Robert Kiyosaki in his book “Rich Dad Poor Dad” published in 1997 is one of the most influential financial literacy books today. It promotes real estate investing particularly the Buy and Lease strategy. This book and his personal success in the Real Estate business has inspired many to start investing in asset and property management.
The business model is fairly simple; find a cheap property, fix it, rent it out, and then use the proceeds from the lease to pay off the mortgage. Over-time the investor earns money off the rent, the equity value of the property, and improve their credit rating to repeat the process. The truth, as always is more complicated than it seems.
The challenge in finding the right renter A property, after all the construction, renovation, and paperwork have been completed is now considered Ready For Occupancy or RFO. That step is already challenging in itself, but most Real Estate investors anticipate this hurdle and have mentally and financially prepared for it. The next step is looking for a tenant. This would require Landlords to have a basic knowledge and application of marketing. Then, there is tenant screening. The fastest way to lose the value of your investment property is to rent it out to bad tenants. The property can be neglected, modified, used for criminal activities, or abandoned to avoid paying the lease. Tenants do this either out of habit, indolence, convenience, or malice. It is very important to choose the right tenants to entrust your investment on a daily basis.
Collecting the rent
Payment through Post-dated checks is the normal procedure for an annual lease. This is convenient for both the landlord and the tenant, and the checking account gives credibility to the renter. There are mechanisms from the bank for an insufficiently funded check, but it doesn’t guarantee that it would not happen. The hassles involved in collecting monthly rent in cash or a bounced check takes up time and resources from the landlord from what is supposedly a passive income source. The problem is even more complicated if the landlord lives a distance away from the rental property. This would mean several time-consuming trips if the renter is trying to avoid paying the lease.
Insurance and Taxes A lot of investors neglect the importance of property insurance in a rented property. They believe that the renter is liable for accidental, force majure, or any damages to the property. This is not always the case and landlords should familiarize themselves with the ever-changing State and Federal Laws regarding this issue. Refer to the HUD website and Section 92 of the Sacramento California Property Code for minimal knowledge regarding the rights and obligations of both the landlords and the tenants. Remember, ignorance of the law excuses no one Failure to report rental income and deducting the expenses involved is a common mistake made by real estate investors. Consult with an accountant specializing in real estate investments on how to report rental income, real estate taxes, asset value, and its deductions to the IRS.
Property Management and Maintenance
There will be damage to the interior and exterior of the property over time There is no escaping this regardless of how careful the renter is with the property. There are damages wherein the landlord is responsible for repairing right away. Damages may or may not be covered by insurance. It is important to know which of the damages can be covered by the insurance company and how it is going to affect future premiums. Specialized contractors on plumbing, electrical, structural, roofing, flooring, and landscaping also exist. This would mean that every investor should have connections with reliable contractors for all specializations and a secondary contractor in case the first one is not readily available.
Return to RFO
There are a lot of reasons why a tenant or a landlord will refuse to renew the contract once it has expired. Both parties depending on the contract stipulation can also cancel the lease agreement before it expires. To the investor, this would mean that to pay off the mortgage they would have to have to return to the first step. Preparing the property back to RFO condition for a new tenant would require at the very least a general cleaning and touch-up repainting. This is an additional cost that may or may not be deductible from the tenant security deposit depending on circumstances. It is prudent to take video and pictorial evidence of the property for any disagreements that may arise regarding the security deposit. Short term leases such as Airbnb properties would require at least an inspection and cleaning. The faster the property is returned to RFO condition and a new tenant move-in, the faster the investor can earn the funds to pay off the mortgage.
These are some of the common problems encountered by landlords when investing in a real estate property for rental income. The problem increases exponentially depending on the distance of the landlord’s residence to the rental property. The stress and hardship also increase as the investor acquires more properties. A lot of people are not aware that there is a one-stop solution to all these problems. Property Management Companies have existed for a long time. It is born out of the Hospitality industry and has in-depth expertise in handling both residential and commercial properties.
Modern property management companies can cater to individual buy and rent investors. The standard cost is a flat percentage of the rent as their base fee. These days, they even cater to Airbnb property investors.
What services can you expect from a Property Management Company
All property management services company provide full support on all the above-mentioned issues and more. They provide it using an in-house staff or through a subcontractor. This would mean that any additional value-added services are expected to cost an additional fee. The base percentage out normally covers rent collection, basic property maintenance, and tenant handling.
Marketing your property
Property Management services handle marketing and advertising your property for rent. Their copywriters are trained to create an honest but comprehensive description of your property to entice renters. They also have experience in taking the best photographs or sometimes provide home stagers for luxury real estate. They also have in-house realtors or partnerships with brokerages to place your property in the MLS. It is normal for property management companies to answer inquiries, conduct initial tenant screening including background checks for criminal records and sex offenders. Qualified tenants are then forwarded to the landlord for an interview and final selection. Managers could charge an application fee from prospective tenants for this service.
Property managers will handle any tenant complaints and inquiries. This would mean that all tenant related calls are screened by the property managers and handled by the company. They will work on minor repairs and if the allowed in the lease, do random inspections without additional costs. Companies have in-house plumbers, cleaners, electricians, or a general handyman to handle minor repairs without burdening the owner. For instances that would require major repairs, the cost assessment will be given to the landlord for approval before any work is done to the property. Costs assessments are not estimates and the property management company is responsible for its accuracy.
The tenant will have the convenience of being able to contact someone during business hours with regards to the property. There are a lot of property owners who work 9-5 jobs and are unable to attend to tenants needs during those hours. Owners will then commission a costly hourly professional to resolve the problem specified by the tenant. This is a time-consuming, expensive, and frustrating process especially for minor problems like a broken faucet.
Property Monitoring and Maintenance
The property management company handles the rent collection and informs the owner if there are any problems with the payment. If there are any complications that happen during collection, the property management company handles all the necessary steps including reporting bounced checks and applying for an eviction notice.
Property Management companies also have in-house accountants that can advise owners on how to report income and expenses to the IRS. They also provide detailed documentation for the owner’s accountant for journal entries.
They can provide cheaper property insurance since they are able to get wholesale policies. They are also able to do this for most value-added services such as landscaping, pool-cleaning, and pest-control. They will coordinate with the underwriter for any damages incurred in the property that can be claimed through an insurance policy. Full-service property management companies will also handle payment of Real Estate taxes for a fee. They can handle utility and association dues collection and payment. They can do this depending on the lease agreement and the management agreement.
Protecting your assets
A good property management company will always start looking for new tenants if the contract is expiring and the tenant has expressed their intention to leave. This would ensure a quick turn over and schedule resources to refit the property back to RFO state. This would ensure that the owner will have minimal loss of income on account of the property being unoccupied. Property managers will also have a fair assessment of the damages and could arbitrate if there is a dispute regarding the security deposit. This would benefit both lessee and the lessor by saving them time and a costly trip to the Small Claims Court. Property management companies can also provide limited legal advice and assistance in case of litigation from a disgruntled tenant. There are cases where the complaint is justified and the property manager will recommend an amicable settlement with the tenant.
Selecting the right property management company
Like all services, cheaper is not necessarily better. It is important to find a company that will provide a complete service at a reasonable price. Their knowledge and experience should also play a major factor in selecting a property manager. There are differences in managing a condo unit, a multi-family apartment, and a single family home. The manager should know the intricacies to manage any type of property, the possible minor and major repairs that could happen, what is included in their monthly percentage fee, and how they will handle any situation that concerns the owner and the tenant. It is also important to know what services they handle in-house and what they subcontract. How they supervise subcontractors and how much the owner gets charged for those services. Airbnb and short-term lease properties should also be concerned about the cost and quality of cleaning services. Overall, it’s important to do your due diligence on any property manager before commissioning them. Property managers can ensure your investment is secure and well managed. The time you save working with them is well worth the value of their fee.
Kiyosaki did say that with financial literacy the buy and rent real estate investment model is simple. He did not say it is easy. It’s also simple to jump from an aircraft in high altitudes and pull a piece of string to prevent a horrible death. It is simple but not easy, especially to those experiencing it for the first time. It can be achieved either by trying it out yourself or hiring a professional to take over or guide you.
There is nothing wrong with coordinating with your property manager in handling your property. It is a good way to learn and the best way to appreciate the hard work that they do for the owner and tenant. Having a full-time property management company to take care of your tenant-client and your real estate asset is never a wrong choice. Some may argue that the deductions from the repairs, taxes, mortgage, and the property manager will result in the landlord not having any income at the end of the month. This is a case of bad investment. It simply means that you have selected a bad property in a low rent area This is another topic altogether. A zero return where you are able to pay the mortgage means the owner is a month closer to owning the property and its equity value. This is also an asset gain. Click here to go back home.