You're about to discover what every landlord should know about property management. Ideally, you're reading this before you have purchased your first rental property because it can save you thousands, if not hundreds of thousands over a lifetime, and can remove many of the hassles and headaches that come along with being a landlord. These principles are incredibly simple once you hear them, but all too often, real estate owners either do not know about them or do not adhere to them, and in either case, the results can be disastrous. Landlording the wrong way can burn out even the most persistent investor and the eviction courts across this country are chock full of these discouraged real estate investors. Save yourself the hassle and the headaches of learning many of those lessons the hard way by carefully listening and most importantly, putting into practice, what you learn in the below video. Here's what every landlord should know about property management:
I hope that what you learn in this blog is going to:
- save you a tremendous amount of money
- it's going to reduce a whole lot of heartache
- hopefully make you much more profitable with your rental units
Most Important Part
Choice of Tenant
Now as a landlord, you can choose your tenant based on their financial qualifications.
- You Can't Discriminate Based On:
- You Can Discriminate Based On:
- their credit score
- based on their job
- based on their income
- based on their debt to income ratio
- based on what they did at their last place that they rented from
You can deny their application
Biggest Problem Landlords Experience
They choose unwisely. Why? My argument is because they do a lousy job of marketing for tenants so they don't get very many applications, so they end up choosing from a bad set, from a bad list of potential tenants.
It starts with good marketing, really getting your property out there so everybody can see and so the entire marketplace knows that your property is for rent.
Price it Right
It also means that you need to price it correctly. If the rent is too high, you get a whole less people looking at it. Assuming you get the right mix of people looking and that boils down to choosing the right tenant. Now, I won't be able to give you all the information on how that works in a video like this. It really is more an art and a skill that you acquire.
How to Choose the Right Tenant
- The Importance of Their Job
My mentor actually owned a payday loan store at some point in his career, and so he knew all about qualified people, but I'll shortcut it for you here and it's this, job. I'll make a little big note there, job. What their job is, is more important than almost anything else. I've definitely seen where some investors think that if you buy homes in nicer areas, higher-priced properties that you get necessary better tenants. I can't find from my testing that that's correct. High income, low income, to me none of that matters. No matter what their come level is, it has more to do with how they create that income.
- Beware of Self-Employed
The worst is self-employed, the worst, because they are the ones that are going to call you up one day and say, "Oh Phil, I'm so, sorry. I can't pay the rent, but you know two months from now Phil, I have this big job coming up and I'll pay you for like 8 months." Uh oh, you don't want self-employed.
The Best Tenants
Nurses are my favorite tenants, because
- They always have got a job, always, no matter what part of the country.
- If they fall behind on payments, which tenants do, when they fall behind, a nurse can pick up extra shifts.
I love nurses. I can't stand self-employed.
Job makes a huge determining factor, but also there is more to it. If you look at their income, their credit score, what's going on and choose the best one. This is an opportunity to choose a good one. Don't choose one just because they have a nice sub-story, uh huh (negative). Choose a good one. Check up their references, call their references, I do. I'll go more into that in just a moment. Okay. Choice of tenant, absolutely huge.
Next, and this is very obvious, I don't think this is rocket science, cash flow. Properties got to cash flow well. It's got to bring a lot of good money because all kinds of things can go wrong and you need a buffer.
- You need a margin of safety so that you're always bringing in cash even if the hot water breaks down, even if the AC unit breaks.
- You've always got money coming in. If you're just barely breaking even, it's not even worth it. It's not worth it at all, which brings me to this next point of reserves. It's very similar to this but you've got to have reserves that you're going to have real property because things go wrong.
- Mostly what happens if a tenant doesn't pay, then you have to evict them. They don't pay you, so there is two or three months of empty house payments and you have to pay for the attorney, and then when they move out, you've got to pay to fix up the carpet and some other things.
- It's interesting, being a landlord and owning rental property, this is kind of like funny money because you get it but then you may have to give it back. What we do a lot to overcome the reserves problem, is we do what's called a rent-to-own, you can do on your single-family homes anyways.
With a rent-to-own, you get an upfront down payment. It could be 3, 5, $7000 and that usually is reserve, so that's problem solved. They give you $5,000 down to move in and they rent the property. You still want the cash flow but you also have a nice reserve 5,000 in case things go wrong because oftentimes things do go wrong.
Know Your Laws
Speaking of things going wrong, you definitely need to know your local laws. It's interesting because these laws can change dramatically from county to county, not even from state to state. We're talking, it's usually on a county-specific basis. You need to read your landlord and tenant act for your county and you need to make sure you understand all the nuances of it.I mean little things like you may have to put screens on all of the windows, and if you don't then you're not doing the landlord and tenant act correctly.
Where does that become a problem?
When you try to evict somebody. When you try to evict somebody is when they try to find every loophole to ruin your life. That's where you want to make sure that you've got all of your t's crossed and your i's dotted, and that's why you need to know your local laws. That means once you decide you're going to own a rental property before you put a tenant in there, you need to prepare for eviction. You need to prepare for this.
Now certainly part of that preparation is knowing your local laws, but what I would argue is even more important is that you take your list that you're going to use and you bring it to your eviction attorney. If you don't have one, make sure you find a great eviction attorney that does a lot of evictions in that county. The more evictions they do per week or per month in the county that the property is located, the better they are because they have more experience. Take that rental agreement to that eviction attorney and say what needs to be in here to make it easy for you to evict. Then you need to ask him:
- "What else are you going to want from me when I bring a file to you to evict somebody?"
- They may say, "Well, we want to see a copy of their driver's license.
- We want to see a bank account information, credit card."
- They will want to ask for all kinds of stuff, and what that means is get that upfront, and sometimes it's called the honeymoon phase. Before the tenant moves in, you get all the information that that eviction attorney is going to want, because a lot of time what the eviction attorneys are going to do is they're going to charge a small or a reasonably small fee to evict the person.
- Then they're going to go after that person to collect the back rent, and whatever they collect they keep like 30% off.
Be Prepared to Evict Someone
Their goal, of course, is to hunt these people, track them down and the more data you have on person, the easier it is for the eviction attorney to track them down. You may be going, "Oh tracking people down, collecting, oh Phil, I don't want to be that kind of landlord." That brings me to my next point. Preparing for eviction means that you have to be prepared to evict somebody, and if you don't have the stomach for that if you don't want to kick people out of houses, don't own rental property. I know that's pretty strong. Don't do it. It's okay. You don't have to be in a landlord business to be wealthy in real estate.
In fact there are plenty of landlords of like 100-home kind of portfolios that will just beg and plead, "Do not own rental property." There are plenty of landlords that would rather, in fact, a lot of sell off their rental units and get into just flipping houses because they like it better. I'm not saying you have to be in this business. Have the ability to say no to the whole business if you don't want to evict people because that's a rule. If you're going to be a landlord, you need to evict because if you don't, if you let people live in homes and not pay you and take advantage of you as a landlord, you train them. The next place they go, they're going to do the thing and the same thing.
Keep a Strict System
You're doing a disservice to society if you're not evicting people. That's why I say just don't even be a landlord if you don't want to evict someone. If the whole concept of kicking somebody out of a house, because they didn't pay you their rent, is something you can't stomach, then just don't do it. All right. We covered that. Good deal. All right. Evict when someone doesn't pay you, so that means that you keep a strict system. If they don't pay you on the 1st, maybe they have until the 5th and with a late fee to pay you. If they don't pay you on the 5th, start eviction. That's how you make it roll.
You do it like that every time because here is what happens, they learn real quick that you don't give grace periods. You say, "Look, it's due on the 1st, between the 1st and the 5th is a $50 late fee. If you don't pay me on the 5th, on the 6th, the file moves to the attorney, you will not hear from me again and the attorney starts the eviction process. It's that simple." That keeps them in line. Another thing you could do here, and I'm a big fan of this, is to auto-collect payments. Rather than waiting for the check in the mail, what you do is you such the money out of their bank account at the first of the month.
What you can do is you can setup what's called a merchant account. Now it takes a little bit of money but not much. There are some options these days whether it's PayPal, whether it's Square, easy simple ways to get a merchant account. I think the best merchant account comes from your local bank or the place that you do your business banking at. You could hire a third party firm to do this, but I think it's better for you to have your own merchant account, suck your own payments out of there.
What you can do is you can get their credit card information as well as their bank account information, so if it doesn't come out of the bank, you import from the credit card. If it's done autopilot, here is what's also really nice. They know that it's coming out on the 1st and they know there is no way to stop that. It's going to happen one way or another. They are forced to get the money into their bank account so that that gets pulled out and so they don't get a whole bunch of NSF fees. Does that make sense? I learned this ... By the way, what I'm sharing with you, most of this I learned the hard way.
I discovered that tenants will pay their utility bills simply because it was on auto-draft. When I was asking them for a check or they were mailing a check here, the problem was sometimes the check was late. With auto-collect nothing is ever late, it's always on autopilot. Now, if they don't have the money in their account and you try to get into their credit card and they don't have any money on their credit card, well they literally have until the 5th and if you don't get the money, then you just start the eviction. It's that simple. Auto-collecting payments can make a very big difference in your ability to make this thing automated but ensure you get paid. All right.
Stay Close to Home
Some of you may have already broken this cardinal rule. You may own what they call a turnkey property far away. Maybe you live in Canada and you own a turnkey property in Florida. I think it's so much better to own all of your rental properties very close to home where you can just drive over to them because you want to keep an eye on your real estate. You want to keep an eye on what's going on. Maybe once every six months or every year, you drive over to the property and maybe you have to give a tenant notice, where you drive over to the property and you take a look, so you see what's going on You see if they've got a pet that they say they didn't have before, so you find out what's going on.
Being close to home is so important to keep an eye on your portfolio, on your rental property. If you do have one just internal property, my suggestion is to sell them. Again every situation is a little different, but me personally when I moved from Nashville to Florida, I slowly had to sell all my rental properties. I tried. I tried to keep them and tried to manage them long distance, a great team I had already built in Nashville, nothing replaces you, yourself being there. Nothing replaces it.
Hiring a Property Manager
The last thing I want to touch on, I'm sure a lot of people maybe are asking themselves this question is, what are my thoughts on hiring a property manager? The challenge with a property manager is usually how much they're going to cost. Now, a property manager for say a 150 unit apartment complex is a lot different than a property manager of a single-family home, because there is a lot of economies for scale on a larger apartment building. For a property manager on a, I'm going to say SFR, single-family home, they are going to take 10% of the gross. That's the gross rent coming in.
Now 10% of gross is usually 50% or more of the net cash flow. You are just turning over a gigantic amount of money for a relatively small responsibility. Now on the other side of the coin, if you have the time in the ingenuity in the initiative, start your property management firm. Property management makes a ton of money over time which you build up a big portfolio because 10% of gross is a ton of money. My big issue with the property manager has to do with how expensive they are because they also usually charge the entire first month's rent or close to it to put a new tenant in there.
Here is another thing, they are not going to advertise and market heavily as much as you would because they've got a lot of stuff going on. They're going to put their ad out, they're going to do a couple of things, but they're going to go heavy the way you would. Typically their choice of tenants is a smaller pool which is less likely to have a great opportunity for an awesome tenant in that small pool. They charge a full month's, first month's rent to fill the property but their choice of tenant usually is never as good as yours would be.
If you already have a great eviction attorney in place, then fantastic that that's pretty much most of the battle. You're auto-collecting your own payments, so you have to hire them for that. If you're like, "Well, I don't really want to mess with it." Wait a minute, what are you really messing with? You've got to ask yourself that question. If 10% of gross is $100 a month, and once every 5 months you've got to talk to the tenant and call them up and say, "Hey, where is your rent money?" Is that worth $500 for one phone call? Yes it is.
Another thing is a property manager usually is going to call a handyman to go fix the property. You could do the same thing. Property managers, usually when they call a handyman they usually get some sort of referral fee from the handyman for setting them the job. Now I'm not saying properties managers are bad, some of them are actually fantastic. In fact, they are just incredibly awesome because they know the local laws real well. They have a great eviction attorney. They auto-collect the payments. They are able to do all things, right, the problem is they are just so damn expensive.
Maybe if you've got a huge portfolio and you can negotiate a better deal on the property management and it's worth it to you, then fantastic. By large, if you follow what I've just shared with you on this video and you do a great job with just these simple principles, there is really no need to hire a property manager, because it's really all about choice of tenant. You auto-collect the payments and if something goes wrong, you just call a handyman. Those are the kind of things and plus here is the other big thing, this goes back to the state close to home.
Keep an Eye on Your Assets
If you just let a property manager handle everything, then you lose sight of your asset and you lose sight of what's going on there. You've got to keep your eye on your assets. It is so critical that you don't just let it all be dealt with somebody else. We're not talking about a ton of work here, so that's why you're meant to drive over the house to see how the contractor did. Did they replace the AC? Okay. That's part of it. Again, if you're bringing in good cash flow, it's worth it. You see all these things wrap back around of each other.
If the cash flow is strong enough, it's worth an extra drive over to the house to make sure the contractor did the work correctly. Or if the tenant is complaining about something really, really bad and you send a handyman over there to take a look, and they call you back and say, "Hey, before I do any work I want to run some things past you." It's just a couple of phone calls and if you have a great tenant, you may literally not hear from them for like two, three years. They just pay the rent, it automatically comes out on autopilot and they are just happy as can be. All you do is once a year or once every six months, you just check out the property to make sure everything's good.
I've got one quick bonus principle if you will, a funny story. An individual I knew back in Nashville, he went to set-out. Okay. The set-out, I'm going to put it next to eviction. The set-out is where if the tenant hasn't paid, and he goes through eviction court and then the judge says, "Hey, if you're not out by the 28th, you're going to be evicted." Then the Sheriff along with the set-out company, think of them like a moving company, they're going to show up on the doorstep of the house. The Sheriff is going to knock on the door, and if it's going to be locked, he's going to pick the lock or have a locksmith there.
They are going to open the house up and literally the moving company, if you will, is going to take every piece of furniture and take it out of the house and set it out, set-out, on the front lawn or on the driveway. That's a set-out. They happen, so if you are a landlord it's going to happen at some point. This individual I knew, he wanted to see the set-out because he knew this tenant and he was so just mad about what the tenant did to him and he wanted to watch this. He wanted to kind to relish in the fact that this guy is getting his stuff kicked out.
He is sitting there kind of at a safe distant watching this thing happen. Now he drove there in his Lexus, bad idea. Here is what happens. They start pulling the stuff out of the front door, and they are dragging couches and TV and just everything, and this tenant just storms out the door, goes to his car and he just peels out down the street. Then you hear him go vroom and he stops. He hits reverse, and he kind of turns his car around to be like perpendicular, if you will, to that Lexus.
This is the guy's car and he goes, and he just starts rear driving right back to the side of the car, this Lexus. There is metal flying. Of course, the rear window of the tenant's car is getting just trashed but also that Lexus is getting destroyed too. Anyway, so he had to, of course, get a ride from the Sheriff and call his car insurance company. Point of the story is, don't go to the move-out.