Archive for February, 2012

RENTAL PROPERTY MANAGEMENT – SYSTEMS FOR THE PROS

SYSTEMS FOR THE PROFESSIONAL PROPERTY MANAGER

 Any business, in order to operate and deliver its products or services, must have systems and processes.  In this chapter, I will be sharing with you many of the systems and processes we implemented to manage the 320+ properties we were responsible for.  The process is like any other . . . it is never finished.  There is always something that, while it works better since you changed it, is still not working as smoothly as you would like.  What I am sharing with you is basically a snapshot of where we are in this ongoing process.

Filing

 Every organization has to do filing.  It is simply a way to put important documents and information away in such a manner as to be able to find it again with you need it . . . and that is the acid test!  You may have an awesome filing system that you have implemented but if you can’t find what you need when you need it, you have to ask yourself: is this really working for me?

The starting place for us in dealing with our properties was to assign a property number to each property.  This number is used in paying invoices; in setting up our property management software and . . . you guessed it . . . in setting up our filing system.    We start out arranging all of the properties in alphabetical order, by their street name and then begin assigning property numbers to them.  Under this convention all of your properties on numbered streets would come before your named streets in the order of your streets: 6th street, 10th street and 27th street, then Apple Street, Boston Street then Orange Street.  If you have more than one property on the same street; the ones with the lowest house number would come before those with the higher ones.  As you are designing your property numbering system, one thing to think about is to allow enough unassigned property numbers between the assigned ones to allow for some growth.  We only re-assigned property numbers once in the five years that we owned the company.  This was mainly due to the fact that we more than doubled our number of properties during that time.  As you can imagine, because we had outgrown our numbering system, we had a lot of property numbers with decimal numbers so that we could fit them between two consecutive whole numbers:  #110, #110.2, #110.5 & #111.

Here is an example of a numbering convention which works:

Property #               Property Address

1

623 E. 6th Street

2

Unassigned

3

Unassigned

4

842 So. 18th Ave

5

622 West 120th E. Ave

6

Unassigned

7

Unassigned

8

123 Apple Street

9

129 Apple Street

10

Unassigned

11

Unassigned

12

855 So. Boston Street

13

Unassigned

14

Unassigned

15

27 Highland Ave.

OK, now that we have figured out how to number our properties we are ready to set our filing system.  We recommend that you use a three folder system for each property.  One is a colored folder; red, blue, green or even electric colors are available at your local office supply store.  The other folder is a plain-Jane manila folder.  The two folders rest in the third folder, which is a hanging folder.  All three folders have the property number and address on it.

The Colored Folder – The colored folder is for all of the legal documents relating to the property, or you could also think of it as housing all of the long-term documents.  On the left side as you open the folder, we keep all of the documents relating to managing the property; Management Agreement; property set-up sheets; Owner information, and copies of any letters to or from the Owner of the property, etc.  On the right side of the folder, keep all of the information relating to the current Lease.  On this side you will keep the Lease itself, the rental application, any Change of Terms, any Three Day Notices or written correspondence with the Tenant or notes of communication with the Tenant.

The Manila Folder – This folder is for all of the day-to-day stuff that goes on with the property.  On the left side, you will keep all of the HOA documentation; newsletters, notices, etc.  On the right side is where you will keep all of the paid invoices for anything on the property: mortgage statements; HOA statements; and paid contractor statements, as well as the work orders for that work.

Another thing that we put in the manila folder is the Lease.  I know, I just said that you will keep that in the colored folder . . . whassup with that.  If you re-lease the property during the year, we put the new Lease in the colored file and move the outdated Lease into the manila folder.  This way, you will still have access to this information without having to go to your archives.

As I have mentioned before, I tend to be an efficiency-driven sort of person.  When I first saw this filing setup, I pushed hard for going to the multi-tabbed, all in one folders.  The reason that doesn’t work as well for this system is that at the end of the year you will want to purge your files and essentially the entire manila folder will go into to your non-active file storage.  This becomes a very efficient process when all you have to do is remove the manila file, mark it with a colored tab with the year it was for and make a new manila folder to replace it.  Also, if you don’t purge your files each year, they would become so fat and cumbersome that you literally would have to rent a larger space to house all of your files!

Archiving – If you are going to keep physical copies of your old files, you will need to maintain a storage facility where you keep all of your file archives.  Typically this is for files on properties that you no longer manage, or for files on properties that you do manage, but the files are so old that the likelihood of needing to access them is minimal.  A good rule of thumb is that you maintain records for 10 years and then have them shredded.

Depending on how long we have been managing a particular property, we would generally keep all of the past year’s files for that property in storage in our office.  Now, if you have been managing a property for 15 years, that doesn’t make sense; information that is 3 – 5 years old is only going to need to be accessed once at the most, during a given year, so it really doesn’t make sense to use your valuable file/office space for that and it goes to storage.  At any rate, this three folder system is working well for us.

Physical Hard Copy Filing vs. Electronic

With all of your current year files and three–five year archives, your filing will require a lot of space.  That is valuable and expensive office space.  If you can eliminate several file cabinets then you could add more work stations and not have to rent larger space in order to hire new people as you grow!

I recommend that you start out scanning all of your documents that you would normally file . . . as they occur!  This will start to build your filing system and when it is time to purge your physical files and move them to another cabinet you can skip that step and move them to archive.  You will have the electronic files on your computers (don’t forget to have an off-site backup!)

 

We hope this posting has been helpful for you.

Thank you for reading!

Pat and Kris

 

For a virtual goldmine of  resources for time and money saving systems and secrets of the pros, visit our website at www.ManageToMakeMoney.com

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PROPERTY MANAGEMENT – PAYMENTS – SECURITY DEPOSITS – SOFTWARE

Payments From Owners

 There are many instances when you will have to have your Owners infuse their account with funds.  This situation occurs for a number of reasons: the property has a monthly negative cash flow; you have just had to do some major repair (replacing the furnace or air conditioner); a major remodel after a long-term Tenant vacated, or something as simple but expensive as paying property taxes.

Buffer amounts

First of all, let me say that we strongly recommend that you maintain a buffer amount (minimum $500.00) in each of your Owners’ accounts.  This will give you the flexibility to take care of small repairs without having to have your Owner send you a check, and depending how much of a positive cash flow the property may have, you can replenish the buffer fairly easily for that.

Infusions

Holding on to the idea that Owners (as is the case with all of us) do not like surprises about money . . . unless we have won the lottery!  Now, emergencies happen and usually, they are difficult if not impossible to anticipate.  But I am speaking here about the expenses that the Owner is going to have on his property that we can anticipate: long-term Tenant moving out, real estate taxes (they’re always due on the same date – year after year) or a special assessment from the HOA.  When we can anticipate these expenses we need to be proactive in estimating how much they will be and when our Owners will need to send funds.  This will accomplish a couple of things:

1.) It gives your Owner a warm fuzzy feeling to know that you are watching his back and keeping him from having unpleasant surprises and 2.) It gives you the funds from which to pay the expenses.  Otherwise you could find yourself in the unenviable position of having done $10,000 worth of work on an Owner’s property and when you call him to get the funds you learn he is in Zimbabwe for 2 months . . . or worse yet, he thought that the expenses were going to be less and he doesn’t want to pay the $10,000 and now wants to negotiate the amount with you . . . YIKES!

Dunning Letters and E-Mails to Owners for Funds

 We have had very good luck with sending e-mails out (to our Owners that do e-mail) when we need funds.  You may think this is very elementary but before you tell your Owner that you need more funds, be sure to do your homework.  What do I mean by that?  You don’t want to send your Owner an e-mail telling him that you need $1,500.00 to pay for the new water heater if his property is running $100.00 negative cash flow each month and he has no reserve buffer left.  If you don’t say something about the negative cash flow and the status of his account, you will just be asking for more money again next month.  This makes the Owner feel like you are not on top of your game (which you aren’t) and causes both of you more work in the long run.

Again, be proactive with your Owners and anticipate what their cash position looks like.  Act like it is your money and how you would want to be treated.  If I had the above scenario, I would tell the Owner that I needed $1,500.00 for the water heater (as we discussed previously) and the negative cash flow on the property has run through his reserves.  We would like an additional $500.00 to replenish his reserve account and $600.00 to cover the next six months of negative cash flow at $100.00 per month.

Maintaining Security Deposit Liability Integrity:

 When a Tenant pays you a security deposit on a property, that is a liability that you will maintain in the Owner’s account.  The purpose of the security deposit is so that you have funds (security) in the event the Tenant fails to pay the rent or leaves the property damaged when he or she moves out.

When there is a cash need for repairs or whatever else on an Owner’s property, there is the temptation of the Owner to see that cash in their account and want to use it to pay those expenses.  If you allow them to use it, this is a very, very slippery slope to allow yourself to step onto.  For a couple of reasons: 1.) unless you document it well and in writing, after a few years, our memories fail us and our Owners are no different, they will typically not remember using that security deposit to pay operating expenses from and 2.) as property managers we are required by law to notify the Tenants that we are no longer holding their security deposit; that the Owner is, and give them the Owner’s contact information.

Now we, as property managers, are the Owner’s agent and the security deposit does belong to the Owner, we are just holding it for them.  If the Owner insists on using this money, we recommend that you go about this in the following way:

  1.  Write a check to the Owner for the full amount of the security deposit and mail it to him with a letter explaining the transaction and a copy of the letter you are sending the Tenant.
  2. At the same time send a letter to your Tenants advising them who is now holding their security deposit.

It is important that you not go back and forth with this transaction; giving the deposit to the Owner, putting it back in the account, back to the Owner, etc.  First of all, this will breed a lot of insecurity and concern on the part of your Tenant and secondly, it is a lot of work and liability for you!  If you are going to do this, we advise that you tell your Owner (put it in your management agreement if you want) that you will make one transfer of the security deposit and that is it.  Something to think about, given enough time and aggravation it won’t be long before your State’s Department of Real Estate will be conducting an audit of your trust account.  That could be right up there on the fun scale along with root canals and IRS audits!

Software

 There are a lot of very good fully integrated property management software programs on the market today.  When I say fully integrated, I use the term loosely as these various programs are integrated to varying degrees.  In general terms, there are programs on the market now that will take care of the accounting for your Owners; interface with your word processor so you can write letters to Owners or Tenants and it will file them with the property; and will keep a rent log for single or multiple properties.

This is the teaser. We will be discussing software programs and their pros and cons in the next chapter.

 

I hope you enjoyed our various topics today.  Next we will start some discussion on “systems” used by property managers . . . don’t miss out!

If this information has been helpful to you, visit our website for more resources to help you profitably manage your rental properties!

Thanks for reading!

Pat & Kris Larkin

 

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MANAGING PROPERTY FOR OTHERS – DELIVERING STATEMENTS AND PAYMENTS TO OWNERS

Delivery of Statements – Mail Hard Copy vs. e-mail

 When our company started all of these processes and procedures . . . it seems bizzare to say it but . . . there was no internet or e-mail.  All of the monthly statements along with all of the backup copies of invoices were packaged, posted and mailed out to each of our Owners.  With the advent of e-mail and good quality scanners, we were able to move toward e-mailing our monthly statements to our Owners.  The only thing that held us back was our Owners; many of whom were a bit technologically challenged and “didn’t do e-mail”.

As we moved forward though, we pushed to make the change.  I am a big believer in processes and the more processes you have for the same outcome, the less efficient you are.  I know that the time is quickly approaching when this will no longer be an issue and electronic delivery will be the standard for all property owners.

If you are just starting a property management firm, this is an awesome opportunity for you.  You can start from the beginning sending your statements out electronically . . . and not be faced with converting to the new technology that will undoubtedly be here all too soon!

 

Payments to Owners

 Assuming that our Owners’ property had a positive cash flow, we paid a disbursement out to each of our Owners at the time we issued the statements.  Our software had a default setting that basically told it to send the Owner any remaining cash in the account after all expenses have been paid.  This is not always a good thing; if you have a system like this, you want to be diligent to keep an eye on future anticipated expenses.  Let me tell you it is not fun to have sent an Owner a bundle of money one month, then the next month you are trying to pay his real estate taxes and you don’t have enough money in the account.  You then have the opportunity to ask the Owner to send the money back to you.  This is not good for your credibility!  We could also go into our system and set a cash minimum that we wanted to maintain in all of our accounts and it would automatically send the Owner anything in excess of that amount.  It is all a matter of how you want to set it up.

Like mailing out hard copies of statements and technology marching on, making payments to our Owners has also undergone some changes.  In the early days, we sent out live checks each month to our Owners.  Now, with the advent of ACH or; Automated Clearing House, we can electronically transfer funds from our trust account to our Owners’ bank accounts, minimizing live checks, mail problems, etc.  Again, we still had those Owners (probably the same ones that “don’t do e-mail”) “who don’t do electronic deposits”.  We continued to work with them knowing that “someday . . . this too shall pass!”

 

Our hope and prayer is that this information has been helpful and sparked some thought processes for you.  To discover more resources for managing rental properties for yourself or others, visit our website and check out our Books, Documents, Forms, Checklists, Videos  . . .  available in hard or immediately downloadable versions.

Thank you for reading!

Pat and Kris Larkin

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MANAGING RENTAL PROPERTIES FOR OTHERS – Statements and Payments to Owners

Monthly Statements

 One of the purposes of property management we was to provide accurate accounting for our Owners, and part of that is to provide them with monthly statements.  As we mentioned previously, a property management firm must set up and maintain a “Fiduciary Trust” bank account for all of the monies for the properties it manages to flow through.  In our company, we had the rent revenues as well as mortgage, HOA dues, maintenance and a multitude of other expense payments for over 320 properties flowing through this account.  Keeping it all straight is paramount!

Regardless whether you manage one property for an Owner or five, you will need to provide all of your Owners with a monthly statement.  This statement spells out all of the income, expenses, disbursements to or from the Owner, operating profit or loss, and the beginning and ending cash position for each individual property for each month.  You will send out each statement, along with copies of all invoices paid for the period and the Owner’s check (assuming they have positive cash flow) or advice of deposit in their account.

Cutoff times and statement dates

 This has been an issue that was a difficult one for us to get our arms around.  We all have different needs, and while we were building the company, like any other fledgling small business, we attempted to accommodate everyone’s needs.  Some Owners needed their disbursements by the 10th of each month and others were OK so long as they received it before the first of the month.  Consequently, we set up two statement dates for our Owners; one on the 10th and the other on the 25th.  This became very labor-intensive as we found ourselves always dealing with statements and statement issues.  We later learned that if people want your service, they will adapt to your processes and procedures, so we changed to one statement date of the 25th for all of our Owners.  OK, we still had some of our oldest clients, (some had been with us for many years and others had been on this earth for many years and others . . . both!) who we maintained a 10th of the month statement date for their convenience.  Though that number continued to decrease!

We set up our statement date of the 25th of the month so that we could manage our clients’ expectations as well as exceed them.  You remember I mentioned that most of our Owners needed their funds before the 1st of each month?  Well, that is why we set up the 25th as the date we specify in our contract.  We promised that they will always have their money by then.  Now, to exceed their expectations; internally, we worked with a 20th statement date.  Due to the calendar and the tricks it plays on us from time to time, we may miss that and go to the 22nd or so, but with few extenuating circumstances did we ever miss the 25th and nearly all of the time we exceeded it!  Which of course kept our Owners happy!

It is all well and good that we talk about a statement date of the 25th. So what?  What that really means is that behind the scenes we have to have a cutoff date for all transactions between the 15th and the 17th of the month, depending on where the dates fall on the calendar.  That means all rents have to be in; all payments made including mortgages, taxes, HOA’s and even security deposit refunds.   Otherwise, we will need to run a supplemental statement for that property for that month.  If we don’t, there would be a gap in the information on the statements from month to month.

 

If this information has been helpful to you there is a lot more where it came from!  Visit our website for more books, videos, downloadable e-books and live seminars near you.

Thank you for reading!

Pat & Kris

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MANAGING RENTAL PROPERTIES FOR OTHERS – Paying Bills for your Owners

One very important rule to have and to stick to religiously when paying any expenses for your Owners:

 DO NOT pay any expenses for your Owners unless you are also receiving the statements or bills for those same expenses.

 This may sound very elementary to you but unless you are receiving the invoices for the accounts you are responsible for keeping current, you have no way of knowing that the account is in fact current.  Think about this, on the first of May you mail in a mortgage payment for your Owner.  It gets lost in the mail and a late fee is assessed.  On the first of June, you mail in the June payment.  This one gets to the mortgage company but is applied to the May payment which, as far as the mortgage company is concerned is 30 days past due.  The Owner is still receiving the statement from the mortgage company and you didn’t receive the statement, so you have no idea that everything with this account is not perfect.  This goes on for several months, before your uninvolved Owner decides to open one of his mortgage statements. He sees that there is a past due balance of the last month’s mortgage payment and the late fee from May which has continued to carry forward.  Not only is your Owner upset and your reputation is tarnished, but now the Owner has several “30 days past due” notations on his credit report.  You will probably end up paying the late fee and begging and pleading with the mortgage company to remove the negative notations on his credit report.  This quickly becomes very time consuming, costly and negative to your relationship with your Owner.  Just make it simple, let your Owner know that you would love to pay whatever expenses he or she wants you to pay, BUT you have to have the statements mailed to your address in order for you to be able to do an excellent job for them.  Remember, you can always offer to send the Owner a copy of the mortgage statement with his monthly statement.

 Mortgages

 Be sure to check the monthly statement to ensure that everything is current and that there are no balances brought forward from the previous month.  Another thing to be sure to check is that you are making the correct payment amount.  In this past several years, there were a lot of adjustable mortgages written in our marketplace.  Some of these adjust monthly, some quarterly, some yearly and some after a number of years. 

 Many mortgages may also allow the option each month to pay one of three or four different ways for the mortgage.  If your Owner has one of these loans you will want to discuss these options with them before you start making their mortgage payments for them.  Here is a description of some of the options your Owner may be faced with:

 Minimum Payment is the lowest payment amount and is typically a negative amortization (you are not paying enough interest to keep up with the rate being charged) payment and the loan balance next month will be higher than it was this month.  Paying the minimum payment also may carry with it some zingers for your Owner later on in time.

 Interest OnlyThis payment is higher than the minimum payment and pays only the interest which has accrued on the loan over the past month.  This payment method will keep pace with the interest rate so your Owner will not end up owing more next month than he did this month.  The thing to know with this option is that it is just what it says; interest only and you will not be paying any of the principle loan amount down . . . . only the interest.

 30 Year Amortized Payment This payment is higher again than the interest only option and does pay down a portion of the principle amount of the loan each month.  If you continue to pay using this option for 30 years, the loan on the home will be paid off at the end of that period of time.

 15 Year Amortized Payment This payment is higher again than the 30 year amortized payment.  The reason for that is that it pays down even more of the principle amount of the loan each month than the 30 year amortized payment.  If you continue to pay using this option for 15 years, the loan on the home will be paid off at the end of that period of time.

 Again, be sure to discuss these options with your Owner.  You don’t want to be paying the minimum payment causing the loan amount to get larger while the Owner thinks you are paying his loan off all this time making the balance get smaller . . . or vice versa.

 Home Owners Associations

 Again, do not agree to make these payments either, unless you are receiving the monthly statements.  While the stakes are higher with a mortgage payment, an HOA can be relentless with their late fees, interest assessments, pre-lien fees and filing liens against the property.  The way they are set up, it takes very little time to accrue a very large amount of these penalties and the HOA management company does not have the authority to waive the fees . . . even in the case of a simple misunderstanding because you were not receiving the statements.  Typically, to waive the fees, the issue has to go on the agenda for the next Board of Director’s meeting and they, and only they, may choose to waive a penalty or fee . . . and they generally will not!

 Property Taxes

 If your Owner does not have their property taxes impounded in an escrow account with their mortgage company they may wish for you to pay them for them.  This is not a big deal, but again, be sure that you receive the tax bills that you are to pay.  We always try to audit our Owners’ accounts a couple of months before their property taxes are due.  This way, if the account is not going to have enough money in it to pay the property taxes, we can give the Owner adequate time to get the funds to us.  A short notice only causes stress on everyone, and we have no idea as to where the Owner has his funds.  They may have the money in a fund or account that takes some time to access and if we minimize their time, it creates a crisis for everyone.

 Maintenance

 You will typically be ordering most, if not all, of the maintenance work being done on your Owners’ properties, so you will be receiving the invoices for the work performed.  There are many ins and outs to managing the maintenance for them.  The main thing is to let them know when maintenance needs to be done on their property.  Whether they are an “involved” or an “uninvolved”, Owner, they will always appreciate at least a “heads up” as to what is going on. 

 When we pay anything on behalf of our Owners, we never mark anything up, and we always include a copy of the invoice or bill for the charge with their monthly statement.  This does nothing but build trust for the Owner that you are not overcharging them for anything and that you are not adding fees or overhead charges to their expenses

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MANAGING RENTAL PROPERTIES – The Management Contract

MANAGEMENT CONTRACT

 A written management agreement is paramount if you are going to manage someone else’s property.  This doesn’t have to be a thirty-page document; in fact, it can be very simple.  The main thing is that you spell out what you agree to do for the Owner as his property manager, and what the Owner agrees to pay you for those services.  That gives you the “bare bones” agreement and you can add to it from there.

I have included a copy of our management agreement for you to get an idea of what kind of a document you will consider using.  Again, please be sure to have a competent attorney review all legal documents you are considering using and have them comment or recreate them into a document that works best for your needs.

Termination of Management Services

  All good things must come to an end, as do management contracts.  They end, either because they expire and are not renewed, the Owner sells the property, or the relationship between the Owner and ourselves simply was not a good fit.

Our management agreement allows for early termination by either party with 30 days written notice.  If we have leased the property for the Owner and paid a commission, the only thing we asked of the Owner was to be paid for the unrealized portion of the leasing commission.  In other words, if we paid out $1,200.00 to a real estate agent from an outside company to find a Tenant for this Owner’s property, and 3 months later the Owner decides to terminate the agreement for whatever reason, then the Owner would have to reimburse us for the 9 months of commission, or $900.00, before we would let them out of the agreement.  Now, like everything, there are exceptions; we once had an Owner with whom the chemistry between us was so negative that we were glad to “eat” the remaining commission just to get out of the bad relationship!

When you know that you will soon not be managing a property any longer and you know the date, you need to send a letter to the Tenant advising them of the situation.  Basically, we prepare a letter that says “as of this date, we will no longer be managing the property you are living in.”  Tell them who will be managing it, where to send their rent payments as well as who has their security deposit.  Send it to the Tenant via certified mail and send a copy to the Owner.  Just prior to the effective date, cut a check for the security deposit and send it to the Owner.  Be sure that all of these steps are well documented in writing.  They don’t have to be fancy or eloquent, just documented.

The above is an excerpt from our new book: “Manage To make Money . . . with a Career i Property Management”.  This book helps you to transition your career to one in the residential property management field.  We also offer 3 hour workshops on transitioning your career.  If you would like to view the management contract or other documents referenced you will need to see the book.

If this information has been helpful to you and you would like to explore more residential property management tools or resources, please visit our website.

Thank you for reading!

Pat & Kris Larkin

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