How to Effectively Manage Property
by Rob Chiang
Have you ever felt overwhelmed by your apartment operations? You are not alone! Whether you own 10 units or 200 units, managing both portfolio sizes could take eight hours a day. We want to share with you where to put your time, energy, and resources. Once you see the amazing rewards of your labor, there is no looking back.
In this article, we will cover a few key topics within property management that should send you down the correct path for both “buy and hold” and “portfolio growth” strategies. This article is written in an owner’s magazine, so let us first assume you own rental property.
Whether you are an owner-operator or supervise your management team, the same principles apply. Do not assume that your property management firm can read your mind. Have a monthly strategy call regarding the performance and direction of your apartment complexes. Every question formed is worth asking.
As apartment operators, one of the most frequent questions we are asked is “What improvements will increase the value of my property?” The simple answer is “Anything that will increase the monthly rent of each apartment.” Sounds easy enough, right? Let’s dive in.
Case Study 1 – Improvements
(2) Bed (1) Bath apartment rents for $2,400 per month. Just picture a basic class “B-” apartment in a “B” neighborhood with no A/C, shared laundry on-site and carpeted floors. Here are some straightforward improvements that could raise the market rent for that apartment. Pergo floors (+$25/rent), Wall A/C Unit (+$150/ rent), adding stacked or all-in-one laundry in-unit (+$100/rent), and fencing off private patio/backyard space if available (+$100/rent).
With these new amenities, your “Class B-” $2,400 per month can now be rented as a “Class B+” apartment for $2,775 per month. You are now collecting an additional $375 per month. In other words, you can collect an additional $4,500 rent per year for this single unit. With an average apartment size of 800 SF, the improvements mentioned above might cost $10,000. In this case, your investment would be paid back in less than 2.5 years.
If you are planning to sell or refinance your property, this increased rent also increases the value of your building. For example, a 15 GRM x $4,500 increased annual rent = $67,500 in added value per unit. If you own a 20-unit property, you just added $1,350,000 worth of value while spending $200,000 in capital improvements. You could also spread this expense over 5 years, spending $40,000 per year. If you are an Owner-operator, you call all the shots and execute. If you hire a property management firm, they will need remodeling instructions and budget constraints. If you are really in a hurry to boost value with limited capital, turnover a handful of units and pro-forma the rest.
As a rule, try to keep your remodeling cost per apartment unit at less than $30K. Additional boosts to your rent per month could be converting carports to garages (+$100/month per space) by adding power, motorized doors, and hardware. Interior demising walls are also an option, though more challenging with the fire code. Upgrading appliances are also an easy way to refresh a dated kitchen. If you are planning on holding onto your property until your kids inherit it, a solid remodel should last 20 to 30 years. If you are planning on selling the property, upgrade the interiors 6 to 24 months before time of sale. Buyers like when the updated units have some proven rental history, while the interiors still look fresh.
Here are some examples of big ticket items that a renter would love to have, but are usually not willing to pay more for: upgraded three-prong grounded wiring/outlets, main/sub panel upgrade, thick drywall insulation, popcorn ceiling removal, heater replacement, raising ceiling height, parking lot surface material, landscaping appearance and maturity, concrete surfaces, main sewer line, main copper water line, security gate, security guard, security cameras, stucco, siding, and roofing. Granted, these items listed are important, but should be planned for in the long-term capital expense category. Always do the improvements that create more cash flow prior to the expenditures that do not generate revenue. Once sufficient cash flow has accumulated as retained earnings, you can plan for items like a new roof and solar panels, Rose bushes, etc. It is also a good idea to consult with your CPA to see which capital improvements offer the most favorable depreciation schedule.
Selecting the Right Applicant
Great, you have made all the improvements you are comfortable with! You have placed an advertisement and have shown the apartment. The next step is selecting the right applicant. AOA provides thorough tenant screening. The more information you have on a prospect, the better. Therefore, always go with the AOA 5 Star Tenant screening. Don’t worry about the higher cost. Applicants are willing to pay you $30 or $40 application fees, which covers the costs of AOA 5 Star Tenant screening. If you hire a property management firm, just be specific and consistent on the tenant criteria you are looking for. In addition, always follow fair housing laws.
Here are a few contact-free tips that help save time during the move-in process:
- Sign your lease electronically. There are services like docusign.com that help facilitate this process. All parties receive a completed copy when fully executed.
- Collect rent funds electronically. Collecting paper checks and running to the bank takes valuable time.
- Install a digital lock. Once you receive their move-in funds, provide the tenant with their code. No more lost keys or waiting to meet a tenant while they are stuck in traffic. No pressure on either party. Change the code next time. Just manage the low battery warnings every 9 to 12 months. Using the contact-free methods listed above could save you three hours per lease, including driving time.
Once the new tenant has finished moving in, check in with them to see how they have settled in. You may want to save an email template as follows:
Dear #1 Tenant,
Hope you are getting comfortable with your new housing. This is a friendly reminder to have the utilities transferred into your name. Should you notice any maintenance items that require our attention, please make a list and respond to this email with photos. We will set an appointment with you to get the apartment tuned up to your satisfaction. In the meantime, please contact us with any questions. Sincerely, Management or (Your Name).
Once you hear back from the tenant, be sure to thank them for any feedback. Think of each tenant as a virtual manager. It is in the best interest of all parties to have the property running smoothly.
If a tenant requests a big-ticket item that is not necessary but desired, discuss splitting the cost with them. Each tenant will have their own unique housing preferences, so perform all reasonable comfort-related requests.
Generally, the higher the rent – the pickier the tenant. You have started collecting higher rent, so be prepared to cater to your high rent tenants. Make sure your common areas are exceptionally clean, well-lit, and free from hazards. Respond as quickly as possible to service calls. The sooner the response, the better the tenant experience. Respond no later than 24 hours for non-emergency work orders. Always be professional, and in return, tenants will treat you nicely. When entry for a routine inspection is required, send two emails and post notices. If you hire a property management firm, let them know your expectations in advance. Assuming everyone is healthy, being physically inside an apartment is the best way to formulate the most suitable solutions to the issues presented. If physical contact is not desired by tenant/manager, then all parties should be open to sending/receiving photos/videos and using video chat.
Each rental property is a unique investment business. Tenants are our customers. As landlords, we are housing providers or “business owners”. The customer is always right, usually. In a rental market that favors tenants, do what you can to please and retain your customers. For example, always welcome tenant feedback. Always sympathize with the tenant’s request, even if their request is being rejected. For example, a tenant is requesting that new windows be installed, but the landlord was not planning on installing new windows for several years. How do you respond? Whatever you do, do not promise new windows unless you are going to do it. Alternatively, you could say “New windows are something we would love to do, however a specific date for this major expense has not been committed to yet. Please check back with us again in six months, 12 months, 18 months, etc.” For now, suggest a better curtains/blinds combination and talk through possible solutions with the tenant. Sometimes just talking with the tenant for a few minutes about their wish list can make them comfortable enough to renew the lease for another year.
Be Aware of the Activity on Your Property
However, stay out of the tenant’s personal business. Document any complaints between tenants. Make sure the tenant’s information remains confidential. Only send out an email blast when you bcc: everyone. PM Software will automatically do this, but when using Gmail, you need to bcc: all. Never do a group text to all tenants. If tenants want to share their information, that would be their own choice. As the owner and/or manager, always keep an arm’s length distance between tenants. When it comes time to serve a tenant a 3-day notice to clean their carport, raise their rent or collect unpaid rent, make sure they take you seriously. Keep your landlord-tenant relationship strictly professional.
Do you really want to see how your building is performing? Obtain a third-party opinion.
Building inspectors are a valuable resource so treat them as such. Treat them as your enemy and you are unlikely to be pleased with the inspection results. If annual city inspections at your property are not required, ask the local fire marshal to inspect your building. A small amount of funds spent on prevention will help you sleep better at night. Nobody can do this job alone efficiently, so obtain the help you need. Getting out in front of any issues that arise is always the best strategy. Survey the tenants to see if they notice anything wrong at night such as: lights out, water sounds, parking violations, animals in the attic, etc. Tenants can be shy unless called upon. Some landlords have conditioned tenants to remain silent. Some landlords think ‘no news is good news’. However, if your tenant has a tub spout that will not stop dripping, ‘no news’ will often mean you have to rip out the entire bathroom after black mold has taken over the bathroom ($15,000). Had the tenant simply reported the leak to you right away, a shower cartridge is the likely fix ($250).
The best tenants are willing to inform the landlord of all perceived issues. For example, a smoke alarm that caught the attention of a tenant who then called the fire department. Even though there was no visible smoke, the tenant still called 911. Thanks to this tenant’s quick action, they saved the rest of the building and its occupants from serious harm. Key points here: 1) You have working smoke/carbon monoxide detectors 2) Tenants are willing to report small issues right away before they become big issues 3) One unit was damaged instead of the entire complex. Sending the tenant a $50 gift card is a nice way to say thanks for saving our $5M building from going up in flames. Yes, you have insurance, but who wants to go through the hassle? The last insurance claim we filed took nine months to pay out.
In conclusion, we have covered a few basic points on how to effectively manage property. Point 1: Get your rents to market rate as quickly as possible. Point 2: Keep your tenants happy and all else will fall in line. Point 3: Perform preventative maintenance to keep your tenants renewing their leases. Repeat 1-3. Now you have an efficient business.
Bonus point: Tenant laws can change from city to city. Please check with your local municipality on the current laws. During COVID-19, there are also emergency orders that supersede the existing laws.
Pop Quiz: 1) Who is your assistant? If you do not know, you are. 2) Who is your handyman? If you do not know, you are.
Disclaimer: I hold a Real Estate Broker and CA General Contractor’s licenses; however, I am not a lawyer or CPA. Each owner’s situation is individual and unique. I recommend you consult with your legal or tax professional for advice that fits your situation. The information given in this article comes from a practical perspective.