Considerations for Real Estate Investors
by Andy Bates
Property management is a crucial part of successfully holding a real estate investment portfolio. While there are generally accepted practices and regulated standards for managing a property, there are still many options available for how it can be done.
This can leave investors wondering not only about what they need to do to manage their properties, but which approach will be the best fit for them. A helpful starting point for understanding investment property management is to look at the options available and assess how each of them gets the job done.
Management Styles
Property management is generally broken down into three types of practice: the large property management company overseeing many hundreds of units; small business property managers who can handle a smaller number of properties, usually all within an area local to the property manager; and, investors who manage their properties themselves.
Each approach to property management has its merits and caveats and each can be useful to investors in different situations.
Maintenance & Repairs
Perhaps the most well-known of all property management responsibilities, maintenance and repairs, are a cornerstone of well-run, and legally compliant, rental properties. Maintenance and repairs do differ from one another.
Maintenance tasks are those routine and preventative tasks which recur on a fairly predictable schedule, such as lawn-mowing and filter replacement. Repairs, on the other hand, are done as needed, such as repairs to major systems on the property or to the structures of the properties such as floorboards and front steps.
The process for resolving maintenance and repair tasks can look very different depending on the size, age, and condition of a property. Even the sheer number of properties within an investor’s portfolio can make a difference.
Property management companies capable of facilitating hundreds of units across multiple investors will have their processes for maintenance and repair requests standardized. They are also well equipped to handle needs in a timely manner and at a professional level of quality. This option is excellent for investors or conglomerates that want to scale their business and portfolio. It’s important to note that the cost of retaining a large-scale property manager is relatively standardized as well. Rather than the investor being able to negotiate a rate with the property manager, managers of this size tend to provide terms to the investor. These are commonly a percentage of collected rents and as such would have a predictable impact on the investor’s monthly return on investment (margins) for the property.
Small business property managers provide an expert level of service in the state and municipalities in which they work. At this scale, investors can enjoy the benefits of outsourcing property management while having the flexibility to keep costs contained. Property managers of this category are often paid an hourly rate which investors can negotiate. While they cannot necessarily handle the same number of units as a larger company, these property managers tend to be well connected to a network of local contractors ensuring that maintenance tasks are fulfilled reliably and repairs are responded to promptly by the right professional for the job.
For real estate investors with fewer properties, it can seem very convenient to handle routine maintenance on their own. This allows them to cut costs on services by employing their own time and effort. This approach does require the investor to know a variety of crafts and trades well enough to execute maintenance and repairs on their properties. It also requires investors to be versed in local standards, ensuring that any repairs are completed to a degree that is professional, safe, and up to code.
Occupancy
Occupancy is critical as it directly impacts an investor’s bottom line through their monthly debt-service-coverage ratio. There are several dimensions here that investors must consider.
In order to receive applicants for a property, these potential tenants must be properly sourced. That means marketing is crucial, so that prospective tenants can easily find the investment property when searching for a residence. Local and online listings that showcase high-quality images of the apartment in good condition are essential to attracting tenants. These images don’t require the property to be staged with furniture and décor to be effective, as many renters provide, or even prefer, their own furnishings. However, if the apartment is intended to lease fully furnished then it’s best to showcase those available amenities.
With tenant applications comes the need for a tenant vetting process. Depending on population density and demand for housing, the number of applicants for a given rental property may vary. It’s important to ensure that renters have solid financials to be able to pay rent on time each month.
The final piece of the occupancy puzzle is tenant retention. While some tenants will move out for their own reasons, many can be retained with a positive living experience. It’s fine to increase rent within legal limits when market growth allows, but “price gouging” rates will keep few tenants satisfied or living comfortably. If grass and weeds around a property are consistently overgrown or repairs are not handled with a sense of urgency, then investors can expect tenant retention to be challenging. On the flip side, being on top of all these issues can alleviate stress and ensure occupants are satisfied.
Good vs. Bad Management
No matter which approach to property management an investor chooses, a positive reputation is a must. Some larger management companies may feel impersonal, some smaller property management operations may not handle tenant objections well, and the lone investor may struggle to adequately service the properties in their portfolio. If tenants are unhappy for any reason, then reputation will suffer.
Investment properties are a public-facing business, and tenants talk. Don’t let a solid investment turn sideways through poor management. Using sound property management tactics can ensure that a solid investment runs efficiently and effectively for both the investor and their tenants.
