How do you financially manage the cash flow of a multi-property portfolio without losing track of income and expenses?
If you have a property portfolio with a large amount of properties in it, it can be very difficult to manage the finances of those properties. You are talking multiple loans across multiple different banks, incoming expenses coming from everywhere. So, how do you financially manage a multi-property portfolio?
So today, I brought on Ben Everingham from Pumped On Property, who is my buyer’s agent of choice, but who is also a very successful investor who has achieved financial freedom himself and has a large portfolio of properties.
Ryan: How many properties is it now Ben?
Ben: Yeah, we are not going to talk about that but it is definitely growing.
Ryan: Okay. So, it is somewhere around the 10-property mark, I think. Is it?
Ben: yeah, we are getting close.
Ryan: Okay, cool. So, let us start by talking about the structure of the loans across your properties because people talk about separating their loans out, having different banks for every single property. Is that what you have done with your portfolio and separated everything out?
Ben: Yes. If you would look at my iPhone for example. On the home page of the apps, there are at least a couple of rows worth of lines now, which is a little bit time-consuming and a little bit tiring, to be honest with you. But from an asset protection perspective and everything else that I am looking for, obviously, it makes a lot of sense to stock your risks between lenders.
Ryan: So you have lots of different banks. Are you saying those app icons are all the different banking apps?
Ben: All of the different banks, yes. So you know, the big 4 there and some of the others as well.
Ryan: Okay. So when you have a property portfolio with so many different banks, how do you manage things between them? Obviously, you are getting rental income for every single one, which you need to work with the real estate agent in order to get paid, then you get expenses from all of them; do you somehow pool them together? Do you treat them separately? What do you do and what can help people in the day that they manage all of it?
Ben: This is a little bit of an up form and it has taken me a long time to get to this point. But basically what I have is one loan account for each property, like one home-loan account; and then I have one offset account for that property. And so the offset account is where the rent is paid into each month, and then that offset account is where all of the expenses for that one property are taken out of as well. So, from an interview reporting perspective, it is completely clean and the data-in and the data-out is super easy for me to get because it is just connected to that one property and nothing else.
Ryan: Yes. So each individual property has its own offset account, which is like a bank account that obviously offsets your home loan; and so all of your expenses are paid out of that. All your income goes into that so when it comes the time at the end of the year to do tax time, which we will talk about in a minute, you can say, “Okay. Property number 1, here is account number 1,” and all your income and expenses are in the 1 account. Is that right?
Ben: Exactly. And it is just pooling that 12-month financial statement off and just allocating that as a lone item into a spreadsheet so you know, “Here is the total rent received. Here is the total electricity cost, etc.,” and just breaking them down. It is so easy to do once you have done it a few times because you know exactly what you are looking for.
Ryan: Okay. So for positive cash flow properties, you would probably have enough money in that account to pay all of the expenses and things like that. But what about some properties that you may have that are negatively geared, or that cost more in a year for one reason or another, than you actually have in that account. What would someone do in that situation?
Ben: Yes. I think about the properties that I own in the past that were negatively geared and in terms of each of those properties, I would just allocate a certain contribution at the start of the year. Let us say that it is going to cost me $2,000 a year to hold that property after my after-tax income. I would just transfer that amount of money into that account into that offset and just leave it for the year. And then any surplus money that was left over, obviously pay myself back at the end of the year. But I just like to have that buffer there.
Ryan: And with – this may be too personal so you do not have to answer it, but with the properties that are generating a positive cash flow, do you let that build up in the offset account just to offset the loan? Or would you like to roll that out for personal reasons, holidays, future investments, etc?
Ben: In the old days, I used to take that money out and not really reinvest that back in. But now, these days I now that I have learned a little bit more. Think anything of your base income, any tax breaks you get, any chunks that you get of money.
I must leave that positive income accumulating against that property until the end of the financial year until I have done the return for that particular property. And then these days I actually pretty much just put that money straight back into repaying the debt at the end of the financial year because all you reap – advantage of it sitting in the offset which means you have not paid interest on that money anyway, but I am in a debt reduction stage in terms of my portfolio so that money just goes straight up the bottom line debt.
Ryan: And so what is the value of paying it off of a bottom line debt instead of just leaving it in your offset account?
Ben: Look, my mortgage broker says that I am crazy repaying that debt. But I am a low-risk person and the older I am getting I am becoming more and more low-risk, so…
Ryan: Yeah, yeah. You are pretty old now. You are what, thirty or something, you know. You have a couple of years left.
Ben: Back when I was a spring chicken like you, I was a bit crazier. But what I am doing is repaying that debt because I do not want to get to 50 and have $5 million worth of debt and a $10 million property portfolio. I want to get to 50 with $2 million worth of debt and a $10 million property portfolio. It truly is passive income and you can sell a few of those properties to completely wipe that debt. That is what I am personally working towards but I am in a…
Ryan: So really, it is a personal reason for you to pay down that down that debt in terms of where you want to be, the goals that you have set for yourself and what you want your portfolio to look like. So, what about managing all of – the income is pretty easy, right? Is it just the real estate agents pay you, how do you follow up if you have not been paid?
Ben: So, you always get paid like legally, they have to disperse the funds for you every 30 days max. You can even ask to have them disperse every 14 if you would like to, and if you would like to. So, you always get your money from the real estate agent and legally they have to send you an end-of-month and an end-of-financial-year statement as well. So from that perspective, your money is going to come in.
It does not always come in in the amount that you think it is because, for example, I get my property managers to pay, water expenses, rates, they pay my insurances, they pay absolutely everything for me before I receive that money. And the reason I get them to do that is to outsource all those tasks so I do not have to think about them all year.
Ryan: Well, that is genius! I have not actually heard of people getting their rental managers to do that for them; to pay water rates, council rates, insurance, etc. Do many people do that or is that something…?
Ben: No. Not many people do; a lot of people pay it themselves. But you think about that: there are 4 water rates, 4 council rates, 1 insurance bill, 3 or 4 other maintenance related things that you come up per year. If you have a decent sized portfolio that could be 40 or 50 things you have to do yourself per year that you just do not want to do.
Ryan: And are they happy to do it? The rental managers?
Ben: Absolutely! I have never had a single one of them come back and push against it, like they actually ask to do it. Some of them are more proactive ones.
Ryan: Yeah, because I was going to say, okay, how do you deal with all the expenses like water rates, council rates, insurance, maintenance, and how do you stay on top of those bills and make sure that they are paid. But I guess the way that you do it is to get your rental manager to do it for you.
Ben; So you just ring those providers and say, “Hey, I would like to change the address that my statements are sent to,” or “I would like to set up email statements,” and they email them to you. You just forward them straight to your manager or you obviously just get them sent directly to there. The only time – when I get my end-of-year statement, I just go through my cell phone and look at every expense throughout the year because sometimes I do pay things that I do not want them to pay. And at that time, I will question them and ask them for a refund or question their logic in terms of paying them and get a logical reason why they did that on my behalf.
Ryan: What would be an example of that where they would pay something that you probably would not have wanted them to pay?
Ben: It might be not so much as paying something that I did not want them to pay because it might not be so much they paid something I did not want them to pay because in my tenancy agreements I specified that any expense over $200 that is not this or this, they need to call me or email me before I will pay it. It is more – they might have overpaid the council rate and I challenge the water charge which is $70 or $80 off. And it is more from that perspective because they are paying it and I do not have the time to review it and make sure it is absolutely perfect. Then the management layer over the top…
Ryan: So you have to really go through manually checking all of those bills either once a quarter or once a year just to make sure that everything has been paid correctly, there have not been mischarges in those bills. So you are outsourcing it like 90% outsourcing it but then you outsourcing it but you still have as you said that management layer where you look over it; just double checking everything, making sure it is alright.
Ben: Yeah. And as you know I am a bit of a control freak so that is probably just my personal nature.
Ryan: Yeah. I think if it was me, it would probably slide a lot more because I am not like, I do not enjoy doing finances and doing all those administration tasks and stuff like that, or I would get my assistant to do it for me because she is really good with that sort of stuff.
Ben: Good idea.
Ryan: So, management of the day-to-day stuff you get mostly outsourced. There must be expenses that you cannot outsource to real estate agents so you have to pay yourself. Or no?
Ben: No. I do not have a single expense that I cannot outsource to those guys except obviously a renovation, or the hot water system shits itself or the stove stops working and I do not want them to find one for me so I will jump online and find one and get them to buy them on my behalf.
Ryan: Okay, cool. And then for people who are not getting real estate agents to do it for one reason or another, before you got them to outsources, there are strategies that you can recommend to people to stay on top of bills, make sure they pay them on time, etc?
Ben: Definitely correct. (1) Create one folder for each financial year for that property. Put all of your financial statements in there and then break your expenses up into categories. So let us say you have a folder with 6 or 7 plastic sleeves in it, and you just put all of your electricity bills in it, all of your water bills, all of your expenses, all of your capital works, renovations, etc, your insurances, and just have one folder for that financial year.
Ryan: So this is like keeping track of your receipts, right?
Ben: That is all it is, state tracking system so that at the end of the year you can pull off all those plastic sleeves together, dump it all in one, and that is the financial year for that property, which I think you need to keep those receipts for 5 to 7 years.
Ryan: Yeah. And some people – I was talking to an investor just the other day, a customer of mine who now has 6 properties in the last year, and he was saying that he has a big annual calendar on his wall. And so he is not doing what you are doing in terms of managing his bills so I might let him know about that. But he puts the bill’s due date on that calendar and so each week or each month he will look at the month ahead, see what is due so he knows what he has to pay. If you are not as organized as Ben, getting other people to do it for you, then maybe that is the strategy that you can consider.
Ben: That sounds depressing. That sounds depressing just looking at your calendar and having 52 bills to pay every year, 6 properties.
Ryan: I think if it was me, what I would do is I would do the receipt folder like you said but unpaid bills I would have a separate filing drawer or something with like 12 folders in it, and I will put stuff in these we paid that month in like each folder; so like January, February, March, April, May. Chuck them in there, and then at the start of each month I will get them out, pay them all, and I will put them in my receipt book.
Ben: That is pretty much – to be honest with you, if we are paying anything ourselves exactly what we do is we pool the invoice until the very last date that it is due and then pay it on that day.
Ryan: Yeah. Or you could use like my wife’s strategy, which is like we got a peg on the fridge and everything goes on the peg and you just forget about it until the overdue statement comes or something like that. But that is probably not recommended.
Ben: I will get a peg.
Ryan: Yeah. We got like a speeding fine the other day and I was like, 7 days over or something. We almost forgot to pay it because it was like behind 6 sheets of paper on the fridge.
Ben: Yeah. You get your overdue notice which is twice as much as a speeding fine and you are like, “Well, I should pay that speeding fine now.”
Ryan: Yeah, before it triples or it could triple again. Okay so, the last thing to talk about would be tax time; doing your tax returns. Is that something that you do yourself or do you just pass everything onto your accountant?
Ben: Have you ever heard of the navy seals, how they talk about hell week? So this is the week to become a navy seal, right. You go through this week called hell week and it is basically separating the men from the boys. And those that are going to be accepted in the navy seals program – and I think 15% or 20% of people actually make it through hell week that start, and we are talking about the fittest of the fittest and mentally capable people in the world.
And they just screen them out through doing this ridiculous stuff like primitive primal stuff like carrying telegraph poles on shoulders across the beach with 30 kgs and making them swim all night non-stop with 30-kg backpacks on, just bullshit stuff, to just test the capability of these people and their leadership qualities when they get challenged and they do not let them sleep for 3 or 4 days and they do not let them eat. And tax time for me is like the intensity of hell day.
Once a year I do not get my accountant to do it because he is going to charge me $300 or $400 an hour to do it, which is probably a good use of his time to me, to be honest. Now that I think about it and now that I stop logically justifying it but I basically look at every property.
I have a spreadsheet and on that spreadsheet it has a tab for each one of the properties and it has total income, total expenses, total initial outlay for the property at the bottom in terms of the expenses that I cannot claim at the moment but I could claim when I sell the property in the future. And I just work through 1 property at a time, breaking it down so I just give him the spreadsheet. I keep the receipts and he does everything on the spreadsheets which takes him heaps of time. He can focus on strategic stuff rather than punching in hundreds of receipts which is a waste of his time.
Ryan: So, do you go through your bank statement and enter every single line? Do you do it once a year, you will print off the yearly bank statement of income and expenses and you will go through and basically punch that into Excel and generate like an annual review column that has everything in there?
Ben: Exactly. Exactly that, so I just work on it all on one day once per year because I am working for myself. I cannot get the variation to assessment that an employee could get. And because I am working for myself I do not really get a cash tax return anymore so there is really no point in doing it on a monthly basis that I might have as an employee. So I just literally have 12 columns of the year and put the expenses in the column that I would have incurred the expense on during the financial year and just work my way through it. It is a punish but it saves you thousands and thousands of dollars every year so it is worth it.
Ryan: And I do that for my business like I have a spreadsheet where I have every day of the year actually and I put expenses incoming based on categories and stuff like that. And then at the end of the year, I summarize that with all the category and things and I send that off to my accountant and they can do my tax returns super easy because I have done all the hard work for them. So that is some good advice for people there if they want to do it themselves and they do not want to pay $300 or $400 an hour to get someone else to do it for them.
Ben: What did I think about, did you want your advisors giving you strategic advice and not focusing on the doing but focusing on the how can – now that we know what we know, reduce your tax bill, or increase your tax return, or tweak this. Always go on for a tax planning session with them in March so that I can go, “This is what the financial year to date is looking like for this property. Is there anything you need me to do now before the 30h of June? It is going to save us a fortune. Or should I make some expenses or this property is looking too positive or this one is looking too negative; how can we look at the portfolio property-by-property as a whole to obviously get the best outcome using the legal framework that we are allowed to use.
Ryan: Let us just quickly talk about this before we close it off, like this tax planning session, what is it? Is it once a year you sit down with your accountant? I am guessing you have to pay them for this session, and you sit down and go through each of your properties and say ‘here is what the year is projecting to be,’ and then other things that you recommend for me to do this year that will improve….
Ben: That is exactly what I do like I spend an hour with him that costs me a couple hundred bucks and we sit down and just go, “This is where we are at. What are your thoughts and suggestions to improve this?” I might be like, “I have just had a chat with Ryan and Ryan suggested this which I have not heard about before. Why have you not brought this up for me?” And he will be like, “Ahh, sorry if we forgot that. Let us look at the last 2 previous years and add that.” You know, you are constantly running and your job is not to sit there and listen to what they have to say.
Your job is to go on with ideas and go, “I am not happy paying tax each year. I want you to help me turn this around so that we can put ourselves in a better situation,” and part of that is also knowing that you want to buy a property in the next 12 months so what does my income have to look like? What do expenses have to look like against that property so that I can move forward in the pursuit of my goals next year as well?
Ryan: Yeah. So why did you choose to do that in March over in something like September or just after the end of the previous financial year: September, October, November?
Ben: Because March is the time that you can actually do something about it. September, you really cannot do anything about your tax situation for another 9 months; wherein March, there might be things that you are doing right now that if you have 3 months to tax time he might say, “Hey, the property is looking really positive. We are going to have to pay tax on that money this year because we do not have any losses. You have been talking about renovating it for 5 years, why do you not strategically do these expenses now so that we can right off $20,000 worth of costs this financial year and the property looks it breaks even on paper?”
Ben: All of those sorts of creative things that you and I know nothing about but licensed professionals do.
Ryan: So it is kind of like you are far enough into the year that you can see ‘okay, this is going to happen in June or July. This is what your tax is going to be like. But you have enough leeway like 3 to 4 months to actually make decisions to counteract that. Whereas if you did it earlier, like July, September, etc, you do not really know enough of the year yet in order to make those decisions. And even if you did, it is probably too early to spend that money because they are not going to benefit you tax-wise until a year later.
Ben: Yeah, exactly. Why would you spend the money at that time of the year when you can spend it 9 months later and every dollar you spend then, you get the dollar back out the next week? And most people just wrap up to their accountant on the first or second week or third week of July, it is too late to do anything at that stage. And you are always reacting rather than being proactive on the front foot. And these are just the little things that you originally go through the process of buying more.
Ryan: Yeah. Well, they are definitely some great tips so thank you so much for that. Guys, Ben is a buyer’s agent. As you can tell, he owns a lot of properties himself and he is financially free through his properties. But he also helps a bunch of On Property audience members to buy their investment properties. So if you are feeling stark, if you want Ben’s expertise, if you want some help in finding a great area, finding a great property, then Ben is offering all our OnProperty-ers a free strategy session if you are interested.
There is a limited number per month. If you are interested in sitting down with Ben, go into a free strategy session of ‘here is my situation now, here are my goals’ and talk with him about how you can achieve them, then head over to OnProeprty.com.au/session and you can request your free strategy session over there. So thanks, Ben so much for offering those free strategy sessions to our audience. And a lot of people going through them have been really grateful. A lot of people have used your services and have been really happy, so thanks for that and thanks for sharing your advice on managing your finances. Is there any last tidbit of advice that you would like to give to people or leave with people when it comes to financial management?
Ben: Yeah. Do not do your own tax return, number 1, regardless of if it is going to save you a couple hundred bucks. Secondly, do not use a rubbish accountant. Go find an accountant that owns a lot of properties himself or represents a lot of people in the real estate industry because the extra hundred bucks that you are going to pay them for that tax return is going to save you literally – probably hundreds of thousands of dollars, to be honest with you; that would be a lot of times.
So, Ryan and I cannot give you that advice but the right people can and if you need any introduction, Ryan and I know some great people ourselves so just ask these sorts of things.
Ryan: Awesome! Thank you guys so much and until next time, stay positive!