Why landlords should consider hiring property managers.
By: Eveline H. Brownstein (c)
In a previous article I wrote about how to decide what rental homes to buy, I said:
Don’t be afraid to buy in affordable areas outside of the state you live in. Conventional wisdom has always been that if you are going to buy property for rental income, you should live nearby. This does not take into account the fact that the best places to buy may not be in your neighborhood, or even in your county. They may indeed be in another state. Of course it is unrealistic to expect you to manage a property from a distance, but that’s where really good property managers can be your best tool for getting the most out of your rental.
Despite the sound advice in this writing, problems can arise when those who buy rental income real estate elect to follow the first piece of this advice and dismiss the second. It is important that anyone who follows the advice to look for lucrative rental income opportunities outside of the area in which they live, also follows my advice to hire a local property manager to manage the property.
The first critical part is, that if you are considering an out-of-area rental income property and after running the numbers you realize that you will not have sufficient income from it to hire a property manager, then I believe it is unwise to purchase the property. Property managers typically charge around 10% of the rental income as a management fee, though there are areas of the country where a flat fee is charged after a certain maximum rental is reached, and others where managers will work with you to give you a “bulk break” if you have more than one property. In a prior writing I emphasized the need to carefully calculate what your costs will be. Factoring in the cost of property management for a property when it is unwise for you to manage it yourself, such as in the case of an out of area property, is an essential part of those calculations.
There are significant risks to a property owner if that property is not carefully managed and the greatest is with those properties where the landlord is absent. Here are some of the more common risks:
- Never meeting the prospective tenant. Despite all of the best background checks that might be done, there are risks when a landlord is unable to meet a prospective tenant face-to-face. Many people can look great on paper, but how do you know for certain that the paperwork they give you indeed belongs to them? Being able to check some things in person, like drivers’ licenses or other identity documents, is a more reliable way to know that the person who is renting your property is who they say they are. Landlords who manage from a distance risk not knowing the veracity of the person who has applied for tenancy and is more limited in their ability to verify the information presented. Additionally, it is more difficult for landlords who are absent from the area to conduct in-person tours of the property, or do a move-in checklist of the property’s condition, so that damages to which the security deposit can be applied are noted. A landlord will not know that damages were done by a tenant, if the landlord is not certain of the condition of the property when the tenant moved in.
- Lawsuits. A poorly managed property that does not meet the legal standards of being fit for tenancy, or one that is managed without careful regard for the legal rights of the tenant, can cause the property owner to be sued. A lawsuit such as the one filed by Montrose, Texas tenant, Mark Kaufman against Harvey Horowitz of California can have devastating financial consequences for a property owner and could easily equal more than the sum total of any property management fees that the landlord would have had to pay to have the property managed by a local, competent management company.
- Destruction of property. Some comfort resides in tenants who know an owner is not going to just drive by and check on their property. In one case in Asia, the “trusted” tenants removed the entire house, brick-by-brick and the landlord was left with nothing but an empty lot. The neighbors were apparently not concerned, figuring that the tenant had the landlord’s permission to remove the house. This is clearly an extreme case of property destruction, but nevertheless, a landlord cannot rely on the vigilance of neighbors to ensure that a property is being properly cared for by a tenant.
- Failure to maintain the home. Those areas of the home that are the tenants’ responsibility to maintain could be neglected if a landlord is not present to ensure that they are undertaken responsibly. Simple matters like mowing the lawn or removing snow, which are designated in the lease as responsibilities of the tenant, may be neglected or not undertaken properly. An absentee landlord will not know that these issues are not being taken care of, if the landlord is unaware of them because the landlord is not able to inspect the property.
- Failure to hire competent repair professionals. Absentee landlords are less likely to know who might be the best local professionals to handle repairs and maintenance on their properties. Local managers, who are diligent about how they conduct their business on your behalf, make it their business to know who to hire for repairs and who can be trusted to make proper and guaranteed repairs to your rental home, so that your investment in it is secure.
- Delays in making repairs or taking care of maintenance. Landlords who are not nearby the property they own may necessarily delay needed repairs or maintenance as they investigate who they might hire, get referrals and quotes, and make arrangements for the repair person to meet the tenant at the property. Successful property management companies make sure they keep copies of the keys to the property and make legal arrangements to enter it so that the repairs can be made, even if the tenant is not available to facilitate access to the property.
- Lease Violations. Landlords who are not able to regularly inspect or drive by the properties that they own will likely not become aware of some rather serious lease violations, for example: if the tenant acquires a pet that is not permitted in the terms of the lease; if the tenant moves additional people into the home or sublets it without permission; or, if the tenant engages in a business out of the premises which is not permitted under the terms of the lease.
- Delayed necessary evictions. A landlord who manages from a distance will find it difficult, if not impossible, to evict a tenant who is not in legal compliance with the lease. Finding a local attorney to take care of the situation will likely cost more than if a local manager handled the process, because the attorney will be required to hire people to undertake the more simple tasks, like serving the paperwork and monitoring the eviction. While an attorney is generally necessary for the filing of the paperwork and for making sure that all aspects of the eviction are in compliance with applicable law, there are, nevertheless, certain aspects of the eviction process that a manager can handle. These aspects vary from state-to-state, but may include: serving the initial paperwork to let the tenant know that the tenant is not in compliance with the lease; ensuring that all deadlines for compliance are met, and in some cases even taking care of removing an evicted tenants belongings from the property timely, so that it can be rented out promptly. It is usually financially impractical for an absentee landlord to make the many trips that may be required to complete the eviction process timely and with minimal delay. Delayed necessary evictions not only cost money as a result of the process involved, but generally also come with a loss of rents that could have been minimized had they been carried out timely.
These represent just a few of the risks that landlords who choose to manage properties from a distance may be confronted with, and why it makes sense for any out-of-area landlord to rather spend the time more wisely, that is: in pursuit of a competent property manager who is properly qualified to manage residential properties, and who diligently monitors the actions of any tenants who are permitted to rent the property.
By: Eveline Brownstein ©
The property owner is, of course. It is the responsibility of the Property Management Company to always make decisions in the best interest of the owner of the managed property. A critical part of this is to ensure that the property is legally compliant with all local tenant/landlord laws. Tenants have rights and property managers must protect their property owners by ensuring that they comply with those legal rights at all times. A property manager should engage in ongoing real estate education to keep up to date with changing legislation.
A good property management company will be helpful to the tenants wherever it can, but it must beware of letting go of its business goals in favor of its manager/tenant relationship. Renters are not your customers. Renters are the customers of the property owner and you are obligated to secure good tenant-customers for your owner-customers. Sometimes, in an admirable effort to reduce vacancies and keep tenants happy, property managers inadvertently closely guard their friendly relationship with a tenant and become hesitant to protect the property owner. On those occasions these undesirable situations may occur:
- Violations of lease provisions (sometimes because the manager mistakenly believes it is minor in a bigger picture)
- Delaying rent collection
- Delaying enforcing lease provisions relating to tenant upkeep of the property
- Delaying beginning a necessary eviction process
- Overspending on repairs
- Undertaking unnecessary repairs or items of a merely cosmetic nature
- Permitting a tenant to choose a repair professional
- Permitting a tenant to undertake repairs to the property
- Trusting a prospective tenant’s statements about their background or credit, over proper checks of their credit and background
Property managers owe a legal and fiduciary duty to their property owner clients. Property owners owe a legal obligation to their tenants. Property managers are the agents entrusted with that legal obligation, and if they are diligent in their legal and fiduciary duty to their property owners, they will also be effective in helping to manage their owners’ legal obligations to the tenants.
Owners should hire well-qualified property managers so as to minimize their legal exposure. Property managers should always know and follow local regulations and laws regarding tenants, and regarding their legal, fiduciary duty to their property owners. Owners are paying property managers for their services. Therefore, property owners are the clients of the property manager. Tenants are paying the owners. Therefore, tenants are the clients of the property owner.
By: Eveline H. Brownstein (c)
The real estate market is at a low for prices and a high for inventory. This is, according to many, the “perfect time” to invest in income-generating real estate. Many articles are encouraging people to invest in income real estate, like this Wall Street Journal report which suggests that retirees can benefit from become landlords in owner-occupied rental properties; or this MSN article with five tips to get you started. In all of the articles I have recently read, few have detailed the dangers that may lurk in not carefully planning your strategy.
At the very height of our recent real estate boom, before the start of what is now being referred to as “the Great Recession,” many people looked at the speedy accumulation of equity in their homes as a handy “cash register” for investing. Sadly, many of those same people not only now find themselves without equity in their homes, but many of them find themselves also without those homes. The bursting bubble was predictable if you were someone like me with four generations of real estate professionals in her family and a history of great investments by generations that came before; but it is easy to see how people with very little real estate experience might have failed to see what experience had taught me was coming.
Despite many articles being written, to the contrary, now is not the best time for everyone to buy rental income properties and, for some, it may never be appropriate. There are, nevertheless, some smart strategies for buying rental properties. Here are my strategies:
- Start with a plan. As mundane as it sounds, having a written plan for purchasing rental income property is essential. Your written plan should detail your strategy for acquiring the property, renting it and paying all of its expenses. It is (and it will become) a business, like any other. All good businesses start with a business plan and rental income real estate is no different.
- Purchasing rental income property is not the same as flipping houses. Some people decide to buy distressed properties, renovate them and then instead of selling them, decide to rent them out. This is not a plan to own rental income property. A plan to own rental income property should include the realization that even in the best of circumstances, the return on such an investment will not be realized for at least ten years or more. You will be committing yourself to owning a rental property for a minimum of ten years and to managing and maintaining it for this period of time, or longer.
- Don’t use the equity in your home to buy a rental income property. Assuming you are fortunate in this real estate climate to still have equity in your home, that equity is part of your good credit. Actually, it always has been; however in the recent real estate boom, lenders seemed quite uninterested in credit worthiness and some were lending without proof of income or ability to pay. I believe that the equity in your home is better used as a short-term loan, that you can quickly and easily pay off, should you need it for emergency repairs to a property, or to cover a mortgage payment or two in the event your rental is vacant for a couple of months. Read the terms of your home equity loan very carefully for restrictions regarding what is possible and seek the advice of a loan specialist.
- Don’t buy rental homes in wealthy neighborhoods. There are two reasons why this is a poor decision for the average rental property buyer.
- Most people who live in wealthy neighborhoods own their homes. Neighborhoods where there are a majority of owners are highly desirable and, as a result, the price of these homes is usually high. Therefore, the price of the home you will be buying will be very high, in relation to the monthly rental that you will be able to charge. Two fairly-priced homes in a middle-class neighborhood, when combined, will often generate the same (and sometimes more) income than the single home in the wealthy neighborhood. Always keep in mind the risk of vacancies which will result in you needing to come up with the mortgage payment. While it is possible, it is less likely that both homes will be simultaneously vacant, meaning you will only have to come up with 50% of what a more expensive home will require.
- Higher rental homes can stay vacant longer due to the high cost of moving into them (first month’s rent plus security deposit can run tens of thousands), forcing you to come up with a very high mortgage payment to cover payments due during vacancies. Once again, purchasing two homes in a less expensive neighborhood will spread your risk and help minimize the length of your vacancies.
- Buy income properties in family-oriented neighborhoods. It has been my experience that family-oriented neighborhoods offer amenities that appeal to the widest variety of renters, regardless of whether they have families or not. The populations in these neighborhoods also appear to be much less transitional, leading to community continuity and some predictability regarding neighborhood desirability over the long-term.
- Buy properties in neighborhoods with lots of opportunities for work. If I had to choose ONE tip for where to buy rentals, this would be it. A few years ago, someone suggested to me that I invest in a neighborhood, “because it is growing.” Never one to pass up the chance for a new investment opportunity, I traveled to the area to take a look for myself. I spent a number of days there, speaking to the locals, visiting the neighboring areas, speaking to realtors and looking at houses. Finally, in bewilderment, I asked the realtor what jobs there were in the area. All I had seen were a number of service-related jobs and lots of restaurants. The realtor responded that there was a university nearby. Needless to say, despite the growth that was going on, this community did not fit my requirements for a good place to purchase rental income real estate. People will always move into an area where there are jobs and no more so than right now, when our unemployment rate is so high. You want to rent to gainfully employed individuals and they are where the jobs are. A university is a great place to work, but I don’t know of any university that can employ everyone in a neighborhood. A desirable neighborhood has many different industries represented in it and offers job opportunities to people in all strata of the worker population, not just one or two.
- Research the neighborhood diligently. With the internet being a primary source of information, it is very easy to research a neighborhood before you buy. Know what the neighborhood offers to residents, but also know what might make it undesirable. Know what the market rate is for rents in the area. Make sure that the property you buy is properly priced so that the rent you receive represents a good return. There are several formulas for determining this. Most involve figuring out how many years it would take for you to realize a break-even return on your investment. Sperling’s BestPlaces.net is one of the sites I frequently use to research a neighborhood, but don’t forget that a visit in person can tell you what an online website cannot.
- Two homes are better than one, and three is even better. All investors and their advisers will tell you to spread your risk among investment opportunities. The same can be said for real estate. I am not an investment adviser, so I am not able to give investment advice, but spreading your risk when buying residential real estate makes sense. If you are able to buy two properties, instead of just one, then two will spread your risk. The odds of both being simultaneously vacant are lower than if you have a single home. The strategy that worked for me was to buy one home free and clear and take out a small mortgage on a second home. The first home covered the deficits created by vacancies in the second and had the ability to save for itself, should it have a vacancy.
- Don’t be afraid to buy in affordable areas outside of the state you live in. Conventional wisdom has always been that if you are going to buy property for rental income, you should live nearby. This does not take into account the fact that the best places to buy may not be in your neighborhood, or even in your county. They may indeed be in another state. Of course it is unrealistic to expect you to manage a property from a distance, but that’s where really good property managers can be your best tool for getting the most out of your rental.
- Be committed to maintaining your property in tip-top shape. So you’ve bought a property and you have a renter. Now you just collect rents and pay the bills? No. A rental income property must have the same attention from you as the home you live in does. It must be properly maintained and not be permitted to go into a state of disrepair. A home loses its equity and its value quickly, when it is not well taken care of. To me, collecting rents from tenants obligates a landlord to maintain the home. When I was a realtor I often heard other realtors say, “You can tell this was a rental.” It meant that clearly rentals were not as well looked after as owned homes. It didn’t need to be a truth. Rentals can be looked after just as well as owned homes and can command the same price if the time ever comes to sell or finance it. Don’t lose valuable equity in your rental home by not taking care of repairs and maintenance, freshly painting it, keeping a pretty garden for great curb-appeal and tending to repairs promptly.
- Research your property thoroughly. The realtor you are working with may not know everything about the property that you will find important. Always verify what the realtor tells you (the contracts you sign with the realtor say as much) by doing your own research. Tax rolls and home values are available online on websites such as Zillow.com. You can also get a lot of information from the local City, either in person or online. Most of this information is publicly available. Spend the money to get a thorough home inspection done . Knowing what repairs will have to be made now, or in the future, will help determine if the purchase is a wise one. Look at the local flood map. Research the weather patterns for hurricanes, tornadoes, earthquakes, etc.
- Don’t forget to diligently do the math. There is more to rental real estate than just paying the mortgage and collecting the rents. Don’t forget the other expenses that will be incurred:
- Insurance. Rental properties must be insured, especially if you have a mortgage (the mortgagee will require it). A good policy will cover the loss of rents in the case of damage to the property and other unforeseen disasters. Set up the payments online to come out of your rental property account each month to ensure the policies stay in force.
- Repairs and maintenance. Depending on the age of your property, this will vary. Setting aside ten percent of your collected rents for repairs is a good policy. Don’t forget to add in the cost of normal maintenance for the property, for example, gardening (if the tenant is not responsible for it).
- Utilities. Renters typically pay for utilities, BUT don’t forget that you will need to pay for the utilities during the times that the property is vacant and being shown. Utility companies generally require a deposit from you to maintain an account in your name as the landlord for the property. When a tenant moves into the property, a utility will transfer the service to your tenant, but when the property is vacated, you will once again have to turn the utilities on in your name. Besides water and electricity, there are sometimes city expenses, like sewer and trash pick up charges. A diligent realtor will be able to get this information from the prior owner, so that you can properly plan.
- Property Taxes. Know your obligation BEFORE you buy. Understand the tax collection policy for the neighborhood, when taxes are due, how and when they are billed. When I lived in Los Angeles, taxes were billed April 1 and December 1. They were due in full, December 1. They were very easy to forget. In Arkansas, my taxes are billed once a year and are due the month of the anniversary of when I purchased the homes. They are also easy to forget, if I am not diligently putting the money aside for them. In New Jersey, they are billed yearly and due quarterly…not so easy to forget. Make plans to set the taxes aside from the collected rents from every collected rent payment. I have found that the best way to handle this is to set up a separate bank account from where the taxes are paid and into which anticipated tax monies are regularly deposited.
Buying rental income real estate can be very rewarding and for many it is a passion and a full-time job that they love. Careful planning and attention to some of the more frequently overlooked details can make it a successful business venture, as well.
By: Eveline H. Brownstein
rentUSAnow.com has rolled out a new logo and new colors throughout the website.
Lots of hard work went into the creation of the new logo, which was refined and perfected by Bob Post of PG Promotionals, of Red Bank, New Jersey. Many people contributed ideas and helped me decide on the final design. Nick Berkland, a successful car salesman at Royal Oak Audi in Alberta, Canada contributed the USA image and was the person who convinced me that the logo needed changing. My visionary in all these matters, Kevin Squires, helped me pick from a variety of designs I created, as did Jen Packer a neighbor and marketing guru and Anette Menzel who owns BeautyAura.com and who is a European Image Consultant, with extensive experience in making people look fabulous.
We are now embarking on an intensive marketing campaign to accompany our new look and we welcome your feedback on our efforts thus far.