on that account. We both have access. The key is making sure you explaining to your joint venture partner that they’re not to do anything with that account without checking with you first because you’re the managing partner, I assume you are in most cases. It’s not an account for you guys to play around with to transfer money whenever. You want to specifically only give them access to it so they can see what’s going in, what’s going out.
Any bills coming in and money going out. Each property specific account you put your rent check into, transfer the money in or however it works for that specific property. The mortgage comes out of that account, whether the mortgage is in your name, a business name or your joint venture partners name. The money comes out of that account.
To write a check for a tradesman or some somebody that doesn’t take a a visa card, we’ll write the check from our main account. We’ll track what the bill was for, right on the receipt, which property it’s for, and then we will transfer the funds from that property back to pay ourselves back. And we just track that with, QuickBooks, Excel spreadsheet, whatever you use to track your expenses. For instance, if there was some job that had to be done at this property, say some plumbing went and I had to pay a plumber with a check, I’d write the check from my main business account that go to him or her, the plumber, and then I would just transfer the funds from our property that we did the work on to pay myself back.
I have a business credit card and that business credit card basically acts like this as well. So the business credit card, I’ll pay for any number of these things and then I just pay directly online from the specific properties account to pay back that credit card.
That is how the flow of money works. The key thing to all of this is that these are just personal checking accounts and you set them up, you get your joint venture partner added on with you so they have access to it too. When it’s time to pay them out, your going to pay them cash flow from it, what I do, I don’t write them checks. I tell them how much money they can take out of the account and then it’s on them to take that money out. This is the system that works for us, we control everything, but our JV partners do have access to it.
In terms of banks, there’s no one bank that’s better than any others. We actually have several accounts with one bank. We have another several accounts with another bank. We have about four different banks that we deal with. There’s no one bank that’s better than any others, but that’s our system. That’s how we work. We found it works really, really well. It’s great for tracking purposes and I highly recommend you do something similar with your own system. I hope this gives some advice to a variety of other people that are looking for how do you do your banking when you have multiple properties and partners.
I’ve cried over piles of paper. Probably more than once but there is one time that stands out in my mind. I had an entire year of data entry / bookkeeping in front of me for a dozen or so properties. I used to do it monthly but that particular year I’d let it slide and so had my husband Dave.
Once we missed a few months, the task seemed so much more daunting the next month so we ignored it again.
Before we knew it, over 12 months had passed. It was tax time and we couldn’t put it off any longer. It was just paper – we knew it wouldn’t kill us – but it was awful and sometimes we felt like we were being buried alive.
After that debacle we agreed that we would revise our business processes so we were never faced with that again. We also agreed there were other areas of our business that needed attention too. Chaos was costing us money, wasting our time and making us miserable.
Part of the process involved switching to a more qualified accountant (we’d been using Dave’s family small business accountant but when we added rent to own it became clear we needed a real estate investing specialist), hiring a bookkeeper and then once I was full time, focusing on every area where we could make more money and reduce expenses.
Some investors get far more sophisticated with their systems and processes. They buy software, create elaborate check lists and hire virtual assistants. You can do that and for some it’s the right thing – but we tend to lean to the simpler and often easier to control options. It does depend on your personality and what you want to spend time and money on … but for us this is working and some of these ideas just might help you too – whether you’re going full time or not.
Our 4 Must Have Business Systems for Real Estate Investors
1. Simple but effective filing system
We used to use a binder per property but found that over the years the binder started to burst. Files are simpler and easier to manage. We have an “inbox” where all mail and documents sit until they’ve been processed (scanned so our bookkeeper can enter them in). Then we have 4 file folders for each property:
At the end of each year the expense file is labeled with the year and property address and put away into our “if we are ever audited” tax box for that year. Every tenant turnover results in the creation of a new file and the filing away of that tenant file. Every document is scanned and stored online as well.
Storing the documents online and creating a “virtual office” has been a huge help to us. No matter where in the world we are, as long as we have our iPad and internet connection, we can handle anything. There are so many options now from clouds to Dropbox to back up services to store your files online– it just depends on the security features and access needs you have.
2. Hiring Help & Bringing Property Management in House
The decision to bring most of our property management in house came as the solution to two major problems.
As we started buying properties more aggressively (going from buying 2-5 per year to 10 – 12 per year) we found ourselves drowning in paper. We had a good filing system by then but it required us to actually spend time filing.
That was part one of the issue. Part two was that the more time we spent evaluating the performance of our properties and the property managers – the more areas we identified for improvement. From ads placed in the wrong places or not at all, to pictures that would scare away good tenants, to missed maintenance work– we found all kinds of opportunities to do a better job managing our properties ourselves.
The problem was we didn’t want to take all the tenant calls.
We decided to take back control of most of our properties and then hire someone into our business to help us.
The math worked. We were paying most of our property managers 10% of monthly rent plus half a month’s or a full month’s rent to fill vacancies. If we no longer used a property manager that money could be used to pay a staff member – someone that could help us with property management, handle the filing problem and take over the basic bookkeeping tasks.
This has been the single most important change to our business and while it’s not always ideal to be self managing so many of our own properties – with help and simple systems – we are able to go away and not worry about what is happening with our tenants in our absence. We also do not have any stress at tax time because everything is organized, entered into Quickbooks and ready to ship to the accountant. And if something is missing it’s not us that has to track down the document!
Maybe hiring a full time person to help you isn’t going to work for your business (and quite likely it’s unnecessary) but most investors can definitely benefit from hiring a bookkeeper – and you’ll probably be surprised at how affordable it is to have someone come in once a month or once a quarter to help you get control of the paper monster! Your time is worth money and so is your sanity.
3. A Fantastic Real Estate Investing Team
To be able to do a large volume of deals requires a strong team. Even having a smaller portfolio of properties requires a strong team. Key members of our team today are:
• Great tradespeople • Realtor • Property manager (while we self-manage many of our properties we do need some help with a few of them!) • Accountant • Lawyer and a notary • Our office manager / assistant • Broker and/or banker • Home inspector • Insurance Broker.
I chuckle at the training programs out there that basically say things like “first, you build your team.” 11 years into it, we’re still building our team. We had a reliable electrician and then he moved to Afghanistan. We had to start over. We went through seven realtors to finally find one that gave us the information we needed, returned our calls quickly, worked hard and was fun. We worked with her for a couple of years and then she became a flight attendant for West Jet. We had to start over again.
Without the right advice or the right person you’ll over pay for work, make mistakes and possibly even get into bigger issues like legal challenges. I’d much rather spend $500 on the right advice than try to do it cheap or for free and take unnecessary risks.
Here are three things to keep in mind when you are looking for a new team member:
Find someone that is recommended – ideally from more than one person
Create a database (we just use an Excel spreadsheet) that notes how you found out about them, what properties you worked with them on, what they charge and what type of payment they will accept (some are ok with credit card but many want cheques – you’ll often want to know this).
Work on getting back ups for trades, insurance and brokers/banks. Sometimes your favourite is busy or the job is bigger and you need quotes. You need to have options so you don’t scramble in the heat of the moment and work with someone that isn’t one of your top choices.
4. Making Real Estate Marketing Magic with Marketing Systems
How many times do you start from scratch when you have to write an ad? Or worse, how many times do you just go onto Kijiji and copy some other poorly created ad to place an ad for a tenant or find a deal?
We used to be badly organized with our photos and ads so we’d always have to recreate them every time. It slows things down and often something that worked well in the past will work well again so it’s better to just use it again and again until it doesn’t work.
Have a marketing file for each property on your computer where you store GOOD pictures (free from tenants junk, clean and with good lighting), ads that worked and any of the property details you’ll need when you advertise it (size, features, heating type, rough utility cost if applicable). Keep a scanned copy of the MLS listing if you bought a listed property. The details on the listing sheet will come in handy for years to come!
We could have made things easier on ourselves from the beginning by implementing simple systems but the reality is that it’s so easy to not make it a priority.
I’ve also seen investors go the other way and be system crazy when they don’t need to be.
For most real estate investors, I think a balance between outsourcing as many of the tasks you despise while ensuring you can still control the process and the costs will be the best solution. And really the best way to figure out what you will and won’t put up with it is to start simple and add more systems as you go and grow. It makes sense for us to have an employee in our office now but we have a sizeable portfolio and are adding around 10 new homes a year. That won’t make sense for most investors but many could use a part time bookkeeper, a great filing system and some spreadsheets to track their team members.
Whatever you choose to implement make sure it’s helping you and may you never have to feel like you’re being buried alive by the paper.
It was the Financial Post’s recent headline that announced the “official” end to the crazy hot real estate market in Canada. The declaration was made a few weeks ago because the listings to sales ratio across Canada hit a nine year high and the year-over-year pricing increase was at it’s smallest gain in over six years. I guess it’s time to stop investing in real estate and move our money into stocks, bonds and GIC’s. The run is over. Nobody would buy real estate now, would they?
Well, we would (and we will). We don’t buy real estate for the short term. We aren’t into flipping properties nor are we really trying to make a quick buck (not that we wouldn’t like to – we’ve just learned that slow and steady is much less stressful and much more achievable). We mostly buy and hold; only selling when we need to make adjustments to our portfolio or because we desperately need some cash.
If we find a property where the numbers make sense, that is in an area with a promising future and it’s a property type that meets our investment goals then we will buy it. If the value does go down over the next few years, that is ok because somebody else will be paying off our mortgage with their rent money and we’re not planning to sell it for at least 5 to 8 years (or longer), and by then we will be in a new real estate cycle.
Remember the media is always going to sell the extremes – things with the real estate market in Canadaare almost never as bad or as good as the media makes it out to be. Even during the boom when prices were rising in double digits everywhere according to the media we still sold a property at a lossin Toronto after holding it for five years.
And while we’re on the subject, in a changing market you may find the services of a real estate agenteven more valuable, as they will have up to the minute news on the market activity, be better able to negotiate with realtors representing sellers that still have the “sellers market” mentality, and can spot opportunities you might have missed because you aren’t in the streets everyday like they are.
Although we like owning real estate during a “boom”, we also don’t mind the “bust” because there are even more opportunities to buy! Start saving those nickels because the buyers market is around the corner!
Published May 1, 2008
May 3, 2008
On the subject of the media’s portrayal of real estate conditions, Rob Chipman, a Vancouver-based real estate agent and blogger, recently discussed a recent artcile in the Vancouver Sun where he was quoted. Simply stated Rob isn’t buying into the media hype that’s either trying to convince readers the Vancouver market is still hot, or that we’re doomed. He evaluates investment properties one by one with metrics, and recognizes that real estate does not always go up. You need to have goals, criteria for investment and make smart choices whether the market is going up or down. He also indicates that newspapers are not the place to get real estate market information. It’s a blog worth checking if you want to put your finger on the Vancouver real estate marketpulse.
This article was almost about our latest purchase. Last weekend was filled with excitement as we almost purchased a tri-plex in Vancouver. It all happened so quickly: In the afternoon Dave received an email telling us the property was about to be listed on MLS. When we called, they were having a showing at 4pm that day. He took a look, ran some numbers, and we decided to put in an offer. After dinner we signed the contract, and before we went to sleep that night, we had an accepted offer. It was a sleepless night for both of us as we wrestled with the good aspects and challenges of this deal. We were both excited about the prospect of owning a good income property so close to two skytrain lines, and in a great rental area. The numbers were pretty good. But, we hadn’t done any research yet, and we weren’t sure we wanted to buy another residential property. As we started to line everything up to complete the due diligence a few red flags went up (for example, we were pushed to strike the inspection condition from our deal; we did it but said we would still do an inspection. We later found out there was another higher offer that had the inspection clause in the deal and that was why they had accepted ours). As the red flags went up and we started to walk away the seller was suddenly making concessions. Things really started to smell fishy.
So, we walked away from the deal. And, we both feel good about it because we listened to our gut. We’re realigning ourselves to our goals and have a plan of action for the next twelve months. But we also feel good because we tried. Don’t be afraid to stick your neck out and try. Putting in an offer on a property, as long as you put it in subject to financing or an inspection, still gives you time to complete due diligence and determine if it’s the right decision. And you can do it comfortably because you have the property tied up. Sometimes all of the lights will be green and you’ll fly through the process and get a great new property. Other times you’ll find some yellow lights, and you may wish to proceed with caution. Or, you may find a red light and stop there. With every offer you learn something. And while we didn’t acquire a property this month, we did gain a renewed focus on our goals and finances.
So instead today, we’re going to help you be prepared for your next deal by giving you some legal terms that are good to know.
It’s fun to tell you all of the stories about our wins and losses in the real estate game, but sometimes we just have to give you good, solid practical information that you must know as a real estate investor (or even a home owner). So, I will keep it short and simple and give youten real estate words to know.
Types of Interest in Land
1.FREEHOLD: Owning a freehold property means you have the right to use the land for an indefinite period of time and, subject to any bylaws or restrictive covenants, may do what you wish with that land.
2.LEASEHOLD INTEREST: Owning a leasehold on a piece of land gives you the right to use the land for a certain period of time. The owner of the leasehold may sell the land, but the new land owner will be subject to the terms and conditions of the original lease.
Owning Property 3.JOINT TENANCY: Typically how you would own the home you live in with your spouse, as it has the right of survivorship which means if one of the owners dies the other immediately is given the other person’s share of the home. Interest is undivided but equal in this ownership type.
4.TENANTS IN COMMON: This is how we own most of our properties together as it allows us to specify the percentage amount of ownership, and it does not carry the automatic right of survivorship. For investment properties this makes a lot of sense because you may not want your partners to automatically get your share of the property if you pass away. For example, Dave and a partner M.M. have bought properties together as Tenants in Common. If Dave passed away, he’d likely want his share to pass on to me or his family, not necessarily to M.M.
If you are putting in unequal amounts of money into the investment you may want the ownership percentages to reflect this. For example, early on in our relationship, we bought property where Dave did 100% of the work on the deal and put up most of the money. We own this property together as Tenants in Common with him owning 60% of the property and me owning 40%. At tax time, he claims 60% of the income and expenses and I claim 40%.
Terms you will see in a Purchase and Sale Agreement 5 & 6.FIXTURES vs CHATTELS: If an item is built in or attached to the property in a permanent way, then it is considered a fixture and will be transferred with the property unless it’s otherwise stated in the purchase and sale agreement. A chattel, on the other hand, is something that is movable like a fridge or a washer and dryer. These are assumed to not be included unless otherwise stated in the agreement.
7. & 8.CONDITIONS and WARRANTIES: A condition is a fundamental part of the contract. We always make our contracts for purchase and sale subject to at least one condition for at least 5 business days. In the tri-plex we almost bought, we struck out the subject to inspection condition but had the deal subject to us being able to obtain satisfactory financing. A breach of a condition within the set time period stated in the contract allows you to get out of the contract. We were able to walk away from the contract without losing any money during that 5 day conditional period because of the financing clause. A warranty, on the other hand, is a promise but it is not fundamental to the contract. In a breach of warranty you may sue for damages but it does not allow you to neglect your contractual obligations. A warranty may apply to something like condominium fees. A seller may warrant that his/her fees are $300 a month. You may find out they are actually $400. This is not a fundamental breach of contract, but you could seek damages as it will cost you $100 more per month.
9.CONSIDERATION: In contractual terms consideration refers to something of value. When you buy a property, the price you pay is the consideration. This is not always a dollar amount, as it could be another property or a promise of value.
10.DAMAGES: Damages refer to financial losses that have arisen from failure to complete the deal as stated in the contract. You have to prove you have suffered financially as a result of the other parties actions, and then you can sue for those damages. For example, you could sue for the $100/month difference in condo fees if you could prove you’ve suffered financially by the sellers misrepresentation of the condo fees.
Last edition we talked about whetherinvesting in real estate is right for you. Assuming you’ve decided it is, then the next consideration is what are your real estate investing goals. When we bought our first two properties we were quitting our jobs to move to Toronto from BC. I was going to do my MBA and Dave was going to find a new job. My goal was to make my money work for me while I was in school.
Why is it so important to know what your real estate investing goals are? In order to figure out what type of property you are looking for you will need to know what exactly you want to get from real estate investing. Are you looking for monthly positive cashflow, longterm appreciation and equity building, or a combination? Are you interested in investing for the long term or the short term? How much time do you have and what is your risk tolerance?
Before you can determine your property type, it’s necessary to assess your current financial state and understand what you are trying to achieve and what is possible.
Your Five Year Plan – Goal Setting
This is a technique we use over and over. Sit down right now and write down:
Where you want to be financially in five years (be specific, for example do you want to be earning $100,000/year in your job, own two properties that are giving you $500/month in positive income, and have $20,000 in RRSPs)?
What can you do in the next 12 months to achieve each of the above items (once again, be specific and try and make the items measurable)?
What can you do in the next six months to move towards your 12 month goals?
What must you achieve this month to move towards your 6 and 12 month goals?
Review these goals regularly. We used to do it monthly, but now we just do it quarterly. Find what works for you, and stick with it.
We will leave how to achieve your goals aside for now, and just focus on finding a property type to help you move forward in your real estate goals. Some initial considerations before you begin a property search:
Will you live in one of the rental units or will you be an absentee landlord?
Do you have any savings to use for the purchase (or can you use your RRSP’s as part of the first time Home Buyer’s Plan)?
What size of mortgage can you qualify for?
What is your risk tolerance?
How much spare time do you have to devote to the property?
Do you have any construction/renovation knowledge (or know somebody that does)?
Will you manage the property yourself, or will you hire a property manager?
Can you afford to supplement the property monthly if necessary?
Think carefully about your answers, as each one has an impact on your choice of property. For now, let’s focus on the very first decision: Living in the building with your rental unit or being an absentee landlord.