Key facts
- Investor Brannon Potts has increased his profit despite falling rents by focusing on reducing expenses.
- Potts reduced his overall operating expenses from over 30% to about 26% of rental revenue.
- He lowered mortgage interest costs by refinancing loans from rates around 7.5% to 5.3% and 5.9%.
- Potts successfully challenged property tax assessments, reducing their share of revenue from 16.6% to 11.7%.
- He increased insurance deductibles to 5% from 1% and utilized a broker to find better rates.
Brannon Potts, a real estate investor aiming for early retirement, has successfully increased his profits despite a recent softening of rents in North Texas. He attributes the rent decline to a significant increase in new rental properties coming onto the market.
Potts, who started investing five years ago, owns 14 rental units across eight properties and plans to expand his portfolio. Instead of purchasing existing properties, he utilizes a build-to-rent strategy, constructing his own rentals and documenting the process on his YouTube channel.
Rather than relying on rising rents, Potts has concentrated on reducing his operational costs. He has managed to lower his overall operating expenses from slightly over 30% of rental revenue to approximately 26%. This has been achieved by focusing on three key expense categories: mortgage payments, property taxes, and insurance.
Financing is Potts' largest expense. He capitalized on dipping interest rates over the past year to refinance several mortgages, moving notes from around 7.5% down to 5.3% and 5.9% for 30-year terms. This reduction in interest costs not only lowered his expenses but also allowed him to pay down more principal each month, increasing his return on capital.
Potts also became proactive in managing his property taxes. Initially accepting appraised values, he learned to file protests and argue for lower valuations. This strategy reduced the portion of his rental revenue dedicated to property taxes from 16.6% in 2022 to about 11.7% currently.
To cut insurance costs, which previously represented about 6.2% of his rental revenue and now stand at 5.2%, Potts raised his deductibles from 1% to 5%. This approach aligns with his substantial cash reserves for repairs and vacancies, allowing him to insure primarily against catastrophic events. He also began working with a broker to compare policies from multiple insurers, rather than a single agent.
Potts utilizes 'common size analysis' to identify cost-saving opportunities. This method converts expenses into percentages of rental income, making it easier to spot properties where costs like taxes or insurance are disproportionately high compared to others, prompting further investigation.