It took me about six years to learn this lesson, and I’m going to share it with you in the next few minutes. It came from a commercial building, but it changed how I think about managing rental property: the condition of the property, the money behind it, and the agreement all have to work together.

I think the cardinal sin that a lot of property owners, landlords, and property managers make is that they attempt to manage the person, the personality of the tenant. And that is a no-no.

You don’t manage the tenant. You manage the contract.

I didn’t know that in my early years as a landlord and property manager. Sometimes I followed the lease, sometimes I didn’t. Most times I just followed the tenant’s lead. When they had excuses, sometimes I felt bad and made exceptions, like most landlords do. I really did not understand the importance of following the lease agreement. It took one building to teach me, and I would never make that mistake again.

Around '09, after the market crash, I bought a building with a group of investors. I moved my office into that building, and I convinced my partners to let me manage it.

The building had a central heating and cooling system, and it was old. It didn’t work all the time. The heating was mostly fine. Most of the issues we ran into were with the cooling.

The front of the building faced east and my office was on the second floor, on the south side. In the summertime, the east side of the building warmed up the quickest. Then as the day went on, by 2 PM or so, when the temperature was often highest, the sun had moved to the south side, which is where I was. So even though I was one of the owners and one of the members of the management company, I was also one of the tenants experiencing the heat. And it was brutal. I knew the tenants were not making this up. What they were complaining about was real.

It didn’t take long for tenants to start complaining to me. Some paid on time. Some withheld rent because the cooling was broken. Now, it wasn’t like we weren’t trying to fix the problem. We constantly had HVAC people at the building making repairs. But the repairs didn’t last, sometimes a couple of weeks at best. And then the problem started again. We knew, and the HVAC people told us, that ultimately this thing needed to be replaced.

Part of the reason it hadn’t been replaced was that the partners didn’t see eye to eye. Some felt the money they put up to acquire the building was enough, and they didn’t want to put anything else into it. But the building needed to be improved. In hindsight, I know now that we should have had a budget for improvements. But at the time, it wasn’t taken into consideration, and we had no funding set aside for this kind of work.

We bought the building for a little less than $750,000. Our monthly mortgage payment, including taxes and insurance, was about $10,000. We were somewhere around 40 to 50% occupancy, barely making ends meet. Oftentimes, we actually had to raise money amongst the partners just to pay the mortgage or make other repairs.

And the cost to replace that HVAC system was upward of $100,000.

It wasn’t going to happen. We didn’t have the funds, and the partners weren’t gelling enough to make an investment like that.

So now I’m managing the building, and everybody’s complaining to me. One thing I learned quickly about commercial building tenants: yeah, they will complain, but the complaints don’t generally come in the form of phone calls. They come as certified letters from their attorneys. So, it’s not just the tenant complaining; it’s not just the tenant not paying. Now you have the weight of an attorney behind it all.

We had a tenant on the southeast side, at the front of the building who ran a small publication, and he’d been in the building for years. I called him “Mr. Slow Pay”. He paid the rent, but it was always late. Sometimes Mr. Slow Pay would catch up, and then he’d drag it out for another two or three months with no payment. And when he couldn’t pay, or when his business was slow, he leveraged an attorney to make his point. He never really took it the distance. He simply used his attorney as a means of intimidation, to apply pressure, get us to pull back on eviction, and keep that slow-pay habit going.

But the biggest problem we ran into was our anchor tenant. (By anchor tenant, I mean among the roster of tenants, that tenant often occupies the most space or pays the largest amount of the rent.) And this guy knew the building. He was the previous owner, and his business was in the building before we bought it. He already knew the situation with the HVAC system, and he knew how to use it against us.

He was doing what his previous tenants had done to him. He always had excuses. It was always this, or always that. He used all the tricks that tenants normally pull, and we kept going along with them. Some of the partners knew him personally, so he played on that card. He also knew that he was the anchor tenant. He could pay whenever he felt like it, or not pay whenever he felt like it, even when his business was making money and he had the income. In fact, we knew he had the income, but we couldn’t get him to come to the table and pay his rent. And anytime he didn’t pay, we had to raise the money out of pocket to cover the building expenses.

Eventually we had enough. Long story short, we finally abided by the lease agreement and evicted him from that property. But by the time we evicted him, he owed us more than $30,000. But the fault was ours. He kept dragging out paying his rent, but we kept going along with the stories. When you get to the commercial arena, the stakes are too high to simply be waiting and listening to someone’s excuses. You must act. And as a matter of fact, your reaction to missed payments should be a mode of operation, not an emotional decision, period.

What I finally realized is that when you’re dealing with tenants, you can’t deal with their personalities. You cannot deal with their personal issues. You cannot deal with their excuses. You cannot afford to take that on. The only way you can really run a predictable business is to abide by the terms of the rental agreement and insist that all parties follow it. And more importantly, as the owner or the property manager, you need to be the number one enforcer. Don’t allow outside forces to affect how you conduct business. Keep the landlord-tenant relationship within the parameters of the rental agreement and drive it home. Nothing else will suffice.

But here’s the other part of the story. That broken cooling system is an example of why I emphasize to investors with rentals that there are three key things you need to do to be successful as a rental owner.

• One: You need to optimize your property so it can perform. If your property is optimized and performing properly, you’re going to be in a good position.

• Two: In addition to being optimized to perform, it also needs to be optimized to make management easier. The condition of the property is a component of management. It will dictate the quality of tenants you attract. If you want better tenants, you better have a property that’s in better condition. Better tenants combined with a good property leads to a better management experience.

• Three: Your property needs to be optimized so you’re able to sell it at any time for more than what you paid for it. With that cooling system, that building would have been hard to sell.

Then you must superimpose a mode of operation that follows the paperwork and that follows the contract. So yes, you can rule with an iron fist and leverage the contract. But if what you’re ruling over is a piece of crap, it’s going to be an uphill battle.

When it’s all said and done, your success, your ability to minimize headaches, to minimize surprises, to keep from running around like a chicken with its head cut off, it comes down to having a property that’s in good condition and an owner standing true to the agreement, managing the contract, and not the tenants.

I’m curious, what’s a lesson that took you longer to learn than you’d like to admit?