Learn While You Earn Managing Property.

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Vol. 23 No.10

June     2000

 

LEARN WHILE YOU EARN MANAGING PROPERTY.

 

Over the years when I’ve surveyed seminar classes to see who liked managing real estate.  Invariably, only a few hands have been raised.  This continues to puzzle me; particularly when it seems the biggest source of concern for those same people who would like to become real estate entrepreneurs is that they can’t find financial backers.  In the final analysis, I think that people completely misunderstand the function of a real estate manager, and the entrepreneurial advantages being able to manage offers.

 

Anybody can get into the real estate business with only minimal knowledge or experience and still make a lot of money with very little investment.  Without much more than a high school education a person can attend a few classes and pass a test to become a licensed professional real estate salesperson.  I failed into real estate after being “down sized” out of the labor force, and became “your friendly neighborhood professional” serving my apprenticeship as a real estate salesman working on commission for a small brokerage office.

 

Because I had had over twenty years experience in the work force in a wide range of activities, and had been a real estate investor for several years, I had an advantage over other fledgling real estate salespeople.  I swiftly discovered that what one learns after getting a license is the key to success, so I set about studying everything I could get my hands on to become better qualified.  The first thing I discovered was that real estate is a highly differentiated and complex business, not to be taken lightly.

 

The term “Real estate” ranges from raw acreage to farms to developed lots to construction of all the varieties of buildings and improvements imaginable up to time shares.  Title to property could be leasehold, fee simple, equitable, legal; title could be subdivided into present and future life, term, contingent, remainder and multiple “carved-out” estates; sole and joint tenancies; surface, air, mineral, water, development, grazing, harvesting rights; easements, covenants, rights-of-way, restrictions, and Options, and leases.  All of these could be bought, sold, traded, assigned, rented, and financed under a multiplicity of additional variables.

 

In comparison to all of this, property management seemed to be a straightforward and simple way to make money in real estate.  It all boiled down to reading and understanding the Landlord and Tenant laws and safety regulations, obtaining and preparing a property for occupancy, advertising for qualified tenants who had both the capacity and inclination to pay required rents and perform required tenant obligations, being able to use and explain a written rental agreement, and getting everyone to comply.

 

There’s an old saying that says, “If you want to become a leader, find a parade and get in front of it.”  If you want to learn how to manage, find some property and tenants and manage them.  Because I had no property and very little money, I became my real estate broker’s rental manager.  My broker had bought a number of houses intending to resell them for a profit.  When he got trapped by a declining market, he was forced to rent them instead in order to make his payments.  In return he increased my share of any sales commissions I earned from 50% to 55%.

That meant an extra $105 or so above my regular commission on a $30,000 house sale, and I was able to learn and practice management skills on someone else’s property.

 

When I first started managing my Broker’s properties, I had to deal with the rentals and tenants that were in place.  While I was doing all the work to make $1,155, he was sitting back enjoying the view getting all his houses managed for free and also receiving $945 from that same $30,000 sale.  Of course, he had brokerage expenses, but he also had a lot of other salespeople working for him too.

MANAGERS MANAGE TO MAKE MONEY . . .

 

My Broker was typical of the majority of people who don’t like management, and it showed in his management results.  When I took over, I had to deal with properties that weren’t especially suitable as rentals and with tenants of every size, shape and description who saw me more as a messenger hired to carry complaints between them and the Broker rather than as a Manager.  As you can imagine, my life became pretty eventful until I began to understand the management function.

 

The objective of real estate property management entails a lot more than just collecting rents.  The Manager’s most important duty is to enhance the investment return of the owner/investor during the holding period.  Like any capital investment, this includes an income component and a capital gain component.  There are three ways to increase income:  The first way is to increase rents while holding expenses constant.  Another way is to reduce expenses while holding rents constant.  Or, rents can be increased and expenses reduced.  Actually, these all boil down to one technique.  That’s to attract long-term tenants who will select your rentals over competing rentals, and who will be happy to pay market rents for years.  If you can do that, you’ll find management to be extremely rewarding and relatively easy.  If you don’t, you won’t like management.

 

In any area, rents for comparable properties have to be competitive in order to attract ideal tenants.  Ideal tenants are those who not only pay rents promptly, but who have the skills and are willing to perform minor maintenance and will voluntarily try to improve the property they choose to occupy.  This isn’t as far fetched as you might imagine.  When the rental property is desirable and priced competitively, Managers can get prospective tenants to compete to rent it.

 

The first step in being able to lure the tenants you want is to be able to offer them property they want.  The easiest houses to manage will be in solid middle class neighborhoods in which there are good schools, shopping, churches, libraries, parks, jobs, and proximity to major traffic arterials.  Nobody dreams of moving into a duplex, town house, condominium, zero-lot line, or row house.  When people rent these types of residences, it’s usually as a temporary housing solution.  Tenant turnover, maintenance, and vacancy expenses will be high, and rents will be lower than a house with comparable square feet would command.  The ideal rental property would be a single story, free-standing three bedroom, two bath, home with a two car garage located on a neat, low maintenance, landscaped lawn.  Of course if such properties aren’t available in your area, you should still strive to come as close to this as possible.

 

People will give up a garage to get another bedroom, so, if all you can buy is a two bedroom house, you might consider converting the garage.  People will climb stairs to bedrooms, so a two story home with three bedrooms is better than a single story two bedroom house.  People like privacy.  If you have a duplex, erect screens to create private entryways and to hide unsightly garbage collection points.  Pay particular attention to sound transmission, segregated parking, and lawn maintenance.

 

If you are renting apartments or condo units, enforce strict rules about what can be placed on balconies or hung in windows, parking of vehicles, disposition of trash, control of children and pets, noise, fire safety, social gatherings and comportment of visitors.  If storage is limited, offer central storage facilities and provide incentives for residents to use them.  Restrict automobile maintenance except in designated areas.  Provide a way for written suggestions and complaints to be submitted and acted upon.

 

There are some practical reasons why single family management is easier: In many areas, Landlord and Tenant Acts differentiate between single family houses, apartments and condominiums, mobile homes, and commercial space.  By and large, managers of single family houses have more latitude and fewer restrictions to deal with.  Moreover, tenents can’t “gang up” on the manager if they don’t live together.

MANAGE SINGLE FAMILY HOUSES FOR FUN AND PROFIT . . .

 

Buying a single family house is easier and less complicated than buying larger units or commercial space because you are usually buying from someone motivated to sell for personal or financial reasons.  You can usually get more favorable prices from individual owners selling their homes than from seasoned investors liquidating a portion of their real estate holdings.  Better yet, you can usually obtain more feasible financing.

 

From an investment standpoint, owning a variety of single family houses scattered among several good neighborhoods is a lot more prudent than having all your eggs in one apartment-sized basket.  If you needed to raise cash, you could sell one or two houses rather than being forced to liquidate your whole portfolio represented by a larger property.  If  changing neighborhood factors should make the house less desirable, you might have to sell it at a discount, but your other houses wouldn’t be affected.  Most importantly, in hard times, people can choose to sell products or to work out of their homes rather than in an office or store.  But they can’t elect not to live in their home.  Consequently, they will sacrifice a lot of other assets in order to preserve a stable family life.  Thus, unlike other types of rentals, single family houses are fairly recession resistant

 

If you like the idea of receiving oodles of cash simply for renting something that everybody needs and will sacrifice to obtain, management can be both profitable and fun.  If you can’t buy your own rentals, manage someone else’s.  Bear in mind that the manager takes his fee off the top before the investor gets paid.  I wouldn’t want this to become well known, but good property Managers feel abused if they spend one week a month actually doing something.  Managers who complain about being “burned out” are often not good Managers.  When a Management System is implemented, it will do much of the work, leaving Managers time for other pursuits.

 

Here’s a typical scenario: Around the first of the month, the Manager may have to spend time chasing late rents and making management reports.  If a property is vacant, or need repairs, he or she might ask the owner to send over some cash to cover expenses.  The Manager might tour the properties to see if maintenance is needed, and ads might have to be run to attract tenants to fill anticipated vacancies, but, these duties can be minimized if they use a management system and stick to it.  The most important step in implementing a Management System is to deliberately buy a house that will make a desirable rental.

 

Being able to offer an attractive house at a competitive price can make any management job a lot easier.  Management strategy starts with selection of price range, quality, condition, floor plan, and location of the particular property to be selected.  The financial terms are also critical.  A rental property should be matched to the tenant-market it expects to serve.  If median incomes in your areas are lower, so will rents be.  Thus, financing terms on the house you are buying must also be geared to lower rents.  If rents are higher, so too can house payments be.  As a rule, if you buy a house priced in the mid-point of your local market, there will be plenty of houses for sale, and you’ll be able to negotiate the terms you’ll need on the house you want.  Paying attention to these things will determine how well a rental property performs.

 

Once you’ve selected the ideal house, being able to create the financial terms you need can give you a tremendous competitive rent-price advantage over other Managers with comparable rentals; translating either into higher net operating cash flows for the owner and more commission income for you if you can sustain higher rents, less vacancy, turnover and maintenance expense.  The more tenants who flock to your “value-priced” lodgings, the bigger the tenant population you can choose from, and the higher you can set the standards that all tenants must meet.  Contrast this with over-leveraged, over-priced properties in which owners and Managers must try to sustain high rent rates while deferring maintenance and repairs.  Invariably, tenant quality, turnover, vacancy rates, and property deterioration increases while net rental cash flow shrinks.

TENANT SUPERVISION IS THE REAL KEY TO HANDS-OFF MANAGEMENT.

 

Offering attractive, desirable rental property to the market to attract a lot of tenant applicants opens the door to high tenant standards and rigorous tenant screening to try to match a prospective tenant both to your rental property and with your Management System.  This can really pay off big in the long run.  I’ve had a number of tenants from whom I’ve collected rents for over ten years with virtually zero effort.  Can you see why all the foregoing is worth the trouble?

 

The Marines have a saying, “All We Want Is A Few Good Men”.  The same applies to tenants.  We are willing to leave a house empty for weeks in an effort to find just the right person who can pass a lot of screens.  You’ve got to be careful that you don’t violate any State of Federal anti-discrimination laws in your screening.  David Tilney, who’s the best and most professional property manager I know has a published office policy manual and application language that states that the BEST, not the FIRST applicant to qualify will have first crack at a rental.  He offers his management seminar about once each year.  He can be contacted for information about his seminars in Colorado Springs, CO at (719) 632-6579.

 

I like to think of Tenants as people who are applying for a critical job.  Unless they perform as required, the project will fail.  I won’t take a chance on someone who may not be able to do the job.  In selecting the right person, I want to check their integrity first, then their initiative.  When someone calls on an ad, they get a tape recorder telling them what’s available and where they can go look at it.  If they call back, they can fill out an application and pay $25 for a credit check on every family member 18 or over.  This checks employment history and wages, residency stability, credit, and three prior Managers.  With expensive rentals, I also want to check bank account balances.

 

Next, the tenants can inspect the interior of the house on their own.  I haven’t shown the inside of a rental in 25 years.  Prospective tenants who pass the first screens can pay a deposit and pick up a key and inspection sheet so they can inspect the premises to see if it will fill their needs.  Finally, I subject them to a personal interview that can last as long as three hours to try to get to know them, and to be sure that they know what I expect of them and what they can expect of me.  They also sign a 16 page rental agreement.  It all boils down to three requirements: (1) Pay the rent ahead of time.  (2) Take care of and be accountable for the property entrusted to them.  (3)  Take care of minor repairs, and don’t bother me or the neighbors except for bona fide emergencies.

 

It’s admittedly a long, drawn out process but easier than you might imagine.  Read over what I’ve described and you’ll see that I don’t get involved until the tenant applicant has jumped through a lot of hoops.  Most people flunk my little test as soon as it becomes apparent that I’m not going to make any concessions to them regarding their credit rating, timing of occupancy, pets, extra vehicles, etc.  Others eliminate themselves because they want me to show them the property.  Only my “Marine” tenants who willingly accept my directions and lease requirements are accepted.  Fortunately, there are lots of reliable, solid, middle-class people who can qualify.  And once they rent from me, they stay for years.  Why?  Because I treat them like valued customers while I supervise them.

 

Supervision consists of motivating people to do something willingly and correctly in minimum time.  To get a task performed, the boss has to issue clear written instructions (Rental Agreement), to outline specific rewards for superior performance (We give a rental rebate for rents paid ahead of time, so long as the tenant pays the first $75 of repairs we pay for each month.), and specific penalties for failure to perform (Loss of the rental rebate, and late charges for failure to pay as agreed.).  We also give them a written Option to renew their lease with no more than a 10% rent raise per year.  They love it!  Once you stop fearing management, and start managing, you’ll love it too.

 

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