It Yours! Now What?

Now that you own the property, it's time to move quickly. Your mortgage payment is due just around the corner, and you have some work to do and decisions to make.

Improvements:

One mistake that many first time investors make is to over-improve the property. They fix it up and make decisions as if they were moving in themselves. This is a huge waste of cash. In most cases, capital improvements do not result in significantly more rent and do not improve the value of the property significantly. Fixer-uppers do not generally make the best rentals, because the amount of cash requiredupfrontunderminesthereturn.Theexceptiontothatwouldbewherethe repairs are financed as part of the loan, but the caution there is in the cash flow. Try not to “fall in love” with the property Generally, emotions undermine investments and that definitely holds true in single family rentals. Here are four verysimplerulestofollowinhowtoimproverentalproperties:

1. Ifit'smissing,replaceit.

2. Ifit'sbroken,fixit.

3. Ifit'schipping,paintit.

4. Ifit'sdirty,cleanit.

Beyondthat,yougenerallyshouldnotimprovetheproperty.Theexceptionstothat rulemightbethingslikefinishingabasementoraddingabathroom.

Here is the final improvement tip: There is one thing, one simple thing that should be done every time that makes a dramatic difference in the rental home. What is thisonesuperfix-allsolutionthatmustbeapplied?SOAP.Acleanhomethatsmells nicewillmakethebiggestdifferenceinhowquicklyatenantrentsit.

ThirdPartyManagement:

Should you hire a company to manage the property for you? The answer is a bit more complex than you may think. Property management companies will be able tohelpyouwithvariousprocessesonyourpropertyincluding:

Ÿ Preparingthepropertyforlease

Ÿ Findingtherightmarketrenttocharge

Ÿ Finding,screening,andplacingthetenant

Ÿ Managingtheleaseitself,includingrentcollection

Ÿ Dealingwithtenantissues,repairs,leasecompliance,evictionsifnecessary

Property management companies will typically charge you a one-time fee for leasing the property, and an ongoing percentage of rent to manage the property. The ongoing fee is typically between 7-10%, but that varies significantly based on location.

In my experience, most investors who self-manage make a couple of huge mistakes that wouldhavebeenavoidedwiththirdpartymanagement:

1. Mis-price the property. This usually happens due to a lack of experience, or from pricing the property based on how much the mortgage is, or relying on limited market data from sites like Zillow/Trulia. The cost of this mistake is usually high due to vacancy. Occasionally, an investor will undercut the rent and miss out on profits. This also happens when a tenant stays for several years, and the investor did not buildinarentescalationclauseintothelease.

2. Allow bad tenants to stay for a long period of time, and/or not hold the tenants responsible for damages. Self-managed investors are more susceptible to tenant's reasonsfornotpayingrent,andloseagreatdealofprofitfromlostrents.Orworse, theydon'tholdthetenantaccountableandenduplosingprofitsonrepairs.

The price of third party management is well worth it to avoid these two giant mistakes. Nottomentionmostself-managedinvestorsdon'ttypicallyhaveagood screening tool to find good tenants. Also, property management companies will typically do a better job of maintenance during the lease and deposit disposition at theendofthelease.

If you feel that you can handle these issues, and can avoid common mistakes, then you perhaps should manage the property yourself. However, as you increase your portfolio to more than one rental, I highly recommend using a third party managementcompany.