financial reality of Managing Real Estate for Profit

The original article I wrote is on E how in 2009.  Additional editing was done to update the piece.
 published here

Managing real estate for profit is a combination of art and science. An excellent system is needed but there really isn't an auto pilot button for property management.

Managing real estate for profit is a combination of art and science. An excellent system is needed but there really isn't an auto pilot button for property management.

The most important element of managing real estate for profit is to buy property that with the proper financing will generate positive cash flow every month. Positive cash flow means that after paying principal interest, taxes, insurance and any other expenses not paid by the tenants, you have money left over. I set a goal of $200 a month positive cash flow from any property I purchased.

Never buy a property that loses money every month. You need self sustaining property. In the case of a downturn you may have to hold the property longer than expected therefore it has to pay for itself.

You never take money you have from savings or a job to supplement your negative cash flowing property. It can lead to disaster. It has become clear recently there is no guarantee that you will be able to sell your property if you are in a jam or need liquidity.

The best thing you can do as property manager is to make sure you start with your property in excellent condition. It is always easier to do work on property when it is empty and it is always easier to rent when things are fixed and running well. It doesn't always take a lot of money to have the little things finished and it always makes a better impression.

Examples: light switches, outlets and covers, light bulbs, faucets, door locks etc.

Cleaning the unit fastidiously is a sure way to set you head and shoulders above other managers. You would be surprised at how impressive a meticulously cleaned apartment can be because most managers think little about cleaning. There is nothing worse than cleaning someone else's dirt, trust me, I have done it 100s of times. Fresh paint and a clean unit will make a world of difference.

Set yourself up with a tenant screening service that is local or if you want to do it yourself you can get set up online so you can do your own credit and background checks. A Google search will give you plenty of options.

Decide on the rental price. Be sure to check the other rentals that are similar to your property for pricing. You will attract more tenants by being in range with other units in the area even if you think your unit is "better".

Another mistake can be pricing a unit far to low for the area. This can lead to a lot of unwanted calls from people just looking for "cheap" places to stay. Pricing is an important aspect of finding quality tenants and making profits.

When your property is ready you can begin looking for tenants. The first, most useful and inexpensive method is to place a sign in the yard. It is a great way to get tenants because many people driving through already live in the neighborhood or are visiting friends and know the area. You will not have to "sell" them on the neighborhood. Craig list is also free and can work well. Local newspapers cost more but can generate a great deal of traffic.

There are also many other places to advertise for free or at very low cost. Again, Google or MSN Bing will give you some great ideas.

You have to have income standards, rental history standards, and credit standards for prospective tenants but you also have to have flexibility. It is important to be realistic regarding credit history. You can set high standards and want pristine credit in an effort to avoid many of the issues that come with owning property. But also keep in mind that the perfect candidates are usually living in their own home already.

It is true that some people just prefer to rent but the idea is to open up or increase the pool of potential renters without getting terrible candidates in your units. It is a good idea to set a range for credit scoring and past delinquencies but it will often just take some investigative questioning to qualify or disqualify some people. As I mentioned upfront, there is no real button for auto pilot when managing property. It takes a tremendous amount of work but the reward can be well worth your effort.

Now assuming you have found a great tenant and you have already created your standard lease, collected the deposit and rent, you can kick back and relax

. Wrong! Now you have to keep the system moving smoothly by ensuring rent is paid in timely manner and you can pay all your bills in the beginning of the month. You will use the rest of the month to find new property, do repairs, or find more tenants.

Your job is to collect rent for profit. You do this by making sure tenants pay at the beginning of them the month. If tenants pay late you end up spending way to much time chasing down rent or having to evict tenants. The key to having a great business is to make it clear to tenants that paying rent late is not acceptable.

Your schedule depends on timely payments. You are not a baby sitter or the tax man. Tenants need to understand when the rent is due. The also need to understand it is their responsibility to pay by the due date. Certain tenants will pay on the first every month but others like to test the waters and see how much rope you will give them. You have to be very direct with tenants if they try to pay rent late the first or 2nd month of the lease. The best way to show them you are serious about getting rent on time is give them their eviction notice or pay or quit notice on the 2nd of the month. It most cases they will get the message and you will get the rent from that month and a tenant that knows if the rent is late they may end up with a 5 day pay or quit notice.

The best way I have found to promote timely payments is to set up a bill pay invoicing system on Quick books. I would send statements each month to my tenants about the 3rd week of the month that stated the rental amount due and the date it was due. I also always included a self addressed envelope that was to be used to mail the rent to me in check or money order by the 1st of the month. This was done to make it easier on the tenants, simplify bill payment for them and it made it easier on me because I could easily spot my rent payments in the bundles of junk mail and bills I received.

I am sure it cut down on late rent tremendously although I have no data or statistics to support that assertion. I just know from experience when I didn't do this I was always fielding calls or making calls regarding rent that wasn't paid. I always heard the "I couldn't' remember your address" excuse when I didn't send the statements.

Place your rents in your account and use your accounting software to write your checks and pay bills with your cash flow. Use the software from day one even if you have just one property. You will be much happier come tax time if you have record of rents received, mortgage interest paid, and list all expenses.

Your goal can be to create a system that is repeatable and then just go out and do it again and again.