Pr esent s: Property Management By: D. Scott Smith, CCIM 443.691.8153.www.commericalrealestateclasses.com
Today We Will:• Pt. 1 The How and Why of Land lording• Pt. 2 How to Lease a Property• Pt. 3 Management of Rentals• Pt. 4 Tools• Pt. 5 Taxation• Pt.6 Forms and Review
Class Room Rules• You must sign in and out to get CE (show ID)• No eating, sleeping, or using electronics• You must be on time• Raise your hand to ask questions• Be polite• Breaks will be administered
Why be a Land Lord?• Self Management vs. Professional Team• Wealth Accumulation• Provide Consumers with Product• Not Boring• Builds Investment Experience• People Pleaser• Overcoming Objectives
Types of Land Lords• ACCIDENTIAL Land Lords Inherited Property, Distress Market• Long Term Land Lords Leverage Time, Leverage Investments• Corporate Land Lords REITS, Asset Class Land Lords, Industry Specific
Land Lords Team• Maintenance Engineer• Accountant• Legal Professional• Business Planner(NOTE: It is important to treat each property as it’s own separate business. )
Types of PropertiesTenants – CommercialRenters – Residential• Single Family• Multi Unit• Multi Family• Complexes
Each Property Needs A PlanManagement Plan includes• Preparing the property (warm vanilla shell)• Pricing the property (mortg. Vs. rent )• Price per unit• Price per sqft• Lease Types• Ammenties
Plan (cont.)• Security Deposits• Commission amounts ( how to calculate )• Marketing Plan• Negotiation Strategies• Tenant Selection Process• Legal Docs• Accounting and Collections procedures
QuestionsOn a scrap piece of paper, without using words:• What would be some of your personal Pro’s and Con’s of Self Land Lording?• What would be some of your personal Pro’s and Con’s of Professional Land Lording?
Self Management Pro’s Vs. Con’s• Save Money • Loss Tax Break• Save • Full Time Job Maintenance $ • Loss of Control• Control
Professional Management Pro’s Vs. Con’s• Experts • Not cost• Contacts Effective• Lower Loss Ratio • May mark up expenses • Unknown internal Systems
Why hire a property manager? http://youtu.be/MUseCJ7PhLQ
Professional Management• Enforcement of Property Rules and Reg’s• Performance of rental market cost settings• Preparation, Marketing, Showing units• Preparation of ongoing repairs• Inspections• Collections• HR
How to hire a professional• Check references• Match manager with property type• Copies of license• Are they credited and bonded• Copies of Insurance
Questions you should ask• See handouts (pg.41)
How Much? And When?• % of collected• Flat Fee Conditions• Amount of time• Size of Property• Market Characteristics• Expense Ratios
The Management Agreement• Legal Consequences• In writing (see example)• Set Milestones w/ incentives• Lawyers Clauses
What if it’s existing?• Existing Tenants and / or Management• Get copies of all Leases• Escrow accounts• Payment History• Expense reports• All license• All services
Cont.• Interview tenants• Walk through each unit• Write new leases if possible• Evaluate market and contract rents• Lease buy out or Buy vacant and lease up!
Understanding Vacancy Ratio’s Determine an expected percentage of loss due to vacancy and non-payment by checking that of comparable properties and the recent loss experienced by the subject property.Last years vacancy and credit loss from the subject property may have been 3% of net operating income. Other comparable properties experienced an average of 4%. Choose a value in the mix, lets say 3.60%.
Vacancy Ratio’s• Adjust your net operating income for next year by any anticipated rent increases. If you are anticipating a 5% increase in rent, and net operating income this year is $44,000, then:$44,000 X 1.05 = $46,200
Vacancy Ratio’s• Calculate the expected monetary loss for next year due to vacancy and credit losses:$46,200(net operating income) X . 0360 (3.6%) loss estimate = $1663.20.
Should you renovate?• Some renovations will not recoup investment• Dollar Cost Averaging• $3,500 renovations in kitchen• Increase on average. $50 a month
Should you renovate?• Minor Kitchen Remodel costs $19,685 with a Resale Value $19,770 Cost Recoup 100.4%• Bathroom Remodel costs $15,051 with a Resale Value of $14,474 Cost Recoup 96.2% The costs and recoup chart below shows the National Averages for the Job Cost, the Resale Value and the Percentage of Cost the Owners Recouped on their initial outlay. The figures to the right of that chart are for the entire Pacific Region for the same items.
QuestionYou have a several vacant units in your 10 unit building (18%) and you are wondering if renovating the vacant units bathrooms will decrease the vacancy.What items should you consider and should you renovate? How long will it take in a stable market to recoup the investment?
Physical Attributes• Curb Appeal is the biggest investment• Standardize all units• Check out competition• Don’t Preshow
Inspection Check List• General Cleaning• Major Repairs• Vanilla Shell• Roof and Basement inspections• Carpet / Flooring schedules
Safety Issues• Well lit areas• Fire Escapes and Exit Signs• Emergency Exits and Evacuation Plans• Fire and Sprinkler Systems• Smoke detectors
Setting the Rents• Rent Comps• Rent Concessions• ProForma (see excel)
Security Deposits• Legal limits• First and Last months rent• Bond, Securitized• Co-Signer• Interest Barring Account
HB 917/HB 284/SB 429/SB 669• HB 917/HB 284/SB 429/SB 669 – Real Property – Residential Leases – Interest on Security Deposits STATUS: NOT PASSED Many bills were introduced to address this issue, but HB 917 was the only one of the bills to advance. It would have required landlords to return deposits with an interest rate of 1.5% or a rate equal to the U.S. Treasury Daily Yield Curve Rate whichever is higher. Although HB 917 was passed by the House, the Senate did not take action on the bill.
Rental Contracts• Standardized Application form• Additional Documents May be needed Business Plan, Application• Lease Agreement written by an attorney• Different agreements for different property and lease types• TI Allowance and other clauses• Commission Agreement
Marketing Your Rental• Have a Full Blown Marketing Plan• Digital Marketing Package• Have a Social Strategy
Cont.• Other Tenants in the Building• Local Employers• See Ways to Market Doc. In hand outs.
Fair Housing Issues• See Hand OutFair Housing Amendment Act of 1988
Property Disclosures• Lead Paint Hand Outs• Asbestos• Radon• Sexual Offenders (Megan’s Law)• Other known material facts
Tenant Screening• Prev. Land Lord Interviews• Financial History• Co-Signers• Application• Credit Report
Collections• *HB 653/SB 457 – Lawyers – Bar Admission Requirement – Exception for Rent Escrow Proceedings• STATUS: PASSED – Effective October 1, 2011• Allows non-attorneys to represent landlords or tenants in rent escrow cases. Occasionally, property managers representing owners in court on a summary ejectment proceeding find themselves also engaged in a rent escrow action.
Rent Court / Evictions• Where to send legal notices• Trial Date set, bring Tenant File• Rebuttal Time Period• Awarded a judgment• Notices posted on property• Different laws for residential and commercial
Expect Problems!• Cash for Keys• Bankruptcy• Hold Overs• Broken Contracts• Assignments• Domestic Issues
Taxes Active Income Bracket Vs. Passive Income Bracket• Income for which services have been performed. This includes wages, tips, salaries, commissions and income from businesses in which there is material participation. Basically the rule is if you actively participate in the business you are allowed a special allowance to deduct up to 25k passive loss against ordinary income, subject to phase-out rules.• It is considered a passive activity (unless real-estate professional) but you are given an allowance if you actively participate in what they consider to be a passive activity. If you dont actively participate (meaning approving new tenants, deciding on rental terms, approving expenditures, and similar decisions) your loss would only be deductible against your passive income.
• Tax Reform Act of 1986 has limited this tax shelter. All real estate losses are considered passive losses (losses that are incurred through an enterprise which the investor is not actively involved). Passive losses can now only be used to offset passive income. In other words, if you show a loss on one property of $50,000, it can offset $50,000 in what would otherwise be taxable income from another property. The tax law also limits a taxpayers ability to shelter active income (income from wages and other activities) with passive losses.• For instance, investors with an adjusted gross income (AGI) of less than $100,000 can use passive real estate losses to shelter up to $25,000 of income from other sources. For taxpayers with between $100,000 and $150,000 of adjusted gross income, this shelter has been phased out. For each two dollars of AGI over $100,000, the $25,000 limit is reduced by one dollar. Therefore, an investor whose adjusted gross income is $120,000 would be limited to a $15,000 tax shelter. This investor could still use real estate losses to offset $15,000 of active income as well as unlimited gains from other passive real estate investments.
• A further limitation imposed by the 1986 Tax Reform Act is that investors who dont actively manage their properties cant use their passive losses to shelter any active income. This means that investors who purchased shares in limited partnerships or similar investments can no longer use these paper losses from depreciation as a shelter against other income.• Read more at http://www.finweb.com/taxes/real-estate-depreciation
Have these internal systems• Maintenance• Expenses• Contractor Lists• Emergency Response• On Site Staff• Security• Keys• 100’s of Forms at your fingertips
Insurance• Accidental Insurance Policy• Renters Insurance Program• How to handle claims
Increasing Your Return• Budgeting• Non-Rent Revenue• Subsidized Programs• Student / Short Term Housing• Education on Property Management• Designations
Thank You!D. Scott Smith, CCIM443.691.8153Scott.Smith@PenFedRealty.comwww.CommercialRealEstateClasses.com