Savvy Landlord: Investor's Survival Guide

Veteran real estate investors provide tips for avoiding property management pitfalls.

March 1, 2004

There’s no question that owning residential investment property is rife with daily challenges—from things as mundane as clogged plumbing to having criminals as tenants.

But savvy real estate professionals who are long-time investors know that the occasional challenges of being a landlord is well worth the trade-off of having a stable investment. Many say they have learned to manage the most frequent problems, such as anxiety, vacancies, bad tenants, and emergencies. They offer their hard-earned knowledge on how to avoid the most common pitfalls of being a landlord.

Psychological Anguish

Although gnawing questions—Will tenants pay their rent this month? How long will the vacancy last? Are tenants’ jobs secure?—plague all investors, eventually the psychological anxiety diminishes and investors learn to roll with it.

“You never get over it because it’s part of being a landlord,” says Danial Griggs, a salesperson with Metro Brokers, Manes and Associates in Littleton, Colo., who has been investing for the past five years and owns five rental properties. “But over the years, there’s a toughening of the skin.”

Jeff Rosenblatt, who owns single-family rentals in Tampa, Fla., and is broker-owner of Floridian Realty Inc. in Plant City, Fla., adds, “When everything is rented, it’s a great business, but it is a business and you’re going to have good and bad years.”

Empty Rentals

Every landlord also frets about market slumps and vacancies. “There are times when you’ll face economic setbacks,” says Doug Richards, CCIM, CRS, a salesperson with Coldwell Banker Commercial NRT in Salt Lake City, Utah, who teaches “Creating Wealth Through Real Estate Investments” through the Council of Residential Specialists, as well as his own one-day seminar on real estate investing. He suggests asking, “What’s the worst-case scenario? Can you hang on to your property at a reduced rent?”

Ideally, you should have emergency funds to cover each property’s monthly expenses. How much you put aside depends on your financial situation, risk tolerance, and market conditions. Most say they’re comfortable having three- to six-months’ expenses on hand.

Although landlords have offered free parking, electronic gadgets, and health club memberships to woo tenants, rent concessions speak the loudest.

When one of Rosenblatt’s properties recently sat empty, he negotiated a $100 monthly rent reduction if the tenant would commit to a two-year lease. Rosenblatt considered it a good deal: He eliminated the financial drain of losing additional rent and extracted a longer-term commitment, which eliminated re-renting costs for two years.

Diversified Portfolio

Owning multiple properties also minimizes financial woes when there are vacancies. Some units rent at a profit, some break even, and others rent below monthly costs. Those turning profits tend to offset those that drag down the portfolio.

Because he has multiple homes renting profitably, Sinu Pohar, ABR, e-PRO®, a salesperson with Coldwell Banker Residential in Irving, Texas, says, “Even if I have two vacancies, I won’t be stuck in a cash-flow crunch. I just may not make as much money in a given year.”

Mary Reilly’s strategy of investing only in single-family vacation homes in Kissimmee, Fla., boosts the potential for profit and eliminates headaches associated with long-term renters.

Reilly, a salesperson with RE/MAX Superior Properties in Huntley, Ill., has three homes within 10 minutes of Walt Disney World®, and the location supplies a steady flow of tourists. She only needs to book about 28 weeks per year to break even.

Bad Tenants

Tenants who were chronic whiners, party animals, or drug dealers all have been part of investors’ experiences. Most say they’ve developed a sixth sense and listen to their gut when screening tenants.

For instance, Steve Goddard, CRS, SRES, broker-manager of RE/MAX Beach Cities Realty in Manhattan Beach, Calif., is wary of prospects who start complaining—“Can you fix this? Paint that? Change this?”—even before signing a lease. Possible responses to irksome requests include, “The apartment is being rented as is” or “Those changes can be made for an extra $500 per month.”

Richards suggests creating a set of qualifying guidelines—minimum income, minimum years of employment, and so forth—to weed out dicey prospects.

But be sure you apply the same qualifying criteria and offer the same concessions to every prospective tenant so you don’t violate fair housing laws.

Although a credit check is a valuable screening tool, a poor credit history isn’t always an indicator of a poor tenant, nor is pristine credit a guarantee of a good one. Griggs will overlook bankruptcies and foreclosures if a tenant has a history of paying rent on time.

Fred Schneider, GRI, owner of 1031 FRS Inc. in Montrose, Colo., agrees. “Some of my tenants went through bankruptcy, disclosed it up front, and provided a letter of explanation. They turned out to be my best tenants, and I eventually sold them houses.”

But emphasize that rent is expected on time and outline a penalty schedule in the lease for late payments.

If prospects unnerve you, delve deeply into their history. Perform thorough screenings of credit history, call previous landlords, verify employment and income, and even run criminal background checks.

System Breakdowns

Plumbing disasters are one of the most frequent emergencies landlords face. Water heaters and furnaces are close seconds, according to long-term investors. One morning last winter, Merilynn Foss, GRI, CRS,cleared her schedule to traipse out to a rental property on a sub-zero day in Missoula, Mont., to get a frozen pipe fixed. “Such problems just go with the territory of owning rental property,” says Foss, a property manager and broker with Coldwell Banker Steinbrenner Real Estate Inc. in Missoula.

It’s important not to be stingy with inspections and repairs because they can often avert emergencies. Griggs calls it pre-emptive maintenance and routinely checks toilets, sinks, and other systems and replaces items before they wear out or break. For some, doing inspections monthly or every 60 days isn’t excessive.

How to Avoid Common Investment Pitfalls

You can make property investing less stressful and less draining, both emotionally and financially, by keeping properties well-maintained, carefully selecting tenants, and being a skillful marketer. Here are some other survival tips offered by veteran real estate investors to have your investments pay off with a minimum of pitfalls.

Physical Condition:

  • Keep properties in top shape. As Goddard points out, a clean property that is well painted and smells fresh will rent more quickly and at a higher rate than its competitors. It also sends a message to tenants that you’re concerned about the property, and they’ll be more likely to take good care of it.
  • Establish an inspection schedule. It’s a way to ensure tenants are caring for a unit and using it as agreed upon in the lease. It’s also a chance to make certain smoke detectors and other systems are working. Tenants also tend to keep things in good shape when they know the landlord will be appearing regularly. Although some landlords like to visit their tenants on monthly or bimonthly basis, many believe that quarterly or semiannual visits are a reasonable frequency.
  • Install high-quality, durable building materials. This will extend the life of properties and reduce maintenance. Bob Turner, ABR, broker/owner of Southern Properties in Cordova, Tenn., opts for commercial-grade carpet and tile vs. vinyl flooring.
  • Use the same paint color in all rentals. It makes touch-ups easy, paint can be bought in bulk at a discount, and you don’t have to track what color is in what unit.
  • Build relationships with repair people and service providers. When you have an established relationship with these valuable people, they’ll make you a priority in an emergency. “I have a list of preferred vendors,” says Richards. “They jump when I need repairs because I pay them quickly and give them a significant amount of business.”
  • Consider hiring a free-lance maintenance person or a property management firm to manage, lease, and maintain rentals. Jim Beattie, broker of Tamarack Realty in South Lake Tahoe, Calif., recommends qualifying them as you would any professional service. He manages his own investment properties, owned a property management company, and currently consults, through Investment Property Consultants, with property owners. Interview several managers and check their experience and references. Present some hypothetical situations and ask how they’d manage problems particular to your properties. Also ask for three addresses they manage; drive by to see how they’re maintained.

Tenant Selection, Retention, and Relations:

  • Look for forthright, considerate people. According to Schneider, parents who discipline their kids in a loving way, rather than yelling at them; those who remove their shoes at the door; and those who offer many references and invite you to their present rental are all subtle signs that they’re decent prospects.
  • Build good tenant relations. Turner delivers holiday fruit baskets, offers tenants referral fees ($50-$100) when they bring new tenants and mails tip sheets on how to reduce air conditioning bills in the summer. He also conducts annual surveys to measure how he’s doing as a landlord and what needs improvement. Goddard calls tenants every 90 days. “I want them to feel warm toward me and know I’m available,” he says. Many of his tenants have turned into buyers.
  • Be flexible when tenants face personal problems and have challenges paying the rent. Consider accepting half the rent on the first of the month and the other half on the 15th for a tenant dealing with a temporary financial crisis. According to Griggs, making compromises is better than absorbing the pain associated with costly and time-consuming evictions and property re-leasing.

Promote Vacancies:

  • Tell everyone you know about your vacancies. One Chicago landlord casually mentioned her empty apartment to elderly neighbors who spent hours sitting on their front porch and talking with passersby. They put her in touch with two tenants who were looking for an apartment.
  • Advertise at nontraditional places, such as the local humane society if you accept pets. Target newcomers through foreign consulates, university housing offices, and hospitals. A lot of Beattie’s tenants are seasonal casino workers, so he promotes his properties through casinos. To ensure that you don’t violate fair housing rules, you shouldn’t target advertising to populations on the basis of race, color, religion, national origin, gender, familial status, and disability. The language in your ads shouldn’t express a preference for or against any protected class. Describe the property, not prospective tenants.
  • Advertise online. Sites like REALTOR.com and www.apartments.com reach potential tenants well beyond the local market and may snag relocaters.
  • Promote rent-to-own deals, if you’re willing to sell a unit. Such promos generate more calls and showings.

Despite the challenges associated with property ownership, most investors say it’s one of the best long-term investment vehicles for real estate professional because they have the advantage of knowing markets intimately and are well positioned to pick rental properties wisely.

And although not all investors agree with him, Goddard has found that once you amass several years of experience in buying and managing income property, much of the angst associated with investing diminishes. “I actually didn’t like the stress of being in the stock market,” he says. “What I’d recommend to any real estate professional is start buying property when you have the opportunity. It can help you build wealth, get income, and shelter your money. I’m of the philosophy of ‘put all your eggs in one basket and sit on it.’”

Additional Resources

Council of Residential Specialists
Offers the course “Creating Wealth Through Real Estate Investments,” among others.

Institute of Real Estate Management
Offers numerous courses about successfully managing investment real estate.

MRLANDLORD.COM
Provides a forum for landlords to talk to and educate each other, and also features tool kits, forms, tips, and news.

National Association of Independent Landlords
A source for credit reports, employment verification, electronic rent collection, and other management tools.

National Association of Residential Property Managers
Geared to managers of single-family and small residential properties, the site offers education, designations, networking opportunities, trade shows, and news.

Elyse Umlauf-Garneau is a Chicago-based freelance writer and former senior editor with REALTOR® Magazine.

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