While real estate can be totally passive, it is really more like running a business than like investing in something such as stocks and 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.
Sure, you can automate a lot of it so you are not spending a significant amount of time on it. But, doing that requires you to understand that running a real estate business requires you to
- Have an excellent team
- Establish 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.
Always Use a Property Manager
You might be able to manage all the properties yourself, but for maximum efficiency it’s important to use a property manager.
If you do want to go it alone, it’s important to get good property management software to help you keep track of work orders, rent payments, expenses, etc.
Either way, the first key to managing a rental portfolio is systemizing property management. The property manager will do far more work than the 8-10% of rent is really worth.
Your property manager truly is 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.
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.
It’s important to set expectations and work out standard operating procedures with each new property manager you hire and for every new rental property.
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.
Be Proactive With Identifying Issues
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. Remember, running a real estate business is no different than running a store, an online business, a warehouse, or anything else.
There are certain things you should be checking on a weekly, monthly or yearly basis to make sure things are running smoothly.
- 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. 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. Do you really want someone living there for a whole year and you never inspect it? Ask the 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.
So, treating your rental portfolio as a business will allow you to buy more properties than you might originally have planned. Not only that, but it also reduces the amount of time you’ll 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!