Smart NOI boost or shiny object?

Question

Hello all. I am located in Fargo, ND and currently have 62 units across 16 properties. I am using third party property management at 6%. The items I find myself needing consistently are cleaning, maintenance, lawn service, and snow removal. Snow removal is obviously unpredictable but has been significant the last two years. There is a snow removal business for sale in my market with three plow trucks, a blower, and a dozen commercial contracts included for $35K. Owner discretionary earnings are 30-40K the last several seasons so the price is fantastic. However, the owner hasn’t raised prices in many years and the current commercial clients aren’t obligated to stay/contracts haven’t gone out this year. I’d be looking to establish a new S-Corp which would handle my snow removal, lawn care, maintenance, and cleaning as well as servicing other multifamily owner friends in my area. I can stay as busy as I want/generate considerable revenue in those categories if I choose. I have good personnel for those seats on the bus. My primary goal though is lowering my expenses for my portfolio while providing bettor service (more responsive/dedicated maintenance and snow removal done well and in a timely manner). I understand there is going to be a considerable time commitment on my end to start this up, get the systems figured out etc. Has anyone done this for their portfolio? What are your thoughts? Good idea or shiny object?

Greg Dickerson · Answer

The answers really depends on your goals and time available to manage and keep an eye on the new business. Focus is 100% of the game. What is the ROI on time and capital invested in the new business vs scaling the portfolio. Of course you cn do both if you are a great leader, delegator, motivator and have/can find great managers. If so you can do both and use the cashflow from the snow business to invest in more properties.The main thing to keep in mind is this will not save you money directly on your existing properties as you want to charge market rates for your properties just like you would for any other customers. This is a separate business and charging retail prices to services your properties will keep the the value of the business up. The business will be valued on a multiple of EBITDA when you go to sell it at some point which you want to plan for now and work towards the exit.

Dallon Schultz · Answer

@Steve Shaffer I think anyway to vertically integrate your company is a great idea as long as you have the systems in place to handle the growth. What is your main goal? Acquire more assets, maintain and manage your current assets, boost the NOI in preparation to sell? I personally find myself trying to do too many things at once and have to refocus on my strengths and bring in help for my weaknesses or additional growth. Is there someone you could partner with to manage the snow plow business while you focus on the real estate side of things? With a business such as that you'll need employees. Employees can be unpredictable and costly so could potentially end up costing you more time and money in the end. Just some things to consider when evaluating the pro's and con's. We're constantly looking for additional streams of revenue that compliment each other within our real estate goals so maybe the snow plow could be one for you!

Steve Shaffer · Answer

@David Acosta Thanks! Brick by brick! I agree with you and have certainly considered your approach. I'm trying to weight throwing the throwing a single plow on my truck approach versus buying this business for what is awfully close to book value that has some income associated with it. @Greg Dickerson I really appreciate you weighing in and for that excellent feedback. I definitely see this business as more of a vertical integration with the portfolio idea than something I was looking to scale and spin-off, but the EBITDA cautions still apply and if there's one thing I've learned from doing real estate for a bit here it is to keep as many exit strategies available as possible. Thanks again!

David Acosta · Answer

Hey, @Steve Shaffer! Congrats on the successful portfolio to date. I like your outside the box thinking here. I'm wondering if there's a middle ground here -- would it be at all feasible to purchase your own truck/gear and service/charge your own portfolio as a test run? If all goes well, you could then build out from there. If you did plan to vertically integrate in the future and bring management in house, I could see this idea making sense because you are already planning to move in that direction. Best of luck with this, I'm looking forward to following along.