Buying a business-need input

[Deleted]

If it's what you want to do, it seems like a good opportunity to jump in and do it. DH will carry your insurance/benefits so you don't have to worry about that?

[imojoebunny]

If that is what you want to do, go for it. Make sure you know some really good repair people! 200+ properties will have a lot of repairs. I would also want to be clear on how those are handled per the contracts and leases. Do you have to go to the properties and let people in, do you leave a lock box, or does the contractor pick up keys from you? I can see that being most of your day, without a full time maintenance person.

I hope it all works out for you guys.

[rubytue]

Doooo iiiiiittttt!

I have nothing useful to add besides encouragement. Sounds like you are ready and are lining your ducks up.

[msmerymac]

This sounds great!

Will you be responsible for filling vacancies and signing leases, or just general property repair and safety? Do you have a standard lease you currently use? Does the company you are buying use a consistent lease or is a combination of whatever the owners found on legalzoom?

[tealblue]

Definitely get the advice of a good CPA and a good business attorney to 1) review the contract of the business purchase and 2) to set up your new business.

When working in public accounting, I saw soooo many people not take these steps and it was horrible for their business. The CPA can also review their current financials to make sure the income they say is how much they actually make.

[ohyouknow]

I am not on these boards a lot, so I don't know your experience (it sounds like you have experience managing property, is that your FT job currently?). I own 145 apartment units in 2 different LLCs within the same city, and about 6 months ago we opened our own PM company along with another owner at the same complex (he has 60 units), so our company manages about 200 total.

After talking with accountants, attorneys (I'm an attorney but not a real estate specialist), etc, we took the plunge. We opened an LLC just for the management, hired a full time manager on W-2 status, a full-time maintenance person on W-2 status, and several PT leasing agents on 1099s. Just recently we hired an online book-keeping company to do the books because they were so overwhelmed.

Prior to opening our own management company we had been contracting it out, and most of the expenses you listed were billed back to us as owners.  There was a FT leasing agent and we as owners were billed for his/her cell phone, federal employment taxes, PM software (Appfolio/Yardi), plus basically anything else under the sun you can think of. Part of that was the impetus of starting our own company - it seemed like we paid all the expenses, plus 6.5% of gross rents. I've had 5 different management companies over the years (different properties and states) and it's not atypical for owners to be charged for those things.

For your $90K are you just getting their book of business (i.e. contracts with owners)? Or are you getting some "stuff" too, like computers, software, office equipment?  Are you sure you can/want to manage out of your home? When you have 200 tenants they often expect an office where they can drop off rent.  To keep down expenses and increase profits have you considered hiring a full time maintenance person and then billing him per hour to the apartment owners? What class of apartments are these? (A,B,C,D)...that will make a huge difference in how much work goes into managing. Hopefully they are larger units and no single family properties or duplexes. Are they spread out geographically so you'd be driving a lot?

It sounds like an opportunity to get your foot in the door...but it will be a lot of work. Even if it's 200 Class A apartments, just the book-keeping alone is a lot. Honestly my biggest concern would be if you plan to do this all yourself....I think 200 units is too much for one person when you think about collecting rent for 200 units, bank deposits, scheduling maintenance, mailing owner checks and statements, getting phone calls, lock-outs, capitol improvements, getting keys to maintenance contractors, etc. It seems like A/C units are always going out, someone's sink is stopped up, etc.  

If you want to talk about it, feel free to PM me.  I'd be glad to talk more about our experiences and challenges. I don't want to discourage you at all! It's profitable! (just a lot of work, lol.)

[Balki.Bartokomous]

May 26, 2015 13:27:36 GMT -5 tealblue said:

Definitely get the advice of a good CPA and a good business attorney to 1) review the contract of the business purchase and 2) to set up your new business.

When working in public accounting, I saw soooo many people not take these steps and it was horrible for their business. The CPA can also review their current financials to make sure the income they say is how much they actually make.

This was my first thought, too. What liabilities do their current contracts open you up to? Do you need additional insurance to cover those? Is your accountant capable of handling the increased accounting need? Will their fee go up & by how much?

How do you know that this is a good price for the company? The payback period is about year & they're getting about 80% of their current annual margin per unit. Is that typical of other comps you're seeing? A year sounds like a good investment to me, but I really have no small company benchmarks to compare it to.

Are the fees that they're charging their current clients reasonable compared to market or do you anticipate changing them after the year is up? Will you lose any business if you change them? Even though you're having the current property owners sign with you for a year, I'd put something in your agreement with your friends to tie the payment to retention, just in case current owners break their contract or don't pay. That way you're covered on both ends.

How do you handle maintenance on your properties & how do they handle it on theirs? Is that something you'll be able to replicate now that you have 225 more units to take care of? I assume you pass those costs on to your property owners. If, say, they're used to paying $30 for a service call & your costs are now $50 because you outsource it & don't do it yourself, is that something the property owners will be able to pay? If not, your margins could be affected.

How are you going to handle managing the property if you're OOT or sick or something? Will you need to hire an assistant? The answering service will just handle off-hours calls & not actually rectify the tenants' issues, I assume. ETA: Will you need to hire a full-time maintenance person? That might actually be more efficient and cost-effective than hiring a contractor.

I'd still want to make sure I had answers to these questions to make sure there were no red flags, but in general, it sounds like a good opportunity.

[littlemisssunshine]

You would absolutely need an assistant. I'm at 75 houses and honestly if I add just one more I'm hiring a part time assistant. I'm meeting with an owner tomorrow who has 150 houses. If I land her as a client I'm hiring a full time assistant. I can't imagine trying to do 200 homes by myself.

I would also check into tax implications and other business expenses. I pay $750 a month just in licensing fees, MLS fees, local realtor board fee, state fees for my LLC. Then there is office rent (I strongly suggest having a place where people can drop off rent), advertising, office supplies, etc. It all adds up quickly. I would wager you'll make quite a bit less than a you think. It always works that way!

[maddiepaddy]

A lot of great questions/thoughts have been brought up so far. What sticks out to me most though is two things.

#1: While these numbers do look pretty good, is the sale amount typical for your industry? It sounds like you're really just getting a book of business. If they quit, couldn't you just go after that business on your own? I wonder if $90K is high, particularly if nothing is included other than the book of business. Are you acquiring their PM company's name and thus their established goodwill? This is not my industry though, so I could be off base on thinking it's a bit $$.

#2: This sounds like a lot of units for one person to manage on their own. Have you factored potential employees into your numbers. The expense of a maintenance person could be passed through to unit owners as someone else mentioned. But I'm not sure you can do with with employees like a rental assistant, accountant/bookkeeper, etc...

[patbutcher]

do it!

[rubytue]

Tangent - is the online payment part of the software you mentioned? We have one house and the tenant wants an online payment option. Do you have a reasonably priced recommendation? For one house lol

[ohyouknow]

Definitely message me and I'll give you my email address since I'm traveling for work starting tomorrow. The more I think about this the more I think you might be buying someone's headache if it's mostly single family homes and small units. If it was large units it would be worth more IMO. Frankly if you are a good manager you can probably just put out your own shingle and attract business. Good managers in the SFH market are tough to come by since the amount of work is so much more than making the same money in large complexes. You still could buy it but $90k seems like a lot to buy yourself a job that isn't easy to quit, if that makes sense. And like PP said, expenses are always more than you think.
One expense I just thought of that we hadn't considered at first was copies and printing. Just a simple notice to tenants with 200 units warrants a trip to Office Max at like 10 cents a copy plus your time. We ended up needing to lease a commercial printer/copier at $300 month because the cost was cheaper after we took into account the time spent.
I'd be happy to send you some contracts and statements if you want to see some real numbers.

[M]

May 26, 2015 16:08:24 GMT -5 rubytue said:

Tangent - is the online payment part of the software you mentioned? We have one house and the tenant wants an online payment option. Do you have a reasonably priced recommendation? For one house lol

our new landlord has us paying through lease runner. There's fees involved on your end though. Couldn't they just have their bank send you a check every month? That's pretty much online.

[M]

@rennido - Good luck! But don't over work yourself. These guys sound like they're selling because it's a lot of hard work and high stress. That's why we sold our business. I wanted a life. That's also the reason why my parents are finally ready to sell their last restaurant and retire. Working 80 hour weeks (95 hours in my parents case) just isn't worth all the money in the world. I know you said you were hiring help so hopefully they work out. Employees came and went for my parents so they hardly ever got time off.

[rubytue]

May 27, 2015 5:39:49 GMT -5 M said:

May 26, 2015 16:08:24 GMT -5 rubytue said:

Tangent - is the online payment part of the software you mentioned? We have one house and the tenant wants an online payment option. Do you have a reasonably priced recommendation? For one house lol

our new landlord has us paying through lease runner. There's fees involved on your end though. Couldn't they just have their bank send you a check every month? That's pretty much online.

I suggested that, but they didn't like it. Right now they are going to the bank every month and depositing straight there. It's the closest bank, right by the grocery store and though the only main road to get there. It worked better she was a bartender and had a lot of cash tips to pay rent. Now she has a real job.

I really like the current system bc no bounced checks. But they asked for another options, so I said I'd look into it.

Eta - thanks for the lease runner tip. It's $3/payment, which is affordable. I was about to set up spark rent when it shut down.