INTRODUCTION
If you’re reading this, you are more than likely either an investor or considering building a rental portfolio of single-family houses.
Owning a rental property – or a portfolio of properties – can be very lucrative. The market has exploded for rental properties all across the nation.
Investors have thrown themselves into the industry and have dedicated themselves to learning vital lessons about buying properties, finding tenants, and managing the entire process.
If you’re new to investing or merely trying to get a different perspective, we want to walk you through FIVE KEYS TO MASTERING RENTAL PROPERTY!
A Little About Us
When we first bought and sold our first investment property, we immediately fell in love with the business. We loved it so much we purchased a HomeVestors franchise (We Buy Ugly Houses) and started wholesaling around 40 properties per year.
We knew that we could spend $5,000 on advertising and we would receive approximately 100 leads per month. Of those leads, we would make about 20 or 30 offers and end up buying three or four houses a month.
We weren’t interested in holding rental properties until we bought a 10-house package in early 2005. About fifty percent of them were vacant, but we knew we could unload them quickly with the network of investors we had put together. We sold some and decided to hold onto the rest and see how we could grow our cash flow over time.
In those early days, we weren’t prepared for all that went into managing just a few properties and tenants!
But the interesting thing is that we kept buying and holding rental properties. When we couldn’t wholesale a house to an investor, we stuck it into our rental portfolio.
In this article, we are going to share how we built and managed portfolios the right way – not only with our investments but with countless others we’ve served through our property management company.
To help you along the journey of building your rental portfolio, here are the five keys to mastering rental property.
Key #1 – Know the Market
Successful real estate investing begins and ends with knowing the market.
Doing your homework is essential. That may sound elementary, but we’ve found it’s not that obvious to everyone. Market knowledge is the fundamental skill an investor must have. Without proper market knowledge, you’ll be lost and could make an ill-informed decision.
Not long ago, we sat down with two soon-to-be investors from Nevada. They had 900k to invest and had been given a list of properties that boasted 16% CAP rates.
When we looked at the portfolio that was put together by a wholesaler, we had to be transparent about the neighborhoods and houses they were about to buy.
It would have been a train wreck.
That day we didn’t speak about the property management company or the investor who put the package together. We spoke entirely to the houses, the neighborhoods, and our knowledge of the local market.
Our visit that day kept them from making a massive mistake. We’re thankful for that visit because we were able to help give them a perspective on the Birmingham market. They left wiser…and with all their money!
What if they would have bought those properties and asked us to manage them? There would have been a disconnect between their expectations and reality.
So how do you get to ‘know your market?’
It starts with research. If we were putting together research in our city, Birmingham, Alabama, it might look something like this:
Nestled at the foothills of the Appalachian Mountains at the cross-section of two major railroads, Birmingham, Alabama was once the primary industrial center of the United
States. At the height of the nation’s manufacturing age, the city grew so fast in population; it was called the “Magic City.”
Over the years, Birmingham transformed itself into medical research, banking and service-based economy. It has also become one the nation’s world-class culinary scenes, boasting great restaurants like Highlands Bar and Grill, Hot and Hot Fish Club, Botega, and Ollie Irene. Birmingham also boasts 99 historic neighborhoods and is often referred to as the cradle of the American Civil Rights Movement.
Birmingham facts: Population: 1,079,089
Some of the largest employers:
- The University of Alabama at Birmingham
- The University of Alabama at Birmingham Medical Center
- Baptist Medical Centers
- Honda Manufacturing Plant
- Mercedes – Benz Manufacturing Plant
- Protective Life Insurance Headquarters
- Regions Bank, NA. Headquarters
- BBVA Compass Bank
- Alabama Power Company Headquarters
- Energen Corporation
- SONAT Corporation
HIGHLIGHTS:
- Ranks Top 10 Hottest Housing Market 2014 – CNN Money
- Ranks 13th among the largest southeastern metropolitan areas
- Represents 24 percent of Alabama’s total population
- Represents 31 percent of Alabama’s total payroll dollars
- Ranks 48th in population among the nation’s top 300 metropolitan areas
- Home to over 40,000 Businesses
As you perform your market research, it’s beneficial to create different sub-market listings and make notes about essential factors.
Here’s a sample run-down with a few key factors to think through (this is meant to be an example…you’ll need to do this yourself):
- Broad Market: Birmingham, Alabama
- Local Economy: (Grade it between an A and an F)
- Employment Sectors: Financial, Medical, etc.
- Sub Market: Pinson, Alabaster, Chelsea, West End, Centerpoint, etc.
- School District: (Grade it between an A and an F)
- Typical Resident: This is where you should create a profile for your average resident. We’ll call our example ‘Bob’ and give ‘Bob’ a profile with the following information:
- – Bob’s occupation
- – Bob’s income
- – What Bob drives
- – Bob’s family
- – Number of kids, if any
- – Hobbies
- Average Home Price: Retail sales price
- Discount Target Price: What your target price should be a for a property in this area
- Average Rent for Area: $1,200 – $1,350
There’s more information that you could put into this market profile, but staring here will give you a better idea about the areas you want to own rental property and allow you to focus and set certain expectations.
It’s important to drill down into the target area that’s best for you and will help you those markets and know what kind of house we’re going to buy and tenant we’re going to place.
The bottom line: If you do your market research, you will know that each market will bring a unique tenant – and you will be better prepared to connect with that tenant and achieve success.
Key #2 – Know What Property Is Right For You
Knowing your market is highly valuable, but merely knowing the market isn’t enough.
You also need to know the best type of property based on your goals.
Consider two things: objectives and risk.
What are your goals and objectives and how much risk are you comfortable taking on?
It’s important to know these things because it will help guide you with choosing your sub-market. Once you’ve done your market research and know what your goals are (along with risk tolerance), you will be better able to determine the best area to help you achieve your goals.
For example, if I have $150,000, should I buy one house that’s newer and in a growing area of town – or should I buy three older homes in more challenging areas for $50,000 each?
What will the average rent be on these different houses? What are the average maintenance costs per year and the average length of tenancy for these areas?
If I’m a low-risk investor, then I may be more comfortable taking a little bit less return on a nicer home. I may believe that I will attract a tenant who has a stable income and may be less affected by life events as well as long-term appreciation.
Keep in mind that if your tenant decides to move, you’ll have a vacant property that will not be producing any income.
If I’m willing to take on more risk, I might buy three older properties with higher return potential. The houses will be older and may need more maintenance over time. But there is a better chance of having at least one or two properties occupied at all times and generating revenue.
You may decide that government-subsidized properties are right for you.
However, you will have your own set of issues to address, like passing annual inspections and ensuring your tenant doesn’t lose their voucher.
The bottom line: Understand your goals and how much risk you’re comfortable assuming to achieve those goals. Only then will you be better prepared to determine the rental properties you should be owning.
Key #3 – Know Your Contractor
Once you know your market and know the types of properties you want to own, you need to identify partners who will help you get that property ready to rent. That means becoming familiar with your contractor – one of your most important partnerships.
Nothing can slow you down (or get you in trouble) more than a lousy contractor. Faulty work, slow work or no work have the potential to bring your rehab or maintenance work to a screeching halt.
It also makes you look unprofessional in the eyes of your tenant or prospective tenant.
It is tempting to find and use a contractor whose prices are the cheapest. And we understand the need to handle your investment dollars wisely…but be careful; you often get what you pay for.
That isn’t to say that low-priced contractors always do a poor job; we’ve met some dependable contractors who were at the lower end of the cost spectrum. Still, you need to be careful. Poorly done work can come back and cost double to fix.
So what do you need to look for?
It’s essential to know if the contractor you partner with is licensed and insured. Why is this so vital? There are several reasons you shouldn’t let someone who is not licensed and insured work on your property:
- They can get hurt on the job and sue you – What happens if an uninsured take you to the cleaners. What would that do to your future returns on that property?
- They can install your equipment incorrectly – If you’re dealing with someone who is not licensed or insured then most likely you are dealing with someone who is not the best at their craft.
- They can do your work and then disappear overnight – These types of contractors typically aren’t in business long. This will cause problems if you need a draw and never show up again. We learned that the hard way a time or two.
Keep in mind that finding a good contractor is a necessity no matter what type of property you purchase.
Even if you buy a new house, you’ll eventually have repairs to be made. It’s best to start developing a relationship early so your work will be carried out faithfully and on time when it’s time for a project.
How do you know if the person you’re considering in Birmingham is licensed and insured?
Here are some helpful tips:
- Call the Alabama Home Builders Licensure Board and ask for a list of contractors that carry a license.
- Ask the contractor you’re considering to show you their card proving they are state certified. These cards typically have a hologram on them that cannot easily be counterfeited.
- For Liability Insurance and Workman’s Comp, it’s best to have the insurance provider fax or email you the full Acord Form directly. This will eliminate the opportunity for an uninsured contractor to provide you with fraudulent documents.
There are plenty of warning signs that you may be dealing with a less than reputable contractors because they were cheap and we thought they were saving us money.
In the short term, maybe…but over time we ended up spending more money repairing their repairs. We also lost several good tenants because of shoddy work.
The extra repair work and the additional months our houses were vacant put us behind on our investment goals.
Key #4 – Know Your Tenant
No investor can achieve success (in any market) without one crucial step: understanding your tenant.
Screening tenants is incredibly vital to the success of your investment.
There’s more to property management than just “maintaining” the property. If this were the case, then you would be able to hire landscapers and maintenance workers and watch your wealth grow. You would be able to sit back and have prospective tenants knocking on your door.
Unfortunately, this isn’t the case. As a real estate investor, your expertise lies in sourcing and buying properties. You are probably not the best at screening applicants to find qualified tenants for your property.
Here are some of the things we’ve been through with our initial poor tenant screening processes:
- Months of no pay – if you don’t know all the tricks that tenants can play, you’ll more than likely fall for some of them before you realize you need to make a change.
- Eviction process – It’s not only expensive and time-consuming in Alabama, but it also includes several months of non-payment before they’re out of your house… your trashed house, that is.
- Destroyed home – We had a tenant in one of our more beautiful homes. After she missed her rent, I decided to knock on her door and talk to her about what we could do to get caught up. When I came to the door, I was greeted by ten small dogs. After we finished the eviction, the house was a mess and cost us at least another $8,000 to get it back on the market. We did a better job the next go around, and our tenant has been in the house for the past nine years.
- Vandalized house – If you have a terrible relationship with your tenant and they But the neighborhood probably knows, and that may mean that some ‘less than quality’ folks may also know your house is vacant. When this happens, you’re inviting vandalism.
Finding the right tenant – a tenant who will be stable and respectful of your property – is as much of an art as it is a science. This is one area in which a property management partner is highly recommended.
We can’t stress enough how important it is to have a tenant screening process that has been proven to work. That typically only comes through experience and trial and error…so you may want to consider saving yourself the trouble and expense.
Key #5 – Develop Your Systems and Processes
Finally, no investment strategy is complete without having systems and processes in place to govern every aspect of the rental experience.
Think of your investment as a part of a finely-tuned business. Like any good business, you’ll need an infrastructure of processes within an overall system that can help you control risk and run your operation the right way.
When creating these systems and processes, clarity, detail, and thorough explanation are your friend. Don’t leave anything to chance when you’re building your rental portfolio. Too many times we have seen investors lose money by failing to create robust processes to manage each part of the business.
If you’re not detailed, find someone who is to help you set up the most critical processes before you begin advertising your property for rent.
A. Collections and Evictions
Whether you’re managing one or twenty properties, having a collections and evictions system setup is going to be significant.
For instance, we make online payments available for our tenants – either one time or recurring. They can also choose to pay through money order or check due on the first, late on the fourth. Whatever the case, set your standard and don’t deviate.
Our process for keeping on top of all of our tenants is going to be a bit more complicated than someone managing ten properties, but the principles are the same. We believe that steady and gentle pressure throughout the month is much more useful than a panicked flurry of calls and emails if the tenant becomes past due.
Some processes that we currently have in place:
- Tenant statements (letters/emails) each month as a proactive way of reminding tenants of rent due
- Collections meetings every Tuesday to make sure we stay on top of rent that is past due
- Three bucket system to classify and assign tasks to each tenant case based on history and situation
- A method to call frequently late tenants from an unidentified number
- Eviction process begins after a certain period if the tenant has not made payment
What is important to remember here is that you need to be consistent and follow through on your tenant collection policies.
B. Keep Current With Tenant-Landlord Laws
Collecting rent and controlling evictions is essential, but so is keeping up with the myriad of laws governing tenant-landlord relations.
We cannot stress enough how important it is that you are fully aware of all relevant regulations and statutes governing commercial real estate.
There are three levels of relevant law: federal, state, and local. It’s important to understand all three, especially at the state and local level, because every state has different regulations.
And if you own properties in multiple municipalities throughout a state – or several states – you will need to be aware of differences at the local level as well.
We recommend creating a system by which you learn all relevant laws and stay up to date with any changes that occur. It’s worth consulting with a local real estate attorney who can help you navigate the legal labyrinth that governs your investments.
C. Maintain Your Properties
Maintenance is one of those subjects that no property owner wants to talk or think about for long. Honestly, it is one of those things that seems to be a nuisance.
Maintaining a property seems only to cost you money, not make you money, and it appears that most of the repairs are in response to tenant use (or misuse).
However, maintaining a property is your duty as a landlord, so it’s essential to have a system in place. You’ll need contractors/partners who can perform the maintenance, plus an expectation of how available they’ll be and how quickly they can respond to your tenants’ request for work – especially if it’s on an emergency basis.
You’ll also need to prioritize routine maintenance on your portfolio, especially if you have multiple properties. You’ll eventually create a regular schedule, based on the seasons (and Birmingham has four distinct seasons…unlike places like San Diego, CA).
For example, you’ll want to perform routine maintenance on critical systems in all of your homes on a regular basis, but you’ll also want to check specific areas and make repairs/adjustments to prepare for the summer and the winter, primarily.
Create a system to handle your maintenance, prioritize regular maintenance, and develop a routine for processing emergency repairs.
D. Marketing and Showing Your Property to Prospective Tenants
Finally, you’ll need to create processes that govern one of the most important parts of owning a rental property: marketing it and showing it to prospects.
There are many ways you can market to get the best tenants.
If you have a decent social media presence, you can market your property there as well.
Many investors are either out of town or have other full-time jobs. Showing a home will be more difficult than having a management professional do it for you.
It’s important to remember that finding a responsible and stable tenant takes effort.
Be patient, set up your marketing and showing processes and be consistent. Once you’ve done this for a few houses, you’ll be able to understand what works and what doesn’t by tracking your numbers.
ConclusIon
Owning a rental property can be a rewarding experience. Once you have your systems and processes in place and have heeded the lessons of those who have gone before you, you’ll find your landlord experience rewarding.
You’ll go through ups and downs and will encounter challenges along the way. But with the right preparation and the proper assistance, you’ll be able to overcome and achieve your investment goals.
Happy Renting!
Author Bio: This is Spencer Sutton; I am an Editor and Director of Marketing for gkhouses, a regional property management company operating in Birmingham, Nashville, Chattanooga, and Little Rock.