the icky parts
You can’t expect all aspects of property management to be fun. As in your primary job, some days run smoothly, and others are filled with problems. Here are a few of the most challenging aspects of the property manager gig:
Difficult tenants (and others): Despite the great people you meet, property management has its fill of difficult and challenging personalities, including people who’re downright mean and unpleasant. You have to be prepared for adversarial and confrontational relationships. Collecting the rent from a delinquent tenant, listening to questionable excuses, or demanding that a contractor come back and do the job properly requires patience, persistence, and a fair but firm approach.
Long hours: Because you’re dealing with housing, you don’t know when you’re going to be needed — at 3 p.m. or 3 a.m. Like me, you can expect to be constantly on call — even when you’re on vacation, at the movies, or in the middle of a family holiday dinner — to deal with issues that only the rental owner or property manager can handle. Fortunately, you can minimize these inconveniences by planning carefully and hiring competent, reliable employees and vendors who can prevent many unexpected emergencies through good management and maintenance. Also, technology has improved significantly and can make remote handling of many issues more manageable. You can now receive and review photos and even repair proposals on your smartphone, for example. But owning and managing rental property remains a 24/7, year-round commitment.
Need for emergency capital: One of my favorite sayings and goals in life is “No surprises,” but owning residential rental properties can lead to situations in which unanticipated expenses arise at any time. Tenants might suddenly stop paying rent at the same time the roof leaks and the water heater goes out in the middle of the night! Having a nice nest egg, a rainy-day fund, or at least a decent unsecured credit line at reasonable rates can be very helpful, as most rental property owners experience a squeeze on their cash flow at times.
Potential liability: After more than 40 years in property management, I believe that most tenants are good people who are just looking for a decent, quiet place to call home. But some “professional tenants” look for any mistakes you make or even set traps for you to fall into that can lead to claims for free rent or even litigation. You need to stay on top of all the legal requirements for landlords in your area and make sure that you always comply with all laws and disclosures. If you’re not willing or able to keep up with ever-changing legal requirements and health and safety issues, or if you’re sloppy with your record-keeping, you may learn some expensive lessons!
RENTERS DRIVE RENTAL PROPERTY MANAGEMENT
The U.S. Census Bureau reports that more than one-third of the U.S. population, or 94 million people, are renters occupying more than 43 million rental units, including more than 14 million single-family-home rental properties. The number of renters has increased in the past few years, with the COVID-related economic challenges in most areas of the country. Also, job-market uncertainty has made it more difficult for some people to become homeowners, and the overall percentage of home ownership has fallen from a high of 69 percent in 2006 to 65 percent in early 2021.
Individual property owners dominate the rental housing industry. According to the National Multi Housing Council, per the U.S. Department of Housing and Urban Development and the Census Bureau 2020 survey, individuals own nearly 72 percent of small rental properties with 2 to 4 units and nearly 23 percent of residential income properties with 5 to 49 units. The majority of residential rental properties of all sizes in the United States are owned by single-purpose legal entities, such as limited liability companies (LLCs), limited partnerships (LPs), limited liability partnerships (LLPs), and general partnerships, which often are individuals or a small number of investors pooling their resources. By comparison, one of the most popular ways for individuals to invest in real estate is through real estate investment trusts (REITs), which have exploded in the market with the acquisition of billions of dollars’ worth of high-profile rental real estate assets. In spite of the significant publicity they’ve received in the real estate media, REITs own only 3 percent of all residential rental housing units in the United States.
The good news is that these negatives can be found in many other careers or professions that don’t offer the benefits and satisfaction you can get from property management. So in my opinion, the pros outweigh the cons.
Examining Types of Real Estate
Before you run out to purchase a residential rental property, you need to have a good idea of the different types you can own. Most real estate investors specialize in properties with specific uses. Investment properties fall into classifications such as residential, commercial, industrial, hospitality, and retail.
For the purposes of this book, I focus only on residential real estate because the majority of rental real estate is housing, and the basic concepts are easy to understand and master. (After you master the basic concepts of residential real estate, you may want to consider other types of property management.) The best practices I present throughout this book are applicable to these types of residential rental properties:
Single-family houses and condominiums or townhomes: Most real estate investors start with a rental home, condo, or townhome because these properties are generally the easiest ones to gain experience with. They may be located in a common interest development (CID) or community association in which all the common areas are the association’s responsibility.
Duplexes, triplexes, and fourplexes or subdivided houses: This category includes properties with two to four units. Often, these properties are the first choice for real estate investors who plan to live in one of the units or want to take the next step up from investing in a single-family rental home or condo. These properties qualify for favorable financing terms, so they’re perfect for the new investor or an investor in higher-priced urban markets.
Medium-size multifamily apartment buildings: These buildings usually have between 5 and 30 units; they are best run with part-time to full-time on-site management and regularly scheduled maintenance and contractor visits.
Large multifamily apartment buildings: These properties are larger buildings that can have 30 or more rental units in a single location, or in close proximity on scattered sites, with an on-site manager or maintenance staff. Owning one of these properties is the goal of many real estate investors who look forward to being able to hire a professional property manager and just check their bank account for their regular cash distributions. (In Chapter 3, I reveal what to look for in a good professional property manager.)
No matter what type of residential real estate you’re involved with, you need to understand the basics of property management. You must market or staff a property differently depending on its size and location, but many of the fundamentals are the same regardless.
Over the course of your tenure as a property manager, you’ll probably manage several types of residential properties, which is just one of the challenging yet fulfilling aspects of the job. You may start out managing single-family rental homes or condos, for example, and then see your investments or career progress to larger rental properties. Sometimes, people in the rental housing business start as on-site employees for large rental properties, learn the ropes, and later apply that knowledge to become market dominators of rental houses in their areas.
Owning
