In my article “3 Key Lessons for Avoiding The Dark Side of Passive Income,” I make the case that no investment is or truly should be passive. The same goes for managing your rental or apartment building portfolio. While you don’t need to be involved on a day-to-day basis, you need to establish a rhythm of reviewing the numbers from your property manager and making adjustments accordingly.
I have investors in my deals and so there is a certain amount of reporting that I do for them. I provide them with ad hoc updates if there’s something unusual going on. But normally I will give them a quarterly report with a Profit & Loss statement along with any distributions.
When you don’t have investors, you tend to pay less attention (trust me, I know), and this is not good. You should ALWAYS pay attention to your investment, even if you don’t have investors to report to.
Here are the best practices to follow on a weekly, monthly, quarterly and annual basis to make sure your building is performing to plan and maximizing your profits.
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Proactively Fill Vacancies
You need to know what’s going on with your income. Which units are vacant? When will they be rent-ready? How many viewings were there? How many applications were received? Do you need to adjust the rent or offer incentives?
You want to know which tenants are behind on their payments. Find out from the manager why they’re behind and if legal action is necessary. I’ve found that the right combination is prompt legal action while proactively communicating.
Understand All Bills Paid
You want to understand exactly what bills your property manager paid last week. What was it for, and for which unit? Was it necessary? Could it have been avoided? Could it have been done cheaper?
You want a record of EVERY bill the property manager paid, how much, who the vendor was, a description of the expense, and for what unit. It’s not uncommon for someone else’s bill to show up in your records. Errors are easily made, but no one but you will catch them.
Bulk trash has been a real issue in Washington, DC, for example. This is where your tenants and neighbors throw out larger items that don’t fit into your trash bin. For the last year, the city has been enforcing bulk trash with hefty fines. As a result, my property manager leased a truck to go by each of their properties to pick up any bulk trash to avoid the fines. This is a great service, but each time they pick up any bulk trash, they charge me $65. In the last couple of months, I’ve had about 3 pick-ups per week!
Because I noticed these escalating costs in my weekly review, I was able to address the issue with the property manager. We decided to upgrade to a larger trash bin to see if that would cut down on the amount of bulk trash. We’ll see if it works, but the point is that you’re catching issues as soon as possible so you can make adjustments quickly.
Call Your Property Manager
I’ve found that a short weekly call with your property manager is key to staying involved with the property. Many of the key metrics you need should be available from the property manager’s online management website. Review those first, and then follow up with a regular phone call to ask questions and discuss any issues.
Create the Profit & Loss Report
Once per month I create the Profit & Loss statement for that month. The income and expense numbers should not be new to you since you’ve been reviewing them every week. The monthly P&L report shows you trends and lets you see how you’re performing to your projections.
Review Work Orders
Once a month I also review the work orders. I specifically look for two things: (1) Are there any units that are costing more than others? If so, why and what can we do about it? And (2) How long does it take to close out work orders? Establish an acceptable baseline with your manager and then track this metric. Work orders that don’t get addressed on a timely basis can result in unwanted turnover.
Once Per Quarter
Once per quarter I pay myself and my investors. You already have the P&L report done from your monthly activity. The only other thing you have to do is create a cash flow and bank balance report: see what you have in the bank account, deduct any bills that are due in the next couple of months (like real estate taxes or larger repairs). Keep a reserve (this will vary, but you always want a reserve in the account!). Whatever is left is money you can distribute.
If we’ve turned over any units in the past quarter, I want to understand why they turned over and if there’s anything we could have done differently to avoid it. I ask my property manager to talk with the tenant to find out why they’re moving out.
If you feel you’re having an issue with turnover, one thing you can also do is to mail a questionnaire to each of the tenants with a self-addressed, stamped envelope to get feedback from them. What do they like about living at the property? What do they feel you could do better?
Once Per Year
Review All Contracts
Once per year I review all of my contracts, such as insurance, trash, landscaping, snow removal, and common area cleaning. I may bid out some or all of these contracts to see if I can save any money.
Complete Your End-of-Year Report
Again, even if you don’t have investors in your deal, I think it’s critical that you develop the discipline to actually write an end-of-year report. Include the annual P&L with the monthly numbers as well as your budgeted P&L. If the actual numbers were significantly different from your projections, explain why. What can you do differently in the next year?
Create the Budget for Next Year
Based on the past year’s performance and the changes you want to make, create the Pro Forma for the next year. Get your property manager’s input and get them to commit to it. Then track your actual performance as you repeat the cycle of review and adjustment.
It’s a mistake to let your property manager do whatever they want without ANY oversight from you. Interact with them frequently and review the key metrics regularly, as I described in this article. If you do, you can make adjustments promptly and ensure you’re on track to maximize your property’s value.
What are some other things you do to maximize your building’s profitability?
Let me know with a comment!