Becoming a Landlord
Even during strong economic periods, maintaining a portfolio of successful investments takes time, energy, and money. Owning an income property typically means being available at any time in case of emergency. Having the right personality, and perspectives, will determine whether a property owner succeeds or fails at holding and managing properties. Patience, responsiveness, and communication skills are hallmarks of a solid real estate management strategy.
Becoming a property owner involves six core disciplines requiring skills and knowledge.
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Sales and Marketing |
Ability to advertise and market to prospective tenants. Ability to sell property effectively. |
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Money Management |
Able to understand and manage expenses. Knowing how and when to increase income. |
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Building Structure and Carpentry
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Understand basic carpentry, electrical, plumbing and climate control systems. Understand property specifics, landscaping and building inspection requirements. |
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Communication |
Ability to communicate with tenants, municipal officials, maintenance, and repair personnel. |
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Negotiation |
Able to negotiate price, terms, conditions, and other facets. Able to deal with tenants and property sellers. |
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Regulatory Interested in learning more? Why not take an online Landlord course?
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Knowledge of building code, zoning, and other restrictions. Understand permitting requirements and process. |
Once you determine that you have the ability to become a property owner, it will be helpful for you to understand what issues are involved in property management. As you can see by the table above, there are several disciplines that intersect when you own and manage real estate. Once you understand each discipline, and design a strategy to handle elements within each discipline, running a property will be easier. Let us look at some basics of income property management.
- Finding the right property. Searching for solid properties with good rental potential; what to look for during inspection; how to analyze income and expenses.
- Buying the property. How to negotiate price, terms, and other considerations in your favor; what type of mortgage to use, and when to refinance; when to use creative financing to purchase the property.
- Attracting and retaining tenants. How to bring in tenants, keep them happy and generate profit from them; knowing what channels to use to attract the best tenants; how and when to increase rental income.
- Resolving building and property issues. Handling repairs, weather damage, code violations, equipment replacement, and updates; dealing with neighbors and community issues; complying with regulations and requirements.
- Handling tenant issues. How to deal with delinquent payments, damaged property, community violations (loud noise, unsafe conditions), occupancy violations, and other lease issues, handling special requests.
- Dealing with vacancies. Limiting empty space; promoting rental openings; preventing vacancies by creating long term relationships.
- Financial activities. Paying expenses such as repairs, maintenance, updating, and waste removal; paying debts on the property; collecting rental payments on time.
- Dealing with contracts. Creating effective agreements for purchases and leases; handling clause violations directly (minor offenses) or through litigation (major offenses); and ending a contract.
- Complying with laws. Meeting structural codes (fire, safety, others); operating according to property owner and tenant laws; meeting housing regulations.
- Keeping good records. Performing financial accounting; documenting activities; maintaining complete, accurate, and updated records.
Setting Goals
The next step in your journey to becoming a successful income property manager is to determine your personal goals and your financial goals. Your personal goals may include how many and what types of properties that you want to manage, how much time you will be involved in this effort, and where the properties will be located. Financial goals should include income and expense objectives, return on investment (ROI), short term (3 to 5 years), and long term (10 to 30 years) net worth calculations. The goals that you set should be firm but flexible; they will become a map for you to follow, but changing circumstances may force you to alter your goals occasionally.
To ensure that your goals as a property management professional are solid, they should follow the well known acronym S.M.A.R.T.
Specific. Use actual dates, dollar figures, locations, resources, and other criteria that will make up your goals. Specific goals provide focus and clearly define your efforts as you proceed with this endeavor. If you simply indicate general objectives such as, "You would like to earn more money." your goals will be difficult to manage and to measure.
Measurable. To track your progress, use measurements (such as dollar amounts) that can be easily compared and analyzed. Establish monthly, quarterly, and annual figures for each of your objectives. Concrete data allow you to stay on track, push to reach target dates, and feel a sense of achievement when the goals are reached.
Attainable (Achievable). Establish goals that can be reached by effort, by committing yourself to improving skills, attitude, financial capacity, abilities, and knowledge. As you achieve and experience more, your goals will seem closer and opportunities that you once ignored may be realized.
Realistic. Determine what you want to achieve by setting reasonable benchmarks. Goals are not dreams; they should be rational, given your financial status, education, experience, attitudes, and abilities. If you want to stretch yourself, establish two sets of goals, one set that can easily be reached with appropriate work and another set that might be possible with a lot of hard work.
Timely (Time Sensitive). When setting goals, connect achievement with a timetable. By establishing goal dates, you will create a sense of urgency. This sense of urgency can drive you to achieving your goals; without it, you may not push yourself enough and you may become disappointed or lose focus. (T can also stand for tangible.) Have goal achievement affect your senses. By rewarding yourself with a sensory experience, such as an expensive meal or new clothing, you "feel" goal achievement through a direct physical connection.
Commercial Properties
Because not all businesses own the property where they operate, there are many possibilities to manage commercial income property. The lease conditions, space, and financial calculations are very different from residential properties, but the risks associated with leasing commercial space are similar. Substantial income loss, damage to property, and high expenses can result from managing this type; however, the upside is that commercial property management can be very lucrative.
Planning and setting goals are important when starting a career in property management. One aspect of your plan to manage commercial property will be to determine what types of tenants to attract. In many cases, the property description and local zoning ordinances will dictate what business types will work at that location. A mixed uselocation will typically attract retail shops, certain service companies (like H&R Block tax services) or entertainment venues, such as restaurants. A mixed use property may or may not have an anchor tenant that is committed to the location for several years. Independent single usebuildings may be more appropriate for physician offices or banks. Larger stand alone buildings might house offices, manufacturing, or warehouse facilities.
Specifics like parking availability, traffic patterns, and municipal planning strategies should be considered when you examine potential properties. The old real estate axiom that claims the most important consideration in buying property is "location, location, location," and it has been proven time and time again. Nowhere is this more important than in commercial property management. That is because your property characteristics, such as location, will likely determine if your tenants will succeed there. This means attracting people and satisfying customers' needs (like convenience and parking availability).
A close examination of prospective tenants is also important. Some businesses flourish, while others fade quickly. Typically, a lease extends for a few to several years in length. Your objective should not be simply to fill empty spaces. You want your tenant to have a chance to succeed in your property. If he or she is successful, they will likely stay at your property (unless the business growth requires a larger space or more convenient location that you cannot provide). This requires attracting the right tenants for your location. What type of tenants will you encounter managing these types of property? You will likely deal with the following types of tenants.
Startups. This type can be risky. The energy and desire of the owner or management do not guarantee a successful long term relationship with this tenant. Money management, personnel issues, poor business decisions, and other factors could cause the business to fail quickly. However, experienced management with a solid, strong business plan could attract new visitors, which may increase the property's value and help nearby tenants as well. Be certain to review as much background as possible, and create a lease that protects you in the event that the business fails.
Franchises. This business has a successful plan to follow and can bring customers familiar with the franchise to your property. This type of tenant typically seeks thousands of square feet and has franchise contracts that extend 15-25 years. Franchises can be the anchor tenant (see below) for a multiuse property. The company offering the franchise (franchisor) usually controls the business decisions of your tenant (franchisee), which includes site location and building design, and will discuss the lease details with you. Because of the franchise contract provisions and length of commitment, a franchise business can be a solid, long term tenant.
Small businesses. Most of the businesses in the U.S. are small, with one to ten employees. These tenants typically have developed good customer relationships, and attract visitors who wish to support locally owned companies. They usually occupy smaller spaces, which can provide a diverse commercial base for mixed use properties. Due to its size, a small business can be more flexible in its operations, but runs a risk of failure if economic conditions turn sour; this presents a challenge for a property manager relying upon income from small businesses.
Anchor tenants. Found in retail and mixed use properties, an anchor tenant usually involves three distinct features 1) the company is large (a franchise or chain store), 2) enjoys a discount or favorable terms within the lease, and 3) agrees to a lease of a minimum of five years. This tenant is positioned to attract traffic to your property and provides a solid neighbor that benefits adjacent tenants. Though this type enjoys more negotiating power in lease provisions, and may require more considerations, such as parking space and municipal support, you gain a tenant that is committed to the property for several years.
Retail. Shopping establishments can create high visibility for your property. Retail stores bring foot traffic, colorful signage, and vehicles to and from your location. However, the buying public can be trendy, changing shopping destinations for newer merchandise, less expensive products or locations that are more convenient. Transportation costs can affect shopping patterns, attracting buyers to shop from catalogs or online. Because of this, retail tenants should be examined closely to determine if they have long term potential to remain at your property.
Office. Managing an office building can be somewhat easier than retail or industrial properties. Lower customer traffic, minimal impact upon the property and less structural modifications are a few benefits of this type of tenant. Your property may contain several to hundreds of employees (such as a call center), and will usually involve operations during normal business hours. This type of tenant can be stable, but is just as vulnerable to failing conditions as other business types.
Industrial or Manufacturing. Properties housing industrial tenants typically involve larger buildings, higher power needs, and shipping and receiving functions. Buildings can suffer more wear and tear, but require less modification than retail stores. Economic conditions and legislation can adversely affect this type of tenant strongly, so it is important to understand the company's history and current and potential customers before committing to a long term lease.
Like commercial property, location is important when managing residential property, though for different reasons. The residential tenant seeks a location that is convenient for purposes such as traveling to work, access to shopping and recreation, and neighborhood design or demographics. Additionally, the building layout and property appearance can be important to tenants. However, residential tenants will not remain if you do not attend to your responsibilities. It is important to provide a safe, secure, and attractive property to retain the best tenants.
Residential properties can be managed with a certain amount of creativity and flexibility. For instance, you can make minor modifications, such as enclosing a porch, which could attract a different set of tenants. Alternatively, you can offer incentives like those tenant maintenance agreements that give the tenant the responsibility to mow the lawn and shovel walkways in exchange for lower rent. A manager's ability to maintain good rental history is limited only by his willingness to appeal to his tenants.
