If you are considering investing in real estate as a piece of building wealth, congratulations. For so many reasons, real estate is a fantastic tool to build long-term wealth while adding cash flow to your monthly income. Before you launch headlong however into buying and managing one single—or a portfolio of properties—there are a few things to consider.
Unlike investing in an index fund or real estate trust where the definition of passive investing is met, owning and operating your own property requires a different mindset. Like most topics, the art of managing your own properties can be learned and, with a little knowledge going into it, anyone can do it.
Below are a few suggestions to consider before you acquire your first property. This list is based on personal experiences from the last seven years of managing our own portfolio of six properties (ten units) made up of single family and small multifamily properties.
Understand the Value of Your Time
Managing your own properties will take time. There is no way around this unless you opt to outsource the property management to a third-party. (And that management can cost more than 10% of your gross rents).
Personal management will require you to run a business. You will need to market the property, fill vacancies, manage repairs, take care of the financial administration and paperwork, forecast rent increases and effectively communicate with tenants while abiding by any local, state and federal regulation.
Managing your rental properties will take time to do so effectively, but with the right processes and organization it should become more efficient over time.
Manage Your Money and Property Cash Flow
As with any business, it is important to manage and forecast your cash flow. This means that you should have an understanding of what is projected to come in (revenue) and what is projected to go out (expenses). It will be important to set aside a specific amount each month to cover both the expected and unexpected costs. It is recommended that you establish a business emergency fund for each of your properties.
Two of the bigger expenses that a property owner should plan for are repairs and vacancies. Significant repairs such as a furnace or water heater can cost thousands of dollars. These repairs will inevitably come up sporadically. Maintenance, small repairs and ongoing improvements will also continue to cut into your profitability.
Planning for vacancies is also important. You do not want to rush into lowering rents so planning to cover financial obligations while your property is between tenants is critical to running your business.
Your individual market and the state of the economy will play into the specific amount that you should hold in your emergency fund, but it is important to plan ahead regardless.
A relatively conservative approach is to hold six months rent in your emergency fund. For example, if your unit rents for $1,500 per month, you should have $9,000 saved in your emergency fund for that specific property. This fully funded account might also help with future financing as some banks provide preference to those who have a solid cash position.
Mind Your Management Temperament
Understand that choosing the business of managing properties is selecting a business based around interacting and managing people. Each tenant and contractor will create a new relationship that comes with its own dynamics. We have discovered the value of being consistent and establishing systems. Although it is important to continuously listen and problem solve with your individual audiences, it is extremely important to be consistent.
For this reason a strong contract will be your most valuable resource. If a contract is thorough and written with specifics, most situations will appear in black and white. A well-written contract will allow most situations to be resolved cleanly. In the event that situations are more complex or fall outside of what is outlined in the contract, remember to listen and be empathetic to the needs of your audience while simultaneously protecting your business interests.
In the most complex of situations, we recommend that you consult with an attorney.
Keep Your Rental Business Organized
Running your properties effectively will require you to stay organized. As an owner who decides to self-manage your properties, it will be important to keep track of the following:
- Monthly (and annual) revenue and costs
- Annual profits (or losses)
- Requests and current status of repairs
- Individual tenant contracts and lease terms
- Written tenant notices and communication
- Year-end tax information
Establish a Reliable Team
It might seem daunting to manage your rental properties, but understand that self-managing does not mean that you have to manage them solo. Success often requires a team. Think of yourself as a the team manager soliciting expertise from other team members and mentors regardless of the size of your portfolio. For doing so will provide the option of scaling your business over time.
We learned early that we should take the time to consider our strengths and weaknesses. This allowed us to leverage our strengths while outsourcing what remained. Take a serious look at your skill sets and build your team around what is needed to fill in your gaps.
Must-Have Team Member Considerations
A knowledgeable CPA who is trustworthy and ethical. Run a clean business from the beginning and you will never fear a financial audit while you reap the benefits of property ownership.
Business/Real Estate Attorney. Laws and regulations are regularly changing. An experienced attorney will ensure that you are abiding by the rules while remaining compliant.
A licensed and bonded handyman. Repair requests will pop up and unless you are skilled in everything involving home repair, it’s often easier and more efficient to have a handyman on-call. Know your skill sets and know your weak points when it comes to repair. When I first started acquiring rental properties, I would make a trip to the property each time I received a tenant repair request. It seemed that my trip would confirm the need for a more qualified contractor ninety percent of the time. I have learned to now ask more qualifying questions over the phone. I am still hiring a contractor 90% of the time, but I am saving my personal time upfront while moving the repair along more quickly for our tenants.
A team of trusted contractors. Keep a list of your go-to plumbers, electricians, and handymen. Install a lock box at each property to allow the trusted professional to make the repair in a timely, efficient manner without having to consider your personal availability. Be sure to regularly change the code to the lockbox for increased security.
Self-Management Summary
Again, if you are considering rental property ownership, congratulations! To be in the position of considering such investment deserves to be recognized. Including real estate in your financial portfolio can be a great way to further diversify while building significant wealth over time.
Too often investors jump into property ownership before they take time to seriously consider the work involved. Real estate can produce significant cash flow, especially over time. Before you decide to manage the property, your tenants and required contractors, be sure to seek education and mentorship upfront, for managing rental properties is far from passive.
