Sunday, May 14, 2006

How to Be a Landlord 101

My blogmom asks interesting questions. Since I love to answer interesting questions, I leave comments scattered all over her blog.

Sometimes they get so long they aren't comments any more, they're posts.

So this time I decided to post my answer on my own blog, and not eat up all her bandwidth with my meanderings.

The alternative - to watch my wordiness - is, of course, not on the table.

That really goes double for this set of questions, (, questions I've answered on my own or my clients' behalf many times in the past:

If You Rent Houses or Apartments to Other People...

Is it a sort of calling, an opportunity to be of service while securing your financial future, or simply a business?

How often do you raise the rent? Does the rising value of your rental property justify raising the rent as little and as infrequently as possible?

Is it better to charge market rates, or slightly below?

Is the business of providing housing different from other businesses? How?

It's a business, absolutely. All businesses are different from each other. That said, I've always approached any business enterprise as a sort of calling, just like I do with my personal life. Things like courtesy, respect, and an appreciation for the impact of my actions on others do matter to me.

Housing, like it or not, is one of the most significant and emotional expenditures any human being makes. Economically speaking, it's the biggest expense we have. Emotionally, *home* matters hugely to us and to all other species on the planet. To lose it to fire or tornado or hurricane or foreclosure or eminent domain can break a person's heart. That is natural.

In my bankbusting days I had a lot of rental properties in my workout portfolio: apartments, a few houses, business/commercial space, office buildings, what have you. As a portfolio manager you don't do the *hands on* so much as you oversee the management performed by delinquent owners - except for the properties you control directly, through seizures and receiverships, or foreclosure. For those, you usually hire a commercial management company, and boss THEM around instead of the owner (or owner's management company).

You go through their performance financials every month, with a fine-toothed comb. You often end up more knowledgeable about that property's performance than the owner, manager, or accountant. This is immensely educational and immensely satisfying.

My college degree is a BSBA from a top university in my field, double-majoring in finance and real estate, graduating magna cum laude. That gave me the tools to really and truly analyze, and make decisions on, just about all things real estate.

What I'm going to say in answering Miss Attila's questions was derived from significant real-life experience that included things like comparing the success of different management styles in identical markets, and measuring the impact of property management decisions over time. After many thousands of hours of analysis of many thousands of rental units in both very tough markets and good ones - are you still with me here? - I can tell you this:

-The single biggest impact on your bottom line is from vacancy.

-The process of re-renting a newly vacant unit is called turnover. Turnover dollar impacts are from both the lost rent - that's the highest impact by far - and from the costs associated with re-renting: the cleanup, repairing any damage, advertising, credit checks, and *employee* (or personal) time used to acquire the next tenant.

Always remember the difference between income and expenses. They're apples and oranges and should be treated as such - differently. This will make you a better manager and landlord.

From a financial analyst's point of view, higher turnover also means higher uncertainty - meaning higher risk - and thus, lower present value of the property as a whole. This matters to your banker. A lot.

-To keep occupancy as high as possible, keep your existing tenants, and re-rent vacant space as fast as humanly possible - to good tenants.

-To keep existing tenants, treat them with respect. E.g., make those repairs they call in about, and do a good and fast job at it. Leaving a broken commode or A/C unattended for more than a minute or two starts a chain reaction of malcontent on all sides. That costs landlords far more money than paying a weekend emergency fee to a plumber.

-Rents are, and should be, market driven. This means the rental market. Actually, the market sales value of the property has virtually nothing to do with it, at least not in the way you described.

For one thing, those are simply two different products, so, two different markets. For another, the concept of rising sales values *justifying* not raising the rent is an improper way of considering rent. To whom are you *responsible* for charging below-market rents? If you want to contribute to the common weal as a landlord, a far better way is to be a better landlord: responsive and legal and fair. That's rare and special enough, right there.

That said: To keep those existing tenants, while you do need to raise rents on them too, don't raise them quite enough to match the market. Cut them a small break - even if it's only $25 or $50/month - and tell them WHY: You appreciate their timely rental payments and nice quiet tidy habits, and you want to keep them around by saying *thank you* by not raising the rent to what you'd charge a new tenant.

It takes only one month of vacancy to make you appreciate that the token amount you undercharged makes a much smaller hole in your pocket than vacancy does. Do the math.

Alternatively, offer to do something small to improve the unit for them - paint it, or replace an old appliance, like that. You're really only maintaining your own real estate, but it can have a remarkable positive impact on an existing tenant. They rarely expect it, because most landlords only do these things during turnover. Most of these perks cost less than a month's rent.

-To acquire good new tenants as fast as possible, do a mix of both slightly undercharging, and doing that respect thing. It goes both ways, so when interviewing prospective tenants, don't just tell them you'll be a responsive landlord when they make that *broken A/C* call. Also tell them you expect the rent on time, late fee after 5 days, etc. etc. Respect is MUTUAL, and in my experience, most tenants understand and respect that fact.

Still, it's amazing how many people do like Desert Cat said, and think you should have called to *remind* them about the late rent, or other silliness. So clarifying it all up front nips that BS in the bud. It's also amazing how many landlords think it's reasonable to wait till Monday to fix a broken toilet the tenant called about on Friday night, so nip that BS in the bud on your part. E.g.: don't just return a tenant's phone call the minute you get the message - make sure they have a back-up number if they can't reach you right away.

See how fun? Real estate is such a universal factor in the human experience. At this point in my life, circumstances being what they are with my health and whatnot, it looks like I won't ever be a big landlord myself after all. It was a goal of mine since around age 15. Still and all, I don't really mind any more. At least, in a way, I got to enjoy it vicariously in my dream job for a good while. That, with the size and variety of properties I'd never have been able to experience owning, my own self - and without the risk, too.

I mean, REALLY. Talk about OPM!

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