Below is a guest post by Anton Ivanov. He is a real estate investor and entrepreneur with a 35 unit rental portfolio spread out across 4 states. He is the founder of DealCheck – the leading real estate analysis software used by 28,000+ investors and agents to quickly analyze and compare investment properties.
A few days ago I was chatting with a new co-worker and the topic of real estate came up (as it tends to in most of my conversations). He told me about the 2 local rental properties he self-manages and asked if I owned any as well.
I explained that my wife and I own 35 units in total, 32 of which are located in other states. We talked for a while and he just couldn’t understand how we manage all of them, especially across thousands of miles.
It’s a question I get a lot.
While I feel that managing our portfolio is rather straightforward, somebody just getting started may see it as daunting or even impossible.
So, I got to thinking about the key principles that help me manage over 30 out of state rental units. Here is what I came up with.
Owning Rental Properties Is a Business
Over the years, I realized that owning rental properties is more similar to running a business and less similar to other investments (like stocks or bonds).
Real estate investing is NOT a hands-off, passive endeavor that some may lead you to believe. It’s not a buy and forget kind of thing. Rental properties are an asset that requires careful management to perform well.
Now, this doesn’t mean that you can’t automate it or structure it in such a way that you don’t spend a significant amount of your own time on it.
But, doing that requires you to understand that being successful in real estate (and running most businesses) relies on two things:
- Having an excellent team
- Establishing processes for operation
You don’t really need a “team” or “processes” to invest in the stock market. But you can’t do without them if you want to own more than a few rentals.
The moment I realized this and started treating my rental portfolio as a business was the moment I was able to expand it much more quickly, while at the same time spending less time and effort managing things myself.
Ok, so how can you actually use this to manage an out of state portfolio of dozens of properties?
Always Hire a Property Manager
It’s tempting to try to self-manage your properties to save on property management costs. I’ve even met a few people who do it quite effectively (on a small scale).
But all of them own just a few units and their properties are located around where they live. I’ve never met somebody who self-manages 10+ units across the country (although I suppose it “might” be possible).
So the first key to managing a large rental portfolio is hiring a good property manager. The amount of work they will do and the headaches they will save you will pale in comparison to their costs (typically 8-10% of collected rents).
Your property manager will be the most important member of your team. Having an excellent team is the first step in running a successful business, remember?
So whether you’re just starting out, or own dozens of properties, you should always have a property manager. Do your research to find a good one in every city you plan to buy in and budget for their costs when doing your cash flow analysis.
Pro Tip: Always look for hidden fees when reviewing property management agreements. All property managers will have their base rate (a percentage of the gross rent), but many will also have tenant placement fees, vacancy fees, lease renewal fees, etc. Read the fine print.
Set Expectations for Each New Property
Hiring a property manager is only half the battle. Next, you need to establish processes to make sure your rental portfolio works like a well-oiled machine.
I like to set expectations and hash out operating procedures with each new property manager I hire and for every new rental property which I buy.
This will ensure you and your property manager are on the same page, and at the same time give them the power to do more without involving you every time – the key to automating your business.
Things you should go over with Your Property Manager
- Target rent. If you did your due diligence and cash flow projections correctly, you should already know the market rent for each property. Discuss this with your property manager and make sure it’s realistic.
- Leasing guidelines. Any good property manager will have some criteria and checks that they perform for every tenant. Make a list of any additional requirements you have. Pets or no pets? What about Section 8? Do you prefer 6-month, 1-year or 2-year leases?
- Move-in incentives. Sometimes you need to offer incentives to get properties rented faster. This may be shorter lease periods or ½ off first month’s rent. Send your property manager a list of incentives you’re comfortable with and at what point you authorize their use.
- Make-ready repairs. I like to be proactive in keeping my units in good, rent-ready condition. To help with this, I usually make a list and budget of pre-authorized repairs and upgrades that my property manager can follow during tenant turnover. This works especially well if you have multi-family properties with similar units.
- Collection & eviction procedures. Most property managers will already have a set process they follow to deal with late payments and evictions. Go over this with them to make sure you don’t want to make any changes.
Pro Tip: Document everything! Instead of sending emails with all of the information above, save it as a PDF and send to your property managers. This will give you something to reference later and help you re-use these templates for other properties.
Be Proactive in Identifying Issues in Out of State Rentals
A good property manager will handle just about all of the work required for day-to-day management of your properties. After all, this is what you’re paying them to do, right?
As the CEO of your real estate business, it’s your job to be proactive in identifying recurring issues, communicating them to your property managers and updating your processes and procedures to fix them.
There are certain things you should be checking on a weekly, monthly or yearly basis to make sure things are running smoothly. Although I advocate these checks, I’m definitely not advocating micromanaging your PMs,
- Status of vacant units. With a large portfolio, vacancies become one of your biggest potential problems. If any of your units are vacant, check in with your property manager weekly to see how the leasing activities are progressing. Is the tenant criteria too restrictive? Do you need to start offering move-in incentives?
- Review your owner’s statements. Every property manager should send you a monthly statement. It will outline all of the income, expenses and maintenance requests from the past month. Don’t just file it away – review it thoroughly and make sure nothing looks amiss.
- Record completed maintenance and repair actions. I like to keep a log of all significant repairs and maintenance requests that were completed each month. This takes just a few minutes but is extremely helpful in identifying recurring issues with your properties. For example, if the drains keep clogging up often, there may be issues with the main sewer line that should be addressed.
- Review year-end cash flow. The whole point of owning rental properties is to make you money, right? Tally up the income and expenses for the year. Now, calculate the yearly and monthly cash flow for each building and unit. It also helps to calculate the cap rate, ROI, cash on cash, and IRR to see how your properties perform in the long-term.
- Conduct a walk-through inspection. If I had a tenant live in the property for the whole year, I like to ask my property manager to do a full walk-through inspection and identify any damages or significant wear and tear that hasn’t been reported. Fixing any issues will help you keep your properties in good condition for years to come.
Pro Tip: Create a folder on your computer for each property and collect all documents in it. This includes any statements, maintenance receipts, tax bills, etc. throughout the year. Keeping yourself organized will help you at tax-time and make it so much easier to manage a large portfolio.
So, treating my rental portfolio as a business allowed me to buy more properties than I originally planned. Not only that, but it also reduced the amount of time I spend on management.
You can start seeing great results if you focus on building your team and empowering them with well-established processes and operating procedures.
If you start doing this even with your first few rental properties, the transition to owning 10, 20 or 50 units will be so smooth, you may not even notice it!