I love rental real estate investing for a lot of reasons:
- Rentals produce regular, lifelong cash flow to support an awesome lifestyle.
- Rentals allowed me to use relatively safe leverage to start with a small amount of money.
- Rentals allowed me to use my skills and entrepreneurship to reach my financial goals faster.
- Rentals are a win for me, a win for my tenants, a win for my investors or lenders and a win for my community.
- Rentals in the right location and with the right financing get better and better with time.
But even with all of these benefits, rental real estate has a big challenge when compared with other more passive investments like bonds, private notes and stocks. The challenge is this:
Rentals must be actively managed.
Basically, that means our rental business is a hybrid between investing and entrepreneurship. We are both the shareholder and the CEO.
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The Shareholder, the CEO & the Operations Manual
As the shareholder, we invest capital with the expectation of safety and return over time. As the CEO, we must create and execute systems and lead people. The shareholder invests money. The CEO invests time, knowledge and energy.
If we someday hope to be a relatively passive shareholder of rental real estate, we must address the second role of CEO and make sure it is successful.
Our role as CEO requires different skills and focus than purely investing. These skills are often neglected in our investor focus on spreadsheets, numbers and long-term cash flow.
So, in this article I’d like to put on my CEO hat and share what I see as a guide to a systematized, outsourced rental real estate business. You could also look at this as the outline of an operations manual. That is exactly how my business partner and I use it in our own rental business.
There could be more, but the core of this guide will cover the following 5 rental business systems:
- Maintenance/Customer Service
The Small & Simple Real Estate Business
Before I begin with the 5 systems, I’ll give you a brief background about my own business.
My business partner and I chose to create our own small management company to manage our rentals. While that has worked for us, you could just as easily argue for hiring a third party to do 100% or pieces of your rental business. Either way, the systems in this article apply to you.
I have found that the bigger the business, the more difficult your job as a CEO will be. If a portfolio of 10-20 units can meet your financial needs, the only reason to grow bigger is because you enjoy being an entrepreneur or you have motivations beyond financial freedom.
Making gobs of money and creating large impacts on society are fine motivations, but let’s remember they are not the same as personal freedom. If freedom is what you’re after, small and simple will work just fine.
The argument against a small business could be that the owner (shareholder/CEO) has to wear too many hats. The story goes that you end up doing everything because you aren’t big enough to delegate tasks to others.
Luckily, these days this argument is more myth than reality.
In our world of cloud technology, smart phones and virtual assistants, it has never been easier to systematize and outsource on a small scale.
A Note About Outsourcing vs. Abdicating
You may choose to outsource some or most of the systems I’ll share with you. This is natural and desirable step, of course.
But I recommend starting off by either doing it yourself or studying the systems intensely. There is a reason the best managers, even at Fortune 500 companies, started off sweeping the floors.
The cardinal rule of outsourcing is to delegate and not to abdicate. Delegation only happens when you have systems and checklists that you can train someone else to use or abide by. Abdication occurs when you don’t know what you’re doing and you hope the other person you hired is trustworthy and has good systems.
Most rental owners abdicate to property managers. I would argue that is why so many of them are disappointed with their results. Use the lessons in this article to create your own standards, either for yourself or for your property manager.
Now let’s get to the 5 core systems of the rental business.
5 Systems to Add to Your Real Estate Business
Leasing is the system that turns prospects into tenants. It finds, screens and signs up our customers. As any veteran rental CEO knows, this process will make or break your business. I have lost more money and experienced more hassle from breakdowns in this process than in any other.
This system can sometimes be outsourced alone even if you choose to do the other 4 systems. Some property managers will find, screen and process your tenants for a fee, perhaps of one month’s rent or more.
A successful leasing system can be broken down into four sub-processes.
a. Lead Generation
This is how you let prospective tenants know about your rentals. Like a funnel, the goal of this step is to generate a lot of interest and get as many people interested as possible.
b. Property Showings
This process allows tenant prospects to view the property and ensure they like it. Once they view it, our goal is for them to complete an application on our website.
This step can consume a HUGE amount of time if you’re not careful. So, we like to use systems that control our time, like video tours, lockbox showings on vacant units and pre-scheduled open houses.
c. Tenant Screening
Now that we have some applications, it’s time to screen the prospects to find a good fit. This is a crucial step because you might feel pressured to approve the first enthusiastic prospect waiving a security deposit at you. Don’t take the bait!
Instead, define your criteria objectively and judge all applicants according to those criteria. The best instructions I have found on this process came from BiggerPockets’ own Brandon Turner and his Ultimate Tenant Screening Guide, complete with user-friendly graphics.
d. Lease Signing and Deposit Receipt
This is the process where you sign up the approved prospect. Finding or creating the best lease is a much bigger topic than I can handle in this article, but know that it’s important to have a lease that both gives you legal “teeth” and that helps you train your tenant to be a good customer.
Also, keep in mind that it is not wise to accept personal checks or cash for the initial payment. Evicting a brand new tenant who bounced a check is no fun, and accepting cash makes it more difficult to track your business as the CEO. Use money orders or cashier’s checks instead. A paper trail is the friend of a systematized, outsourced business.
A collections system is the heart of your business because it supplies financial oxygen (cash) to every other component. If you fail to have a bullet-proof collections system, your rental business will suffer.
I break my own collections business into two sub-processes:
a. Regular Collections
This is the process of invoicing, receiving, depositing and tracking all of the rent you are owed each month. You can systematize this step with spreadsheets and file folders, but a solid property management software can make the process much easier.
Our current management software is Buildium, but for years we tweaked and used Quickbooks for all of our invoicing and collections. A cloud based service like Buildium is ideal for systematizing a small rental business because it already has many of these systems built into its framework.
In addition to tracking who has paid and who hasn’t, we like to offer easy and passive payment options for our tenants. This does NOT include going to pick it up in person. Our payments options include:
- Online payments: We do this through Buildium for $.50/transaction, but just Google “online rental payments.” You’ll see a long list of other options.
- Pay directly at bank: We like Woodforest Bank at Wal-Mart because they are open 7 days per week. Our tenants write their name and address on a deposit slip, and they tell the teller the name of our business. We instantly see copies of the deposit slip by email so that we can credit the tenant for their payment.
- Dropbox: For last minute payments, we have a secure dropbox at one of our apartment units.
- PO Box: If the tenant wants to mail payment, we still allow them to send to our PO Box address.
If you want to outsource this step without hiring a property manager, a great person to hire is a part-time bookkeeper. We did this many years ago. Bookkeepers are already used to tracking inflow and outflow of money, so this is a natural position for them.
b. Delinquent Collections
You need a system in place to handle those who don’t pay on time. You’ll have to adapt it to your local laws, but our system looks something like this:
- Rent due on the first.
- After 5 p.m. on the 5th of the month, a late fee is incurred.
- A call, text, and/or email will be made on the 6th to inquire about unpaid rent.
- If we receive no response or do not notice proactive effort from the tenant, we file an eviction immediately. In South Carolina, we do not have to mail notice if the proper wording is in our lease. If that’s not the case with you, you’ll have an additional step to give official, written notice to the tenant of their delinquency.
- We prefer to work with the tenant to stay. So, if they can demonstrate means to pay us back in a reasonable period of time, we will work with them and cancel the eviction.
- If the tenant ignores us or cannot catch up, we proceed with the eviction until the tenant moves (typical) or until the Sheriff comes with us to set them out (rare).
The main point here is that you have a system that dictates your responses.
You can certainly still help people if they don’t pay their rent. If a tenant is honest and sincere but just struggling financially, we’ll do whatever we can to help them find another place. We once found a homeless shelter for a tenant of ours who had no family to move in with.
But unless you are also in the business of being a charity, follow your own system and help the tenant however you can outside of that process. Otherwise you’ll be looking for charity yourself when you can’t pay your bills!
This step can be outsourced either to a property management company handling all of your management or to an attorney who can contact the tenant and handle the eviction for you.
This was the very first step we outsourced in our business, and it was a beautiful thing!
We tried a few candidates before finally finding an honest, hardworking and competent bookkeeper who was willing to fit within our system (working remotely, no office). Interestingly, we found her from a magnetic sign on her car at a stoplight (“I Do Bookkeeping”)!
Before we hired a bookkeeper, however, we did all of these steps ourselves. We used that time to write detailed notes and instructions for each task in order to create the following processes:
- Reconcile bank and credit card statements
- Check mail and payment dropbox several times per week
- Deposit all payments
- Check online sources for payments received
- Enter all bills to be paid into Quickbooks or property management software
- Print checks once per week (at my home office)
- File paperwork (leases, insurance docs, statements, receipts, etc.) — we’re moving towards paperless filing, but we still have some physically filed in a home office once per week
- Review insurance periodically for expirations or problems
- File payroll returns and make payroll payments
- Help to file 1099, 1098 and other required year-end forms
- Turn on and off utilities for rentals, as needed
- Other miscellaneous bookkeeping and admin tasks
There are some tasks that fall under the bookkeeping umbrella that my partner or I still do. These include:
- Sign all checks (never give this up!)
- Enter HUD-1 statements into Quickbooks after a purchase or a sale
- Prepare books for tax return filing with CPA
- Handle miscellaneous problems, anomalies and rabbit holes (and bookkeeping holes can be dark, deep, and unpleasant!)
- Oversee bookkeeper’s tasks
Outsourcing many of these steps was critical for us because it freed up our time to work on the business and not in the business (as Michael Gerber says in The E-Myth). It also allowed us to move to other systems and begin systematizing and outsourcing those as well.
4. Maintenance & Customer Service
The product we sell in the rental business is the experience of living in our units. Our tenants will pay higher rent prices, stay longer and refer more often to the extent that they like two things:
- The property itself
- The service from the landlord
There are some things you can’t control as the manager of your property, like a yapping dog next door. But many facets of your tenants’ experience you can and should control. Having detailed systems that you follow shows your tenants that you have a plan and that you care.
This system starts with building a good team of subcontractors who are reliable, easy to communicate with and who are willing to visit properties on short notice. Price is certainly also a consideration, but beware of the cheapest handymen to fix all of your problems. You’ll pay (as we learned) for that mistake sooner or later in the form of further problems.
Our current list of subcontractors on call includes:
- Plumbers (multiple)
- HVAC techs (multiple)
- Electrician (multiple)
- Lawn service
- Pest control/moisture control
- Gutter and vinyl siding contractor
The maintenance system itself should focus on the things you can control once you buy the property. It can be divided once again into several sub-categories:
a. Repair Requests From Tenants
When we first started, we thought these calls were a bad thing. Not true!
You want your tenants to communicate with you so that you can handle problems before they become expensive. This is also another opportunity to give your tenants a positive experience as you respond quickly to their requests.
First, you need a reliable way for the tenant to reach you. If you plan to outsource this task someday, it’s better to have a number other than your cell phone.
Google Voice works great and is free, and Ringcentral.com is another inexpensive, cloud-based option. Either service gives you a dedicated phone number where the tenant can call, text and leave a voicemail.
Someone must monitor these calls from tenants, and occasionally you will get middle-of-the-night emergencies, like a water pipe that has burst. These experiences aren’t pleasant, but I have found the emergencies are much more rare than the minor problems.
Second, it helps to have a checklist or “triage” sheet that tells whoever handles the calls how to respond to the situations. Many times what seems like a big deal can be handled by checking the breaker, for example.
Give the full version of this triage list to whoever takes the calls, and give a “common emergencies” list to each tenant. With a little instruction, a tenant could, for example, turn the water off at the road if a pipe has burst.
b. Preventative Maintenance
If you want to prevent as many expensive, emergency problems as possible, periodic maintenance is a must. The best practice is to create a checklist and schedule the visits. Here are some regular maintenance items you might want to consider:
- Check roof for nail pops, lose shingles and other potential water entry points
- Clean off roof and gutters
- Change HVAC filters
- Clean and inspect HVAC system, mechanical parts and duct work
- Check electrical breaker box and service lines for problems
- Check all sinks and tubs for leaks
- Caulk and reseal areas exposed to water (bathrooms, kitchens, exteriors)
- Spray for bugs (especially down South)
As you can tell, the goal is to spend a little bit of time on the major systems (roof, plumbing, HVAC, electrical, structural) in order to prevent larger problems later on.
These visits can be outsourced to competent sub-contractors using your checklist, and they can send videos or photos to you for your files.
c. Request From Landlord
From time to time you’ll discover problems caused by the tenant that must be addressed. Most often for us, this means trash in the yard, illegal cars, extra residents or some other violation of the lease.
We often send a text or call since it is quick, but it’s best to also deliver notice of the problem in writing. Email is the simplest and easiest to track, but we have also used door hangers, which we take a digital photo of as proof.
If you ever need to evict based upon this lease violation, you’ll want to have proof that you gave notice.
This is the final of the 5 systems, but it is one that can can either make or cost you a lot of money. This system begins with the move-out of one tenant and ends with the move-in of the next.
The basic goals here are:
- FAST turn-around time. Every day of vacancy costs money. At a rent at $1,000/month, you are missing out on $33 per day!
- Good document condition (checklists, videos and photos).
- A high standard of property condition and cleanliness that you can hold your tenant to.
- Fixing problems and perform preventative maintenance as needed.
Important sub-processes for this system include:
a. Move-in and Move-Out Checklist
Security deposits are extremely valuable tools for us as landlords. But without a clear and fair move-in and move-out process, your decisions whether to keep part of or all of a security deposit can be very contentious.
Plenty of tenants leave properties in bad shape, but some landlords unfairly keep far more of a deposit than is warranted. So distrust abounds on both sides.
A thorough checklist at move-in and move-out, along with photos and videos, can remove a lot of the “he-said, she-said” battles related to security deposits.
For a more detailed example of a bullet-proof move-out system, see this oldie but goodie BiggerPockets article: “Landlord’s Guide to Security Deposits Best Practices.”
b. Turnover Repair Punch-List
This process is about telling your sub-contractors what work needs to be done to get the property ready for the next tenant. A clear, thorough checklist will allow them to quickly and effectively get the property ready.
A very good idea I picked up from another property manager is to create carbon copy, standardized checklists for your subcontractors. For example, your handyman would have a room-by-room checklist including items like checking smoke detector batteries, checking for leaks, fixing bi-fold doors, etc. A painter and a cleaner would also each have a separate room by room checklist.
As each item is completed, the contractor puts a check beside it. In the end, a copy is left for the tenant, one is given to the manager, and one is for the contractor’s records.
This serves a few critical purposes:
- The tenant is aware of all of the items you do to prepare it for them
- The manager has a quality control and accountability system
- The contractor has clear instructions for his or her work
c. Tenant Move-in
Here is a list of items to remember when your tenant moves in. Some of these are basic to-dos that avoid extra expense (leaving the power on), but others are ideas that make a good first impression for your tenant.
Many landlords strive to make a good first impression with the property, but what about impressing them with customer service? This can set you apart, earn more referrals, and build trust between you and your tenant. Some of these we do; others we hope to implement soon.
- Transfer utilities out of our name
- Leave key for new tenant (after all required monies are received)
- Remove all staging materials, lockboxes, signs and flyers from the property
- Deliver Tenant Information Folder (property instructions, important phone numbers and other handy resources) and welcome gift
- Add tenants to birthday email campaign
- Welcome, “just-checking-in” phone call two days after move-in
- Handwritten note and referral request
As with any relationship, the little things done with great care mean a lot. Most landlords are so bad at customer service that just a little bit of extra service will easily set you apart from your competition.
The Power of Systems
What I have given you in this article is basically the outline of an operations manual for a business. Although this is already the longest article I’ve ever written, there is a LOT of meat I could fill in.
Each system and sub-process can have more actual checklists, forms (your lease, for example), add-on instructions and even graphics to explain how to do something.
Why go to all of this trouble? Twentieth century business thinker and leader Edward Deming said it well:
“If you can’t describe what you are doing as a process, you don’t know what you’re doing.”
The power of systematizing your business is the forced competency it brings to you. To document your system, you must ask questions like:
- How do we currently do this?
- What is the best way to do this?
- Who else does this and how can we learn from them?
As you ask these questions, you become aware of good habits and bad habits. Then you can change or improve what you’re doing.
As you perfect the system for yourself, you can also begin delegating and teaching your system to others. Because you have a logical process to follow, your team and you know what to expect. It makes accountability easier for you, and it makes implementation easier for whoever does it.
We’ve reached the end. I hope this guide has been helpful.
Don’t feel overwhelmed by the detail outlined here. We have been creating and adapting our own operations manual ever since we began our business. For all of us, it starts simply with one process or one checklist. Then the building process never ends.
In fact, I’ll probably receive comments on this article that will improve or change what I do. That’s the beauty of BiggerPockets and a mastermind of landlords all aiming to improve what they do.
Thank you for reading! I hope you’ll contribute your comments and suggestions below. Am I forgetting anything? What do the systems look like in your rental business?
I’d love to hear from you.