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Savvy landlord
Real Estate Investor's Survival Guide
Veteran real estate investors provide tips for
avoiding property management pitfalls.
BY ELYSE UMLAUF-GARNEAU
There’s no question that owning residential investment property is
rife with daily challenges—from things as mundane as clogged
plumbing to having criminals as tenants.
But savvy real estate professionals who are long-time investors know
that the occasional challenges of being a landlord is well worth the
trade-off of having a stable investment. Many say they have learned
to manage the most frequent problems, such as anxiety, vacancies,
bad tenants, and emergencies. They offer their hard-earned knowledge
on how to avoid the most common pitfalls of being a landlord.
Psychological Anguish
Although gnawing questions—Will tenants pay their rent this month?
How long will the vacancy last? Are tenants’ jobs secure?—plague all
investors, eventually the psychological anxiety diminishes and
investors learn to roll with it.
“You never get over it because it’s part of being a landlord,” says
Danial Griggs, a salesperson with Metro Brokers, Manes and
Associates in Littleton, Colo., who has been investing for the past
five years and owns five rental properties. “But over the years,
there’s a toughening of the skin.”
Jeff Rosenblatt, who owns single-family rentals in Tampa, Fla., and
is broker-owner of Floridian Realty Inc. in Plant City, Fla., adds,
“When everything is rented, it’s a great business, but it is a
business and you’re going to have good and bad years.”
Empty Rentals
Every landlord also frets about market slumps and vacancies. “There
are times when you’ll face economic setbacks,” says Doug Richards,
CCIM, CRS, a salesperson with Coldwell Banker Commercial NRT in Salt
Lake City, Utah, who teaches “Creating Wealth Through Real Estate
Investments” through the Council of Residential Specialists, as well
as his own one-day seminar on real estate investing. He suggests
asking, “What’s the worst-case scenario? Can you hang on to your
property at a reduced rent?”
Ideally, you should have emergency funds to cover each property’s
monthly expenses. How much you put aside depends on your financial
situation, risk tolerance, and market conditions. Most say they’re
comfortable having three- to six-months’ expenses on hand.
Although landlords have offered free parking, electronic gadgets,
and health club memberships to woo tenants, rent concessions speak
the loudest.
When one of Rosenblatt’s properties recently sat empty, he
negotiated a $100 monthly rent reduction if the tenant would commit
to a two-year lease. Rosenblatt considered it a good deal: He
eliminated the financial drain of losing additional rent and
extracted a longer-term commitment, which eliminated re-renting
costs for two years.
Diversified Portfolio
Owning multiple properties also minimizes financial woes when there
are vacancies. Some units rent at a profit, some break even, and
others rent below monthly costs. Those turning profits tend to
offset those that drag down the portfolio.
Because he has multiple homes renting profitably, Sinu Pohar, ABR,
e-PRO®, a salesperson with Coldwell Banker Residential in Irving,
Texas, says, “Even if I have two vacancies, I won’t be stuck in a
cash-flow crunch. I just may not make as much money in a given
year.”
Mary Reilly’s strategy of investing only in single-family vacation
homes in Kissimmee, Fla., boosts the potential for profit and
eliminates headaches associated with long-term renters.
Reilly, a salesperson with RE/MAX Superior Properties in Huntley,
Ill., has three homes within 10 minutes of Walt Disney World®, and
the location supplies a steady flow of tourists. She only needs to
book about 28 weeks per year to break even.
Bad Tenants
Tenants who were chronic whiners, party animals, or drug dealers all
have been part of investors’ experiences. Most say they’ve developed
a sixth sense and listen to their gut when screening tenants.
For instance, Steve Goddard, CRS, SRES, broker-manager of RE/MAX
Beach Cities Realty in Manhattan Beach, Calif., is wary of prospects
who start complaining—“Can you fix this? Paint that? Change
this?”—even before signing a lease. Possible responses to irksome
requests include, “The apartment is being rented as is” or “Those
changes can be made for an extra $500 per month.”
Richards suggests creating a set of qualifying guidelines—minimum
income, minimum years of employment, and so forth—to weed out dicey
prospects.
But be sure you apply the same qualifying criteria and offer the
same concessions to every prospective tenant so you don’t violate
fair housing laws.
Although a credit check is a valuable screening tool, a poor credit
history isn’t always an indicator of a poor tenant, nor is pristine
credit a guarantee of a good one. Griggs will overlook bankruptcies
and foreclosures if a tenant has a history of paying rent on time.
Fred Schneider, GRI, owner of 1031 FRS Inc. in Montrose, Colo.,
agrees. “Some of my tenants went through bankruptcy, disclosed it up
front, and provided a letter of explanation. They turned out to be
my best tenants, and I eventually sold them houses.”
But emphasize that rent is expected on time and outline a penalty
schedule in the lease for late payments.
If prospects unnerve you, delve deeply into their history. Perform
thorough screenings of credit history, call previous landlords,
verify employment and income, and even run criminal background
checks.
System Breakdowns
Plumbing disasters are one of the most frequent emergencies
landlords face. Water heaters and furnaces are close seconds,
according to long-term investors. One morning last winter, Merilynn
Foss, GRI, CRS, cleared her schedule to traipse out to a rental
property on a sub-zero day in Missoula, Mont., to get a frozen pipe
fixed. “Such problems just go with the territory of owning rental
property,” says Foss, a property manager and broker with Coldwell
Banker Steinbrenner Real Estate Inc. in Missoula.
It’s important not to be stingy with inspections and repairs because
they can often avert emergencies. Griggs calls it pre-emptive
maintenance and routinely checks toilets, sinks, and other systems
and replaces items before they wear out or break. For some, doing
inspections monthly or every 60 days isn’t excessive.
How to Avoid Common Investment Pitfalls
You can make property investing less stressful and less draining,
both emotionally and financially, by keeping properties
well-maintained, carefully selecting tenants, and being a skillful
marketer. Here are some other survival tips offered by veteran real
estate investors to have your investments pay off with a minimum of
pitfalls.
Physical Condition:
Keep properties in top shape. As Goddard points out, a clean
property that is well painted and smells fresh will rent more
quickly and at a higher rate than its competitors. It also sends a
message to tenants that you’re concerned about the property, and
they’ll be more likely to take good care of it.
Establish an inspection schedule. It’s a way to ensure tenants are
caring for a unit and using it as agreed upon in the lease. It’s
also a chance to make certain smoke detectors and other systems are
working. Tenants also tend to keep things in good shape when they
know the landlord will be appearing regularly. Although some
landlords like to visit their tenants on monthly or bimonthly basis,
many believe that quarterly or semiannual visits are a reasonable
frequency.
Install high-quality, durable building materials. This will extend
the life of properties and reduce maintenance. Bob Turner, ABR,
broker/owner of Southern Properties in Cordova, Tenn., opts for
commercial-grade carpet and tile vs. vinyl flooring.
Use the same paint color in all rentals. It makes touch-ups easy,
paint can be bought in bulk at a discount, and you don’t have to
track what color is in what unit.
Build relationships with repair people and service providers. When
you have an established relationship with these valuable people,
they’ll make you a priority in an emergency. “I have a list of
preferred vendors,” says Richards. “They jump when I need repairs
because I pay them quickly and give them a significant amount of
business.”
Consider hiring a free-lance maintenance person or a property
management firm to manage, lease, and maintain rentals. Jim Beattie,
broker of Tamarack Realty in South Lake Tahoe, Calif., recommends
qualifying them as you would any professional service. He manages
his own investment properties, owned a property management company,
and currently consults, through Investment Property Consultants,
with property owners. Interview several managers and check their
experience and references. Present some hypothetical situations and
ask how they’d manage problems particular to your properties. Also
ask for three addresses they manage; drive by to see how they’re
maintained.
Tenant Selection, Retention, and Relations:
Look for forthright, considerate people. According to Schneider,
parents who discipline their kids in a loving way, rather than
yelling at them; those who remove their shoes at the door; and those
who offer many references and invite you to their present rental are
all subtle signs that they’re decent prospects.
Build good tenant relations. Turner delivers holiday fruit baskets,
offers tenants referral fees ($50-$100) when they bring new tenants
and mails tip sheets on how to reduce air conditioning bills in the
summer. He also conducts annual surveys to measure how he’s doing as
a landlord and what needs improvement. Goddard calls tenants every
90 days. “I want them to feel warm toward me and know I’m
available,” he says. Many of his tenants have turned into buyers.
Be flexible when tenants face personal problems and have challenges
paying the rent. Consider accepting half the rent on the first of
the month and the other half on the 15th for a tenant dealing with a
temporary financial crisis. According to Griggs, making compromises
is better than absorbing the pain associated with costly and
time-consuming evictions and property re-leasing.
Promote Vacancies:
Tell everyone you know about your vacancies. One Chicago landlord
casually mentioned her empty apartment to elderly neighbors who
spent hours sitting on their front porch and talking with passersby.
They put her in touch with two tenants who were looking for an
apartment.
Advertise at nontraditional places, such as the local humane society
if you accept pets. Target newcomers through foreign consulates,
university housing offices, and hospitals. A lot of Beattie’s
tenants are seasonal casino workers, so he promotes his properties
through casinos. To ensure that you don’t violate fair housing
rules, you shouldn’t target advertising to populations on the basis
of race, color, religion, national origin, gender, familial status,
and disability. The language in your ads shouldn’t express a
preference for or against any protected class. Describe the
property, not prospective tenants.
Advertise online. Sites like REALTOR.com and www.apartments.com
reach potential tenants well beyond the local market and may snag
relocaters.
Promote rent-to-own deals, if you’re willing to sell a unit. Such
promos generate more calls and showings.
Despite the challenges associated with property ownership, most
investors say it’s one of the best long-term investment vehicles for
real estate professionals because they have the advantage of knowing
markets intimately and are well positioned to pick rental properties
wisely.
And although not all investors agree with him, Goddard has found
that once you amass several years of experience in buying and
managing income property, much of the angst associated with
investing diminishes. “I actually didn’t like the stress of being in
the stock market,” he says. “What I’d recommend to any real estate
professional is start buying property when you have the opportunity.
It can help you build wealth, get income, and shelter your money.
I’m of the philosophy of ‘put all your eggs in one basket and sit on
it.’”
This article was published on: 03/01/2004
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