All Forum Posts by: Michael Klinger

Fun fact: Cincinnati is twice in prior list. Not unlike nearly every letter in its name. 

RUBS...

Is it just me or is this the most useless acronym ever?

So many times in print or on a podcast comes up the term RUBS.  It usually goes something like this:

"We've implemented 'R.U.B.S.' which is Ratio Utility Billing System. Which is a method of calculating a resident's utility bill based on occupancy, apartment square footage, number of beds, or some combination of factors."

Maybe it's whispered as an acronym a t REIT board meetings, but in the outside world, I've NEVER heard it just used as a straight acronym. because it always has to be unpacked. Every time.

1.) Wouldn't it be easier to just say "we bill back the water."

2.) It is neither whimsical in the word it creates nor a mnemonic that cleverly reminds you of its meaning.

Unless you are thinking of it in "rubs the tenant the wrong way.

Just an observation for fun.

Next episode, let's discuss the uselessness of "basis points."

Some thoughts that have been brewing...

Back Story: I went from 0 to 64 apartments about 15 months ago (C class), as I 1031 exchanged from an owner/user office building in Los Angeles to remote control of Multi-Family in Cincinnati. I also now spend more of my time on the the East Coast and remote control a smaller version of my Los Angeles business. But I’ve been remote controlling that for several years. I now also have the three properties in Cincinnati with property management. Due to geography though all in Cincinnati, 2 properties (42 units) are with one management company and the third property (22 Units) with a second.

My Los Angeles business is a cocktail of deeply technical and slightly creative but also with an intensely high level of client service. So my relative perspective on multi-family, is that it is a much “easier” business to understand and lends itself to many operational advantages and predictability that can be systemized better than my other ventures...

Nevertheless, I think constantly about the continued under-performance of my properties as I intended for them to be: buy-and-hold cash-flow investments. So seeking ways to whip these things into shape. I’ve been patient for over a year with the effort of management to have the time to pull it together. Time is up.

I would say that relative to my thoughts and expectations about what “property management’ should be are really far apart from what it is. I really started cracking heads after a 6 month period of getting stable. The first 60 days were very cloudy and I gave them space to do their thing. About 90 days in, I started to unravel numerous lame management practices and then really started persistently telling both companies to pull it together or else. Since then I am nothing more than a pain in the butt to both companies who have both responded to me by effectively telling me that I am welcome to walk away — if that’s what I want. I’ve considered it and interviewed options, but conclude that it would be disruptive and probably just more of the same — just different, with a backslide during the transition. One company has gone from beyond awful to barely adequate, while the other company from awful to adequate but still lame in too many ways.

The short answer on what the issue is that it all relates to finding and retaining good tenants. Sure, some of the expenses were high and that has been addressed, but really a distraction from the real issue which is keeping the units filled with happy paying tenants. Period. This circles back to LAME property management. Period.

End of my back story.


With that here are my observations/food for thought around things related to owning apartments:

1.) Why is so little is discussed about property management specifics on blogs, websites and podcasts that I have voraciously consumed? Whenever I hear information about property management, the answer is quickly brushed off with some kind of non-insight like “you need good property management” rather than actually digging into actionable steps. With my small business background Its clear that me that there ARE steps for owners, even if they fully intend to use third party property management… to at least set a level of expectation on the tone and company culture of their small businesses.

2.) I hear endless pointers on “building relationships” all geared to relationships with brokers, banks, property managers, hard money lenders, potential partners, syndicators etc. Yet, I hear very few conversations about building relationships with our customers the tenants or excelling in customer service. Have we forgotten that these are our clients? These relationships are the one's that generate the rent that create the NOI that justify the CAP rates, that make for a solid deals that create profit and wealth. Is anyone else on this page?

3.) Why is there such a tone “Us-versus-Them” vibe regarding tenants from owners? Are we forgetting that tenants are our clients? Yes, I too have experienced quite a bit of tenant bad behavior, but they are still my customers. I think this is toxic.

4.) Why are more people not self managing? I’m not specifically saying literally personally, but just as I do with my other business ventures, I hire people and then manage them and also pitch in, to run my operations. I am already managing my management companies more than I could have ever imagined would be normal but I don't get the response I would expect from a direct employee. The problem with this is that it is very frustrating because I don’t want to have to fit their mold (because their mold is lame). I want them to fit my mold and adhere to my standards and my company culture. So every operational tweak that I thing is smarter, more efficient and geared towards better customer service is pulling teeth. It’s always a compromise and it’s always less than what I want for the properties or my customers. Which means I’m pretty much mildly-to-moderately frustrated with them all the time. Meanwhile the result is not to my satisfaction and the investments miss their rational potential.

5.) Self Managing Part 2: My gross rent is about $35K a month for the three properties. If I had a store-front pulling $35K a month in gross sales, I can’t think of ANY circumstance where I would hire a separate company to handle the daily operations and staffing of my storefront. Yet with multifamily hiring a company to do this is the go-to approach. Maybe if my storefront was my brand that I franchised to a separate company, then that could explain another company running it. But otherwise there is no example I can think of in any other small business arena where this approach makes sense. Yet that’s what many apartment owners do. Even those with lots of doors.

6.) Self Management Part 3: I think that the “norm” on the handling of the books 180 degrees off. Why do we think it’s okay to be limited to monthly statements and restricted view of our business accounting? I had to do some serious teeth pulling from both of my management companies to have more than just the standard 3 week delayed monthly statement with limited additional detail on request provided with reluctance and not always with success. As the owner of any of my small businesses, I need/want have a top down view and the MOST detail available on the transactions. Meaning, summaries are great, but… I should also be able to see a summary and then drill down as deep as I want to If anything catches my eye. Down to the original line item on an invoice or utility statement or whatever. Since nobody else seems to be catching mistakes on the cellular level, I want to be able to. How did we get here in this sector with this nonsense?

In all fairness to any great property management companies out there, I think my two companies are particularly untalented as basic bookkeeping. I find mistakes ALL THE TIME in their ledgers. Some big. Some small. It drives me bonkers. Partly because if I could dig in myself ,many would be so easy to fix  but I can’t. I have to request these changes and sometime the dumbness of some of the mistakes and stupidity and misunderstandings of non-fixes becoming further mistakes that go in circles. Also it’s a bit infuriating because it’s just not that hard in the scheme of bookkeeping. 60 odd “sales” a month to enter and no more than 30 bills to log, a task split between two companies making a mess out it. Some of which are set up for auto-pay or collect online. If they can’t enter basic rent / bills and pay things without making a mess of it, how are they to actually perform on the real issues.

7.) Self Management Part 4: Where (really) is the real long term accountability in a third party property manager — short of keeping an owner happy enough to keep them as a client? After all, if we are honest with one another, the best interest of the owner, and the best interest of the property owner aren’t really aligned. The owner benefits from highest rents and lowest expenses and the least turnover. The property manager benefits from monthly management fee percentage of rents and the least amount of hassles that the tenants and owner demand. But they can also benefit from turnover in the form of leasing commissions and from some profiting in the maintenance and make-ready work on apartments being re-leased. They lose a little from a vacant unit, but if I have a $700 unit go vacant for 2 months, there is far more for me to lose ($1400) than their $90. It makes me think that there should be a certain amount of compensation (or all of it) that is profit based, rather than gross rents based. Why is this not common?

8.) The limit of the “model” as a business: Clearly the model is different than a lot of business. It’s kinda like school where you start with an “A” of 100 and then get marked down to your final grade through the semester to your final grade. On any given month, aside from major investments to raise it’s place in the market, an apartment building has a effective maximum ceiling rent that is realistic at that given time. From that you get marked down from your 100 percent by expenses, vacancy, delinquents, evictions, catastrophes, etc. Before you know it you have a "C" average. You can’t make up for it with extra credit, such as longer business hours, or taking on extra projects you might otherwise turn down, you can’t have a blowout sale. You can’t work extra hours. You can’t really expand in any measurable way by pairing your service with companion services. And so on. So month in and month out, you can only do what you can to get as close to that ceiling as possible. Raising the laundry machine's price doesn't move the meter. 

Thanks for listening. I welcome a thread.

1. ) Rent raises. Definitely tread gently/lightly and strategically for all the wise considerations here

2.) An LLC can be created in one day in Ohio. So whoever is holding up the paperwork -- I think you need to push them. There's is really no excuse.

A little over a year ago,I bought a property that I SHOULD have pressed harder on. For me it was a 1031 exchange and I was purchasing 3 properties at once. What a handful. I reluctantly took one of the rent rolls as gospel for that property as I had many other details to concentrate on. After purchase It was clear that the rent roll was inflated. I'd definitely should pressed harder for clarification or proof of such differences between rent roll and leases. Either through banking statements or something. Press harder. There shouldn't be anything to hide if the rent roll is accurate and well intended. If it has been fudged, only a diligent buyer will know and if that information has been fudged, what else has been?

Ruh Roh.

Lotta jargon cleared up in one shot.

Lotta moving parts...

I am curious as to why/ or what it is that concerns you where the meters are? Are you saying that something regarding your take-over or repairs is potentially affecting the location of the meters? If not, then I can't imagine a reason add that concern to your list?

What are some favorite metrics/benchmarks in the long run -- long term buy and holds with fixed loans and no mid range thoughts of selling , re-financing etc.?

For example... I have my 64 multi-fam units in Cincinnati from a 1031 exchange about a year ago. When I went into there was a cap rate/ROI that I hoped to achieve relative to the equity in the purchases. For fun, I can also keep an eye on cap rates as they relate to present day investments in that market and asset class for comparison. Cap rate has been a quick way to take the temperature on my ROI of the my funds in the purchase and it's return as an investment, without clouding it with all the other moving parts.

At the same time, cash-on-cash interests me less, as mine isn't particularly impressive. Other investors end up with large cash-on-cash numbers. Mine isn't any kind of monster, as we opted to lock into long term fixed loans and I didn't leverage that heavily. The mindset on that (aside from the challenges finding the right deals with the clock ticking on the 45 day 1031 period) was that a long term buy and hold and moderate leverage would meet most of our cash flow goals without going too risky with too little time to do it carefully  -- and with the limited deals available to us at that exact moment. 

I also prefer to sideline the consideration of upside from loan pay-down and appreciation on the properties. Mostly since I can't spend that right now.

Since it was only a little over a year ago, my equity's original cap rate probably isn't a whole lot different than what it would be now.  The data on cap rates in my investing area are moving around but last year's and now are in the same league.

So that seems like good back of the napkin analysis for me now. And since the borrowed money is fixed, and assuming healthy and stable occupancy is possible, the cash flow performance can mostly be influenced only by raising rents ahead of rising operating costs over the years.

So... Since for others there are lot of moving parts and the tendency for investors to cash-out refi, trade up, etc., what metrics are others using besides original cap rates and return expectations to shortcut to a performance point over many years, when all the other metrics are floating around. Is it always relative to the original deal with adjustments for re-fi's and such, or is there another approach to this?