The Reality of Risky Renters

In today’s economy, a significant number of rental applicants present a credit profile that includes challenges due to job loss, income instability, or struggles with a mortgage they could no longer afford.
When considering such an applicant, it is important for a landlord to look at the complete picture (credit profile, income, and rental history) and take into account how the applicant handled the challenges. The landlord should also consider whether the applicant has put him or herself into a financial position to be able handle the rent, utilities, and maintenance required of the rental being considered.
In scenarios where the applicant does have some strengths but also presents a higher than average risk, that risk can be offset by requiring an increased security deposit.

Understanding Tax Benefits

Almost all landlords have heard that there are tax benefits to owning investment properties. But most do not know that major repairs or renovations may need to be depreciated over several years. In some cases, tax benefits are limited based on your level of activity/involvement or your primary source of income. Be sure to consult a tax advisor to understand how IRS tax code applies to your personal situation.

Focusing on Tenant Retention

In a perfect world, a landlord wishes to find a tenant to move into their rental property as soon as it is available, pay rent on-time, keep the property well maintained, and continue renting until the landlord decides to sell the property or move back in.

In a previous post, I discussed our goals for balancing between maximizing cashflow and minimizing vacancy as part of our Listing Process. Here, I’d like to focus on retaining a good tenant for as long as possible.

To be honest, most people don’t like to move. Moving costs money, is hard work, and can be disruptive to family plans and routines. So once a tenant is in place, they usually stay in place, unless they have a compelling reason to move.

Some compelling reasons we can’t control are: the need for more space as a family grows, the need to be closer to work as commuting becomes stressful, or the desire to own a home. So, if a tenant needs an additional bedroom, wants to reduce their commute by 30 minutes, or plans to take advantage of low interest rates and sales prices, when lease renewal time comes around, we’ll need to start focusing on finding another tenant.

However, there are many other factors that we can control that lead to tenants deciding to stay put and extend their lease. Tenants expect owners/managers to be responsive to maintenance needs and react promptly to service requests. Tenants expect owners/managers to provide support in dealing with neighborhood issues, HOA amenities, utility companies and general concerns. Tenants who commit to on-time payments and proper care of the home expect owners to reciprocate by keeping rental increases to a minimum. With long-term tenant retention as our goal, we have processes in place to meet each of these tenant expectations.

Our maintenance coordinator (Lisa Cochran) assures prompt response to all service requests. She also offers to meet contractors at the property to provide entry if the tenants have difficulty coordinating a repair appointment. Follow-up is part of our process to ensure that the tenants are satisfied and that the reported issue has been completely and properly addressed.

Our customer service coordinator (Shayla Gibson) is always available to assist with requests for parking passes, pool passes, gate cards, or other items needed by the tenants. She also assists with scheduling utility transfers and handling concerns with neighbors. Shayla sets the tone for our relationship with new tenants by sending out free VRE tickets and Lowe’s coupons just after move-in.

At lease renewal time, an agent in our office will prepare a market analysis so that owners can determine how they would like to establish the terms for the lease renewal. We’ll work with the agent to balance between increasing cashflow and minimizing (or eliminating) the cost of vacancy or finding a new tenant. See our previous post for more details on deciding when to increase rents at renewal time.

Throughout the life of the lease, our office staff endeavors to maintain an excellent rapport with all tenants. It is part our commitment to maximize tenant satisfaction and tenant retention. Our monthly email reminders to our tenants keep lines of communication open. We truly believe that providing excellent service to our tenants is one of the best way we can provide excellent service to our landlords.

Doing our part to create jobs!!

Last January, during the State of the Union Address, President Obama’s words inspired me to set a goal of expanding our business by 35% in order to create one new full-time job at our company. On December 5, 2011, we reached that goal and hired Lisa Cochran as our Maintenance and Leasing Coordinator.

While many segments of the economy have been devastated over the past three years, the Property Management industry has been given the opportunity to grow and flourish. In our area, many Military Service Members who are homeowners find themselves being transferred out of the state or out of the country and unable to sell their homes. These home owners often become “unintentional investors” as they convert their homes into rental properties. Given the distance from the property, the difference in time zones, and the time requirements of their jobs, these homeowners often seek the services of a professional Property Manager to ensure their home is properly maintained.

RPM Direct has been able to leverage new technology to quickly share information with out-of-town home owners so they can make prompt and informed maintenance decisions. Our commitment to EXCELLENT customer service has allowed us to effectively meet a growing need in the marketplace. With that continued commitment, it is our goal to continue to grow our customer base and to add on two additional full-time positions in 2012.

Areas of Expertise and Professional Limitiations

As a member of the National Association of Residential Property Managers (NARPM), we are required to provide our customers with a disclosure of our areas of expertise as well as our professional limitations.

Our firm’s Principal Broker, Lee Odems, has been a licensed Realtor for 24 years and a license Broker for 17 years. He is an Ethics instructor, an ABR, and has held a variety of leadership positions at the State and Local level of Real Estate Governance including serving as the President of the Prince William Association of Realtors

Our firm’s Property Manager, Michele Odems, is a member of NARPM, but not a license Realtor. She is also a Real Estate investor with 8 years of experience managing residential properties.

All services that require a licensed Realtor and performed by Realtors who are independent contractors associated with RPM Direct LLC or our sister company, Buyers Advantage Real Estate Corp. Additional administrative tasks are performed by unlicensed assistants and staff.

While we provide year end 1099s and maintenance summary reports, we cannot provide any form of tax advice. Each landlord’s tax scenario is unique and we must recommend that you consult a CPA for any tax questions. For our own tax, accounting, and record keeping guidance we have the CPA firm of Comiskey and Tarlosky on retainer.

While the course of Property Management and Rentals involves the signing of several contracts. We cannot provide legal advice or interpretation of specific legal language in the contracts. We must recommend you consult an attorney for any specific questions regarding interpretation of the contract language.

During the eviction process, as an agent on the owner’s behalf, our Property Management staff can file Pay or Quit Notice, file Unlawful Detainers, file Request for Writ of Possession, and attend uncontested court hearings on behalf of our owners. If at any point a tenant contests the eviction or files bankruptcy, the owner will need to be represented by an attorney. We have the law offices of Hawthorne & Ngyuen on retainer for those scenarios.

We rely on the experience, knowledge and expertise of skilled contractors and technicians for all maintenance issues. All of the contractors we use are insured and licensed where ever the work needed requires a license.

Research and Understand Warranty and Insurance Limitations on Rental Properties

Earlier this year, our local area experienced an earthquake, a hurricane, and severe flooding all within a few week time period.  The earthquake created cracks in basements that were not noticeable until the heavy rains resulted in floods a few weeks later.  Several of our landlords called their insurance providers to initiate claims and were surprised by some of the limitations that their homeowner’s policy had since their home had been converted to a rental property.  Each insurance company is different, so be sure to review your policy with your insurance provider so that you fully understand the coverage differences that apply to rental properties.  Be sure you have the correct type of policy in place and explore optional coverages to ensure that you and your tenant are protected in case of fire, flood, mold, or any other severe damage that could occur to the home.

Warranties may also have exclusions for rental properties.  For instance, many carpet or flooring warranties only apply to owner-occupied properties.  Be sure to review the fine print on your warranties to be aware of any exclusions.

Deciding whether to purchase a Home Warranty for your rental property

When you purchase a home as a re-sale, you have the option of putting a home warranty in-place to cover unexpected expenses due to failures in appliances or systems in the home. When you transition your home from your primary residence to a rental property, you again have this option available. We are currently managing approximately 100 properties with over 1/3 of the landlords having opted to put a home warranty in place. So, we have had a great deal of experience interacting with the warranty companies.

There are pros and cons to having a warranty but I believe the decision should be based on how the landlord is most comfortable budgeting for maintenance expenses. There are 3 major home warranty companies (American Home Shield, 2-10 Home Warranty, and Old Republic) as well as several smaller ones. Each warranty policy costs between $350 and $500 per year depending on the chosen coverage and deductible. Assuming that an average home may have 2 maintenance claims per year, the average annual cost to the owner with a home warranty would be $600, which would include the cost of the policy and the 2 deductibles. If the home is relatively new and appliances and systems have been well maintained, it may be likely that several years would pass without needing to initiate a warranty claim at all. Those owners may prefer to forego the warranty policy and instead put $600 per year into a maintenance savings funds so that they have the funds available when an appliance or system repair is needed.

The main benefit of having the home warranty in place is that it protects landlords from major repair expenditures. Repairs to older HVAC systems can cost thousands of dollars, so for older homes where the HVAC system is near the end of the life cycle, the warranty plans often provide great value. Note that the systems and appliances must be properly maintained or the warranty can easily be voided.

The downside of the home warranty is that it can sometimes take several days to have a vendor assigned and an appointment for repair set. This level of responsiveness can be frustrating to the tenants. Also, there are often items that are not covered (removal of old equipment, requirements to bring systems up to current code at the time of the repair) that catch owners by surprise.

Some local Property Managers have chosen not to work with warranty companies because of the limited ability to react quickly to urgent situations. At RPM Direct, we will support the owner’s decision to carry a home warranty, we just want to make sure they understand the pros and cons before making a decision. Please feel free to ask if you have any specific questions!