Midyear Portfolio Review: Content Package | Ep 146

James
If you listen to last week's episode, which you don't have to, there's a little bit of a building on top of it. Uh-huh. Uh or it's more like the natural extension of it.

Because if your sponsor ever says, Hey, we're on budget You should be like, what budget? Compared to what? Because budgets are weird and there's probably a better comparison to do it on.

And so I just want to talk about that general idea of what it looks like to to like to be following the plan And we're going to do that on the Furlo Capital Real Estate Podcast, where we dive into the intricacies of real estate investing. And our mission is to equip people to invest wisely. In the plan.

And um so that uh what are we doing? In both properties and residences, so that together we can build wealth while improving housing. I'm James and this is my planned out wife, Jessi.

Jessi
I like plans.

James
You do like plans.

Jessi
This does Make me think of we were just recently talking about our kids and cleaning rooms.

James
Oh yeah.

Jessi
And it's like cleaning in general. You can very easily like Have a quote unquote budget, a plan that you're like, Yeah, okay. Oh, this is what needs to be done. Yeah. And then the person does it and you're like What what did you think I meant you were going to do?

James
Oh I cleaned my room. Right.

Jessi
Yeah, you're like, well I put the garbage in that thing. I'm like, uh okay. Okay, what about? That

James
stuff that's overflowing. All the toys. Oh, you meant that too?

The whole thing. I kind of did. Yeah.

Jessi
It's like we have to make a very detailed plan. It's like okay, from corner to corner. You have to see the entire floor and I can vacuum in here and it's not gonna suck anything up.

James
Yeah.

Jessi
Are we on the same page now?

James
Oh true.

Jessi
But then it's even still like, you hit the books too? Like, oh boy, okay.

James
Hey, you know It's all part of the training process. I've we go through cycles ourselves.

Jessi
It's true. I'm I'm messy. I'm guilty of being like, eh I'm just gonna shove that for I've

James
I've learned for different owners, they have different expectations for how detailed the plan is. I've got some who are like The plan is that you never call me.

Jessi
Okay.

James
That's a good plan.

Jessi
On it.

James
Like if you never call me, you're doing well.

Jessi
Great.

James
Got it. I got others who are like, no, no, no. I

Jessi
line by line.

James
I would like to know everything.

Jessi
That penny.

James
In real time.

Jessi
Yeah.

James
Which is fine. I get it, but it's and I've I've finally I'm learning like, all right, I should just like I should just provide everyone the real time. And if someone doesn't care, they're not gonna read it.

It's fine. Yeah, no, it's definitely a thing. And and when you're trying to plan stuff out, budgets are sneaky deals because they are like it's for a year and they are often based off of the previous year.

Jessi
Sure.

James
Right, which is which is totally normal. That's how budgets are done. I get it.

Or they compare themselves to quote the market. And I think there are a lot of times when the market gets blamed. It's a bad rap.

When at the end of the day it's like, no, you're just not good.

Jessi
Oh.

James
Um and and you're blaming the market, which is a very um our son is learning about growth mindset.

Jessi
Yeah.

James
In fourth grade, which I'm like, yes, love it. And one of the big differences, so a growth mindset is uh where you have control and can make an impact versus saying like, no, no, no, it's it's fixed. I can't do anything about it.

Other people are affecting me. And so Um, to so to say, hey, this property is not performing well because the market's bad, there's nothing you can do about it. You're stuck, you're fixed, there's no opportunities there.

Whereas if you say, well, the property's not performing And it's because I'm not managing it well, ah, there's opportunities to change and manage it well. And and so it's kind of like, what are you And yeah, of course, my skills and the market, they interplay. I get it.

But it's more like what's your focus?

Jessi
Yeah.

James
And um, that's the growth mindset there. Uh yeah. Um And so, um, so honestly, the only like honest benchmark, do you know can can you guess what the real benchmark should be? Um

Jessi
reality?

James
I don't know. No, no, no, no. Uh it's your day one underwriting that she did.

Jessi
Well ,

James
that's the when I bought the property Here's what I thought was gonna happen. Here was my actual like the plan where I made the decision to buy this thing. How am I doing against that? That's the that's the comparison that matters.

Jessi
Sure. That's not necessarily How you're gonna set every budget from then on the

James
right.

Jessi
But you're comparing like where am I at

James
relative to

Jessi
how it was when I was

James
and I guess I should make a distinction here If you're talking about, hey, we need to make an operating plan for, you know, to get the maximum or do the best this year, yeah, budgets are super helpful. But if you're trying to compare like overall, how is this project doing? You you gotta you wanna compare it to the original plan.

Jessi
Yeah. Ultimate.

James
Yeah.

Jessi
Truth.

James
They're they're different purposes, I guess. And I'm focused more on the How do we evaluate if this was a good deal or not?

Jessi
Okay.

James
Yeah. Yeah. All right.

Good, good, good clarification. Uh, let's see here. Um So, uh when I say that a deal can be on budget, and I might have already given away, but that's okay, but can still be broken.

Does that sound like like it's a technicality or I'm like, hey, we're on budget, but it's still broken. Am I like splitting hairs here or does that

Jessi
Not necess well

James
I know. I f I I think I already gave away my answer, unfortunately. I wasn't

Jessi
Yeah, I th I think Compared to to Yeah. If you're comparing it to where you're where you're where you uh originally thought the numbers were gonna go, and you're like, well, I'm not quite there. It's broken, but you can still be like well have a plan. Yeah.

James
And I think that there are and maybe here's a a better way to to think about it. Um, which is kind of where I was hoping to go with this, is there's a difference between forecast error and execution error. Okay, so forecast error was, man, well I thought rents were going to do this and they didn't. And so your only choice is either to wait it out or just like reprice it and go like, yep, it's not this.

Yeah. This is what the rents are actually going to be. As opposed to an execution error.

I didn't market in the right places. I didn't screen well. So I got bad tenants who didn't pay.

I don't know. Whatever. That's the it's more like, okay, now you gotta fix it.

Or fire somebody. Um that's kind of the um And so I think what can happen though is both of those, which I was kind of hinted at earlier, I was getting ahead of myself, like both of those can be called the market. And you go, yeah, yeah, it's it's a tough market, you know, like No one's buying my ads or no one's paying their rent or you know.

There's a lot of delinquency. Like, well yeah, it might just be you bad at screening As opposed to, yeah, no, actually like I thought it was going to do this. Turns out it didn't, which might have been me.

I'm just about at forecasting and reading the tea leaves. Mm-hmm. Potentially.

Or, you know, you know, interest rates jack way up and you go, Well, that happened Um yeah, and so I think um the oftentimes what will happen is uh is you might have things where like revenue holds, but your expenses drift, right? And they they get a little bit higher. And that's usually because you're watching the rent and i know this when i'm talking to owners like they want to know what are you gonna rent it for like that's they care that i get asked that question more than anything else But the expense lines?

Eh not not really as much.

Jessi
They don't look at that nearly as closely.

James
Not it doesn't it doesn't feel that way.

Jessi
Or they don't care about it as much.

James
Correct. Correct That's not true for every single owner. I got some where like, no, they scrutinize every single line. Oh yeah. I'd be

Jessi
I'd be the only one who'd kind of want to know where stuff's at.

James
But but yeah, they um they don't pay as close attention to things like taxes and utilities and auto pays and and stuff like that.

Jessi
Yeah. Um

James
which part of what we're talking about is like like these are things that you can do at the end of the year kind of walking into the new year to pay attention to. And yeah, you should pay attention to the rents, but like there's all these other things. So If I said um that I could add $1,500 a year to a property without touching the rent, okay, what would you assume I was about to do?

Jessi
uh some sort of improvement.

James
Mm-hmm.

Jessi
Well, but then you touch the rent.

James
Right. Cause

Jessi
get because that would be the follow-up.

James
Yeah, yeah, yeah.

Jessi
Um I mean I guess lowering

James
Okay, like what kind of expenses are you thinking about?

Jessi
I don't know.

James
And that's my point.

Jessi
Doing stuff yourself.

James
Is there's a lot of you go, yeah, expenses. What could that be? It's just I that's it's it's something that's not looked at as closely. Right. Your instant reaction was Hey I'm gonna go into like let's do something to increase the risk.

Jessi
Which

James
which I get

Jessi
much more concrete to wrap your head around.

James
So

Jessi
I mean I guess if I thought if I thought really hard, like you could like compare cleaning services and find that's cheaper.

James
Uh-huh. Uh-huh.

Jessi
Or I don't know.

James
Yeah, yeah, yeah. Cutting maintenance costs is definitely like sure is a thing. Um I was the thing that I was thinking of was insurance.

Jessi
Oh.

James
Which this time of year is a great time to revisit your insurance rates and see if there are better ones that are out there. You know, because you might have something whereas for the same coverage. I don't know, like it might go from thirty four hundred dollars down to nineteen hundred dollars.

Fifteen hundred bucks a month, just like that. We had that, it was a few years back where we had an insurance guy and you know everything was fine. And then he actually He shifted his business and was no longer covering our types of properties.

And so I was like, sorry, I gotta go find someone else. And I did. And it was significantly cheaper.

And it like It suddenly added, geez, it was a lot. It was like five grand a year. Wow.

To our bottom line. And we're like, cool. I'll take it.

Jessi
Yeah, that's good to know. That that is definitely something that I wouldn't necessarily think about going out to price shop You know, it's like, I don't know, insurance is the same. Like, right?

Just get the insurance, you've got the insurance, that's fine, don't think about it. It's like, oh, wait a second. Yeah, that's something to revisit.

James
Well, and yeah, because it's interesting. There's different lenders who they're looking at their investment portfolio and they will suddenly say, oh, we need more single family homes or commercial properties or industrial or whatever. And so they will reprice their loans and how aggressive they get and how permissive they get on their underwriting to bring in those types of assets to try to balance out their books. Insurance agents will do the same thing.

Jessi
Weird.

James
And so they'll have different promotions and stuff depending on who it is they're trying to attract or not.

Jessi
Wow.

James
Yeah.

Jessi
Strange.

James
Or you get an agent who just understands how the underwriters think for a certain type of property. I go, I just get it. But then they don't for another one.

And so, um, yeah, you kinda gotta and I don't know a lot of the stuff's just guess and check at the end of the day Wow. And it's d and it's all dynamic, right? You might have someone who's been like, he's my guy for fifteen years.

Jessi
Right. Yeah. There's

James
my guess is he's not the cheapest guy anymore, but maybe that's okay.

Jessi
Yeah. Well, and Uh not that you would always make a decision based on price or cost, but if you were looking at the budget and wanted to make adjustments.

James
Yeah.

Jessi
Yeah.

James
And again, one of the perks about um again, I'm gonna make the pitch. If you haven't looked at your insurance recently, you should. Uh there's no tenant consent You don't have to worry about that. There's no 90-day notice. There's no turn risk.

Jessi
Yeah.

James
Like it's it's as safe as it's a phone call.

Jessi
Yeah.

James
You know?

Jessi
Is there anything else like that?

James
Um Yes. Uh yeah, there's a couple others. It's my next one on the list.

Um it's this time of year. So it this time of year, eh a little bit, I guess. Comes in November.

Well technically property taxes have already been assessed. Then the bill comes due in November and you have until the end of the year to contest whatever that a assessed value is. And so it's worth taking a look.

And if you think it's significantly off, calling them up and and having that conversation and getting it repriced. It's a thing. I've talked to a couple people.

They've done that. And again, it's the similar like it could be a lot. Sure.

There's also the easy like to just pay your taxes early and you get that 3% discount. You know, if uh quick math, right? Um it's two thirds what is it?

That's like a four and a half percent on your money advanced. Which is roughly twelve percent annualized. It's risk free.

Jessi
Yeah.

James
At least you don't have the cash, then it's really risky. But um should we say before? Uh but um yeah, December thirty-first is when the appeals board deadline is. Um Yeah, I think there's a lot of people well they'll they just wait too long and they start paying attention to it next year.

Jessi
Sure.

James
You're like, oh that was too late.

Jessi
Yeah. Um

James
yeah. Uh and then I just think there's a renewal calendar. Um you gotta pay attention to when renewals are happening.

So like for example I hate renewing or Filling vacancies between Thanksgiving and Christmas. I'm to the point where like I've I've experimented in past years. I'm like, I just pull all my listings.

I'm like, nope. Don't care because I think I'm almost batting 100% on everyone I've rented to during that time. A problem occurs.

Jessi
Yeah.

James
I just like because no one wants to move during that time of year. So the only people who are moving are the ones who are desperate. They have to.

And that and it usually means there's some sort of other baggage that is coming along the ride for that. Mm-hmm. I've I've more in recently just more like, no, I increase my my screening standards.

Because there might be someone out there. Maybe.

Jessi
Yeah.

James
But again, you know, I don't know. Maybe someone who's really on top of it and they are gonna like start a new job at the beginning part of the year, and so they're getting their move on and figuring it all out ahead of time. Maybe.

I guess. But uh I just I find it's yeah, I don't I don't know. That's uh those are the main ones that um that I thought of just paying attention to that leasing calendar.

Um, you know. It's one of those, and again, this kind of harkens back to last week. Vacancies are killer.

And so if you're as we're walking into Uh actually this goes live October 6th, I think. Um so we're beginning part of October when you're listening to this, hopefully. Uh I'm like, you got like a month and a half to to lock in uh whoever whatever vacancies you have.

Jessi
Right.

James
And y it's worth it to you to reduce the rent and keep your screening criteria where they need to be. Um don't Yeah, but then yeah, it's okay to to reduce the rent because uh otherwise it could sit for another two, three months. And that's just no bueno.

Yeah. So um especially when it's cold out, you don't want the house to get all cold and stuff like that. So uh so yeah, that's um it's a short list for a checkup to do at the end of the year as um as a non-DIYR, right?

Um You're just like, yeah, these are things that you can do to um to improve it. So

Jessi
pretty I don't know. It's pretty straightforward.

James
Pretty straightforward. Um where is that original underwriting file at? Where did you put that thing? Um I got a question for you actually. Um can you name the property that you'd bet our original numbers were the first the furthest off

Jessi
Like in a good way or a bad way?

James
Either way.

Jessi
Either way.

James
Right? So so let's see. We own um light apartments.

It's our 11-unit place. We've got J and J Mini Storage. Those are our 70 units plus a house.

We've got our five unit place in Sweet Home. Um we now have a 15-bedroom in Corvallis. I've got a retail and some more storage warehouse apartment in Flomemouth.

Those two properties. Um we've got the warehouses up in Jefferson. Got Baker Tower over Baker City.

Um I think those are all the those are all the long-term holds that we still have.

Jessi
I um

James
Yeah. I actually didn't do the research on this, so uh you and I are just gonna I think I have a guess, but Um yeah, which one is

Jessi
I don't know which one would be um super far off.

James
I mean I've had some flips where the numbers are way off, but that's a different beast altogether.

Jessi
Sure.

James
Yeah. I think it's the light apartments. In a really good good way.

Jessi
Yeah. I mean that's what I would say it line apartments in a good way, only because we got we got great financing and then vacancy has has been Great and we got yeah to fix it up and get it to that next level.

James
And the market, I'm gonna put that in quotes rent has been really good.

Jessi
Sure.

James
And um favorable to us.

Jessi
Yeah.

James
And so uh yeah.

Jessi
Yeah, it's probably in a good way. I would I would think um the warehouses would would be one that Uh it was off maybe in a bad way, only because like

James
the property taxes by taxes

Jessi
taxes were off.

James
That would do it. That was that was a stupid thing.

Jessi
It's a different it's a different thing.

James
And and as a result, they recalculated what the property taxes would be and I didn't. not put together that it was going to be wildly different.

Jessi
Yeah.

James
And it went from like a thousand dollars a year. No, it was like eight hundred bucks a year to eight thousand dollars a year. And like I was like, what just

Jessi
happened?

James
And the and the The appraiser, um he politely explained to me what happened.

Jessi
Yeah.

James
And I was like, Oh, cool, that's awesome. Fun. Um so that was one where yeah, that was like a seven thousand dollar swing just out the gate.

Jessi
Yeah.

James
Since then it's been pretty consistent because they're all commercial leases and they move on. Yeah. I would think that's probably the worst on the on the on the negative.

Jessi
I would think too though like It's not necessarily being off on the numbers, uh although kind of, where it's like that one too has has fewer bigger tenants. And so it's like if one leaves, like the vacancy is a much bigger deal.

James
Oh yeah. It's huge.

Jessi
And it's like we knew that, but we hadn't experienced that. Yeah. And so it's kind of like I don't know.

That's another thing that is just like, hmm. And it's like, okay, well, let's list it. And then it's like, well, you don't we don't really know.

Yeah. If the market is gonna produce ev a cheat. Yeah for

James
someone's interested in it. No, totally, totally.

Jessi
So it's like we might have to lower the Lower the price.

James
Yeah. Yeah. So yeah, all right. All right. Interesting.

Jessi
Yeah.

James
So that's uh so again, I think it's worth it to go back and forth. Find those underwriting files. You're like, yeah, how are we doing relative to what we initially thought?

Jessi
Yeah.

James
Would be interesting, especially the longer you've hold held it, you know, the further away it gets. Um, I think it's also important to ask like which line is broken? Is it my forecast or is it the execution?

This is and I think those are important things to do. Uh what did you assume for taxes and insurance in terms of growth rates? Mine were like three percent every year.

Seems pretty reasonable. Um again. Uh if you've got a property manager, you could ask them to help you.

Like, do they have anyone? I've got an I've got an awesome insurance guy who I regularly like. If you're looking for it, like he's the man.

Go talk to him. Um he'd gets it. Uh I think there's just other maintenance things like you were talking about.

Like does it make sense to to look for a new landscape, cleaner, plumber, electrician, whatever? Um, which were pretty regularly I mean, I don't know, our landscape guy's like, he's awesome. Um, I'm gonna be sad when he retires.

Jessi
Yeah.

James
Uh yeah. And and again, look at paying attention, are there any leases that expire November? even October through kind of that April time frame and like just being aware of those things.

Um for your sponsor, right? Again, you can ask them, hey, what are we doing on actuals versus what the original Proforma was? And again, you're not versus the budget.

That's not what you're asking about. And um and yeah, so Uh yeah, so I guess the big takeaway is to remember to compare to the promise, what you thought was gonna happen, versus just the prior year.

Jessi
Yeah.

James
I mean they're both valuable to look at, but um when you're looking at comparison to say how did it go? That's it. So there's my to-do list for you. Go find those original numbers. See how it compares.

Jessi
Nice.

James
Alright, uh that's what we got for you guys today. Um if you are interested in Uh investing with us or having us manage a place of yours, you can learn more about what we do and what we offer at furlo.com.

Switch that whoa. With that Thanks for listening. Have a great day.