Property Management 101
In This Chapter
* Looking at the pros and cons of property management
* Exploring the different types of real estate
* Surveying the steps involved in renting your property
* Walking through the day-to-day details of property management
The key to long-term success and wealth-building through real estate ownership lies in the foundation you acquire as a hands-on property manager. For instance, some people start out managing rental properties owned by someone else and gain a great deal of experience that they can use for their portfolio.
There are many positive reasons for becoming a rental property owner or manager, and just as many ways of doing so. Perhaps you've saved up the down payment to purchase your first small rental unit and hope to see your investment grow over the years as a nice retirement nest egg or a supplement to your current income. Maybe you want to invest in a medium-sized apartment building and build some equity as well as rental income to supplement or replace your current income. Perhaps you've inherited Aunt Gertrude's run-down cottage and need to find a good tenant who'll care for it and pay the rent on time. Maybe you've recently closed on your new primary residence, only to find that selling your existing home isn't as easy as the real estate agent promised. Or perhaps you've had to move across the country to find a suitable job but want to return to your home in the future.
Whether you plan to become a full- or part-time property manager, you need to know what you're doing — legally and financially. This chapter serves as a jumping-off point into the rental property world. Here you can find useful info, tips, and checklists suitable for novice or seasoned rental property managers. So get ready for some practical advice from the tenant trenches to help you handle situations when they arise!
Understanding What Property Management Really Is
Property managers provide consumers with a product known as shelter. In other words, as a property manager, you supply tenants with a place to live in exchange for the payment of rent. Although property management doesn't seem that complex, you can avoid the many mistakes unprepared property managers make by knowing what you're getting into.
The following sections give you a quick overview of the pros and cons of property management. Chapter 2 provides more in-depth analysis of these advantages and disadvantages to help you determine whether renting your property is the right choice for you.
Considering the benefits
Property management can be a rewarding and fun venture. I can't imagine my life without some aspect of property management in it (why else would I have written this book, right?). Following are some of the reasons why I get such a kick out of this business:
[check] Experience with real estate investment: As you manage rental property, you have the opportunity to observe and begin to understand investing cycles, which is an essential skill for becoming a successful real estate investor. Of course, some real estate investors succeed without ever being hands-on property managers because they hire others to handle the task for them. However, I believe rental property owners should gain that real estate investment expertise by actively working as property managers for several years, either for themselves or others.
[check] Interaction with different people: If you're a people person, you'll find that property management is a great opportunity to meet all types of people. Not everyone you encounter is someone you want to make your close friend, but you'll certainly have the chance to work with a smorgasbord of personalities.
[check] Skill development: Property management requires diverse skills because you must handle so many different tasks (such as marketing, advertising, leasing, screening, and maintenance). But it also allows you to grow those skills beyond the basics through patience and passion. For example, you may begin by advertising your rental unit in a basic way and move to analyzing an entire ad campaign. Pay attention to how unrelated products are presented for sale and apply those concepts to rental housing. Most of the best marketing ideas are already out there, and you just need to adapt them to your rental property.
[check] Variety: Personally, I enjoy the variety of tasks and challenges found in property management. Sure, some aspects of it are repetitious. Rent is due every month, and all properties require ongoing care and maintenance. But for the most part, every day in property management is something new.
Confronting the icky parts
You can't expect all aspects of property management to be fun. Just like your primary job, some days run smoothly, and others are filled with problems. Here are a few of the bad aspects of the property manager gig:
[check] Difficult tenants: Despite the great people you meet, property management has its fill of difficult and challenging personalities, including people who're downright mean and unpleasant. You have to be prepared for adversarial and confrontational relationships with others. Collecting the rent from a delinquent tenant, listening to questionable excuses, or demanding a contractor come back and do the job properly requires patience, persistence, and a fair but firm approach.
[check] Long hours: Because you're dealing with housing, you don't know when you're going to be needed. It may be 3 p.m. or 3 a.m. Like me, you can expect to be constantly on call — even when you're on vacation, at the movies, or in the middle of a family holiday dinner — to deal with issues that only the rental owner or property manager can handle. Fortunately, you can minimize these inconveniences by planning carefully and hiring competent and reliable employees and vendors who can prevent many unexpected emergencies through good management and maintenance. However, owning and managing rental property remains a 24/7, year-round commitment.
[check] Need for emergency capital: One of my favorite sayings and goals in life is "No surprises," but owning rental properties can lead to situations in which unanticipated expenses arise at any time. Tenants suddenly stop paying rent at the same time the roof leaks and the water heater goes out in the middle of the night! Having a nice nest egg, a rainy-day fund, or at least a decent unsecured credit line at reasonable rates can be very helpful, as most rental property owners experience a squeeze on their cash flow at times.
[check] Potential liability: After more than 30 years in property management, my opinion is that most tenants are good people just looking for a decent, quiet place to call home. But some "professional tenants" look for any mistakes you make or even set traps for you to fall into that can lead to claims for free rent or even litigation. You need to stay on top of all the legal requirements for landlords in your area and make sure you always comply with all laws and disclosures. If you're not willing or able to keep up with ever-changing legal requirements and health and safety issues, or if you're sloppy with your record-keeping, you may learn some expensive lessons!
The good news is that these negatives can be found in many other careers or professions that don't offer the benefits and satisfaction you can get from property management. So in my opinion, the pros outweigh the cons.
Examining the Types of Real Estate Available
Before you run out and purchase a rental property, you need to have a good idea of the different types you can own. Most real estate investors specialize in properties with specific uses. Investment properties fall into classifications such as residential, commercial, industrial, and retail.
For the purpose of this book, I focus only on residential real estate because the majority of rental real estate is housing, and the basic concepts are easy to understand and master. (After you master the basic concepts of residential real estate, you may want to consider other types of property management.) The best practices I present throughout this book are applicable for these types of residential rental properties:
[check] Single-family houses and condominiums or townhomes: Most real estate investors start with a rental home, condo, or townhome because these properties are generally the easiest ones to gain experience on. They may be located in a common interest development (CID) or community association where all the common areas are the association's responsibility.
[check] Duplexes, triplexes, and four-plexes or subdivided houses: This category includes properties with two to four units. Often these properties are the first choice for real estate investors who plan to live in one of the units or want to take the next step up from investing in a single-family rental home or condo. These properties qualify for favorable financing terms, so they're perfect for the new investor or an investor buying in higher-priced urban markets.
[check] Medium-sized multi-family apartment buildings: These buildings usually have between 5 and 30 units and are best run with on-site management and regularly scheduled maintenance and contractor visits.
[check] Large, multi-family apartment buildings: These properties are larger buildings that can have 30 or more rental units in a single location, with an on-site manager or maintenance staff. Owning one of these properties is the goal for many real estate investors who look forward to being able to hire a professional property manager and just check their bank account for their regular cash distributions. (I reveal what to look for in a good professional property manager in Chapter 3.)
No matter what type of residential real estate you're involved with, you need to understand the basics of property management. You must market or staff a property differently depending on its size and location, but many of the fundamentals are the same, regardless.
Over the course of your tenure as a property manager, you'll probably manage several different types of properties. That's just one of the challenging yet fulfilling aspects of the job. For example, you may start out managing single-family rental homes or condos and then see your investments or career progress to larger rental properties. Sometimes people in the rental housing business start out as on-site employees for large rental properties, learn the ropes, and later apply that knowledge to become the Donald Trump of rental houses in their area.
Owning and managing all types of rental property can be lucrative, and I suggest you jump in where you have your first opportunity, because no rules mandate your starting position.
Renting Your Property
One of the first and most important lessons I learned when I started in property management more than 30 years ago is that vacant real estate isn't a very good investment. You need to fill those vacancies and keep them filled with tenants who pay on time. Just try looking in the mirror and telling yourself that all the rent came in last month. I bet you can't do it without smiling!
Of course, renting your property and retaining your tenants doesn't just magically happen; it requires a plan and a lot of work. But you want to work smart and not just hard. In the following sections, I cover some of the best practices for preparing your rental units, setting your rents, attracting qualified prospects, and closing the sale.
Chapter 4 expands on where it all begins: the acquisition of the rental property. Part II then helps you position your new rental property within the rental market and discover how to find good tenants.
Preparing the property
Before you can rent your property, you have to make sure it's ready for a tenant to move in. However, you can't simply put a For Rent sign up and expect to rent to the first caller. You need to spend some time properly preparing the property. And by "some time," I mean a lot.
Relax! Tear up that application to those cable shows that completely renovate your fixer-upper for free, because you can prepare your property yourself. Just remember to focus on the inside as well as the outside. Chapter 5 shows you the best way to determine what to upgrade and renovate to meet the needs of your target market of prospective renters. I also explain how to ensure that your property's curb appeal, or its exterior appearance, makes your potential new tenants want to see the inside of it and not keep driving by to the next property on their list.
During this stage, you really get to test your decorating skills on a budget because you don't want to over-improve the property. But if you're too tight and try to get by with anything less than your best effort, be ready for the majority of those individuals showing interest in your rental unit to be the least-qualified prospective tenants. The moral of the story? Don't be cheap, but do be practical!
To get the great tenants, you need to guarantee your rental property compares favorably to other properties in your area and makes that important positive first impression. This impression starts on the exterior, with a neat and well-maintained appearance, and continues with a clean and inviting interior, with the features and amenities expected by prospective tenants in your area.
Properly preparing the unit also often requires the use of outside vendors or contractors. What you don't contract out — tasks such as basic cleaning, maintenance, and painting — you need to do yourself. You also need to know how to perform a careful inspection to make sure the unit is ready to show. I give you details about how to accomplish all these tasks in Chapter 5.
Knowing how much to charge
Understanding what you can charge your tenants is far from arbitrary. Setting the rent in particular can be tricky — especially if you've just spent hours investing your time and sweat into renovating and scouring your rental unit to make it sparkle.
In such cases, you may overestimate the market value of your unit because you have so much personally invested. But your prospects aren't likely to be impressed that you laid the tile. Instead, they'll quickly point out that the carpet color doesn't match their furniture, but if you lower the rent $300 per month, they'll consider taking the unit off your hands, almost as if they're doing you a favor. You may be able to structure some mutually beneficial rental concessions, but don't be a pushover.
Many rental property owners are simply too nice. Maybe you're someone who has trouble bargaining and holding out for the top fair-value dollar, kind of like my mother-in-law, a sweet but overly generous woman — especially when it came to yard sales. My wife and I are glad no one ever offered Rita 50 cents for our car!
before a tenant moves in:
[check] The amount of the security deposit: Setting security deposits is a function of not only market conditions but also limitations on the amount you can charge and whether that amount's fully refundable. These restrictions are set by your state laws. Determining whether you want to pay your tenants interest on the deposits you hold is also subject to law, but certain advantages can warrant doing so even where not required (especially for long-term tenants).
The best way to decide on all the details of the security deposit is to conduct market surveys to see what others are doing. If everyone else has security deposits set at approximately half of a month's rent, requiring your new tenants to come up with a security deposit of two full months' rent upon move-in is difficult.
[check] The type of rental contract: Another important decision that has lasting consequences is deciding whether a lease or month-to-month rental agreement is best for your property. Such conclusions are often reached after conducting a market survey and understanding the pros and cons of each type of contract.