Managing your own rental properties can be a challenging venture requiring patience and the right expectations. Knowing which pitfalls to avoid can minimise headaches and maximize your profit. Here are two lists of Do’s and Don’ts of rental management which may be of use to you before and after renting your property.
Before renting your property
1. Determining “fair market rent”
What determines the rent you should charge for your properties? The obvious answer is “your competition.” What are comparable properties renting for in your area? You’ll have to make a neighbourhood survey to find out.
Don’t compare apples with oranges.
Check the location, environment, neighbourhood, condition of the property, size, and amenities of similar properties. A brand new building with new furniture may demand a higher rent than your old property.
2. Furnished or unfurnished
Furnished apartments and houses can demand for more rent. If your property is located in an area where furnished units are highly sought, do furnish yours to meet the minimum requirements.
Don’t overdo it.
Be cautious so that you do not over-improve your property as improvements cut into your ROI.
3. Qualifying tenants
As part of your tenant qualification procedure, you should have an interview with prospective tenant and at least obtain the following information:
1. Name and present address;
2. Age and marital status;
3. Present/previous landlord’s contact number;
4. Occupation and employer’s contact number.
Be certain that none of your qualifying can be interpreted as discriminatory as far as race, colour, or religion. It is against the law. You can, however, restrict your tenants to mature adults, no children or pets, retired age people, etc.
4. Do you want to manage?
If you are retired, you may have nothing but time and ownership of a real estate investment is just what you need to keep yourself active, both mentally and physically.
Don’t force yourself to manage.
If you are working full time, you may have no time to manage your rental property.
Or perhaps you have the time but cannot stand the thought of talking with your tenants or helping them with the problems they may have in the apartments, store, or office that they are leasing from you. You should then engage a manager or a property management company to manage for you.
After renting your property
1. Increase in rent
If you fail to increase your rents to at least keep up with inflation, you will find that your real estate investment will cease to appreciate and selling your property at what should be the fair market price will be difficult.
Do not let yourself fall into this trap.
When market conditions permit, keep your rents up with the current comparable area rents. A reasonable increase in rent is expected by most tenants. Don’t impose an unreasonable increase in rent.
Unless the increase is unreasonably large, most tenants would rather pay the increase than face the trouble of moving to somewhere that may or may not end up less expensive.
2. Keep the economy in mind
When considering rental increase, you need to keep the overall economy in mind. This includes the cost of food, appliances, professional services, transport and housing. This means that rents must go up to cover added property operating expenses created by inflation.
Do not be shy to tell your tenants.
Most of the time they will understand the reason of the “economic” increase which landlords have no control such as tax increases, higher maintenance or management cost and higher interest rate.
3. Keep your property in top condition
You will want to be assured of higher occupancy and top rents. This requires keeping your property in first class condition.
Do not just take without giving back.
We have seen properties where the investor became greedy and took as much out of the property as he could without putting anything back into it. It wasn’t long before his vacancy level started to increase and, as an indirect effect, he had to lower rents to obtain tenants.
Once a property gets a bad reputation, it will be a long and costly process of bringing it back up to standard.
4. If you are engaging a manager
You can ask among your real estate agents and easily find one who is currently doing such “part-time” job. Or you can pick someone among your tenants/friends/relatives with the following characteristics:
1. He/she should live in or near your property and can take care of all the day-to-day problems that arise.
2. He/she has the time to watch after your property. Pick someone that you know spends a lot of time at home.
3. He is, or you feel he will be, conscientious.
4. He must be at least resourceful, if not handy. This is an important point. If he does not know how to repair that leaking faucet or replace that broken electrical socket, at least he must know who can help him. If he is a handyman, he will be worth more than what you have to pay him.
5. He should get along with your other tenants.
Don’t choose someone who is busy or has no motivation to manage your property.
Your best bet is a retirement-age individual (or couple) who is usually there. He probably has had years of experience in handling people and doing minor repair work.
Don’t be “cheap.”
A good manager will be worth everything you pay him and more.
5. If you are engaging a management company
You should give the management company some guidelines as to what expenditures they are allowed to make without your prior approval. Don’t pay them a fee based on what the property should produce in income or it would not matter to them if they rented the unit or not.
Basing their income on the rents that they actually collect also gives them the incentive to keep the unit leased at the highest possible rent.
Don’t base their fee on the income after operating expenses have been taken out.
The management company may then be unwilling to properly maintain the property because any reduction in net operating income (the income left after all operating expenses but before mortgage payments) would also reduce their fee.
6. Relationship with your tenants
Compassion for your tenants is important. No one wants a landlord who reminds them of the old time rent-collecting villains. Always listen to their requests and try to accommodate them as far as you can.
Don’t become too friendly with tenants.
Keep an “arm’s length” relationship with your tenants. When the market demands it (surely operating expenses will), get a rent increase when the lease comes up for renewal. Likewise, if their demand is unreasonable or unjustifiable, be firm to say no.
7. Collecting of rents
Request tenants to automatically deposit their rents into your bank account each month. This makes the rent collecting job an automatic operation. To protect yourself against those tenants who are habitually late in paying their rent, consider writing a “late penalty” clause in your lease.
8. Paying bills and mortgage payment
This task can be made automatic also by applying a standing instruction to bank so that the monthly payments will be deducted from your bank account automatically.
9. Keeping records
Keep an accurate accounting of all income and expenses. The Inland Revenue Authority (HASIL) will expect it. It can be done by keeping income and expense ledgers in spreadsheet on a monthly basis. This will facilitate you to prepare a profit and loss statement by end of each year.
This article is contributed by me and Dr. Ong Kian Leong, both the co-founders of the first ever online property investment course for Malaysians, called Property Method. Dr. Ong Kian Leong (commonly addressed as Dr. OngKL), is the creator of GoFinanceTM, a tool that allows investors to accurately evaluate if an investment is worth investing as well as worth financing for maximum return. Claimed by himself as a student in the life-long learning journey, he is also the master trainer of Property Method and the blogger behind www.REIJB.com (Real Estate Investment Blog).