You’re about to discover the 10 commandments of property management. Every landlord should apply these simple principles. And although I read books and attended trainings on property management when I first got started, the bulk of these commandments came from over a decade in The School of Hard Knocks. Here are your 10 property management commandments:
1. Choose Your Tenants Wisely
Ninety percent of property management is choice of tenant. When you choose the right tenant, property management is very straight forward. Chose your tenants wisely. To choose wisely, you must advertise extremely aggressively, so that the entire pool of potential tenants in a given market knows your property is available. You must offer the right rental rate because good tenants are very sensitive to higher-than-market lease amounts. Then, you must be very selective and choose the one that has the best overall application. Most important is how they produce income. Nurses are fantastic because nurses always have employment opportunities, and if they ever fall behind on payments (which many tenants do), they can pick up extra shifts to catch up. Self-employed people are the highest risk. They are the most likely to give you the sob story about why they can’t pay rent this month. Sifting through and deciding on which tenant to select is extremely important and requires patience. You’re better off with a vacant property than one that is filled with a bad tenant. Choose your tenants wisely.
2. Your Properties Must Cash Flow Well
Too many investors buy properties that have very little cash flow. If the property doesn’t cash flow extremely well, it’s not worth the headaches and hassles of owning it because all kinds of things can go wrong. The most common problem is that the tenant stops paying you–but doesn’t move out. Then you have to make empty mortgage payments and cover the costs to evict and the expenses to renovate what the tenant destroyed. All kinds of things can go wrong and having the cushion of good cash flow can help offset the hazards. It’s far better to have fewer properties that all individually cash flow well than a huge portfolio of deals that barely break even.
3. Establish Reserves Upfront
In addition to cash flow, you should have reserves socked away for each property for when the inevitable storm comes your way. You can certainly save all your cash flow until you build up a reserve, but it’s even better to establish reserves upfront, before the tenants move in. If you are renting a single family home, consider offering the property as a rent-to-own because the tenant creates a reserve for you.
4. Master Your Local Laws
The devil is in the details when it comes to landlord and tenant laws. It’s the little things that can really trip you up and, if you don’t bulletproof yourself, a professional tenant can wreck havoc. He could live for free for several months or take you to court and win some frivolous lawsuit because of some technicality you weren’t aware of. Landlord and tenant laws can vary tremendously from county to county – not just state to state, so you want to study the local landlord and tenant act for the county where your property is located. Take a marker and highlight anything you don’t fully understand. Then pay a local eviction attorney for a few hours of their time and sit in their office and have them educate you on everything you don’t understand. To find the best eviction attorney, head down to the eviction court for your county and note the attorneys whose names appear the most on the docket. In most counties, 80% of the eviction cases are handled by a handful of eviction attorneys. Work with the one that does a tremendous amount of eviction cases.
5. Prepare for Eviction Before a Tenant Moves In
You should prepare for the day of eviction before the tenant ever moves in. That includes having your eviction attorney review and make necessary changes to your lease agreement. During the “honeymoon phase” (before the tenant has moved in), is the time to get all the information an eviction attorney would need in the event you have to file for eviction. Ask the eviction attorney what the perfect eviction file looks like. It may include a copy of the tenant’s driver’s license, a picture of their license plates, a very thorough rental application, and more.
6. Evict Tenants That Don’t Pay
Be very strict about following the payment terms and conditions in the lease. If the tenant doesn’t pay on time, you charge a late fee. If they don’t pay prior to the late fee period, start the eviction. If you give a tenant an inch, they will take a mile. And if you can’t stomach the idea of evicting someone for not paying their rent, it’s best that you not own rental property. A tenant needs to be held accountable for not following the terms of the lease. Evict tenants when they don’t pay the rent or don’t own rental property if you don’t feel comfortable evicting.
7. Auto Collect Rent Payments
Waiting for checks in the mail is not efficient and breeds excuses from tenants. Instead, set up a merchant account and process the tenant’s payments as an ACH directly from their checking account. As a back up, if the money is not available in the bank account, get their credit card information and process the rental payment on their credit card. You’ll have to get the proper authorizations in writing from the tenant prior to do this, but you can do that before they move in. And it’s better to process the payments yourself rather than use an outside company. Those outside companies sometimes allow the tenants to call them and request the payment not be processed that month. That defeats the purpose altogether! The power in direct drafting rent payments from a tenant’s bank account is that they are forced to have the money in their account or they will get hit with insufficient funds fees. So they hustle to make sure that at least there is enough money in their bank account for the rent payment to go through.
8. Periodically Inspect Your Properties
Keep a close eye on your rental portfolio. Periodically, inspect each of your properties to view the condition and how well the tenant is maintaining the property and if the tenant is breaking the lease in any way. Something as simple as not changing the A/C air filter can ruin an air conditioning system and although you can hire someone else to do periodic property inspections, nothing replaces you as the owner having your eyeballs on the property itself.
9. Own Close to Home
Owning close to home is helpful for productive landlording. You know your own backyard better than anywhere else, so you know where the best employers are (and therefore you know where to advertise your vacant rental units). Your mastery of local laws can take years to fine tune, and it’s far easier to learn in just one area rather than several. You can cultivate a relationship with a local eviction attorney, since the best ones usually specialize in just one county. You can easily keep an eye on your properties and your contractors. Investors higher priced areas complain that the cost of a property in their area is twice or three times that of other areas, and they’re tempted to buy long distance rather than close to home. Either own close to home or don’t buy rental property.
10. Weigh the Costs of Hiring a Property Manager Carefully
Many investors are quick to outsource their landlording duties to a property manager. But consider the costs of a property manager because it may be more cost effective to manage the property yourself. Many property management firms charge 10% of gross rent, which can be a significant amount of money. Ten percent of a $1,000 rental is $100. If the total cash flow is $200 per month, that property manager is getting 50% of net cash flow! You may want to keep that money for yourself in exchange for managing the property. You can collect the payments on autopilot. If you don’t get the rent money, you can call the attorney and start the eviction. You can forward maintenance calls to a 24/7 handyman service. It may be worth 10% of gross to do those few tasks yourself. Although re-renting the property is a bit more hands on, it may be worth it to keep the first month’s rent in exchange for that money. Plus, you’ll advertise harder for the best tenant, whereas most property management companies do just enough to get it rented rather than spend a little extra to get the best tenant.
Everyone’s situation is different, and you may discover that hiring a property manager is more cost effective than doing it yourself.
Phil Pustejovsky is a real estate investor, mentor and coach that has been a part of over 1,000 real estate investing deals over the past decade. He has also trained investors from all over the US and Canada to new levels of financial freedom through his innovative and real world investing techniques and strategies. His new book How to be a Real Estate Investor recently became a #1 best seller on Amazon. You can also learn more about Phil at http://www.freedommentor.com. This article is reprinted here with permission from Creative Real Estate Online at http://www.creonline.com.