If you’re like many new investors, you may be inclined to defer decisions to your property manager, figuring she must know what she’s doing.
This can result in an under-managed property. Yours is one of hundreds that your property manager is managing, and no one is going to care more about your property than you do, so you should maintain an active role in its management.
On the other hand, the last thing a jaded, 20-year property management veteran needs is some newbie investor telling her how to do her job. You must tread lightly here.
In this article, we’ll discuss how to work with your property manager on the most common issues you’ll need to work out together:
- Vacancies
- Tenant Selection
- Maintenance and Repairs
Vacancies
When a rental property sits on the market for over a month, it’s often because it hasn’t been priced right. This applies to the rent projection on the pro forma financial statement before you buy the property as well as having a vacant rental on the market after a tenant has left.
Setting the rent
One problem is that investors typically ask the property manager “What rent should we ask for this house?” and the property manager (wanting to please her client) replies with the higher end of the rent range, such as “$1,800 per month; we might even get $1,825”. Then the property lies vacant.
The way the investor should ask the question is “What is the 30-day price?”, namely, what does the rent have to be so that we have a signed lease within 30 days? That takes a lot of pressure off the property manager so she can suggest a more realistic number, like $1,750.
Consider the tradeoff: Let’s say you hold out for $1,800 and the property sits vacant for an extra month. You gained $50 per month but lost $1,800. $1,800 divided by $50 = 36 months. So, it would take you 36 months – three full years – for the higher rent to make up the $1,800 you lost that first month.
Your role is to provide guidance to your property manager. Let her know you’re more concerned about getting a good tenant quickly than you are about getting top dollar.
Doing a sanity check
Whatever she tells you, you can get a sanity check by going to a website like Zillow.com, type in the zip code of your property and filter for the same number of beds, baths, square footage, etc., and see what properties like yours are going for.
If the property manager’s recommendation is at the high end of the range, you should ask why she thinks yours will command higher rent. If she’s just being aggressive, feel free to ask her to list it at a rent you feel is more realistic. It’s better to err on the low side and get the property rented and cash-flowing quickly than to hold out for top dollar.
Other considerations Try not to have leases that expire over the Christmas holiday season (Nov-Jan) when it’s harder to find tenants. That could cause vacancies in the future.
Similarly, if you have a multi-family property like a fourplex, make sure the leases are staggered and don’t all expire at the same time. By working with your property manager on these points, you can get your vacancies filled quickly.
Tenant Selection
Your property manager will be looking to you to provide guidance about what kind of tenants you do – or do not – want. You should think through how you want to handle this and be prepared to provide that guidance. Here are the most common examples. General Standards for Tenant Applications First, you’ll want to understand your property managers standards for tenant applications, such as credit score minimums, minimum income requirements, criminal background check requirements, and landlord references.
Are Section 8 Tenants a Good Fit for Your Property?
Section 8 is a program from the Department of Housing and Urban Development (HUD) that pays some or all the rent for low-income households. Ask your property manager if your property is suitable for a Section 8 tenant and, if so, discuss the pros and cons of Section 8 tenants.
The appeal of the Section 8 program is that you’ll get reliable payments from the government. During the Covid pandemic for example, investors with Section 8 tenants got their rent (at least most of it) like clockwork on the first of each month.
The downside is that dealing with the federal government adds a layer of bureaucracy. For example, it often takes a month longer to source a Section 8 tenant than a market tenant and the government requires an annual property inspection, and that can take weeks to schedule.
If you do get Section 8 tenants, your property manager should screen them as they would a market tenant and accept only the best applicants.
Do You Accept Pets?
Your property manager will need to know if you allow pets in your property and here are some considerations:
You Should Allow pets
Two thirds of American households have either a dog or a cat, so not allowing pets in your rental property will significantly reduce your pool of available tenants and make your property manager’s job harder.
Buy pet-friendly properties to begin with Most investors don’t consider pets when making their purchasing decisions, but pets will be your tenants too. Buy properties that are pet friendly. A house with a large yard and a fence will get rented faster than a house with a small yard and no fence.
Beware of dangerous breeds
Among dog breeds, pit bulls account for two-thirds of all fatal attacks on humans. Rottweilers are a distant second with 10%. Your property manager should have a list of breeds she recommends you avoid. Make sure her rental contract has verbiage that makes the tenant (not you, the owner) legally liable for their pet’s behavior.
Cats
Some investors allow dogs, but not cats. Discuss with your property manager what effect that will have on rentability.
Bottom line, pets and their humans come as a package deal. If your pet policy doesn’t work for the pet, it won’t work for the human either! Make sure you consider the needs of both when buying and leasing investment property.
Tenant Turnover
Tenant turnover is the costliest expense you’ll have as a landlord, and it can make or break your investment. You should have a conversation with your property manager about how to reduce turnover.
- Keeping the rents $50-$100 below market rate could reduce turnover and pay off in the long run;
- Families with children tend to stay put and move less frequently;
- Section 8 tenants stay longer because dealing with the government bureaucracy is a hassle;
- And any other strategies she can recommend.
Also, examine your property manager’s fee schedule. If she gets a full month’s rent as a tenant placement fee, she may have no incentive to reduce vacancy, as she makes most of her money when the property changes hands. Have a frank discussion about that to ensure her interests are aligned with your interests.
Maintenance and Repairs
Markup on Repairs
Most property managers have an in-house handyman who can handle routine repairs, but many times will need to call in a third-party vendor. Ask the property manager what her markup is. A 15% markup on third party repairs is common, because the property manager must call around to find a vendor who’s available, arrange a time with the tenant and the vendor, and possibly drive to the property to let the vendor in.
As a matter of policy, let your property manager know that you’ll want to see “before” and “after” photos of all repairs done on your property.
Higher Maintenance Expenses
Inflation has been an economy-wide problem lately, and real estate repair and maintenance expenses have been no exception. We’re hearing from property managers and investors alike that service call costs are rising due to increased cost of materials and shortages of skilled labor. What you can do:
Get preventive maintenance on big-ticket items
One of the most expensive items in a rental property is the HVAC system, which can cost $5-10K to replace. It’s worth paying an HVAC service company to change the filters and do a diagnostic, rather than relying on the tenant to maintain it. That step can save you a lot of money in the long run.
Increase your cash reserves
While having at least a month’s worth of rent set aside for emergencies is always a good practice, it might make sense to increase that emergency fund, just for a rainy day.
Ongoing Upkeep
There’s nothing worse than having a tenant leave after a few years and discovering that he trashed your property. To avoid such surprises, your property manager should have a process for periodically checking on the property to make sure it remains in good shape.
One way is to schedule semi-annual visits to the property, pitched to the tenant as a service to check the batteries in the smoke detectors, change the filters in the HVAC system and check for leaks. Tenants appreciate the service, and the visit might cost you, the owner, only $75 twice a year. The first visit could be scheduled on the day the tenant first signs the lease, so they know to expect it.
No matter how your property manager does it, there should be some process for regularly checking in on the property to make sure that any problems are addressed early.
Summary
In conclusion, here are the most common issues that you and your property manager will be working on together:
Vacancies
- Ask what the “30-day rent” is.
- Do a sanity check on Zillow.com.
- Ask the property manager for her rent recommendation but be prepared to question it.
Tenant Selection
- Are Section 8 tenants a fit for your property?
- Do you want to accept pets, and if so, what kind?
- Consider keeping the rents slightly below market so your tenant must pay more to leave.
- Rent to “sticky” tenants such as families with children in local schools, if Fair Housing Laws allow you to.
- Be mindful of your property manager’s fee schedule for placing tenants.
Maintenance and Repairs
- Know your property manager’s markup on repairs.
- Let her know you’ll always want to see “before” and “after” photos to ensure the work was done.
- Work out a plan for inspecting the property annually or semi-annually.
As stated at the beginning, your property manager has a lot more experience than you do, so you must tread lightly when jointly deciding how to manage your property. If you approach it as a partnership in which both of you are working toward the same goal, you shouldn’t ruffle any feathers. At the end of the day though, it’s your property, so don’t be afraid to take an active role in how your property is managed.