How to Manage a Rental Property Profitably: Vital Rental Property Management Tips You Need to Know
The final section of the Real Rental Wealth guide covers the essential best management practices that you’ll need to avoid financially damaging mistakes, and succeed most profitably as a rental property investor. It’s time to get your hands a little bit dirtier, and manage your rental property not just any way, but the right way.
You’ve spent hours planning and organising the perfect rental property and strategy. The numbers look great. You’ve arranged hundreds of thousands of dollars of financing, and put your future on the line. The fact is though, in the rental property business – none of this matters if you don’t pick the right tenants.
A good landlord should provide excellent accommodations and go over and above to ensure the comfort of their tenant. You are providing a vital community service. The flip side of this is that the tenant needs to pay their rent, on time – every time. Picking the wrong tenants can result in an un-profitable, financially damaging rental property venture. Limiting your selection process to ‘having a good vibe’ and a trusting handshake – is a rookie move, and will almost always result in losses. There is a bit more work involved.
Thankfully, picking the right tenant is not hard, and is simply a continuation of a well-executed rental property plan. Thorough tenant selection will help to ensure your financial prosperity, and an enjoyable experience as a landlord.
Think of it like this – when you applied for a mortgage – the mortgage company did an income review, a credit review, and needed to see a substantial form of down payment in order to let you borrow money. That mortgage company looked into these things thoroughly. So why should tenant selection be any different?
Now you are the ‘underwriter’ and you are the one analysing the situation to ensure consistent payment from your tenant. You need to do your due diligence.
With my ‘nightmare tenant days’ long behind me, here are a few of the things I have been practicing, with excellent results over the last 5 years. Many others have agreed as well, that going through these steps when selecting a tenant has made a word of difference in the quality and success of their rental investment.
- Have a strong lease. A strong lease will help protect you from damages, and in the case of an insurance claim can prove certain things, such as a tenant’s requirement to have their own tenant insurance. This, among several other lease details can provide a world of difference in the cases where things don’t end up going as planned. We shouldn’t rely on things going wrong, however there is no additional cost or risk involved in planning for the worst case. Given enough properties, enough tenants, and enough time, something unfortunate will happen. And you’ll be glad the lease is strong.
- Do a full tenant application, including a credit check, past land lord check, and employment confirmation.
- Credit: There are several agencies and organizations across Canada that allow landlords to pull credit checks for a small fee. A credit check will require a prospective tenant’s permission and signature, which can usually be included in an application to rent. The main thing to look out for on a credit report is missed payments. If an individual has had a history of missing payments, it means they find it difficult to meet minimum bills and are likely financially over extended. The tenant may be in trouble financially – and this trouble will be passed on to you. These individuals may have even been comfortable missing payments, which I think is even worse. Unless this trend has been corrected over a 2 -3 period of time – beware. Missed payments will usually reflect as a lower credit score. Depending in part of the quality of your accommodation, a credit score minimum of 630 is suggested. A credit score over 680 is usually a good sign.
- Landlord and Employment Checks: It takes just a few minutes to make these calls. Ask the past land lord if there have been any issues. They will likely tell you the truth. But beware of unusual hesitations, such as if the previous or existing land lord is looking for the right way to frame their sentences. Or any kind of ‘humming and hoing’. This could be a warning sign. Calling an employer is also acceptable. You just need to ask the employer if the individual is employed where they say they are. This is the main thing. But if the employer goes on to say that the employee is in great standing and that the person is wonderful – than this is great information to have. Be careful not to be too intrusive with employers – this could end up looking bad on you.
- Get a ‘last month’s rent’ upfront. Ultimately this is your only protection from missed rent payments. If a tenant is more than a few days late paying their rent, you have this to dip into as you prepare and deliver the eviction documents. Full eviction can take upwards of 2 -3 months and involve Court Tribunal hearings. So this last month’s rent may be a key factor in helping to hold you over for this period, if it unfortunately arose. Ensure you get this upon the signing of the lease – even before the first month’s rent is paid.
There is no magic bullet formula to finding tenants every time that will be 100% perfect every time. People lose jobs. Split up. Run into trouble. That’s life, and as a landlord you may find yourself affected by these tenant issues. However by following the steps above, you GREATLY increase your chance of a successful tenancy, and reduce your risk accordingly. This combined with enough luck, and you won’t face issues at all. Most tenants are truly a pleasure to have around. Make this feeling mutual.
Rental Property Management Best Practices Continued…
Sweat the small stuff. For a good tenant who wants to take care of their living space, a small thing may seem like a big thing to them. We’re not talking about a burnout light bulb here. A tenant should and will replace their own light bulbs, or anything like this. But there is a fine line – if a tap is dripping or a toilet broken, you’ll likely need to attend to this. You’ll want to attend to this as well, because a dripping tap can cost you $50 extra month in water bills. For this, and other issues related to property management, an entire article or even book could be written. Our purpose here is to get you thinking about management in the right kind of way.
Have a team of trusted professionals. Unless you are yourself a handy person who can handle most minor repairs, a major emphasis is on having a trusted set of tradespeople that you can rely on to go out to your property when things go wrong. This includes, but is not limited to a plumber, electrician, carpenter/ general trade’s person and a lock smith. If it applies, you may also want to contract out tasks such as snow shoveling and lawn maintenance. Ensure you have solid contracts for this (and everywhere) that limit your liability. Even if you are a handy person, you will not always be around to make the repairs that need fixing quickly. It’s good to have a responsive and trusted network.
I’m most cases, for repairs I simply coordinate the work between my contractor and the tenant, check the work out when it is complete, and then pay the bill. So there’s no need to be running out to the property all the time.
Do repairs and upgrades. Over time, things will ware and things will tear. A good time to make minor repairs and painting is between tenants. However there will be other things that may need attention, depending on your property. Furnaces, roofs, decks and a host of other things may need maintenance over time. This should be budgeted in and kept up with. If everything goes wrong over the course of year, you may not be able to keep up or be shocked by a series of large and sudden expenses. Keeping up your property over time will avoid this, and will make your tenant happy.
Run it like a business. Keep good records. Whether you are using a detailed spreadsheet or stash your expense receipts in a box – some kind of cash flow (income minus expense) management system is needed for your success. Monitoring your expenses will help identify where potential savings can be created. Perhaps more importantly, it will help lower your taxes in the most effective and legitimate ways. If you’re not inclined like an accountant, it may be wise to hire a book keeper.
Consider a property manager. If interested in owning a rental property, but not personally prepared for management – a property manager can do this for you. Units are leased, rents are collected and deposited, repairs are made, and maintenance is taken care of. In this case you’ll almost never be contacted unless a major repair is needed. Everything is taken care of – you just review the numbers and make the payments. When considering a property manager, be sure to shop around and get feedback from existing landlords. There are definitely some better property managers than others.
Of importance, property managers can lower your return on investment drastically. Some property managers charge between 5% and 7% of Gross Rents – plus they will charge extra for all maintenance and repairs. You will typically lose control of expense management, although good property managers should do a good job of this. If there is good cash flow from several units, a property manager can make especially good sense. In any case, if considering a property manager, be sure to work these numbers into your initial projections for expense, and return on investment.
Finally, some of your management tasks can be outsourced, while you hold on to others. For example, I have a Realtor lease my units for half a month’s rent in compensation (doing credit and other checks in the process). I also have contracts with tenants for snow shoveling and grass cutting. While if something else goes wrong, such as a plumbing issue, I will involve myself a bit more closely. This helps to control costs I find, and after a while – you just get used to it.
In Closing and Next Steps
In closing, the best advice is to talk with other landlords and professionals who have done it. Bump around the ideas you’ve read here. Continue to develop and formalise your financial plan. Connect with a network of people that you can work with throughout your career as a real estate investor: A good Realtor who understands property investment, zoning, market potential ect. A Mortgage Broker who specialises in Income Property investment and Financial Planning. And a team of other trusted individuals to rely on. They will, in all likelihood, prove invaluable to you.
In the rental business, it’s the people you align yourself with that will be key to your success.
You’re on good footing. Its time for you to join the historical ranks of the property owning noble elite. But do it well. Be a great landlord. Sweat the small stuff. Control your variables and make money. But most importantly, don’t forget to have fun!
Altrua Mortgages provides Mortgage Broker services across Canada, with a special focus on Kitchener-Waterloo, Cambridge, Guelph, Milton, Hamilton, Toronto, Ottawa, London, and Windsor. Do not hesitate to contact us anytime for a personalized conversation on how you can succeed in the rental property investment market.