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A Property Manager's Financial Considerations
 
 

A Property Manager's Financial Considerations

Creating a Budget

Managing income properties effectively requires tight controls on financial transactions. An apartment building, for example, can drain capital and turn positive cash flow into a negative flow if you are constantly making repairs and updating features. Once you understand a property's history, it will benefit you greatly if you establish an annual budget for income and expenses. When you create your budget, keep the following activities in mind.

§ Make estimates on when updates will become necessary.

§ If no maintenance figures exist, plug in estimates at appropriate times (for instance, lawn care during summer).

§ Account for repairs by reserving a percentage of monthly income.

§ Include quarterly tax payments.

§ If you pay for utilities and waste removal, include an adjustment factor (about 2-4 percent) to account for annual price increases.

§ Choose current costs that can be reduced and make estimates based on cost reductions.

§ Consider future rent increases and include the adjustment in your estimates.

A typical quarterly budget looks like the following.

Activity

January

February

March

Rent Received

$2500

$2500

$2600 (increase unit #2 and #3)

Expenses:




Utilities

$600

$600

$600

Maintenance

$140

$200 (add. snow removal)

$140

Repairs and Updates

$0

$75

$75

Mortgage

$1200

$1200

$1200

Insurance

$100

$100

$100

Taxes

$400

$400

$400

Miscellaneous

$50

$50

$50





NET INCOME

$10

-$125

$35

Once you have established a budget, it will become a set of goals to achieve each period. By creating estimates, you can manage both income and costs because you can usually make adjustments in your approach to meet those estimates. In essence, your budget should lead to increased profits and manageable expenses.

Setting Rental Prices

How do you establish your rental prices?

Rent should be high enough to cover expenses, and make a profit, but low enough to attract tenants. There may be special attributes that can be taken into account when setting price levels. For instance, a property with surveillance cameras and security personnel will likely generate a higher rent than an unsecured building. A location that is "convenient to everything" can allow you to charge more than a remote property. Even the quality of your tenants can affect the rental amount. "Location, location, location" is built on a theory that real estate seekers desire a combination of convenience, status, and appearance. An attractive, safe neighborhood is more desirable to live in than a rundown area; therefore, tenants can expect a higher rent.

The most effective way to fill empty space is by charging a comparable rate. The prevailing rate or market rate is the amount being charged for similar properties in nearby areas. Commercial property managers typically charge a rate based on the total area of the space (for instance, $4.00 per square foot). Simply managing the most attractive, updated, convenient property does not guarantee that you can charge a price that is significantly higher than your competitors. Most tenants seek rental units that match what they need, and many times they will sacrifice top notch amenities for a lower rent price; so, beware of charging a payment that is too high compared to neighboring properties.

When should you raise your price?

Increasing the rent you charge is never easy; raise it too far and you risk losing tenants, increase it only slightly, and you are locked in for the lease period (potentially losing money if expenses increase). If the property you manage has rental rates that are below average, consider raising your rate to meet or slightly exceed the market. Tenants will probably be unhappy but unlikely to move if there are few less expensive options around. Stay updated on prevailing rates to make sure that you are in line with competitors. When a unit becomes available, take steps to improve its condition (such as interior painting) then charge a bit more than comparable units within the building are charged. The improvement may be seen as justification for a slightly higher rental charge.

You may need to raise your price as expenses increase. An income property can quickly become a financial burden if expenses turn cash flow negative. It may be less painful to raise the rate in smaller increments over time than a large increase at one time. Most residential tenants will expect an increase if they occupy a unit for several years.

How can you increase the income on your rental units?

Increasing income can mean one of two things, raising the cash flow or reducing the vacancy rate. Raising the cash flow can be accomplished by setting higher rent payments or lowering expenses. Reducing the vacancy rate (the length of time a unit is empty) can improve income when you lock tenants in for a longer rental period. There are several strategies you can use to improve the income from your property.

1. Increase rent following updates or improvements. Complete projects that enhance the current environment and raise the rent when a lease expires.

2. Charge additional fees for amenities or services, add a per-use or monthly fee for onsite laundry facilities or arrange for nearby parking and charge a monthly fee.

3. Test higher prices with vacant spaces, used by managers of multiple properties who can afford to test the market while a unit is empty.

4. Offer a discount in exchange for a longer term, extend leases by reducing the monthly payment, and include an early termination fee.

5. Create a revenue sharing arrangement on commercial properties; offer a discounted rent to businesses in exchange for a percentage of their earnings (works best in a growing economy!).

Residential tenants and commercial tenants search for space with different objectives in mind. It is important to understand your prospects' motivations when managing your price structure. For instance, retail tenants want the best exposure for their business and may pay more for a prime location, whereas manufacturing companies seek the most cost effective space to produce goods. In residential properties, social climbers want amenities and attractive accommodations, whereas low income tenants are looking for the lowest price available. An effective manager will cater to his most likely prospects.
Want to learn more? Take an online course in Landlord.

Taxes

A property management company that owns no real estate is required to pay income taxes based on the management fee it charges the property owner. Generally, there are only a few deductions it can claim as a part of doing business. However, property owners who self manage face two primary tax obligations, property taxes, and income taxes, and they can claim a number of deductions.

1. Interest expenses. Usually the largest single deduction is the interest paid on financing charges. This includes mortgage interest, and can include business related credit card interest, loan interest, and merchant accounts with local hardware stores or other businesses.

2. Depreciation. Landlords can recover some of the purchase cost by claiming depreciation expenses that are spread out over the useful life of the property.

3. Repairs. The cost of reasonable and necessary repairs can be deducted. This may include updates.

4. Travel. Property owners can deduct expenses associated with visiting the property and activities that are directly related to rental responsibilities.

5. Home office. If you are managing properties from home, you can deduct costs associated with the business and a portion of your home expenses.

6. Employees and Contractors. Expenses associated with hiring and managing others related to the property can be deducted.

7. Losses from casualty or theft. You can deduct all or a portion of losses to the property due to casualty (damages from a sudden event) or theft. This does not include personal property of your tenants.

8. Insurance. You can deduct insurance premiums paid in relation to rental activities. This may include fire, theft, and flood insurance, liability insurance, and workers' compensation for employees.

9. Legal and professional services. Fees paid to consultants are deductible as they relate to rental activities.
It is best to consult a tax professional to understand clearly all the tax requirements, benefits, and consequences involved in property management. Federal tax codes change and state tax regulations vary from jurisdictions to jurisdiction, so hiring a qualified tax accountant will help you minimize your obligations.

Tenants

Attracting the Best Tenants

The lifeblood of property management is the tenant base that leases your rental units. Whether you manage a residential complex or multiuse commercial building, your tenants are paying the right to occupy a space and receive the benefits associated with this relationship. To be successful, you should manage the property in a way that ensures that you have satisfied, prompt paying tenants renting for long periods. How do you attract the types that will pay on time, will not disrupt or disturb neighbors, will maintain their space properly, and remain your tenant?

It is important to look at property management from a sales perspective. Your responsibilities are to fill vacant space, maintain the property, and deal with tenants. An effective sales approach to each of these tasks will go a long way in determining your future as a property manager. You should market the property by looking at it through the eyes of your potential tenants, and that starts with a first impression.

As with any first impression, appearance is going to be important. In this case, both the property's appearance and your appearance should be examined to make sure that both would persuade a quality potential tenant to sign a lease agreement. Studies have shown that the top two factors that have the biggest impact on rental applicants are, 1) how the manager behaves and, 2) what the building and leased space looks like. Your physical appearance should be neat and professional yet casual. Using notepads and checklists show that you are organized and interested in providing good service. The building should be clean, clutter free and showing no signs of unusual wear or damage.

Here are some factors to consider when you are attracting prospective tenants.

Residential

Commercial

Property appearance. Updated interior and exterior paint; good lighting; landscaped yard; gleaming floors; clean windows; clean appliances and fixtures; clutter free hallways, stairways, and common areas.

Property appearance. Neat, landscaped exterior; properly functioning equipment, fixtures, and appliances; ease of access for occupants, vendors, and the public; damage free interior.

Manager's appearance. Neat clothing; clean, well kept face, hands, and hair; professional attitude; organized, interested behavior.

Manager's appearance. Professional attire; organized, knowledgeable behavior; quick response to inquiries.

Management's reputation. Known as reliable, courteous, and responsive; good relations with current and past tenants.

Management's reputation. History of well run properties; high traffic locations; fair rental charges; quick response to emergencies and repairs

Lease terms. Fair, reasonable conditions, and price; clearly stated emergency and dispute resolution procedures; incentives for prompt payment or self-maintenance.

Lease terms. Fair, reasonable terms; priced near market rate; clearly defined responsibilities.

Neighbor tenants. Responsible, courteous behavior; similar social or family status.

Neighbor tenants. Successful, long term businesses; strong anchor tenant.

How you advertise the property will also affect the response you receive. If you run a print advertisement, choose a publication that your best potential tenants typically read. The local newspaper is a good choice for a general audience; however, you may attract many undesirable prospects, unless your ad is written well (see below). If you can afford magazine advertising, you can target tenants with specific interests. Placing an ad in the classified section in the back of regional or trade publications has been effective for some multi property managers. Distributing flyers at locations known for attracting the quality of person that you seek is another method to use. Announcing a vacancy in the neighborhood where your property is located can attract tenants through neighbor referrals. The important thing to remember is to choose a method that will allow you effectivelyto target tenants that will have the qualities that you are looking for. A tenant that is simply able to pay the rent will not generate a solid income. You should seek to create a community of positive, like minded tenants that will support the property for years to come.

What you say to attract tenants is important as well. The general practice is to describe property and list the price; however, if you place a general, run-of-the-mill advertisement you will likely get responses from a broad, run-of-the-mill audience. Property rental should not be viewed as a commodity trade (cash for space). You will be entering into an extended relationship, a minimum one year, so you will want to approach a "sale" of leased space with a long term attitude. Use terms in your ad that will interest the specific tenant that you seek. For example, if you are attracting tenants for a trendy metropolitan property use terms like "step up to your new lifestyle" or "around the corner from (the city's) vibrant nightlife." Tap into what appeals to your prospects. For commercial tenants, you can describe the area, talk about traffic, or explain the type of visitors that come to the property.

Choosing Your Tenants

Many property managers announce a vacancy and simply accept whatever applicants respond. However, a more effective approach to creating a profitable, enduring relationship with tenants is to choose exactly the type of tenant you want. This does not give you license to discriminate, that is against the law. However, property management is competitive and you have the right to run your business in a way that returns the greatest profit. That being said, by seeking specific characteristics among your prospective "customers," you have a good shot at having a successful business relationship with them.

Let us examine some general qualities that will help determine if an applicant will become a solid, reliable tenant:

1. Payment history. By examining an applicant's credit history, you can determine if he will pay promptly, how he uses credit, and his debt level.

2. Previous tenancy. An applicant that has a stable history of tenancy bodes well for a long term relationship, but movement year after year shows a pattern of instability that may indicate that this is not a good candidate.

3. Job or business history. A good history reflects responsibility, so look for a consistent track that shows achievement.

4. Personal and professional references. Look for character issues within the details of a reference's responses.

5. Future prospects. Try to determine if the applicant's future looks bright because it generally reflects a good prospect.

The most efficient way to uncover as many facts about your prospect is to have him or her fill out an application, conduct an interview, check credit history, and contact references. By combining information from these sources, you will get a picture of whether they will be a good tenant. One of the key steps is to create questions for both the interview and reference contact that allow the person responding to give you details about your prospective tenant. Use questions like, "What was your favorite part about college or job or business?" that expose attitude, preferences, and personality. Laws prohibit managers from asking questions that are too personal, but if the questions are a part of a reasonable process of determining the best candidates, applicants can be expected to answer them.

Maintaining Your Tenant Base

Once you have brought the best tenants in, how do you keep them renting your property? That will depend on several factors. The rental space must meet the needs of a tenant, and you must be able to depend on reliable payments and a tenant's concern for keeping the property free from damage.

Create incentives for good tenants to stay beyond the lease term. Make an offer with reasonable time, say three months, remaining on the lease so that, 1) there is time to make any necessary adjustments to the lease and, 2) the tenant has time to consider the offer and discuss it with you.

Some laws prohibit extending certain incentives so check with the laws in your jurisdiction or consult with an attorney. If it is lawful to offer incentives, think about ways you can extend a lease period, retain a prompt paying tenant, or bring in other tenants that are familiar with your renters. Here are some conditions that you might offer.

Ø Free rent in exchange for extending the lease. Offer a free month per year to encourage your tenant to continue renting from you. If you do not want to miss the total rent payment for the month, you may consider lowering your monthly price an amount that would reduce the entire year's income by one month.

Ø A rebate on extended leases paid following termination.Consider returning a month's rent or some other amount to the tenant when the lease is terminated, provided he agrees to a lease period of at least two years.

Ø Discount or free offer to refer another long term tenant.Encourage a good tenant to refer a friend or close acquaintance with good credit or payment history to rent from you. This can accomplish two things, 1) bringing in another quality tenant and, 2) strengthening your tenant base by including renters who are familiar with each other.

Ø Right of first refusal on a different space. Offer to extend the right to occupy an available space before you advertise it to other prospects. This can help if your tenant will be seeking a larger space or a better location in the future.

Ø Discount for prompt rent payments. Upon the initial lease period expiration, offer to extend the next lease at a discounted price if your tenant has made prompt payments during the initial lease. Though this reduces your cash flow, it helps avoid having a vacancy (and the costs associated with renting the space). Some states prohibit this practice, so check the law.

Ø Lower price for a longer lease. Simply offer a discounted price for signing an extended initial lease, for perhaps two to five years. Protect your interest by including a condition that charges a significant early termination fee.


There are no rules to being creative when recognizing and rewarding good tenants. Though tenants' needs or lifestyles may change, you can increase the chances that you will retain the best clients by showing them that you want them to remain in your property.


 
 
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