How to manage properties – creating cash flow:
How to manage properties and being able to create- and maintain a positive cash flow from your rental portfolio is one of the questions I get the most. As you may have read elsewhere, we are a big provider of high-yielding rental properties to investors worldwide, but with potentially high yielding properties comes a larger set of risks.
I recently spoke to Rentberry about some of the advice we try to follow ourselves, to be able to maximise cash flow and avoid tenant related issues. Hopefully some of the below points may help you be able to better understand how to manage properties in your portfolio, or if you’re just starting out, it may help you make some educated decisions about where and how to purchase.
- Select an area with a strong rental demand:
This may be an obvious one, but always look for an area where renters genuinely want to live. This will vary between cities, but a good bet is always to try to find something that is close to employment centres and/or transportation links. As a firm, we have been focused on suburbs close to the inner cities in Cleveland, Indianapolis, Pittsburgh, and other cities in the Midwest, as the rental income is comparatively high to the amount you spend on the purchase, when compared to other metro markets such as here in Southern California.
- Always work with a professional property manager:
Please, make a reputable and serious professional property manager your first call once you have decided on an area you are interested in. They can help save you so much pain and agony, as they’re the ones who truly know how to manage properties. Do not be afraid to meet with several companies and “shop around”, and don’t forget to ask for references from other investors. Some management companies (officially or not) make their money primarily by selling properties to “their” investors, and the management is secondary, and you want to try to avoid that as much as possible.
A good property manager will help you avoid the issues I mention below, and they’ll also be able to advise you on good properties to buy, as well as place tenants for you. Expect to pay 10% of rents collected in management fees, as well as some costs whenever your property needs maintenance. Don’t be afraid to ask for “before and after” pictures whenever a work order is requested, as some (but not all) property managers use these “service calls” as a way to boost their income by billing for work that’s not needed, or inflate the costs. Yes, we have had it happen many times in the past.
- Make sure tenants are screened:
If you follow the advice above, you shouldn’t need to worry too much, as a good property manager will make sure that the tenants are screened adequately. One mistake new investors tend to make is they get so excited at the prospect of having someone move into their property that these checks are sometimes lacking or even non-existent, which is a potentially huge mistake. The wrong kind of tenant will not only hamper your cash flow by not paying rents, but can also completely destroy your property and cost you many thousands in legal fees should you need to get into a messy eviction process.
In general, you want to make sure to check employment references (unless you go with Section 8 rentals, which has pros and cons) and also check their credit, and previous judgements etc. Even though you’ll be excited at the prospect of filling your property, this stage is very important, and the behaviour and responsiveness of the tenant will tell you a lot about how they will act going forward.
- Make sure you get a security deposit:
Getting a security deposit is a crucial part of how to manage properties. At the higher end of the market, you can aim to get “first, last, and security” (3 months in total) when the tenant moves in, at the lower end you are more likely to get one month’s rent as a deposit.
Most likely you will need it (and more!) when they move out, as there’s often significant wear and tear on carpets, the walls often need some fresh paint, as well as a number of other items but if the tenant at least has some skin in the game by virtue of having paid a deposit, that will help a little bit in avoiding some of these issues.
- Do not allow tenants to fall behind:
Usually once a tenant falls behind by more than a month, it’s Game Over as far as them ever getting caught up. Generally we have had to (in the more low cost areas) accept that around Christmas and New Year’s, tenants are slow at paying, but instead tend to get caught up around tax refund time.
However, my advice would be to not allow tenants to fall behind as the excuses tend to pile up, and unless you are working with a professional property manager that knows how to manage properties, you can easily become a victim of listening to their (often very compassionate) stories, and allowing rents to slip behind.
Whenever rents are late, it’s also important in my view to enforce whatever contractual rights you have to collect a Late Payment fee, as this tends to serve as a deterrent and means payments are less likely to be late next time.
I have been working with investors for many years in primarily high-yielding markets and have learned a thing or two about how to manage properties, and if you contact me, I would be more than happy to share some of my knowledge, as well as help you locate some great cash-flowing properties if you are just starting out on this exciting, though sometimes tricky, journey to create a performing real estate portfolio.