Why Being Actively Involved in Your Real Estate Investments is so Important
By: Clifford Hockley, Senior Advisor and Principal Broker
George owned a three-plex in a quiet neighborhood. He had no trouble getting tenants to apply when there was a vacancy because he made a point of keeping his units clean and up to date. In his 30’s and 40’s he had worked on the properties making repairs, so he was at his property on a regular basis. At this point in his life (his 60’s) his knees hurt and his right shoulder needs surgery. So, he decided to hire a property manager.
That does not mean that he has taken his eye off the ball and he is still actively involved. He meets with his property manager for a phone conference every month, usually a 15-minute call to confirm income and expenses as well as any maintenance issues that have not already been improved. Once a year they review budgets and plan out the annual capital expenses. Usually, they meet in person at the property for a unit-by-unit walk-through.
It’s the unit-by-unit walk-through and the exterior inspections by the property manager, that are so very critical to the active management and long-term health of a building. For example, recently one of my property managers reported to me the condition of a couple of the units I own. He pointed out that a few of the residential tenants were “hoarders”.
He was paying close attention to them. This, as well as the cleanliness of units, drives the long-term “healthy” condition of an apartment. Unfortunately, many apartments built in the last 40 years don’t have room for storage. As a result, there is no place to put tenant holiday decorations, their 5th-grade scrapbook, or their winter clothes. This means many units have a cluttered feel which makes them very hard to clean. Additionally, many apartments don’t have a space to keep cleaning supplies. There is no room for a vacuum cleaner, a bucket, or cleaning supplies.
As important as cleanliness is the maintenance condition of a commercial or residential property
There are four major reasons to make sure a property is maintained.
- Reduction of operating costs: If plumbing is broken, you have water leaks and increased water and sewer costs for example. Inspections can identify leaks and help reduce the ever-increasing utility costs.
- Long-term tenant longevity and happiness: At a recent property inspection I attended we noticed a back door that was delaminating and needed to be replaced, the tenant pointed out that a sink in their bathroom did not have a much-needed metal pedestal used to hold up the sink. We completed those repairs, made the tenant happy, and upon renewal were able to extend the lease term and increase the rent for that tenant, rather than have them move out.
- Improve cash flow position: Most importantly we can make repairs while a tenant is still living in the unit, in other words, we make most of our repairs while we have rental income, rather than waiting for the tenant to move out and having to make the repairs when there is no income.
- Keeping an eye on the condition of the Property: Even the watchers bear watching. Not every property manager has time to inspect your investment on a regular basis. Properties need to be seen. Humans respond better to visual stimuli. If you can’t get to a property to visit it, and your property manager is overwhelmed, hire a drone operator to do a fly-by for you. The better a property and its landscaping look, the more likely you will be able to attract new tenants and keep your existing tenants. That way you can at least see the:
- Condition of the neighborhood;
- Condition of the landscaping;
- Condition of the siding;
- Condition of the roof and gutters;
- The parking lot even if you cannot get into the individual spaces.
Active Involvement Includes Budgeting and Financial Reviews
Unfortunately, most investors are not fans for financial review of their properties. George had asked his wife Hannah to help out.
Hannah agreed to review the monthly financials, condense the information, and bring financial inconsistencies to his attention. For example, when rent was not paid, or a move out occurred or when an expense seemed extraordinarily high. She also double-checked the budget prepared by the property manager and reviewed it with George. Hannah also kept an eye on annual insurance premiums and coverage as well as property tax and utility bills. Finally, she was responsible for organizing all the information they needed for their annual tax returns as well.
Vendor and Tenant Selection
George left the vendor and tenant selection up to his property manager but did reserve the right to have input on the scope of projects and decision-making on major projects. He asked the property manager to get two bids for maintenance projects over $5,000, so he could choose the vendor and review and understand the scope of work. Each property has a different threshold of supervision, depending on the size of the property and the income generated.
Goal Number One is Active Management
Even if you cannot get into the properties as you drive by them, having your property manager take pictures of vacant units before they are leased can give you an idea regarding their condition. You want to encourage them to take the time to inspect the units and get pictures before and after tenant move in.
Unfortunately, properties deteriorate over time unless you take care of them. Weather, use and abuse, and neighborhood influences all have an impact on your property. Active management on your part to maintain and improve your investments will increase property value and make the property more attractive to tenants (leading to higher rents), future investors (when you chose to sell) and help keep the overall neighborhood successful.
They say a rising tide lifts all boats, and as you actively manage your property improvements, its looks and operations, so may the neighbors, thereby increasing the value of your property. In that way, active management really pays off.