Setting and Collecting Rent

Rental income is the lifeblood of a landlord’s business. If the mechanisms aren’t put in place to bring in the right amount at the right time each month, the business will eventually wither and die. When properly performed, this is what allows top real estate investors to achieve a higher- than-average return on investment. Here’s a list of issues to review and questions to ask any property management firms that you interview:

Setting the Rental Rate

How do you determine your rental rates?

There’s a science behind maximizing rents. For a property manager to achieve this requires them to have knowledge of the local market and perform solid research on the last 10-20+ most recently rented comparables. Rules of thumb like the 1% rule (charging 1% of the property’s value as the monthly rent) are handy for reference, but cannot replace thorough research using current market data. Aside from affecting rental income, your rental rate can also impact the property’s value. The goal should be to get the unit rented within a month.

How often do you raise rents?

Rental rate surveys should be performed at least annually, and more frequently if there are vacancies or lease renewals.

Do you put contractual escalators in the lease?

Contractual rent escalators allow the rents to be raised without the need to negotiate, offer an explanation or give notice. Tenants know that they’ve already agreed to it, so it doesn’t feel arbitrary. And tenants are actually grateful if the firm decides to not enforce the full rate hike.

Collecting Rent

How is rent collected?

It’s a plus if the management company offers direct debit for tenants. Processing fewer checks improves cash flow and saves time and money. This lets you know as soon as possible if funds aren’t there and eliminates excuses about checks “lost in the mail.”

How do you deal with bounced checks?

This is usually a warning sign of trouble ahead. After the first bounced check, tenants should be prohibited from writing personal checks until at least 6 months of good payment history has been established. Additionally, the rental agreement should have a provision stating that tenants agree to pay the maximum the law allows for all returned checks.

How do you deal with delinquent payments?

Find a property management company with a process that’s firm but reasonable. Tenants will start paying later and later if the management company lets them, so it’s imperative that they enforce ALL aspects of the lease. Once they identify a tenant with a trend of delinquencies, they should keep a close eye, making sure they either get back on track or deal with the consequences. Remember that a strict collections process is only balanced out by the property manager quickly responding to tenants’ needs with quality service.

What is you current rate of delinquency?

Find out if they run a tight ship or allow things to get out of hand.

When is rent due? Is there a grace period, and if so, how long?

The standard is that rent should be due on the first day of the month (in hand, not postmarked), and late on the second day of the month. A grace period that extends to either the 3rd or the 5th is also standard. Keeping it shorter prevents it from getting significantly delayed in the event of a holiday or long weekend.

How much is the late fee?

While late fees can generate revenue, their primary function is to get tenants back on track to timely payments as quickly as possible. This property management fee is typically 5-10% of rent. Sometimes a small daily fee is added as an incentive to catch up ASAP. In theory, late fees are supposed to reflect the penalty the owner would experience in the event of a late mortgage payment.

How do you handle evictions?

Their process should be well documented, and although the best course of action will vary based on the circumstances, they should be able to explain to you the basic checklist they go through each time. You want to deal with a company that acts quickly, documents their actions and understands your area’s unique laws for this process.

In the last year, roughly how many evictions did you experience, out of how many properties being managed?

The higher the number, the less confidence you should have in their screening process.

How quickly do you usually get repossession of the property when an eviction takes place?

Time is money, and a smart tenant with bad intentions can drag this process out for a very long time. Find a manager who excels at containing and eliminating the problem as quickly as possible.

Do you provide eviction insurance?

This is basically a small monthly fee that insures that the management company will pay for all attorney and court costs associated with evicting a tenant they placed. It’s not a widely offered service, but it’s a valuable one that speaks to the property management company’s confidence in its screening process.

Next up: Your cash flow may be strong now, but rent will inevitably decrease over time if your property isn’t well maintained. In our next post, we’ll talk about how to determine if a management company has a strong preventative maintenance and repair program in place.

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The Realty Medics are the nation’s leaders in “Rocket Science Renting”: Rocket Science Renting is about keeping your life simple by letting someone else handle the complex work of property management for you. It’s knowing that your property is running smoothly, with no hiccups or glitches. It’s hyper-responsive customer service that gives you property management peace of mind. It’s advanced technology that could only be designed by a former NASA engineer like our owner, Ben Sencenbaugh. And it’s knowing that you’re always getting maximum value and ROI for your investment.

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