Real Estate 101: Managing The Property

The following is a guest post by FMF reader Apex. He has been investing in rental real estate for more than four years and is authoring a Real Estate 101 series, posting every Friday, based on his experiences.  (To read the series from the beginning, start here.)   The series is designed to give prospective investors the basic tools they need to succeed.

Once you find a tenant the only task remaining is to manage the day-to-day operations of the property.  This involves collecting rent, dealing with late or unpaid rent potentially leading to evictions, as well as handling the repairs and maintenance needed for a property.  This area is one that often causes a sense of fear or lack of confidence among prospective investors.  How does one effectively manage the property to deal with these issues? 
 
I am going to answer 4 questions that I hope will relieve some of the anxiety in the area of collecting rent and handling repairs.
 
What do you do when a tenant is late or not paying rent?
 
The first thing I would recommend is that you make immediate contact with the tenant as soon as they are late.  This is absolutely critical.  You must not wait to do this.  The first day after your late fee deadline, you need to call them or email them if they respond to emails.  If you cannot get them to answer their phone or respond to an email within a few days and prior to the 10th of the month, you need to go knock on their door.  I have not had to go to the door knocking step yet but I have come close when I was failing to make contact with them.
 
When you make contact you inform them that the rent is late and ask them when they plan to pay it.  The next step is important.  Listen carefully!  They are now going to be telling you a story.  I have gotten many of them.  Some of them are a little strange, but strange things happen, especially with tenants.  Your task is to determine if this story makes sense or is a delay tactic.  If they do not give you a date certain when they will be paying the rent, you need to ask for one.  If they do not know, that is your answer and you should move to an eviction.  If they give you a date but their story has sounded questionable thus far you need to ask them where the money is going to come from.  If they don’t know that or don’t tell a story that makes much sense to you, you should also consider moving to eviction.  If the date is in the near future it’s probably worth waiting to see what happens.
 
I have found every one of my tenant’s late rent stories to be believable, even some of the strange ones.  I have told them if they do exactly as they have told me there will be no issues.  Every one of them has followed through as they stated.  We will see someday if I can detect a fairytale that has an unpleasant ending since I haven’t been told one yet.  It is worth noting that almost all of my tenant’s stories were as a result of the tenant contacting me proactively prior to the rent being late to inform me that it would be late and why.  This type of story has far more credibility since a deceptive tenant is more likely to try to avoid contact.  When I have had to contact tenants because of late rent, it is usually just them being sloppy, lazy, or dealing with paycheck issues.
 
There are a few typical types of stories you will encounter.  People who are paid bi-weekly get paid on different days of the month each month.  Many months that day will be just before or after your late fee date and they will need that check in order to cover the rent.  Bi-weekly tenants often have beginning of the month cash issues.  You should learn to expect it from certain tenants.  Tenants have unexpected car problems, or other unexpected expenses.  Family, friends and special occasions can cause them to spend money on things leaving them short of enough for rent.  These things happen.  Do not tell your tenants how to manage their lives or their money.  They will not listen to you, they will resent you for it, and it won’t help you get paid.  Your only task is to determine if they can come up with the money to pay you.  Most people can dig themselves out of these issues in a month or two.  It makes sense to stick with these tenants, let them pay a few late fees and dig themselves out.  Evicting tenants who need a little more time, but will eventually have the money is not in your best interest. 
 
If a tenant ever misses a deadline that they gave you, you should contact them immediately and ask for the rent.  If they cannot produce it, you should move immediately to eviction.  You want the tenant to find a way to pay.  But at this point, it is now far too likely that they simply cannot.  You must cut your loses and get them out of your property as soon as possible.  The only thing worse than a vacant property is an occupied property that is not paying rent.
 
How do you do an eviction?
 
Eviction court can be scary.  I have never been there, so it scares me a bit too.  If I needed to do an eviction, the first thing I would do is attempt to get them to leave without having to do an eviction.  I would give the tenant an in person Notice To Quit.  I would tell them that I am beginning eviction proceedings.  I would inform them that this will go on their record making it much more difficult for them to rent in the future.  I would then tell them that if they were to move out voluntarily by a date of our agreement that is not too far into the future that I would have no reason to evict them.  Depending on the circumstances if I could ensure they would be out much quicker than the eviction process I would even consider offering them a financial incentive to leave the property soon.  I would really hate doing this.  I would be paying someone as a result of them refusing to pay me rent.  This would seem to be adding insult to injury.  The truth is this is a business decision.  Evictions cost money.  They take some time, and are an extra hassle.  It may be cheaper and quicker to pay them to leave.
 
If that does not work and you need to do an eviction I would recommend hiring either a service or a real estate attorney who specializes in doing evictions.  They can do this for a reasonable fee in addition to the eviction fees.  Hopefully this is an extremely rare event if you do your tenant screening carefully.  The good thing is that in most states it is fairly straightforward and only takes a few weeks. 
 
How should you handle repairs?
 
You know the level of handy work that you are comfortable with.  If you do not have a mechanical bone in your body, you need a short list of contractors and handymen who do this for hire. My recommendation for finding them is Angie’s List.  I have a multiple year subscription to that service and look up contractors on the service regularly.  I have taken recommendations from friends and other investors.  Their idea of a “good” contractor is often different than mine.  On Angie’s List I can see ratings, other customer’s prices paid, and reviews that describe situations that I can tell I would be comfortable with.  It’s the best tool I have found for finding good contractors.
 
If a wrench doesn’t frighten you too badly, give it a try.  The tenant will be happy to see you quickly responding to their needs and trying to fix their issues.  You might be surprised how many times it is something simple that you can easily fix.  If you cannot fix it you simply inform the tenant that you will need to have a professional come and resolve the issue in a day or two. They will be pleased with either outcome.
 
I also recommend looking up the issue they are having on the Internet before going to the property.  I have looked up countless issues involving fireplaces, washing machines, dishwashers, furnaces, you name it.  If you can accurately describe the problem and the model of the appliance that is causing the issue you would be surprised how many times there are exact descriptions of how to solve it right there on the internet because someone else has asked the same question.  Issues that I would have been going in blind hunting for a problem, I went in, knowing exactly what to look for and exactly how to resolve it because I had researched the problem on the Internet.
 
There are many tasks that I have attempted to fix without having any previous experience dealing with the issue.  I was nervous that I would not be able to fix many of these problems but went to try to address them before bringing in a professional.  I have now fixed leaky plumbing, fixed washing machines, replaced a motor on a furnace, replaced failed smoke detectors and light fixtures, fixed countless electrical outlets, and even replaced failed circuit breakers.  I had never done any of those things prior to having rental properties.  The more you do these things and research on the internet how to deal with them the more you will get comfortable doing them.  I was fixing some plumbing at a property just a few weeks ago and was telling the tenant that I was not exactly a plumbing expert.  He said “not yet anyway.”  I laughed because he had touched on the truth.
 
I also do not recommend trusting the tenant to be able to properly tell you what the issue is or to follow your directions in trouble shooting it.  It is almost always a good idea to go investigate the problem first even if you are going to bring in a professional.  I had one tenant tell me their stove had burned out.  The burners had sparked and the digital control panel went dark.  I asked if they had checked the circuit breakers and they said they had and they were all working.  I was prepared to order a new stove because the same thing happened to my personal stove and it had indeed fried the main circuit board.  My gut told me I better verify it first so I came over with my voltmeter to check it out.  I could not get any voltage so I went to check the circuit breakers.  Sure enough the circuit breaker to the stove was tripped.  I turned it back on and the stove was working again.  The tenant was in a state of shock.  They were confident they had checked the circuit breaker.  I brought them to the box to show them the breaker that was tripped.  I showed them the one that had the word stove written next to it.  They meekly told me that they just checked the breaker that said kitchen because they assumed everything in the kitchen was on that breaker. 
 
If your first call is always to a professional, you will waste money.  For those using a property management company this is worth asking about.  If the property management company’s first call is to a professional, they will waste your money for you as well.  You need to go check these things out yourself first. 
 
What do you do when an appliance fails?
 
All appliances fail.  When they do I recommend having a place you can call that has good inventory and can get you a replacement at a reasonable price.  I have an outlet store that I call.  I tell them what I need, ask them what they have in stock in my price range and ask them to deliver it and replace the faulty unit.  It takes very little time and very little involvement from me. 
 
When you do replace appliances I do not recommend buying used appliances on Craigslist.  I do not recommend buying extremely cheap appliances to save money thinking this is just a rental.  You do not need appliances with lots of extra features, but you want a brand and model that is known to be reliable.  I have even purchased models of certain appliances that are closer to commercial grade.  I pay more for those but it serves two purposes.  First it is projected to last much longer.  In the long run that will likely make it actually cheaper than the cheaper models.  Even more important is an appliance that doesn’t fail nearly as often saves me from having to make services calls to try to fix broken appliances or determine if they need to be replaced.  Paying a couple hundred extra dollars for an appliance that is more reliable and lasts longer is a good investment.
 
Managing the property is an important part of real estate investing, but you do not have to do it all.  You will find out which elements you can do yourself and for those you feel you can’t or simply do not want to there is a professional to help you with every one of them.  If you can manage a home you live in, you can manage a home someone else lives in too.

Click here to read the next post in this series: Real Estate, The Lease

Comments

[Nate Fancher]

Hi Apex! Good advice. Property management has always been one of the scariest things for me, as I'm sure for many people looking to get into real estate investing. I currently only own my own home and at the right time, hopefully we'll fill this one with a tenant when we move.

Question:

I can certainly see the benefit of hiring contractors, but what is your thought on management companies handling everything? Rent collection, maintenance, etc...

I know it depends on the investor (weighing the loss in more income vs. time spent managing the property).

Would love to know your thoughts.

[Apex]

@Nate,

I do not use property management companies both because of cost and because I want to control the quality of what is done. That being said I am not opposed to it. It is definitely the right move for some people.

It is very important that you get the right kind of management company if you use one. I can't tell you how to go about that because I have not done it but there are certainly some bad management companies that will not do a good job for you.

As far as management company versus contractors, I will repeat a paragraph that I wrote above in this article:

"If your first call is always to a professional, you will waste money. For those using a property management company this is worth asking about. If the property management company’s first call is to a professional, they will waste your money for you as well."

If it's a management company, they need to have someone who can do a basic analysis (hopefully included in your monthly fee) before calling in the professionals. You can't call a professional every time a tenant doesn't know how to find the correct circuit breaker.

[Jim]

Another great installment in the series. I agree with everything you've said.

Almost all the time a 3 day quit notice will be all you need if a tenant isn't paying rent. They'll either come up with the rent or leave on their own. Its probably less than 10% of the time that you need to go further. I strongly agree with hiring a service if you need to do a full eviction. Most of the horror stories about evictions are from landlords trying to navigate the courts alone for the first time with no clue what they're doing.

I'd also add that I would not let tenants fix problems themselves. Some tenants want to offer to fix things. They may have experience in the area (or at least claim to). This seems like a potentially great idea but I'd avoid it. Key problems are that you don't know how well a tenant can fix things, its hard to hold them accountable and theres liability concerns.

I also don't buy used appliances. For the amount you save its not really worth it. Its hard to find decent used appliances and when you do they're prone to break down as well since they're already old. My dad on the ohter hand pretty much only buys used but he's a lot more capable handy man and he has a lot of properties and keeps extra appliances on hand. That doesn't work for me and won't work for most folks either.

[Apex]

@Jim,

I agree with you about not letting tenants fix problems. They could easily make it worse or turn a minor problem into an emergency. For instance if they have a water drip under the sink, tell them to put a bucket under it and you will look at it in a day or two. If you ask them to put a wrench on it and try to tighten something up, you might end up with a room full of water and an emergency call to a plumber.

And this is not meant to be an attack on tenants. They do not know how to fix most of these things nor should they. I was a tenant for the better part of a decade before I owned a house. I didn't know how to fix anything and certainly wasn't interested in trying.

[Jim]

Right, its not an attack on tenants in general. I'm sure most tenants who offer to fix something can do as good or better job than I can. The problem is I can't take the risk that a tenant will do a poor job or worst case injur themselves. And I don't really know which tenants are / aren't great handymen.

[pen]

My ex roommate did fix stuff around the house we were renting. He has a long list of certifications, and our landlord actually hired him for other projects as well. Just check to make sure the tenant knows what he/ she is doing before ok'ing that repair, agree to any terms beforehand, same as you would with any contractor.