Now you have the property. Next step is to decide if you want to manage the property your self, or hire a property management company. If you want to manage the property your self, you should get training from your local apartment association. They have classes to help you. Also, you should read on property management. Don’t just jump in and start being a land lord and not know what you are getting your self into, and what demands/requirements are needed.
If you decide the you would like to get a property management they will take 5-10% leasing commission of annual rents. I suggest that you go to http://www.irem.org and find a property management company in your area. Once you have selected a group to call, ask them the following questions (or you can go to their web site and find answers to the questions below):
o How long have you been in business?
o What professional designations do you hold?
o What continuing education programs do you offer your employees?
o Can you call existing clients of theirs?
o What software do you use for managing property and why?
o Can you get a sample management agreement to review?
o What costs are included in the agreement and what is extra?
o How many employees?
o Who will be the main contact? How long have they been with the company?
o What cost saving techniques do you use?
Once you find a property management company, sign them for a 120 day contract to see how they perform. Assign maintenance issue on one of three levels of importance:
1. things that have to be done
2. things that should be done
3. those things that would be nice to have done
Once you find a property management, have the both of you brainstorm and ask figure out, “If some one were to buy your property today, what changes do we think they would make in the first 60 days”?
As soon as you control the property try to get a Cost Segregation Study.
The IRS has a ruling that allows commercial-property-owners to increase the amount of accelerated depreciation allowed in a tax year. These savings extend back to property acquired after 1986, and they apply to new or future construction. They also extend to existing buildings under renovation, expansion and leasehold improvements, as well as to property about to be acquired. It can also be used for financial accounting, insurance and property tax purposes. The primary goal of a cost segregation study is to identify all construction-related costs that qualify for accelerated income tax depreciation. Cost segregation is not a tax shelter and it is not tax evasion.
To get the benefits, you must get a “study”
A cost-segregation study analyzes taxes and costs incurred to acquire, build or renovate commercial real estate. Experts/CPA’s conduct these services. They break down the cost for the accelerated income-tax schedules. To qualify for a cost-segregation study, property-owners must be taxpayers or must intend to pay taxes. They must also operate as a for-profit entity.
Study costs can range from $10,000 to $100,000, depending on the property’s size and complexity. In many cases, however, the benefits outweigh the fees.
These benefits of a Cost Segregation Study, can free up money used for other investments, paying down debt or making capital improvements. If you are interested in this study contact me and I will put in you touch with a credible company that can analyze your situation.
o Considerable return on investments property that do not need to be insured.
o Increased tax deductions for depreciation and reduces taxable income.
o Opportunity to correct misclassified assets and claim “catch-up” tax deductions.
o Ability to achieve faster building and acquisition cost write offs.
o Reduction in insurance costs by identifying the components of the property that do not need to be insured.
o Determine personal property versus real property for write off versus capitalization prior to construction. This allows you to write off these items opposed to capitalizing the assets. This can provide you with huge tax benefits.
o Defers taxes on capital gain amounts until the property is sold.
o Reduces real estate property taxes.
o Reduces federal income tax and increases depreciation.
Running the show
Owning and operating an apartment, is no easy task. There are a lot of procedures on analyzing the property’s functionality. When investing in apartments your priority may be one of the three: cash flow, appreciation or tax benefits. The great thing about apartments is that you can have “forced appreciation” by making changes to the property. Having an apartment is owning a business. So with any business, a way to increase revenue is to decrease expenses and to find more ways to earn more income. I have included some tips to benefit you as you attempt to maximize your investment on the building.
Expenses you can expect while owning an apartment:
o Legal services
o Tax preparation
o Office equipment and supplies
o Property management
o Credit checks
o City business tax
o Property tax
o Capital improvements (big expenses)
o Eviction services
Having proper management in place is key to running a successful apartment property. Depending on your level of time, experience and energy having a property management company oversee the operations may be ideal. Especially if the complex is big. Smaller apartments tend to be managed by the owner (along with an on site manager). Regardless who does the actual work on the property, I have included here a variety of tips to get the maximum return out of your investment.
Fair Housing Rules prohibits discrimination on a variety of things from race, gender, age, disabilities (including mental and physical) marital status, sexual orientation etc. Anybody who deals with potential tenants must follow fair housing laws. This includes owners and property managers.
Be consistent when dealing with potential tenants. Set the same standards across the board. Such as, giving someone a pass, by lowering their security payment, or what you charge for late rent compared to other tenants.
Your rental/lease agreement sets the tone with your tenants. It is best to obtain a contract that a lawyer has written out because it is legal document. The rental/lease agreement should have the names of all adult tenants and they should all sign the rental/lease agreement. This makes each tenant legally responsible for all the terms and conditions. Should someone bail out with out paying rent, or someone violates a term, you can cancel their agreement and have them move.
Your agreement should clearly specify that the rental unit is the residence of only the tenants who have signed the lease and their minor children. This will probably not stop people from moving in with out your screening process, but what it will do, is keep people aware and cautious. They will know if you found out folks where living there with out your screening, they could be asked to move. Every rental document should state whether it is a rental agreement (month to month) or a fixed-term lease (usually it is yearly).
Your lease or rental agreement should specify the amount of rent, when it is due, where to send it and how it’s to be paid (check, cashier check etc). For late fees, have when it is considered late and the amount of the fee. Also, have a fee for bounced checks.
The return of security deposits can generate problems. To avoid mistakes your agreement should have the dollar amount of the security deposit. In California, the maximum deposit allowed on an unfurnished property is not more than the amount of two months rent. The maximum deposit allowed on a furnished property is not more than the amount of three months rent. You may use the deposit for possible repairs. The contract with the tenant should state that they may not use it to apply for there last months rent. When they do move, you have to return their deposit in 21 days after they move (in California). If decide to take money out of their deposit when they leave, you will need a report showing the deductions on why.
Clearly set out you and the tenant’s responsibilities for repair and maintenance in the lease or rental agreement:
o Their responsibility to keep the rental clean and to pay for any damage caused by his/her abuse or neglect.
o They should alert you of defective or dangerous conditions in the rental property.
o You provide tenants with your work procedure for handling complaints/repair/requests.
o Have restrictions on tenant alterations on their apartment with out your permission, such as adding appliances, painting, etc.
You should include a clause prohibiting disruptive behavior, such as excessive noise, and illegal activity, such as drug dealing.
If you do allow pets, you should identify any special restrictions, such as a limit on the size or number of pets or a requirement that the tenant will keep the yard free of all pet manure. Important rules and regulations covering parking and use of common areas should be mentioned too.
Stay on top of maintenance/repair needs. To avoid problems with tenants, you should make repairs to rental units as soon as you can. Major problems, such as a plumbing or heating problem, should be handled within 24 hours. Always keep tenants informed as to when and how the repairs will be made, and the reasons for any delays. If the property is not kept in good repair, tenants may gain the right to with hold rent, deduct the cost from the rent, sue for injuries caused by defective conditions, and/or move out without needing to give notice. Some situations tenants can sue for the discomfort/distress caused by the poor conditions.
Your local building or housing authority, and health or fire department, can provide information on local housing codes (and penalties for violations).
The following are things you can do to limit crime and reduce the risk that you would be found responsible if a criminal assault or robbery does occur:
o Meet/exceed all state and local security laws that apply to the property, such as requirements for deadbolt locks on doors, good lighting, and window locks.
o Provide a security system that provides reasonable protection for the tenants. To get advice speak with the police, your insurance company, and private security professionals.
o Educate tenants about crime prevention/safety.
o Conduct regular inspections to spot and fix any security problems, such as broken locks, swimming pool precautions or parking lights.
o Handle tenant complaints about dangerous situations, suspicious activities, or broken security items immediately.
o If additional security requires a rent hike, discuss the situation with your tenants. Many tenants will pay more for a safer place to live.
While some of these tactics may be expensive, the money you spend today on effective crime-prevention/safety will be much less if something bad did occur on your property.
Drug-dealing tenants can cause problems. If other tenants feel threatened, the authorities may give you heavy fines and may seek criminal penalties for knowingly letting the situation proceed.
To avoid trouble caused by criminal tenants and to limit your liability in any lawsuits that are filed: do a good job screening your tenants, don’t accept cash rental payments, in the rental/lease agreement have it clear that you will evict tenants who deal drugs, get advice from the police on what to look out for.
If you were negligent in taking care of your property and that negligence caused an injury, you could be liable for damages. After all it was your responsibility to maintain the section of the property that caused the accident and if you failed to take steps to prevent the accident, your chances of getting a law suit are increased.
A tenant can file a personal injury lawsuit against your insurance company for medical bills, lost earnings, pain, permanent physical disability, and emotional distress. A tenant can also sue for damage to personal property, which results from faulty maintenance or unsafe conditions (ex their car is damaged).
You can avoid many problems by maintaining the property in excellent condition. By using/having:
o A written checklist to inspect the areas and fix any
roblems before new tenants move in.
o Encourage tenants to immediately report safety or security problems (not just their unit, but through out the property).
o Keep a record of all tenant complaints and repair requests with details as to how and when problems were fixed.
o Twice a year, give tenants a checklist on which to report potential safety hazards or maintenance problems that might have been overlooked. Use the same checklist to personally inspect all rental units once a year.
Here are some tips on choosing insurance:
o Purchase enough coverage to protect the value of the property and assets.
o Be sure the policy covers not only physical injury but also discrimination cases, unlawful eviction, and invasion of privacy suffered by tenants and guests.
o Carry liability insurance on all vehicles used for business purposes, including the manager’s car or truck if it’s used on the job.
If disputes arise between you and your tenants, try to resolve them without lawyers and lawsuits. You can try to put in your lease/rental agreement that all issues will be brought to a mediator/arbitrator. This can save you money. For information on local mediation programs, call your mayor’s or city manager’s office, and ask for the staff member who handles “landlord-tenant mediation matters” or “housing disputes.” That person should refer you to the public office, business, or community group that handles landlord-tenant mediations.
But if that is not possible and you have a conflict with a tenant over rent, repairs, noise, or some other issue that doesn’t immediately bring an eviction, meet with the tenant to see if the problem can be resolved informally. If your dispute involves money, and all attempts to reach agreement fail, try small claims court, where you can represent yourself. This will save significant money.
Limit your exposure to lawsuits. Popular reasons are mold and fair housing. Mold starts with water. It is about prevention, controlling water and moisture intrusion. You should proactively attempt to identify potential sources of water and moisture intrusion before they occur. Such as old roofs, pipes that leak or sealed properly, toilets that don’t function correctly. If a tenant claims that mold is effecting them, you should take it seriously.
I once got and this email and I don’t know how accurate it is, but it does make you think.
o 5% of the world’s population is in the U.S.
o 70% of the world’s lawyers are in the U.S.
o 94% of the world’s lawsuits are filed in the U.S.
o There is a lawsuit filed every 30 seconds.
One way to protect your self is to form a LLC if you don’t have one. The LLC requires payment of an annual fee. It must be run as a business, that is separate from personal finances. I have resources that can get your property into a LLC. Contact me and let me know if you would like to talk to them about your situation.
Finding A Right Contractor
Having contractor’s assistance is important in running an apartment building. Picking the correct contractor will make your worries less. Have them meet you in person when they present the bid to you. Observe how their quote looks. This is a proposal, so critique the look and feel of it. Did they put time to put it together, or make it in two seconds? Also, have them physically show you a copy of their business license and ask for a copy of their insurance and bond papers. If they can’t, tell them to make like a banana and “split”
Have the contractor give you referrals. With the referrals and ask them do they:
o Return calls in a timely manner?
o Show up for work when he says and on time?
o Keep the job clean as he goes?
o Give consideration to residents?
o Perform inspections thoroughly?
o Alert you to potential maintenance problems?
Ways to increase revenue/save money while owning your apartment:
o Conserve water: Water saving toilets, shower heads, low flow faucets.
o Utilize new technology: System that converts salt into chlorine can cut thousands of dollars in swimming poll cleaning and maintenance costs.
o Bill tenants for utilities.
o Obvious…increase rents.
o Collect rebates and freebies: check with city about rebates on water savings and energy saving landscaping, heat reducing items, solar power panels.
o Close the swimming pool: If no one uses it, close it and fill it with dirt, or cement.
o Trim payroll cost: rather than pay, for a full time manager, have an onsite resident manager who receives free or cut rate rent in exchange for picking up trash, deliver tenant notices, etc.
o Manage the managers: make sure your property management company puts you the owner interest first.
o Hire moonlighters: sub out work, to independent contractors who have day jobs, that can bring an added service to you. Ex, someone who works at Home Depot, works for a city housing authority, or for a large apartment company.
o Automate accounting: get bookkeeping software can help identify unnecessary cost and keep track of income tax deductible expenses.
o Request discounts: you can get discount just by asking your vendors.
o Track vacancies: good data can reveal ways to reduce vacancies. Try doing an exit interviews, to understand reasons why people move.
o Review contracts: an annual review of the cost of all products and services used by the apartment operation can reveal opportunities for savings. Get at least three bids for each service. Work with providers/vendors who specialize in apartments, you may be able to get a lower price, plus they truly understand your needs.
o Cut insurance costs: To save on insurance premiums raise policy deductibles, eliminate unnecessary or duplicative coverage, shop around for cheaper rates, group buildings under an umbrella liability policy or make alterations to the building itself. Let them tell you what the issues are. After knowing that try to change the issue around modify the issue/structure and see if that would change your underwriting score.
o Buy wholesale: Avoid retail when possible.
o Raise rents: be sure to compare rents for apartments that are similar in location, size and amenities.
o Laundry rooms. You can have a company pay you a fee to have their products on your property that they install, you sign a lease with them, they service it and you both share profits. Or buy it your self and have contractors service it.
o Cable/satellite/Internet. Typically providers will sell their service to the owner at bulk at a discount, and then the owner resells the services to the apartment residents at a markup that generates a profit but is still below the retail cost residents would pay individually.
o Monthly pet fee.
o Vending machines.
o Maid services for tenants.
o Security alarms. Tenant will pay extra to have it on their apartment.
o Bicycle racks.
o Pay utility deposits over a 3-6 month period. Get a “between renters agreement” go to electrical company express tenants will/are paying their own electric bills and if they take off/move the electrical company can’t cut off power unless it notifies you/property management company.
o Get a large garbage container and empty it less.
o Have maintenance fee clause in rental agreement tenants pay $50 less each month in return for taking care of minor maintenance (this way management will not have to worry about minor things).
o Pay bills with in 10 days and try to get a discount @ least 2%.
o Lease garage storage.
o Have several apartments available for “corporate housing” that is fully furbished and have companies rent out the units for a temporary time period.
o Enforcing late fees.
o Always outline which repairs the company and responsible for up to a certain $amount. Ex have the management company handle any maintenance or repair cost that run less $200.
o Convert a master metered property to a sub-metered.
o Billboards (rent space on your property).
o Provide access to building rooftops for cellular companies.
o Consolidate 2 or more property managers to achieve synergies.
o Protest assessed tax valuations to have them lowered.
o Each time tenant moves out check faucet and toilets for drips.
You can create “forced appreciation” by rehabilitating a run down property and make it more expensive than the purchase price. You could also, convert it into condo’s. With instant appreciation, you can buy a property for less than the market value, fix it up, come up with more systems to increase revenue and sell it.
o Have photo ID cards for on site staff, residents will feel safer. Especially if the person comes into the apartment to fix something. Having a standard polo shirt is good too.
o Send thank you notes to residents who keep their patio clean. On the flip side, notify them when it is dirty.
o Have tenants able to pay for their laundry by debit card, or have change on hand.
o 1 night a week, stay open to 8 pm. Have manger work one Saturday per month.
o Instead of giving away money for people that pay their rent on time, offer a coupon to a local merchant.
o Send anniversary gifts of occupancy.
o Extend your referral bonus to them for up to 12 months after they move out.
CYA… keeping files on all tenants
o Forwarding address of the tenant to which they have authorized the refundable deposit. This is key to have because if someone skips town and leaves with out paying rent. With this information, you have a person and address to find the person.
o Copy of the deposits form. What deposits were held back, if any, and for what reason (could prove handy if taken to court).
o Residential Lease Agreement.
o Lease terms, amount of rent, how long the resident stayed, what personal property, such as appliances, are included in the property and all deposits taken in.
o Credit Report received when the application was made this is good for recovering rent owed.
o A list of property improvements that were made prior to advertising the rental.
o Correspondence received or sent to the resident during their tenure.
To get forms (applications needed for running a property, check with your local apartment association