Effective Property Management, the Key to a Profitable Investment
When it comes to real estate investing, the price you buy at is often considered the most important factor in being successful. However, if you intend to own your property for any length of time the manner in which you operate it (i.e. property management) is equally important. Tens of thousands of dollars can quickly be lost if you attempt to self-manage without the proper systems & processes in place. A house bought for a severely discounted price can quickly turn into a liability (and a significant source of stress) if you do not manage it effectively. On the contrary, a property that you may have paid slightly too much for can (in time) become a profitable venture with exceptional management.
So, you want to manage your own properties?
All too often, novice investors with no prior experience purchase real estate and attempt to self-manage. They assume that it's easy and that tenants will treat the property as if they owned it. This assumption can lead to a very short career in real estate investing. A rental property is a business, would you attempt to run a business if you had no prior experience/education in the industry? There is a reason that one of the most reliable sources for successful investors to purchase properties at a discount is from small-time rental property owners who self-manage. They are often willing to get rid of their properties for any price because they are so tired of managing them (and losing money). They begin their (brief) careers as property managers thinking it's easy and end them with no desire to ever own a rental again. There are certainly investors who have self-managed their rentals from day but those individuals made sure they understood all of the following items from day one.
It's going to get uncomfortable
Property management can involve difficult situations and extremely unpleasant conversations. Are you prepared to post an eviction notice on a family's door? Are you comfortable having to explain to your tenant why you're keeping their security deposit when they move out due to damage? Are you prepared to increase rent when the market dictates? These are all realities of property management and if you're in the business for any length of time you will almost certainly have to have these conversations. All too often, novice managers let these items slide and avoid difficult conversations which ultimately leads to the loss of money and the steady decline of the property's condition. If you're planning on self-managing, you must be prepared to deal with these situations as they come up and not allow your emotions to affect your decisions.
Advertising Your Property
Implementing effective marketing strategies to attract tenants to your property is essential to running a profitable business. You first have to determine what the appropriate monthly rent is which can be done by looking at what comparable properties are listed for, using sites link Rentometer to see what similar properties are currently rented for, and talking to local agents/property managers. Once you know what to charge for your unit it's time to start advertising. If you're in a hot market then this is relatively easy and you may be able to quickly fill your units simply by posting on Zillow. However, if you're in a slower market you will want to be sure to also post on other sites such as Craigslist, Hotpads, Trulia, Facebook Marketplace, Realtor.com, and your own website if you're business is far enough along to have one. You can also put a "for rent" sign in the yard but the reality is that few prospective tenants are calling numbers off of yard signs and nearly all of them are looking online. Utilizing several different marketing platforms will help ensure that you begin to get leads, but knowing how to screen them effectively is essential to being successful.
Screening Tenants
If you are going to manage your own rentals, thoroughly screening your tenants may be the most important step of the process. Before someone has moved in there are numerous (legal) reasons to not allow them tenancy. However, once they have settled in it is EXTREMELY costly, difficult & time consuming to get them out. Therefore, you must have a solid vetting process that ensures only responsible, trustworthy adults are renting from you.
First and foremost, you should always require that they fill out a rental application. This (seemingly) simple task disqualifies many people as they will take one look at it, see the multitude of personal questions, and decline to even fill it out (this is a good thing). A solid rental application will at minimum include all of the prospective tenant's personal info needed to run a background check, financial information, the phone numbers of their two previous landlords, their employer's information, names of all individuals that will be moving in with them, and questions asking if they've been evicted/foreclosed on. In addition, the tenant should pay an application fee that covers the cost of the background check. Here in Colorado, the law dictates that you can only charge a tenant the exact amount the background check cost you and you must be able to provide them a receipt showing that amount if requested. If you live elsewhere the law may vary but be sure to check on this item before you charge an arbitrary application fee. Additionally, be sure to check on your state's laws regarding what questions can and cannot be asked on your rental application as it varies tremendously depending on where you live.
Once you have the application filled out, you can now conduct your due diligence by running the background check, calling their references and verifying their employment. As a rule, the prospective tenant's gross monthly income should be 3 times the monthly rent at minimum. This should be verified by asking for two pay stubs and by calling the employer and speaking with their manager. In addition, if the background check shows any felonies, evictions, or foreclosures the applicant should be immediately disqualified. Finally, when you call the applicants previous landlords ask questions like "were they ever late on rent?", "was there any damage to the property when the tenant left?", "why did they leave?", and "would you rent to them again?". A 10 minute conversation with their last landlord will give you a good idea as to whether or not you want them in your unit. If you take all of the aforementioned precautions, you will significantly increase the probability that the tenants who make it through your vetting process are financially responsible adults.
Fair Housing Laws
When screening tenants, it's extremely important to be cognizant of fair housing laws. The Fair Housing Act prohibits discrimination of a prospective tenant due to their race, color, national origin, religion, sex, familial status, or disability. These are the protected classes outlined in the federal law and these items must not be taken into consideration when deciding who to rent to. It's important to keep in mind that this is a federal regulation and your state may have additional legislation outlining what might be considered "discrimination". (HUD.gov)
What if you have a tenant who is behind on rent? Perhaps they're a single parent and you know they're trying their best to pay on time so you decide to cut them a break by not charging them a late fee. You've likely violated fair housing laws. If you have charged your other tenants that late fee, but did not charge this specific one a fee due to their situation, you are discriminating. What if you have a "no pet" policy but a tenant claims they have an "emotional service animal"? You can request that they provide documentation proving that it is registered but you CANNOT reject them due to the animal or else you are discriminating. These examples illustrate why it's essential to know the subtleties involved in fair housing laws. When you think of "not discriminating" the first thought that comes to mind is often that you would never do so. That is, until you realize that helping a tenant out who falls on tough times may be considered discrimination. The key is to have standardized policies and procedures that adhere to the law that you never deviate from. (HUD.gov)
Your Lease
Once you have your screening process down, ensuring your lease is bulletproof is the next big step in effective property management. If you know an experienced real estate investor/property manager who is willing to share their lease with you (and they're in the same state, therefore, under the same laws as you) then using their lease as a starting point can be a good option. You should always have the lease looked over by a real estate attorney but having an existing lease for them to analyze will cost far less than creating one from scratch. Otherwise, you may want to bite the bullet and have them draft a lease from scratch to ensure it's legal and thorough. An effective lease will outline all of the responsibilities of both parties, highlight who is renting the property and for how long, and describe what actions allow for breaking of the lease by both parties.
This will likely be one of the first questions that the prospective tenant will have asked, but the amount of the security deposit should be clearly outlined in the lease. At minimum, the tenant should not be allowed to move in until you've received first month's rent and one extra month's rent as a security deposit. Ideally, you should require first AND last month's rent along with 1 month's rent as a security deposit. If you're in a decent market this should be realistic and is the safest way to go.
Be sure your lease isn't entirely one-sided. It should include clauses that outline the tenant's rights just as it outlines yours as the property manager. Leases that are too heavily geared toward protecting the landlord and that fail to include the tenant's rights are likely to be thrown out in court.
Pre Move In Inspection
Once you've selected your tenant, they've signed the lease, and they're ready to move-in, it's essential to conduct (and document) a pre move in inspection that documents the condition of the unit before the tenant moved in. This should be a full-report with photos of all rooms in the unit clearly demonstrating that everything was in working order before the tenant moved in. Additionally, the tenant should sign & date the document verifying that they agree with the details of the report. This ensures that when the tenant moves out there are no questions as to whether or not damages were there prior to move in.
Regular Inspections
Your lease should clearly state what intervals you will be inspecting the unit on. Again, this should not be a one-sided relationship and the inspections are as much to ensure that the property is safe and well-kept as it is a chance for you to be sure they're adhering to the terms of the lease. You should be inspecting the property twice a year minimum and some managers go as far as quarterly. Whatever interval you decide to put in the lease is what you should follow and be sure to give your tenants several days' notice before you conduct your walk through.
Maintenance
When you conduct your inspections you will likely find that your property is in need of maintenance. Do not put off repairs! Always hire a qualified expert to do the work and be sure it's completed promptly. Novice property managers frequently try to save money by completing repairs themselves which can be a good option if it's a simple fix. However, if it's something that requires more specialized knowledge such as electrical work be sure to hire someone who has the expertise to do the work properly. Trying to save a quick buck by doing work yourself that you're unqualified to do can lead to significant management issues (and more expenses) down the road.
As a property manager, you need to remember that your tenants are your customers and treat them as such. Tenants need to be able to submit maintenance requests easily and you must respond to them quickly. Setting up a Google Voice number for your tenants to use when they need to contact you is a cost-effective way to avoid giving out your personal cell number.
Evictions
If you manage rentals for any length of time, then there is a high probability that you will have to go through the process of evicting tenants. The process varies from state to state, but generally begins with the landlord issuing a notice requiring the tenant to correct whatever issue is causing the landlord to take action (non-payment of rent, violation of other parts of the lease, etc.). If the tenant does not fix this issue then (after a certain number of days depending on the state) the landlord can file an eviction suit against the tenant. The lawsuit can take several weeks or several months to go through depending on the details but once the process is complete a law enforcement official is the only person that can legally remove the tenant from the premises. This can be problematic because often times there is a significant wait for the official to come to your property and remove the tenant. Here in Colorado, it normally takes up to a month. Besides the lost rent, you're looking at $3,000-$4,000 in costs to go through the entire process. This is why it's so essential to implement a rigorous screening process that reduces the chances of ever having to evict a tenant. (Dillman, Beth)
It's also important to note that you must be 100% consistent in your process when evicting tenants. Your lease should state exactly what day rent is due and how many days after is considered late. If you serve a tenant a 3 day notice on the 3rd of the month for non-payment then EVERY tenant who has not paid rent by the 3rd of the month must be sent the same letter. Remember, your treatment of tenants must be consistent in all of your operations to ensure you're not in violation of fair housing laws.
Further Considerations
Another mistake that leads to poor property management is the lack of funds to properly maintain the unit. All too often, investors over-extend themselves and end up not having the capital required to operate their property effectively. They end up deferring maintenance which leads to lower rents and less responsible tenants. With less money coming in via monthly rent checks and more negligent tenants many landlords then become even more hesitant to spend funds towards repairing their property. This is an unfortunate cycle that leads to an investment that is not profitable and tenants who do not get a functional and safe home. The takeaway here is that you must be financially prepared to handle maintenance as it comes up or your property will often become more of a liability than an asset.
As a real estate investor, it pays to be forward-thinking. Although you may manage your properties now, you never know what your situation will be in 5 years so even if you plan to self-manage you should be prepared to hire a property manager eventually (blog on this soon). Therefore, it's important that your monthly rents afford a margin to cover a property manager in the future.
Managing properties is not easy, but if you take the time to set up efficient systems & processes, to understand your state's laws, and to keep your property safe and functional a new investor can effectively (and profitably) manager their rentals.
References
Dillman, Beth. “The Eviction Process in Colorado: Rules for Landlords and Property Managers.” Www.nolo.com, Nolo, 19 Jan. 2016, https://www.nolo.com/legal-
HOUSING DISCRIMINATION UNDER THE FAIR HOUSING ACT.” HUD.gov / U.S. Department of Housing and Urban Development (HUD), https://www.hud.gov/program_
This blog was written by Dan Haberkost - dan.haberkost@gmail.com