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Lesson 7 -
Property Management
Management is the most important aspect of
owning rental property. Bad management can result not only in loss of
rents and/or increased operating expenses, but can lead to lawsuits and
even criminal prosecution. Even though proper management is such a very
important part of real estate investment, it is often ignored by the
get-rich-quick book and tape offers presented in TV info-commercials.
When an investor decides to manage their own property, they quickly learn
that the job requires totally different knowledge and skills than the
investing aspect of income property.
In view of the
importance of the property management subject, we are developing an e-course
called Managing Income Property that covers this subject in considerably more
detail so we will provide only a brief discussion of the subject in this lesson.
Also, RHOL has devoted many pages to the subject in our
Manage Web and you may want
to spend some time reading and researching there when you reach that point in
your rental property investment business.
General
Management Principles & Procedures
Using A
Property Manager
Some people want to reap the benefits of real estate investment, but don't want
to personally manage their properties. If you are in this category, there are a
couple of issues that you need to keep in mind.
First, you need to take this factor into account when purchasing the
property because you need to include the cost of outside property management in
your analysis of the property.
Second,
it is imperative that you use care in picking a
property manager. You should first read our
Selecting A Property Manager page. And, even if you do hire a property
manager, you should also be knowledgeable about the aspects of management so
that you can recognize when your hired manager is doing his job properly and
react quickly if he is not.
Being a
landlord is really a business of managing people more than of managing property
per se. Most problems associated with owning rental properties results from bad
behavior of individuals or misunderstandings between the parties rather than
any defects of the property itself.
Accounting
The better
your records, the more you can write off on your taxes. Then, if you are
audited, the more likely you are to be to keep your deductions . . . and your
money.
Accountants
and Bookkeeping Services
If you don't want to do your own bookkeeping, services are available from
various types of vendors. These services are relatively expensive for the
owner of one or two units. You also need to take into account the time and
trouble to interface with the service, phone calls and/or visits to their
office.
Doing It
Yourself
Many small landlords still try to
keep books on slips of paper - and determine profits by how much money is
left in their pockets. Amazingly, some larger landlords do almost the same
thing, even in this day of computer-assisted bookkeeping and tax preparation.
It has been our experience that landlords and property managers who keep
good books and use the deductions that are legally available to them do much
better with the IRS, and sleep much better at night than those who don't.
If real estate investors learn the rules and take full advantage of the
deductions and tax credits, they will likely pay as little tax as those who try
to circumvent the law and deal in cash whenever they can. Finally,
documentation that verifies the income and expenses of a property is important
when you sell the property.
Rent Roll
This is simply a form, either on paper or in your
computer, showing the building number, address, tenant information, move in
date, security deposit amount, rent amount and, if applicable, the source of
rent payments.
You are expected to have a receipt and deposit system for your collected
rents. If you are audited, the IRS is likely to want to trace all your deposits.
That means that they will want to know where all the money came from and will
want to know what happened to all the rents you received, or should have
received. The better your records, the less IRS auditors are likely to look for
fraud or errors.
Maintenance Log
A record of tenant maintenance complaints and the timely solution or
resolution can save very expensive legal costs in the event of accidents on
rental property to tenants or their guests. There are a great many other reasons
for good maintenance records as well, including evictions and the IRS.
Check Register
A check register, with good detail, is about all the actual bookkeeping
that many small landlords need to do. Every check should be coded, or contain
the kind of expense that the check paid - when, who, what for & why.
Every deposit of income should contain the same kind of information.
If you think you need to keep track of cash in a separate book, that's
fine, as long as you actually write everything down so that you can have an
accurate picture of what is really going on in your business.
Bills & Receipts
Pay your bills by check or credit card whenever you can. The reason is
that you have both the receipt and the canceled check or credit card statement.
When you write a check, note what it's for on the memo line and always write the
check number on the receipt. Use the same credit card for business purchases
whenever possible.
If you can't resist, and pay by cash anyway, write the relevant address
and purpose on the receipt. A dated receipt also helps to show where you
were and what you were doing if you need to reconstruct a portion of your
mileage log.
When an IRS auditor sees that you have all your records in good order,
with detail, and easily accounted for, they are likely to do a cursory check and
move on to someone else.
Computerize
There are now many good reasons to use property management software
that were not there just a few years ago. Everything about using computers has
become much easier and much of the new "Landlord" software is designed to look
and feel a lot like your Web Browser. We believe that you can start using a
powerful program to manage your properties, tenants and finances without ever
having to read a manual or understand how it works.
Any landlord sophisticated enough to have found us on the Web, has enough
computer literacy to keep their own books and prepare their own tax return using
any of several good computer programs.
You can use a pencil and paper with
a few simple forms like a rent roll, maintenance log and a check register. You
can do a good bookkeeping job with an easy-to-use program like Quicken. The
important things is that you do maintain complete and accurate records.
Maintenance
The upkeep and improvement of
rental property is vital to
continuing economic viability. Property that is not regularly repaired and
refurbished is not able to compete effectively for new tenants, except with
discounted rents. A practice of deferring maintenance, and lowering rents,
leads to a downward spiral that is hard to reverse.
The Law
There is also a principle of landlord-tenant law known as the "warranty of
habitability." If
landlords don't meet their legal responsibilities to maintain a property, a
tenant usually has several options. Depending on the state, they can include:
moving out, even in the middle of a lease; paying less rent; withholding the
entire rent until the problem is fixed; making necessary repairs; hiring someone
to make them and deducting the cost from next month's rent; or calling the
local rental or building inspector, who can usually order the landlord to make
repairs.
A tenant can also sue the landlord for a partial refund of past rent, and
in some circumstances can sue for the discomfort, annoyance and emotional
distress caused by the substandard conditions.
Resources
There is a tremendous quantity of information available regarding
maintenance, in both book and Web formats. RHOL provides some information and
links to other of the many maintenance-related Web sites are found on RHOL's Maintenance Online
page.
Selecting vendors to do your
maintenance is an important issue that can have both financial and legal
implications beyond the task at hand itself. Be sure to read RHOL's Selecting
A Contractor page. This subject is covered in detail in our Managing Income
Property e-course.
Landlord-Tenant Laws
It is important that a landlord have a good understanding of
landlord-tenant laws because failure to obey the laws can be costly. Landlords
should have access to the actual state statutes, not just depend upon books or
web sites for interpretation of general law. In most states, commercial landlord-tenant law is
significantly different than residential.
Civil
Rights
The Federal Civil
Rights Act of 1866 - Prohibits discrimination based on race without
exception. The United States Civil Rights Act of 1968, and its Amendments in the
Act of 1988, are commonly called
The Federal Fair
Housing Act of 1968 - These laws prohibit housing discrimination against
certain classes of individuals.
In a significant 1968 case, the Supreme Court decided Jones v Mayer where
the Court upheld the Civil Rights Act of 1866. The ruling prohibits all racial
discrimination, private or public, in the sale and rental of property. The
decision was important because the 1968 law, as it was written, exempts
homeowners who rent a part of the home they live in, and certain groups who, for
example, may wish to rent to members of their own religion or club.
In addition, some state and local laws prohibit discrimination based on a
person's sexual orientation, family, marital or even military status. Others
prohibit discrimination based on even wider ranging issues, including: source of
income and political affiliation.
Religious Organizations and Senior Housing that meets certain conditions
are exempt from fair housing laws.
Federal Fair Housing
Laws
Federal Fair Housing Laws prohibit discrimination if it is based on: race,
color, religion, gender, national origin, familial status, mental, or physical
handicap.
State and local Housing Discrimination Statutes and fair housing laws
sometimes provide even broader coverage. They often prohibit discrimination
based on: age, occupation, source of income, marital status, sexual preference,
ancestry, or even military background.
The most obvious example of discrimination is refusing to rent to a member
of a protected class. But housing discrimination can take many forms, including:
offering different lease terms to members of protected classes; using
discriminatory or preferential language in an advertising; treating certain
classes of applicants preferentially or segregating protected classes into
separate areas of a rental property or community.
The Fair Housing Act prohibits landlords from taking any of the following
actions based on race, religion or any other protected category:
- Advertising or making any
statement that indicates a preference based on group characteristic, such as
skin color or age
- Falsely denying that a rental
unit is available
- Setting more restrictive
standards, such as higher income, for selecting tenants
- Refusing to rent to members of
certain groups
- Refusing to accommodate the
needs of disabled tenants, such as allowing a guide dog, hearing dog or
service dog
- Setting different terms for
some tenants, such as adopting an inconsistent policy of responding to late
rent payments, or
- Terminating a tenancy for a
discriminatory reason.
Penalties for violation of
fair housing laws can include Actual Damages, Civil Penalties, Punitive Damages,
Injunctions, and Attorneys Fees.
Americans with
Disabilities Act
Individuals with disabilities have a right to equal housing opportunities
under both the Fair Housing Act (FHA), which made them a protected class, and
the Americans with Disabilities Act (ADA) of 1990, which requires that a
landlord make economically feasible "reasonable accommodations" and
"reasonable modifications" for disabled tenants. Fair Housing requires
that a landlord not discriminate based on a tenant applicant's mental or
physical handicap. The American's with Disabilities Act goes much further. Those
covered by the Act include: any physical, mental and emotional impairment that
limits one or more of life's major activities.
Disabled Americans are protected by both the Federal Fair Housing Act and The
American's with Disabilities Act. We have several pages on the subject under a
web called Barrier Free.
Health & Safety
Landlords are
sued more than any other group of business owners in America. The average
settlement paid by a landlord's insurance company is $600,000, and the average
jury award is $1.2 million. Aside from civil rights violations, most lawsuits
are related to health and safety issues. Knowledge will minimize a
landlord's risk.
Health
Lead, asbestos, radon, and mold are some of the health issues about which a
landlord needs to be aware. While not necessarily a health issue, pests must
also often be dealt with. These issues are covered in more detail in RHOL's Managing Income Property e-Course.
Safety &
Security
Although safety and security can
be somewhat intertwined by the broadest definitions of both terms, we will
consider safety issues to be those related to accidental injury and security
issues to be those related to injury caused by others. Hence, a hole in the
sidewalk that might cause someone to fall is a safety issue, whereas, hiring a
convicted sex-offender as gardener is a security issue. Inadequate lighting can
be both a safety and a security issue.
These issues are covered in some detail in RHOL's Managing Income Property e-Course.
Insurance
Having the proper types of
insurance and adequate levels coverages is an absolute necessity. A
well-designed insurance program can protect your rental property from losses
caused by everything from fire and storms to burglary, vandalism, earthquakes,
floods, and personal injury.
Which company provides the best coverage at the lowest price continually
changes, so it is important to obtain new quotes for the desired coverages prior
to expiration of the current policy for a property. This subject is covered in
detail in the Managing Income Property
e-course as well as on several pages of the
Manage Web.
Forms &
Agreements
Landlords and property managers must utilize a large number and variety of forms
and agreements including applications, lease agreements, checklists, letters,
legal notices, and court forms. It is important that the landlord use forms
that are both legal and adequate for its intended purpose. RHOL provides a
large variety of example documents on the Forms Web.
Applications
The first line of defense against bad tenants is
having an adequate application form.
Contracts
Contracts (also called agreements) are documents
signed by two or more parties wherein the parties agree to perform in accordance
with the included terms. The Lease or Rental Agreement is the most
important contract used in managing income property.
Checklists
Checklists are not only a good idea for protection
of both the tenant and the landlord, but they are required by law in many
states.
Letters
Letters are required for a variety of matters
where the landlord wishes to simply communicate with tenants in a way where
proof of the communication and of exactly what was communicated is desired.
Legal Notices
By legal notices we mean a more formal
communication that is related to terms of the lease and which might later become
part of a Court action.
Court Forms
Forms in this category are those that must be
filed with the Court. It is usually best to use forms that are actually
provided by the Court itself rather than generic or "printed elsewhere" versions.
This subject is covered in detail in
RHOL's
Managing Income Property and
Evictions e-Courses.
Filling Vacancies
Advertising
Advertising is often the only way to attract qualified prospective tenants to a property. The methods property
managers traditionally use vary from a simple sign in the window to slick
brochures, ads, and mailers to, more recently, the Internet. What works best
often depends on the competitiveness of the market and even on the time of
year.
What ever advertising medium is used, property owners must always be aware that
housing discrimination laws apply to all forms of advertising relating to
housing offered for sale or rent.
Vacancy Listing on
the Web
The newest, and perhaps soon the best way to
advertise rental housing vacancies is to post them on a searchable vacancy
listing site like our
VacancyList.Net.
If you are a Landlord or Property Manager who also owns and/or manages
commercial property, you should visit our
HavesWants Web Site.
Print
Advertising
Newspaper classified advertising
is the traditional medium used for rental
housing. It should briefly describe and sell the primary benefits of the
property.
Other Kinds of
Advertising
- For Rent signs
are usually effective and are
the reason most tenants apply for a
particular rental unit.
- Apartment guides
or magazines are effective in some areas, particularly for larger high end
apartment complexes, but they are not designed to fill just one current
vacancy.
- Apartment locator and
vacancy listing services can be effective in areas where such
companies are well established, or in a high-vacancy rental market.
- Direct mail of flyers
and brochures to tenants in other nearby properties can be an
effective marketing tool. You can also post the material in
supermarkets, stores, Laundromats and other places.
- Word-of-mouth
advertising from existing tenants is often the best advertisement.
- Employers in the local
rental market. Try to contact human resource managers to get
permission to place notices on company bulletin boards or in workplace
newsletters.
In a tight
rental market many successful property managers advertise an open house at the
vacant property and make a party out of it, rather than arrange for separate
private showings. When several prospects show up at the same time, they will
occasionally bid against each other for the chance to rent an attractive unit
and even pay more than the advertised price to get it. It is a good system if
you are careful to always offer the property to the "first qualified tenant" who
will pay the price, not the "most qualified".
All Advertising
No matter what types of media you use, avoid charges of discrimination. See our Fair Housing
Advertising Page.
Tenant Screening
& Selection
Landlords and
property managers must understand that adequate tenant screening and proper
selection are crucial to their success. You must always check out your
applicant before you commit. You can also collect an application fee from your
tenant to pay for this service. Collecting this fee is a common practice and it
is a very small cost to your tenant compared to a deposit.
Property managers must not only select tenants who are good credit risks,
but also people who will coexist peacefully with their neighbors and other
tenants. Middle of the night calls are much more likely to deal with some kind
of disturbance than with leaky plumbing.
Screening
Application
The first line of defense against
bad tenants is having an adequate application form. An adequate form is one
that requires the applicant to provide information that can be used to verify
his identity, obtain a credit report, verify employment, contact previous
landlords, and do a criminal background check. And, the application should
contain a clause specifically stating that the applicant authorizes you to do
all these things. The application should also warn that failure to provide all
items of information being requested (unless not applicable) is grounds for not
considering the application.
It
is also important that your application include permission to obtain credit
reports on all applicants and that all applicants sign the application or
individual forms.
Some rental property owners and agents require that tenant
applicants provide a deposit of $200 or more to cover application screening fees
and to hold a rental unit until their application and credit is approved. In
most cases, the "holding portion" of the deposit is returned if the applicant is
denied - and some landlords apply the screening fees to the first months rent if
the applicant is accepted. Whatever the policy, be sure that it is clearly
stated in the application form or other document that is signed by the
applicants.
If the tenant applicant withdraws their application because they found
more suitable or less expensive housing, the landlord may elect to keep all or
part of the deposit. Particularly if the landlord incurred an economic loss as a
result.
When the landlord holds the rental unit for a tenant applicant, it is off
the market and unavailable to other qualified prospective tenants who may have
to be turned away. If the applicant later changes their mind, the property owner
may have suffered financial harm in the form of a lost business opportunity. In
such a case, the landlord is justified in retaining all or part of the holding
deposit.
Landlords and agents should use good judgment and be fair in their deposit
policy. An applicant whose holding deposit is retained without adequate
justification may well have a cause of action for damages against the property
owner.
In the event a landlord elects to retain a deposit with good cause, it is
imperative that all records pertaining to the application be kept for at least
the time period prescribed by law, generally three years. Keeping the
application, with documents supporting any reason for refusal attached, will
ensure that the landlord has good evidence if a rejected tenant later decides to
bring a lawsuit or complaint charging housing discrimination.
Most professional
property managers now consider allowing some pets, providing the tenant pays a
pet deposit and signs a pet agreement. Pet fees at apartments now range from
flat fees of $20 to $700, and monthly surcharges from $6 to $25. The most often
quoted monthly charge for a pet is $15. The average up-front fee is about $225,
but the most often quoted fee is $100. High fees are usually for large dogs. A
few states have limits on the amount allowed as a pet deposit (e.g., Nebraska
limits the amount to 25 percent of rent), but an overwhelming majority of states
do not have limits.
Investigation
Verify Identity
Identity theft has become a real problem throughout the country and
the prudent landlord will take steps to avoid such fraud. Obtaining a credit
report on the wrong person is worse than no credit report at all.
Credit Report
Be sure to provide the applicant a rejection letter
if the credit report is the reason for rejecting an applicant.
Previous Landlord
Reference
For reliable results, you want to check a previous landlord, not the
current one. Although you wouldn't do so, a landlord with a problem tenant will
be happy to provide a good reference in order to expedite departure.
Employment
Verification
In recent years it has become more difficult to get information from
employers because of the fear of lawsuits. Some employers will not even admit
to knowing their own employee over the phone. Many will not give out any
information without written authorization from the employee and will only
respond to a written request. The best approach is to have a separate form for
completion by the employer that has been signed by the applicant employee.
Criminal Record
Check
If you are going to use criminal record check, be sure that you run
the check on all applicants in order to avoid possible charges of discrimination
due to the applicants' appearances.
Selection
Qualification
Criteria
There are many good reasons for accepting or rejecting an applicant that
are not discriminatory if they are applied equally and fairly.
Some property managers brag that they select the most qualified
applicant, but since any such definition can be subjective, it can also be
challenged as discriminatory. The mere allegation of discrimination can lead to
expensive legal costs, time and trauma covering months or even years
Landlords are allowed to select tenants using criteria that are based on
valid business reasons as long as these criteria are applied equally to all
tenants.
Deposits
The failure of some landlords to establish a clear and fair system of
setting, collecting, holding and then returning security deposits has
contributed significantly to the negative landlord image. It has also resulted
in legislation in most states and countries that now regulates almost every
aspect of rental housing deposits. Neglecting to inspect and document the
condition of the rental unit before the tenant moves in often leads to disputes
or misunderstandings over security deposits when the tenant moves out.
Consequently, many landlord tenant laws now require that inventory or move-in
check lists be completed and signed, prior to occupancy, in order for any
charges to be deducted from security deposits for damage.
Rents
What Should They Be?
What the rent should be depends upon market conditions, the ability of
tenants to pay, and, in a very few jurisdictions, rent control.
Rent Control obviously effects everything you do in those cities that
maintain government controls on the amount of rent that can be charged. Some
states, like Massachusetts, have recently outlawed the practice, others have
forbid it entirely. A few states still allow it in some cities.
Raising
Rents
Unless your property is located in one of the very few local jurisdictions
with some form of rent control, there is not legal limit to what you can charges
as rent. However, there are definite real limits imposed by market forces and
the smart landlord takes into account the significant cost of replacing a good
existing tenant.
Collecting Rents
There are many things that a landlord
can do to make sure that rents are actually collected and collected on time.
Collection failure is usually the result of a fear of vacancy, confusing
kindness with business necessity, and the landlord simply not being diligent.
Evictions & Collections
In the event that a tenant does not pay his
rent when due, and you have asked him nicely for payment for the very last time,
landlords may still not take any action except that which is proscribed by the
law of their state for collection and eviction and the strict rules of the
federal Fair Debt Collection Act.
When all else fails: EVICT. For detailed
information visit our
eviction page or, better yet, take our
Evictions e-course.
If you have a money judgment on a
former tenant you can garnish wages, bank-accounts and more. RHOL's Collecting
Judgments e-course provides everything you need to know.
Miscellaneous
Section 8
A Section 8 rental subsidy is a federal payment to a landlord on behalf of
an individual tenant. In a Section 8 certificate tenancy, the household pays 30
percent of their income for rent. The difference between 30 percent of the
household income and the set "fair market" rent of a unit is paid by the federal
government. Detailed information regarding the subject can be found on RHOL's Section 8
page.
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