Property Management Kit For Dummies - Robert S. Griswold

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real estate also offers you the opportunity to pay off your mortgage by using your tenants’ money. If you’re prudent in purchasing a well-located property in a stable area, you should have enough income to pay all the operating expenses, utilities, maintenance, taxes, insurance, and debt service. Each month, your property becomes more valuable, while your tenant essentially pays all your expenses, including principal and interest payments on your loan.

      

Your lender and tenant aren’t the only ones who can help you with the purchase of your rental investment property. Even the government is willing to offer money to help your cash flow and encourage more investment in real estate. The government allows rental property owners to take a deduction (or offset to income) for depreciation on their income taxes each year. Depreciation isn’t an actual out-of-pocket cash expense, but an accounting concept that provides you an allowance for expected wear and tear. Depreciation deductions reduce the taxable income from rental properties and give you more cash flow during your ownership. See Chapter 20 for an explanation of how depreciation can defer income taxes until you sell your rental property. The Tax Cuts and Jobs Act (TCJA) of 2017 also provided positive tax advantages for rental property owners, but with a major shift in politics in Washington, D.C., major changes in future tax regulations might wipe out most or all of the gains in the TCJA.

      Over time, you may find that your rental income collections grow faster than your operating expenses. That’s why many economists feel that real estate is a superior investment, because historically, real estate has been a very effective hedge against inflation. With the unprecedented increase in government spending over the past several years due to the pandemic and federal economic stimulus programs, the role of real estate in preserving the value in an inflationary environment is becoming a stronger driver for demand and much higher prices for all types of income-producing real estate. After your tenants finish paying your mortgage for you, you may suddenly find that you have a positive cash flow — in other words, that you’re making a profit.

      Good management equals good financial results. Having tenants who pay on time, stay for several years, and treat the property and their neighbors with respect is the key to profitable landlording. Finding those people is easier said than done, however. One of the greatest deterrents to financial independence through real estate investments is the fear of management and dealing with tenants, which is why management is so important. But what makes a good manager? The next several sections take a closer look at the many aspects of managing your own rental properties.

      Realizing that good management makes a difference

      To get a firm grasp on managing your residential rental property, you need to understand what good management is. Good management entails having a well-maintained rental property that’s occupied by a paying tenant on a long-term lease who treats the property like their own. As with many things in life, managing well is much easier said than done, but by doing your homework and understanding what it takes to be a good manager, you can reduce beginners’ mistakes.

      Who hasn’t heard about or even experienced horror stories about a greedy or downright unpleasant landlord who took advantage of their tenants? The image of rental property owners and managers as being overbearing, stingy, and snoopy has become part of the culture. You’ve probably also heard about tenants who don’t pay their rent, damage the rental property, and harass the neighbors and owner. Virtually all of these horror stories are true, but it isn’t a coincidence or bad luck that they happen to the same landlords again and again.

      

Bad management can bring down a rental property investment — pure and simple. If you choose the wrong tenant or fail to address certain maintenance issues, your real estate investment may turn into a costly nightmare. You can be financially devastated when you have a mortgage to pay and your new tenant gives you a rubber check for the security deposit and first month’s rent. To make matters even more challenging, you may find that your occupant skipped town after trashing your rental unit.

      

Fortunately, you can master good property management skills. Where do you start? Well, aside from this book, I encourage you to look into professional organizations that have qualified staff who can present educational offerings for property owners and managers. Here are three of the best of these organizations:

       Institute of Real Estate Management (IREM), www.irem.org

       National Apartment Association (NAA), www.naahq.org

       National Association of Residential Property Managers (NARPM), www.narpm.org

      Separating your personal style from sound management

      In your own home, you’re in full control of making sure that you have money to pay the debt service on the property, and you take a serious interest in addressing small maintenance problems while they’re still low-cost items. As a homeowner, you also probably have experience in trying to live on a budget.

      

When managing rental property, you must be able to put your personal tastes and style aside in favor of what keeps your tenants happy and your costs reasonable. Because you don’t live in your rental property, you need to make sure that the furnishings and the property’s condition appeal to the broadest number of potential renters, even if you’d rather decorate it like the Palace of Versailles. You also have to be practical, thinking about the long-term implications of your management decisions. You may prefer drapes for window coverings in your own home, for example, but cordless vertical blinds are more practical for a rental property. Although they may not be as luxurious as drapes, vertical blinds are more durable and much easier to clean, and a broken or bent individual slat is easy to replace.

      Managing your time

      For most rental property owners, managing rental units is a part-time job. They handle tenant calls, collect the rent, show the units, and even perform most maintenance in the early evenings or on weekends. Managing your time is an important part of managing your rental properties. It’s about evaluating how much time you have and then looking for ways to streamline tasks so that you make the best use of your available hours.

      

Although rental management can be a part-time job, don’t be fooled: Making a success of it takes a lot of time, patience, and hard work. At first, most people assume that they’re equipped to handle any and all property issues. They may even find they can manage two or three units without problems or time conflicts. They enjoy managing their rental properties and appreciate the savings. As their portfolio grows, however, they have to be even more efficient in handling management activities. The challenge of being a landlord is finding the time required for this second job.

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