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It is recommended that a first
time real estate investor hire an outside management company
to manage your first property. It is a good way to learn the
day-to day operations, review accountings, understand management
expenditure requests, prepare budgets, negotiate with vendors,
renew or write new leases, etc. You should locate a management
company before purchasing the property.
Management fees are usually determined as a percentage of
rent collections (typically 4-6% for smaller properties and
2-4% for larger ones).
A property manager must be able to perform the following
obligations:
- Fees and operations
- Monthly reports
- Billings and collections
- Leasing and tenant relations
- Repairs, capital improvements and replacements
- Bonding and insurance
- Marketing
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Understanding property management
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From the time you buy a property until you decide to sell it, what
happens to it will be an important factor in what it will be worth
at sale. Therefore, your investment will require management. Good
real estate management will maximize the net return, adding value
to your investment.
Property management encompasses a broad range of decision-making
and planning functions, including bookkeeping, policies and procedures,
tenant-selection and rent collection, planning for the future, improvements
to the property and more. While there are good management firms
available to take over these duties, there is no substitute for
an involved investor. The management experience you gain will prove
invaluable in making future investment decisions.
Before you buy
As an investor, you will want to take a look at all current leases
and service contracts before you buy.
Setting
rents
Properties being sold often have units paying below market rates.
Before raising the rent, you should try to make repairs or improvements
to show you care about maintaining the property. Little things like
this will go far in improving tenant-landlord relations.
Filling vacancies
Half of all apartment vacancies are filled by merely posting a sign
indicating a unit is available to rent. Potential tenants should
fill out an application indicating employment and rental histories.
You or the manager should check the applicant’s references
and make sure they are who they claim to be.
Units with lower rents tend to require more management input than
more expensive rentals. In addition, allowing pets will reduce vacancies
and mean more tenants will remain for a longer term; however, a
security deposit should be given and rules must be initiated and
enforced in order to keep damage and nuisance to a minimum.
Maintaining the rental unit
In areas where rentals are in high demand, a landlord can get away
with doing very little in order to rent a vacant unit. Regardless,
a unit should at least be properly cleaned before a new tenant moves
in. When units remain vacant, it is a good time to make repairs
or upgrades to increase value. When considering improvements, look
at how much the improvement will contribute to the net income. It’s
important that owners stay clear of making improvements which will
not be paid for in 4 or 5 years through the increase in net income.
Security
Property owners should not advertise that a building is secure or
that tenants will be safe living there. Some courts have determined
that statements like these made in ads amounted to a “warranty
of safety” making the owners liable for damages. However,
owners do have a duty to make properties as safe and secure as reasonably
possible by providing adequate exterior lighting, installing peepholes
and security chains, installing quality window locks and deadbolts,
as well as replacing hollow core doors.
Handling problem tenants
Many income property owners sell because of problems with tenants.
Because of this, it is often better to let a problem tenant break
a lease without consequences so they will just leave. Most tenants
will not cause problems, but be careful of unreasonable ones trying
to take advantage of you. A property owner should do all they can
to address the tenant’s problems; however, if the tenant stops
paying rent, you should begin eviction proceedings immediately.
Tenant problems can generally be solved before they begin by screening
potential tenants before you allow them to rent. Verify employment,
check credit and contact prior landlords. The best rule of thumb
is to avoid renting if you are unsure of a tenant’s reliability.
However, landlords should be familiar with civil rights acts which
prohibit discrimination based on factors other than ability to pay,
job history, credit history, etc. Rental qualifications must be
uniformly applied to all potential tenants.
Uniform Residential Landlord and Tenants Act
The Uniform Residential Landlord and Tenants Act has been adopted
by all US states, although some states have individually modified
potions of the act. The act sets forth obligations of the landlord
and tenant, which all landlords should be familiar with prior to
taking over a tenant occupied property.
Evictions
It’s generally easier (and cheaper) to pay a problem tenant
a small sum in order to get them to move rather than begin eviction
proceedings. Evictions proceedings result not only in legal expenses,
but also income lost during the process and likely property damage.
Laws governing evictions vary from state to state. Again, landlords
should be familiar with the process before taking possession of
such a property.
On-site apartment management
Many times an owner will delegate the day-to-day management of an
apartment complex to a resident manager who may be paid in some
combination of salary and/or free or reduced rent. In exchange,
the on-site manager will perform duties such as taking rental deposits,
handling minor maintenance issues and solving tenant problems.
Managing to make and save money
Profits can be made by coin-operated washers, dryers and vending
machines. Moreover, owners should look for ways to cut utility costs
by installing florescent lighting in common areas, increasing insulation,
maintaining weather stripping, and planting windbreaks near buildings.
Record keeping
Accurate records of income and expenses must be kept for tax purposes
and should be kept as an aid in long-term business planning. To
help, consider using a property management software program to keep
your records organized.
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