Single-family Property Management Fundamentals: “Hassle-Free” Landlording

Property Management Priorities

Why is it that some landlords will tell you horror stories about their investing endeavors while others spend months at a time on tropical vacations?

Dr. Stephen Covey wrote that an important habit of effective people is to “Begin with the End in Mind.” Countless examples can be had to illustrate just how essential this concept is (Get the LUI Goal Setting Workshop Here); and you will find a few common characteristics in nearly all of them. They are that the goals are clear, concise, and simple and are very limited in number. These same characteristics should also apply to your goals in property management. Everything that you do as a landlord should address your top priorities which are:

1. Preserve the Asset
2. Minimize Vacancy
3. Eliminate “Landlord Headaches”

By designing your property management procedures with clarity, brevity, and simplicity you can achieve your “end in mind” of a profitable investment management strategy that provides residual passive rental income streams.

Hassle-Free? Really?

Hassle-free property management, Ha! If there was ever an oxymoron this was it; or so was my belief. This was my biggest hang-up to getting started with investing in real estate, because I was the typical “I’m too busy” guy. I didn’t have time to deal with all of those middle of the night phone calls about clogged toilets—I was too busy . . . working!

Fortunately, Steve Davis recommended a book to me about putting your business on auto-pilot, and even more fortunately, I read it. In “The E-Myth,” Michael Gerber describes a small business approach that breaks down your supposedly complex company into basic processes.

He asserts that if Ray Kroc of McDonald’s, a guy selling milkshake machines at the time, could turn a hamburger stand into a multi-billion dollar operation, with multi-thousand worldwide locations, largely run by teenagers (as Gerber puts it, the very same ones that you can’t get to take out the trash), then your dinky little house renting enterprise is certainly small potatoes.

Organizationally however, your little business is no different than a giant business like McDonald’s. Both have marketing and sales functions (yours is leasing) and specific roles that go with it (like sales manager), an operations function and accompanying roles, a finance function (accounting), etc (Note that while topics like leasing, records management, insurance, and bookkeeping all fall under the property management umbrella, for the purposes of this article the focus will be on the landlord/tenant relationship).

The difference though is that in your business, every job, like the leasing agent, the handyman, the bookkeeper, the collections/evictions manager, and the receptionist is filled by the same person—you! Could you imagine walking into a restaurant, famous fast-food or otherwise, and seeing the owner trying to do the jobs of the manager, greeter, waiter, cook, bartender, busboy, and dishwasher all alone? It would be ridiculous wouldn’t it?

Then why are you doing that with your business? The most common answer I get when asking that question is one that I have used myself many times; that no one else cares more than me, can do the job cheaper than me, will do it faster than me, or will do the job at the same level of quality than me.

So if you are correct about your importance, then your presence is absolutely essential to your operation. You have to be there, doing the work, or it won’t get done, right? So you have to be the painter, you’ll never be the production supervisor, or the vice president of operations, much less the president of your own company. Think about this in terms of opportunity cost. What is the highest and best use of your time and skills?

Are you more valuable to your venture as the painter or the president? Jack Welch, concluded at least 8 years before he was named CEO of GE, that the best strategy to get a promotion was first and obviously to excel, but second to train his successor. Common instinct would falsely suggest that being “essential” would create job security, but if you really are that necessary then the company can’t afford to promote you. So I’ll ask again, are you more valuable to your business as the painter, or the CEO?

Hopefully you concluded that you must give yourself a promotion. That is what this discussion is about— replacing you in your business’ organizational chart and doing so with systems. Ironically, this simultaneously results in getting you out of the way and better serving your customers. If a several billion dollar operation can be run by kids, then you too can break down your tasks into small parts and create a system for the most routine ones.

Make every possible decision ahead of time, including most possible variances, and everything else is just a matter of execution. For example, what if the tenant doesn’t cut the grass, pay the rent, damages the walls, has a pit bull, etc. It can all be planned for the same way that your favorite burger joint developed a plan for the contingency that you might want mustard on your quarter pound sandwich instead of the secret ingredient (shhh, could it be 1000 Island salad dressing?).

The Secret Sauce!

If there is any secret to effective landlording it is this: the big secret of property management is . . . {drum roll} . . . offer the best product for the best price. If you have followed Lifestyles Unlimited for any length of time, you have heard the best product / best price philosophy many times before, probably rendering it anti-climactic by now.

But keep in mind that by providing your tenant a property where everything works, is in good condition, and is not near the end of its life expectancy, then if something breaks that means the user broke it and should be responsible for its repair. Concurrently, by offering your better house for the same or less money you’ll attract the kinds of tenants who have choices—including the ones with a history of taking care of their obligations like maintaining decent rental, criminal, and credit history.

Remember That Leasing Class . . .

“They have to fix it? But who would want to fix my house?” A common newbie question with by now a hopefully expected answer which is: responsible people who care about their home. When this idea seems foreign to some it is usually because they just can’t figure out how to communicate the maintenance and repair part of the lease agreement without raising a dispute and putting the landlord / tenant relationship in a negative context from the start.

I recommend that you go back and review some of the dialogue from the leasing material for more details (LUI Class, radio show, leasing article I’ll write soon), but you can get the gist of it here.

Some parts of the leasing strategy that my mentors shared with me are dedicated to proactively resolving disagreements before they have a chance to even become disputes. For example, my leasing script includes a leasing incentive ($25 discount on 1st month’s rent) for prospective tenants moving out of a single-family home (vs. an apartment) because they already have experience with proper maintenance procedures, and if they are coming from an apartment the prospective tenant can also get the same incentive by attending a maintenance orientation.

This dialogue accomplishes two goals. The first is that it helps increase the ratio of appointment makers to appointment keepers because everybody likes to get a deal. The second is that it sets up the expectation early on and in a positive light no less about who is responsible for property maintenance and most repairs.

Another pointer from the leasing class is to go out an actually befriend the neighbors. These are people who are worried because a house on their cul-de-sac just became a rental property and they are wondering what kind of ‘riff-raff’ you’ll let move-in. By introducing yourself to them you have the opportunity to let them know about things like your policy regarding criminal background checks, and that they can help choose their own neighbor by making referrals.

If their referral checks out and moves in then a gift card from a nearby restaurant will be their’s. You have just created a leasing partner (mine sometimes even shows the property), and at the same time they are keeping an eye out for the property’s well being, like watching for vandals. The biggest benefit though is that tenants who are already socially connected to people who live on the block have a tendency to stay in the house longer. Lower turnover makes the sun shine just a little brighter.

Ummm, So No Felons?

Tenant screening is the most important part of the property management process. In most places it is also a legal requirement that you have a written policy statement concerning qualification requirements to rent your property. The landlord needs to know about a household with a history of damaging property, or a tendency to omit paying rent from their budget; before they move in.

Earlier I mentioned that a perceived “hassle factor” was the false belief that I held onto that prevented me from getting started. From where do you think that belief originated? Author Robert Shemin says more than 2/3 of landlords do not screen applicants beyond scanning the application and asking some questions.

They do not verify anything, or even obtain a screening report. National Tenant Network, the company that I use for applicant screening reports shared with me that in 2008 rental property owners nationally lost over 12 billion dollars to evictions, skips, and damages.

Can you see why the word on the street is that property management is all about hassles? What is to be expected when you don’t check credibility!? When you are aware of an applicant’s tendencies then you can design your screening policies to meet standards that along with your other operational and collections procedures will significantly limit or eliminate these situations. (You can even turn them into a profit center.)

A screening policy must always comply with Fair Housing laws, and the penalties for not doing so can be severe. You cannot discriminate against protected classes, such as race, color, national origin, religion, sex, familial status, and handicap.

You can however discriminate against non-protected classes, like lawyers and politicians, but you must apply the same standards to every applicant. The question this raises then is “Do I approve the best application or the first one that meets my minimum criteria?” My suggestion is to go back to your property management priorities (listed above) and ask yourself which policy serves your business better. The conclusion that I have reached is to go with the first applicant that meets your minimum standards AND pays the deposit plus the first month’s rent. You might literally end up with applicants in a race to Starbucks to pay you first!

What Minimum Criteria?

Here are some questions about policies that you should consider answering in your written statement of selection criteria:

• -Is all criminal history equal? Is violence the only kind that warrants disqualification or do all felony convictions disqualify? Are misdemeanors treated the same way?
• -Do you require previous rental history? Are 2, 3, or 5 years of rental history long enough? What if the applicants have been living with family and have no landlord reference? What if there is an eviction but it occurred more than 5 years ago?
• -Do you require your tenants to have income? How much income relative to rent is acceptable? How long must the applicant have been in the same job? Does a past judgment for damages to a rental property automatically disqualify or will additional deposit provide enough security?
• -Is credit history important? What about bad history that coincided with a provable medical incident?
• -Do you have pet limitations?
• -Do you have occupancy standards like no more than 3 people to a bedroom?

Whatever your answers to these questions are, write them down, make them available to everyone submitting an application to rent your house and rarely if ever, alter them.

Screening doesn’t stop with the report generated by the background service you use though (you can find several, including NTN who I use by downloading the Lifestyles Unlimited Vendor Directory). After ensuring the data on the report matches the application, start calling the referenced landlords and employers, and call them twice, once in the morning and also in the afternoon to help ensure that they really are as they were represented to be by both the applicant and themselves in the first call. Also match the landlord’s name given on the application with the owner’s name recorded in the county’s appraisal district website to ensure that the person with whom you are speaking really is the prior landlord.

The Foundation of the Landlord/Tenant Relationship

Now that you have a family ready to move in, you have one more preparatory step before consummating the landlord / tenant relationship officially, which is to learn your own lease. It is the foundation of your relationship, establishing boundaries and defining expectations. Think about any disagreement you’ve ever had, even with your spouse and I bet that you’ll discover that it boiled down to either of these scenarios: your expectations of you did not match their expectations of you, or your expectations of them did not match their expectations of them. Surprisingly I consult with landlords regularly who have never even read the lease they use, including some who nullify that lease by breaking it!

My preference for the document to use is the most current one written by your state’s realtor or apartment association, however many of these are copyright protected. If this is the case in your state as it is in Texas, the two suggestions I have are either to work an arrangement out with a realtor (possibly on a flat fee basis) to negotiate your leases for you, or obtain a copy that lease to take to your attorney, letting him know that you want your lease to look and function like the ‘go by’ copy (the attorney I use is Lifestyles Unlimited Vendor, Charles Giesen).

A big advantage to using a standardized lease is that the lease will be very familiar to any judge should your presence be required in eviction court. Another significant benefit is that these associations update their documents following the state’s legislative sessions, so you stay current statutorily. For these two reasons primarily but also to establish an authoritative position at the outset of the relationship, do not negotiate with applicants on any lease term.

But whatever lease agreement you decide to use, the lease that is offered by the Texas Association of Realtor’s for use by their member’s clients includes a clause that I think every lease should contain. If yours doesn’t and your state’s statutes do not prohibit it then write the clause into your lease. It is an Application of Funds clause that states that all monies received from the tenant will be applied to non-rent items first, and then what remains will be applied toward rent.

You should also have financial penalties for non-rent breaches of the lease written into it as well. For example, a home owner’s association levying a fine because the tenant failed to keep the lawn, or they denied access to a repair person after having made arrangements otherwise, you can then invoice it to the tenant. When the rental due date and the usual payment amount arrives, it is actually short, and the shortage is rent since non-rent items were paid first—and your procedure’s for rent collection should now be implemented.

Moving In

The honeymoon is about to start, right? Well it does after the wedding . . . so let’s not get ahead of ourselves since you must sign that lease contract, and trade money for keys first. And don’t forget the rings—you’ll need some other documents and items in addition to the keys and lease. A possession transfer checklist will help and include the following items on it:

• Lease
• Keys
• Property Condition Form
• Camera
• Maintenance Tips Brochure (one of the Lifestyles Unlimited vendors, Old Republic Home Protection has one on their website)
• Rules and Regulations
• Welcome Packet (should include your contact information and office hours, helpful phone numbers, coupons to nearby restaurants, brochure from a renter’s insurance company)

After you greet your new tenants-to-be, begin reviewing the lease with them. Remember that you are not there to negotiate, but to communicate and establish expectations. For this reason emphasize all of the issues that you are concerned might come up later, like the section on maintenance, during the lease review, and if you followed the script I mentioned earlier, preface the section with “As we’ve already discussed . . . ,” and move through.

Once the lease has been reviewed and signed, proceed to the next item on the agenda; the move-in inspection. You should have the tenants complete a move-in property condition form at this time and for every single item they list, photograph it. Del Walmsley taught me this policy in his two-day seminar and it has saved quite a bit of money.

First it gives you a record of the property’s condition upon transfer of possession to compare with your inspection when you get the property back. Any damages to the property beyond normal wear and tear that are not listed on the move-in condition form are then charged to the tenant’s security deposit. Secondly, by photographing every instance of the properties blight no matter how slight they may be, you have strengthened your case if you are ever accused of negligence by providing anything other than a property that is clean, safe, and functional. Additionally, if you opted to offer a maintenance orientation as discussed earlier this inspection is a good time for it.

The First Month

Now it is time for the honeymoon. A week or so after the move-in, send your handyman over to touch up the paint, especially on the corners where furniture may have nicked the walls. Make sure your handyman knows to ‘accidentally’ leave a gallon or so of paint behind so that the resident has a match to help keep the property looking sharp. Additionally this little trip also communicates that property condition is something you care about. This ‘feel good’ visit does have an ulterior motive though. Provide your handyman with a worksheet to fill out with questions regarding items of concern like number of cars, pets, and other important things to verify, and by the way, you are hoping that some violation turns up.

This leads to your first argument and you knew it would come. Whether that first week’s inspection turned up some kind of nastiness like an unauthorized pet or the rent is one day late, you now have a lucky opportunity. You get to settle the issue of the nature of the relationship. There are rules that you are going to follow, and that you expect to be followed. Enforce them no matter what. I don’t want to hear any “buts”, because there aren’t any; with a new tenant this is especially important.

During the Lease

The honeymoon doesn’t have to be over just because you’ve had a spat. Surveys suggest that the number one reason tenants move is because of their landlord’s is a lack of responsiveness. One part of your strategy to prevent frequent turnover is to beat them to the punch by initiating contact—on a positive note. This way if you are required to make contact concerning something unpleasant, they’ll be more likely to take your call or open your mail. An open line of communication will allow for alternatives to eviction.

But I thought I wasn’t going to have to do anything once they moved in! What I’m talking about doing though is creating automatic points of contact, mostly correspondence that any 16 year old kid can do (and does do for me!). Remember that you CAN create prewritten form letters or even a newsletter that just requires a computerized mail merge file, some envelope stuffing and a walk to the mailbox. Again, your 16 year old niece knows how to do this. By the way, she also knows data entry and can do most of your bookkeeping entries, filing, placing ads, answering phones, and any other routine task.

If you go with an every other month schedule (mine is quarterly plus holidays, and is now mostly web-based) for written contact it might look like this:

• January: Happy New Year! Do you resolve to buy your home this year?
• March: Maintenance Tips
• May: Prepare Your Home for Summer Vacation
• July: Survey: What Do You Like Most About Your Home?
• Sept.: Help Us Update Your File; Has Phone Number/Email Changed?
• Nov.: Prepare Your Home for Cold Weather

I encourage you to get creative and add some more ideas to your routine. Remember to try and make some kind of positive contact on a regular basis, because your variable points of contact will usually be negative. Examples include notices of HOA Violations, neighbor complaints, periodic inspection results, breach notices, and sometimes eviction/collection correspondence.

You will also have occasion to make routine on-site contact as well, but again it doesn’t have to be nor should it be you going to the house—it’ll usually be your handyman. Provide the same inspection form that was discussed earlier each time you send someone to the property. I rotate 8 different ‘reasons’ to visit the property, giving me a two year rotation with quarterly visits.

Year 1

Jan. Touch-up paint (I use a color that is a close match to many brands of cigarette smoke residue)
Apr. Spring Cleaning Maid Svc
July Install / Upgrade Ceiling Fan
Oct. Carpet Cleaning (With a good enough portable machine, your handyman can take care of this very cheaply. I bought a Namco Husky which is available at a discount through your Lifestyles HD Supply account)

Year 2

Jan. Safety/Security Check (Inspect smoke alarms, door locks, window locks. Did you know that the Texas Property Code is particular about security devices? (Check it out at Chapter 92, Section 92.153)
Apr. AC Check (A basic coil cleaning and coolant level check will let you know if your tenants are changing the filters properly.)
July Lawn Service (On a hot day in the middle of summer, schedule your guy to take care of the lawn one time.)
Oct. Pest Control (Choose an extermination company that has excellent marketing material and ask them to leave a brochure for your tenant.)

Please take a particular note that each one of these visits is relatively cheap; the most expensive one is about $70, which is less than 8% of your income for the quarter, but will save you far more in turnover reduction and longer equipment life. Additionally, they serve multiple functions: (1) you get a quarterly inspection report on your properties, (2) they add value to your asset, (3) they add value to the tenant’s occupancy, and (4) they extend the life of the mechanical components of the property.

Maintenance, Repairs, and Improvements

Taking care of the property is the single most questioned topic in the many of the real estate classes in which I’ve participated, and I may have confused you a bit by writing earlier that the tenant is responsible for maintenance and turning around and saying that you are going to do some of it too. What I want you to do is under promise and over deliver. The tenant is responsible for nearly all maintenance items, and you should enforce your policies regarding them.

For example, when your inspection reveals that your tenant has a tendency to forget changing the air conditioning filter, then warn them once, charge them the second time because you’ll have to hire a technician to service and inspect the equipment. Unlike an apartment complex where you have staff onsite monitoring the property daily, only the resident is onsite daily. You have turned over a $100,000 asset to someone for $1,000—they should take care of it! Incidentally, if you require your tenants to carry a renter’s insurance policy with a liability clause, you have just insured much of your exposure from their negligent, accidental, and of course intentional damages.

But the only way it is fair to make your tenant responsible for maintenance is to start off with a product that works well and has remaining life expectancy. We are not talking about maintenance concerns here, this is the world of capital improvements and you, the owner, are 100% responsible for all of them. Most of these items though become known to you long before you own the property; when you perform your first walk-thru or as late as your due diligence period through inspections (still before you own the property).

This gives you two options for items that require attention: (1) replace them; or (2) repair them and set aside an escrow for future replacement. If you do not replace an item that has outlived it’s life expectancy then you waived your right to turn maintenance over to the tenant—so if you get irritated when your phone rings then replace everything nearing its life expectancy upfront. Now that you have many years before something wears out, buy some insurance to cover your exposure from damaging or destructive incidents.

Your business model now looks like this: ensure that everything works, screen applicants so that you are placing tenants with a history of treating their obligations seriously, and insure your exposure against contingencies. Can you see how much you have reduced the likelihood of the infamous middle of the night phone call about something ‘just breaking’? (By the way, get a separate mobile phone for your real estate investing business, and turn it off before 5pm and on weekends.) Well if something does break and you get a phone call about it, remind your tenant of the lease provision whereby you share responsibility for most repairs.

Obviously if the condition was cause by the tenants, their guests, or the negligence of either then they pay 100% of the cost to repair; or if the condition was caused by you or your negligence then you pay 100% of the cost to repair. For almost everything else the tenant pays the first $250 of each repair (the co-pay amount in my leases), and you pick up the portion over $250. Then purchase a home warranty plan from Old Republic Home Protection Company, a participant in the Lifestyles Vendor Program, to insure your exposure on those repairs.

While we’re on the subject of home warranties, my plan calls for a $65 trip fee (under $250 so the tenant pays it) that usually the is most that is billed, which gives you another opportunity to over deliver because your tenant could be worried about having to go all the way up to the $250 limit stipulated by the lease.

Retention Strategies and Move-Outs

You have delivered more than expected on numerous occasions and at the same time your property is less expensive and in better condition than the others available. Your efforts to provide such an outstanding product and service to your customers will go further than any other approach to turnover reduction. You even target marketed to neighbor contacts and your advertising mentioned rooms spacious enough for large furniture (people who must move big, heavy stuff, usually don’t want to).

Your operational plan already recognizes that the cheapest source of customers for most businesses, rental real estate included is your past and existing customer database, through renewals and referrals. By keeping a lease expiration schedule and offering a renewal special before your tenant is even thinking about moving out, you can prevent many unnecessary departures. Many of your tenants will begin thinking of housing alternatives about 30-45 days before their lease expires, so make your irresistible offer 45-60 days out. Additionally, set your leases to expire in favorable months by spreading the termination dates throughout the year.

Even so, your tenants will sometimes outgrow their home, move out of town, or just desire a change. When that 30-day notice of intent to vacate arrives, it is time to shift back into your leasing mode and put on your salesman’s hat.

Step one: with properties on notice is very time sensitive because you might still be able to save the move out and achieve a lease renewal. Interview the tenant and try to discover the motive behind the move—unless they’re buying it could be an easy fix especially because moving is miserable.

Step two: during or shortly after the interview offer your move-out instructions document as well as a moving checklist that includes how much moving actually costs, showing deposits for utilities, paying for mover’s or trucks, and lost and broken items among other things.

Step three is to enlist the out-going tenant’s help with showings, since you’ll be marketing the property during the notice period, with the goal of a move in the very same day of their move-out. A speedy return of the security deposit (compared to a 30 day wait) is usually enough of an incentive to get their help with this, which means you’ll be getting the property back as agreed—in the same condition in which you surrendered it in the first place.

When Moving Out Isn’t Voluntary

On occasion however, voluntary move-outs aren’t in the cards and you’ll have to begin your evictions/collections procedures. It is of utmost importance for you to understand that when a tenant doesn’t pay rent, then you must begin your procedures with no delays. Del teaches that there are only two reasons for nonpayment (they can’t pay or they won’t pay) and in either case the responsible course is to begin the process; you can dismiss the eviction proceedings as soon as the tenant makes good on your contract.

In many parts of the country the steps in the procedure are similar, but the timing is definitely different. The time-frames in the steps below are general and based on a Texas eviction, but vary even in the state. The odds are however that you’ll rarely make it to the courthouse before payment in full arrives.

• Day Event Action Step
• 01 Rent is due Check mailbox; take loot to bank
• 02 Rent is late Send a notice that procedures will soon begin; include a list of charities to contact (i.e. Harris County Housing Resource Center); begin marketing property
• 03 Late charges Begin assessing late fees; send Notice to Vacate
• 06 Wait period ends Register eviction petition with court
• 18 Hearing Attend trial; argue case
• 24 Possession date Request forcible removal by a court officer if occupant has not yet vacated property
• 27 Removal date Constable removes occupant; begin make-ready
• 30 Lease property New tenant moves in

Make it So Easy a Teenager Can Do It

Scanning through this document you’ll notice two similarities: (1) that for any of the recommended tasks the skill set required to accomplish the objective is basic; and (2) if you add them all up you might be talking about a 4-5 hour a week commitment. The only tools you would need are a computer, telephone, calculator, pen, paper, envelopes and stamps.

Take each of the routine tasks, break them down into steps. Then consider the likeliest 2 or 3 variable contingencies and write them down in a notebook right after the procedures section and you’ll have an operations manual. Then let the kids run the business, and give yourself a promotion to Head Honcho In Charge, or CEO.