In this episode you’ll learn:
1️⃣ Why I’d pick a house flood over a leaky faucet
2️⃣ How to identify the “leaky faucet” legal problems in your investing business
3️⃣ What you can do to stop losing time and money
4️⃣ Why “flood” asset protection strategy leaves you exposed
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Protect Against House Fires & Leaky Faucets
House fires are scary and as real estate investors we know to protect our properties, our tenants, and ourselves from this risk as best as possible. But most investors don’t stay up at night thinking about leaky faucets. However, left unfixed – even a leak can snowball into a big problem.
Asset protection is the same. We are kept up at night thinking about lawsuits, but we’ve got a dozen leaky faucets in our investing business. The crazy thing is most asset protection strategies are designed to deal with lawsuits – and house fires but not the leaky faucets. Using offensive asset protection strategies, real estate investors can stop the drip and tighten up their ship to increase profits.
Audit Your Real Estate Investing Business
Real estate investors often don’t know where these seemingly benign risks lie. By auditing your real estate investing business you can uncover where you are slowly and continuously losing time and money. First, start by looking at your P&L report in Quickbooks or whatever bookkeeping software you use for your real estate. Check and see what expenses could be preventable. Next, evaluate your time. This isn’t a 1 week time study but something you do over time. Jot down any frustrations, lost time, or wasted money that you encountered. Then 1-2 times/year design and implement new systems, documents, terms, whatever to prevent them from happening again.
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Resources Discussed in This Episode
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Bonnie Galam 0:11
When I think about things going wrong in my buildings, I tend to put them into one of two different buckets, flood-type problems, and leaky faucet-type problems, let me tell you, I’ve had both of them. And it may surprise you, when I say that I prefer the floods, assuming, of course, that everyone is okay, in these big catastrophic situations like floods or house fires, which is, of course, always priority number one, then the floods are in some ways easier to deal with, they’re big and expensive. And yes, take some work to get through. But you know, nine times out of 10, you’re gonna come through Hall. Why? Because insurance will step in to clean up the mess and rebuild. And depending even on the insurance, they may even relocate your tenants and pay you for lost rent. However, the leaky faucet is a bit of a sinister beast, it’s one of those things that could be a quick fix or something that is totally ignored until you realize the floors are starting to warp. And then there’s black mold everywhere, and you’ve got a major problem on your hands. And first off, you’re lucky even if you got a call from your tenants about these types of issues. Because it can just seem so benign to them that they may not even tell you about it. And they may not bring it up until they start raising a roof over, you know, black mold that they’re seeing. And then you finally you know, start looking for the source of the problem. And it’s one of those things where it just may be inexpensive enough that insurance isn’t going to cover it. Or maybe it’s just not even worth making the claim. Because of course when you do that, then you risk your rates going up. And leaky faucets are one of those seemingly benign problems that you can just put off or put on the backburner, but by doing so you might end up seriously rolling the dice. And I have found that most asset protection follows the same pattern as well.
Bonnie Galam 2:04
Everyone prepares for the flood. But it’s surprising when that little leak turns out to be a big mess. Even if leaks are far more likely than floods or fires that destroy everything in one shot. And in this episode, you’re going to learn what are the leaky legal faucets in your investing business and what we can do about them. But before we dive in, I’m excited to announce here for the very first time that I am hosting a brand new free workshop for real estate investors this month. It is called The Five Steps to Legally Protect Your Portfolio. And you can sign up right now by going to Bonnie galam.com forward slash five steps. In this free workshop. You’ll learn how to legally deal with tenants contractors and partners so you can save more time and of course more money and competently scale your portfolio. I’ll be teaching the workshop live three different times on July 20 and 21st. As space is limited, so sign up at bonniegalam.com/fivesteps to save your seat. At the end of the workshop, I am really excited I’ll be sharing a brand new limited-time promotion for my signature program Landlord Law School. I am really excited about this brand-new workshop and I cannot wait to see you there. Now without further ado, let’s dive into the episode.
Bonnie Galam 3:19
Because one of the things I love doing in my real estate investing business because I’m a big efficiency nerd is to audit my business. It’s something I teach real estate investors how to do inside Landlord Law School. But it’s not something I always did. And until I did it, I really didn’t realize how much money was on the line by doing this activity. So let me tell you about the first time I did an audit. And what I found. It was around tax season I remember I was cuddled up on the couch under probably a bajillion blankets and like December right before we turn over our books to our CPA, and I’m always perpetually cold. And so I was probably wearing leggings and a sweater and like it’s because that’s just how I am in the winter. I’m like a snowman or the Michelin man with all of my layers. But I was curled up with my good friend QuickBooks, and I was really taking a look at our books. And I had finally gotten comfortable with like the basics of bookkeeping.
Bonnie Galam 4:13
And now I was confident in our, you know, our books and our record keeping, and I wanted to start running some reports. And so I ran the p&l Profit and Loss report to see how things were gonna shake out for US tax-wise. And I looked at the breakdown, and, you know, overall expenses and what they were going to be what was going out, and I noticed, you know, what the biggest categories were, which were, of course, you know, kind of like the expected categories of mortgages and insurance and taxes. And then I looked at the lower line items, which I initially thought about, you know, just brushing off because oh, they’re small, they’re not important just moving along. But what I found actually really surprised me. And they too added up to thousands of dollars a year. And it got me thinking like how could we get leaner and eliminate this waste that’s going on in our business because like who doesn’t want to give themselves a raise? You know, just by getting a little bit more organized, right, like that’s the easiest way to make more money in your business. But then I took it a step further. And I really thought about the line items that QuickBooks doesn’t capture, you know, like the extra mileage, schlepping back and forth to properties. And sure, I could deduct the mileage, but I can’t deduct, you know, wasted time. And, you know, the cost of vacancies the time wasted for eviction court the holding cost delays, like how do you capture in QuickBooks, you know, the absence of revenue. And the reality is, is that QuickBooks can’t, but the human mind can. And so that’s what I set out to do. And I started making a note of this kind of stuff that was going on in our business, I realized that we were dripping, and losing time and money left and right, it was constant.
Bonnie Galam 5:41
There was, you know, tenant BS here and an extra month vacancy there and driving into the city for something stupid. And I realized, like, it got to the point where the real estate was controlling us. And we didn’t control it, everything was reactionary, and the waste that I saw inside of QuickBooks suddenly snowballed into something much, much bigger. And, you know, this brings me to a really common misperception, I hear all the time, in real estate, where it’s like, oh, I’ll just deduct it. And you’ll, that’s some bad math, I’m just gonna come out and call it as it as deductions, subtract from your revenue to decrease your taxable income. However, I submit to you that if you want that you actually want to maximize your income, rather than your deductions, at least you know, your deductions that are due to like waste, and unnecessary expenses, because the deduction is worth saying, like 30% of the value. And let me do some math for you here. So you’ve got like $100 expense that’s just wasted, it’s a fine for something, or it’s extra tolls, or whatever the case may be. And after that expenses may save you, like $30 in taxes that you pay at the end of the year. But wouldn’t you rather just have an extra $100 of income, which might end up being $70 after tax, but that’s a $40 difference. Now, extrapolate that math over hundreds or 1000s, or even 10s of 1000s of dollars. And you can see how like, you don’t want to just like unnecessarily expense things because you’re actually better off paying taxes, and typically getting that as income you get where I’m going here. And so if you’re thinking, as I’m talking about this, oh, I just expense, my problems. Stop. You’re bleeding money. And it’s, it’s just bad math.
Bonnie Galam 7:18
But I will tell you, you are not alone. A lot of my clients back at the firm came to me with you know, similar types of issues where they were just bleeding money, and they didn’t know what to do about, you know, they couldn’t prove that a tenant caused damage at the end of the lease, when the tenant raised a fight, you know, that they got the property in this condition. And so they ended up just eating that expense or situations where a contractor wasn’t prioritizing the project. But the contract didn’t even talk about timelines and due dates. And you thought that you know, by structuring, you know, the relationship with the contractor by, you know, doing structured payouts would lead to the contractor hustling, but what it just turned into was the contractor trumping up first payments left and right from all these different people, and then taking their good old time and getting to the job whenever they kind of felt like or, you know, little municipal fines here and there, like whether it’s your fault, or the tenants like if you’re stuck holding the bill, at the end of the day, that’s like flushing money down the toilet. Also, you know, I’ve seen situations where, you know, investors don’t understand the due diligence, when they’re buying new properties, and they find themselves holding the bag after closing, and they end up like totally surprised and frustrated because when closing already happens, and most of the time, you can’t online, the clock short of there being some sort of fraud and instance. But like there goes your budget, your ability to make a profit for, you know, several months, maybe even several years. And along those same lines, vacancies, you know, turnover time, I have found to be one of the most expensive parts of being a landlord if it’s not handled smoothly and organized. Because every single month that you don’t have occupancy is 1000s, you know, maybe just hundreds of dollars, depending on what your rent is. But, you know, let’s say 1000s of dollars a month. And all of those situations are instances where real estate investors lose money and their legal wasn’t doing anything to help them and the reason why was because their asset protection was only prepared for the massive flood or the fire or the slip and fall, the catastrophic losses weren’t yeah, your LLC and your insurance are maybe going to kick in.
Bonnie Galam 9:20
However, this drip, drip, drip, drip drip of losing money can and will snowball on you, especially if you’re looking to scale. And these aren’t situations in that LLCs as insurance is going to come to your rescue. And so you’ve got to make sure that you are regularly auditing your investing business to find these types of holes. And that includes, you know, looking at your financials, looking at your systems, looking at, you know what is actually happening in your investing business. And I teach real estate investors how to do all that and how to put legal processes and systems in place inside of landlord law school but this is something that you can at least begin to tackle on your own and you No in some of the house flood approach to asset protection is you know really what most investors have in place. However, most investors are more likely to encounter a leaky faucet multiple times a year. And so you’ve got to make sure that your legal strategy covers both and so if you guys liked this episode, please let me know by leaving me a five-star review on Apple and subscribing. And now that you know why the leaky faucet is just as risky as the house buyer. What are you supposed to do about it? And I’ve got the answers for you in my free upcoming workshop coming up in just two weeks on July 20th and 21st. And during that, I will walk you through The Five Steps to Legally Protect Your Portfolio and stop that leaky faucet. I would love to see you there. And next week on the podcast tune in because I will be covering another common misperception I see running rampant in the real estate community. And that is all about the right time to put asset protection or legal tools in place. So stay tuned for that. I’ll see you here same time, in the same place next week. Bye for now.
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