How to Be A Prepared Property Manager in 6 P’s

16

Proper
Prior
Planning
Prevents
Poor
Performance

Are you prepared?

Every property manager (or managing owner) works constantly on keeping their tenants prepared for the events that could occur while they live in our properties.

We help them plan their rental payments, report maintenance needs, handle emergencies, acquire insurance, check their smoke and carbon monoxide alarms, and be good neighbors besides. But all too often, property owners and even managers fall victim to the ‘do as I say, not as I do’ mentality.

The fact is that it’s even more important for the people in charge of properties to be prepared for any possible contingency. And in many ways, the potentials we face are much more severe: evictions, tenant damage, natural disasters, and other emergencies can hurt both you and your tenant emotionally and financially.

It’s on you to be prepared and competent enough to make things at least mildly less bad for everyone involved. Here are some important things to think about in advance:

Insurance

The most obvious one; if your property isn’t fully insured, you’re going to want to take care of that first and foremost.

Related: Outside the Box: Looking at Property Insurance from a Different Perspective”

The thing about insurance that a lot of people forget is that conditions change over time; they tend to think that their policy is like a Showtime Rotisserie: ‘set it and forget it.’ But the truth is that is pays — often quite a bit — to sit down every year or two and review your policy with your agent, and talk about changes to your circumstances and to the insurance market as a whole.

Insurance companies are continually making policy changes, and many of them are prone to putting major coverage alterations in the small print of their monthly newsletters (which are often treated like junk mail in the first place.)

Ask every time you see your agent: what disasters, tenant damage, emergencies, and rent losses are covered by your policy? To be safe, you may want to get their responses in writing, just in case they’re wrong. It may behoove you to alter your coverage or even switch companies if your policy gets altered out of usefulness.

Record Keeping

There are so many reasons to focus a lot of attention on good record keeping.

When you’re doing it, it feels like drudge work — but when you need it, it feels like Proper Prior Planning. Is the IRS auditing your business? Is a tenant accusing you of not communicating according to your agreement? Does the judge need to know exactly which day the tenant in 34b first complained of that musty smell? Proper record keeping is there for you when you need it.

Keep all of your incident reports, tax returns, maintenance records, receipts, communications (written, recorded, and electronic), and other documents in a single organized location where you can easily retrieve and review them.

Keep a second copy electronically by scanning in every document. Have a private archivist look over them annually, ensure that there are no obviously missing pieces, and create a further backup on a long-lasting storage medium like a DVD or one of the online solutions.

Prepare For Your Maintenance Needs

Too many property managers have a standing policy of “if it ain’t broke, don’t fix it.”

Just like with your own car and home, this is a bad policy if what you want is to save money over the long haul. Your body benefits immensely from preventative care — and so does a rental home. Roofs, carpets, paint, fences, appliances, plumbing, wiring, HVAC — all of it (and lots of other miscellaneous items) need to be on your maintenance schedule.

You should be able to look at the purchase records of each of the major items in a home and work out a decent estimate of when they should be maintained in order to prolong their lifespan and prevent an unnecessarily early replacement. For major appliances like HVAC, a yearly checkup is necessary; for more long-lasting items like exterior paint, a coat every five years could be more than adequate.

Related: The Key to Saving Money in Real Estate: Property Maintenance

Consider Your Finances

Your maintenance plan should also include predictions about the cost of these items.

Understanding what your anticipated costs are should put you in the right frame of mind to consider your unanticipated costs as well. What are your exact financial plans to deal with an eviction and subsequent loss of four months’ rent while you find a new tenant?

What if a natural disaster ruins the home? Insurance will cover a lot of it, but you should have a detailed plan for exactly what it won’t cover and how you can pay for it without going bankrupt.

This doesn’t mean you necessarily have to have a rainy-day fund big enough to cover any disaster. Your plan can and should wisely include options such as turning to the bank for a business loan, or if necessary selling a lesser-performing property in order to maintain an all-star property.

Clearly, however, the best plan is to set up a sizeable emergency fund (in an interest-bearing account.) That way if worst comes to worst, you have the resources you need to respond immediately.

Everyone in the business has heard someone say it at some point: “failing to plan means planning to fail.” Engage your six P’s and get your affairs in order today, and you won’t find yourself floundering because of an unexpected (but perfectly expectable) event in the future.

Do you have a story of a time that you failed to plan?

Be sure to leave your comments below!

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About Author

Drew is the manager of Royal Rose Property Management, a fairly high-tech solution for Detroit Metro area property owners & investors.

16 Comments

  1. Sara Cunningham on

    Great article. I just found out that my insurance company are planning to cancel one of my policies because the property needs a new roof. The tenants hadn’t put in any complaints so I was totally unaware since I am an absentee landlord with a property management company. It’s made me realize that having them do periodical inspections is essential.

    I’ve also had to replace two HVAC units this year so far and plumbing in another, all major expenses which could of really hurt if I hadn’t had the funds to do this. It’s really important to make sure that you have adequate money set aside or available to you to get these things taken care of.

  2. Wow Great post!
    Not very many property management post out there. Thanks for your input. Quick question for you, I wanted to know what type of program do you use for record keeping. Ive heard many using different property management type of software, while others use quickbooks or their own excel spreadsheet with formulas?

    • CJ LOVE: fortunately, we’ve been blogging for awhile and understand the exposure it gives us:)

      Regarding record keeping the progression as your portfolio grows or your desire to automate usually goes something like this:
      1) Paper stage – simple, but no fun and no backup.and your tax preparer won’t like you much.
      2) Spreadsheets – better organization and if you know how to use cell calculations, formulas and macros, you can do almost anything,
      3) Quickbooks – fairly easy to use software that once you figure out how to use, makes tracking income & expenses a breeze (hint: setup each property/unit as a class) and your tax preparer will luv ya!
      4) Property Management software – there are a proliferation of companies offering solutions allowing you to pick one that fits your needs – DIY, small company or large. Many interface with Quickbooks or provide their own accounting output for tax purposes.

      Hope that helps!

  3. In regard to insurance, READ THE POLICY after you start the coverage. Many people simply never read the policy and then discover the “holes” in the coverage after something happens. After reading the policy, sit down with the agent with a long list of “what if” questions. If not satisfied with the answers from the agent, write a letter to the insurance company.

    Review all the insurance coverages every year with an eye on increasing the deductible. If the property owner has paid down on the mortgage and has a strong bank account than when the property was purchased, increase the deductible.

    Dres, Thanks for your viewpoints.

    • KEVIN: read the policy? Just like tenants should read their lease? We find fewer & fewer doing either, but you make an EXCELLENT point!

  4. This made me laugh. When I was going through Chief’s initiation in the Navy, we learned it like this. “Piss poor planning precedes poor performance.”
    I had huge expenses in my rental this year after 10 years of virtually no unexpected expenses. It was two years old when I rented it the first time.
    3 months no rent. (she lived there 8 years and paid a lot of late fees)
    Eviction expenses.
    Replace carpet and paint due to cat urine.
    Fence repair and repaint.
    After all of that and the new tenants were in place, condenser for AC.
    So grateful that I put $50 per month into an account to handle these. It almost covered the expenses.
    And my PM got a great lawyer, so the evicted tenant is paying me back directly through wage garnishment.

  5. SARA – thanks for sharing. We’ve seen too many investors NOT put money aside for repairs and then when they happen they either can’t afford them, which upsets the tenant and often leads to them not renewing or they have to borrow the funds, which hurts their cashflow.

  6. Good article, Drew: The old “Failing to prepare means your preparing to fail’ line comes to mind. As for the P’s, I would probably add “be Persistent” to the mix. If you’ve hired a professional property manager (which I recommend- it being my business and all), you want to be persistent in getting any answers from them that you might need. If your agreement with them requires them to inspect your property x times/yr, be persistent in getting the report from the inspections. If it’s not a place you handle for yourself, you have to get information that’s both accurate and current from those whose eyes see your place in your stead.
    Aside from the P’s, whether it’s a homeowners’ policy, home warranty, builder’s warranty or an appliances’ manufacturer’s warranty, you simply need to know what coverage you have and what you don’t. Similar to a comment made by another poster here who mentioned “holes” of one sort or another, you need to pay as much attention to your policies’ and warranties’ exclusions as you do to their “things we cover”-type lists.

  7. Excellent post Drew! I appreciate the time you invested in creating such a high quality article. Required reading for any buy and hold RE investor.

    Cheers,
    Jordan

  8. JORDAN: put a bit more time into this one than most, but wait until you see a future article we did some work on! Be sure to follow us:)

  9. When I’ve been talking to friends about renting out their property they are always shocked to find out what realistic numbers are — everyone seems to have grown up thinking that $1,000 in rent is the same as $1000/month in income —-oh if only it were so!!!!!!

    I currently have the GLORIOUS luxury of being able to put all of the profit income for future repairs and upgrades (house was in need of a lot of things when I purchased it, but thankfully not all needed to be done at once). I can tell you it has been really good about keeping me honest about how profitable landlording ISN’T, since the amount in the bank is my total profit over 4 years (tax benefits and expenses I’ve paid out of pocket have cancelled each other out).

    • DEANNA: your point about $1000/month income is also true with tenants! They have no clue of the costs of homeownership and think every penny they pay in rent is pure profit. We currently have a tenant behind in rent that agreed to a court ordered payment plan asking for cosmetic repairs. Tenant was very upset when we responded we wouldn’t do any repairs until they were current on rent. They then tried to “negotiate” with us to apply their next rent payment to the repairs and couldn’t/wouldn’t understand our response about those funds being needed by the owner to cover other property expenses.

      You also touch on a topic (inspiration for a future post!) of OVER rehabbing a property. Too many DIY Landlords fix up a rental as if they’ll be living in it, not a tenant. For some areas/demographics, you have to do so. For most though, there’s a big difference between rehabbing a home to rent out versus flip.

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