Those of us who invest in real estate want to know how to get the most out of our investments. Here are a few tips:
1. Rental units
Let’s start with the condition of the rental units. We want to make sure the tenants keep them clean. Since excess clutter can be a potential fire hazard, the living space should be kept tidy to prevent the outbreak of fire. If a fire does occur, tenants should always have a safe exit available. There should be proper ventilation to keep mildew and mold from growing. Some tenants don’t have enough furniture to fill an apartment, whereas some have so much that mice, roaches, and other vermin feel at home too. At least once a year, your onsite managers should inspect all units. They should take notes and digital photos, because you will need to know what they observed. It might even be a good idea to accompany them occasionally. Two sets of eyes are always better than one.
Consider the case of the building owner who had a great cash offer for her building. When things reached the inspection stage, she was astonished to discover that all of the bathrooms needed rebuilding due to dry rot, even though she had installed new windows the previous month. She had always assumed her onsite manager was maintaining the property competently. Of course, the one unit she had occasionally visited was the manager’s unit, and it was always in great shape. Ultimately, the building owner had to hire an inspection service to identify all the problems, and she faced a whopping expenditure to make good all the necessary the repairs. Needless to say the sale died.
2. Building exterior
Next, consider the exterior of the property. Some questions: What does it look like at night? Is there enough exterior lighting? Would your tenants feel safe? Would your tenants fall into potholes or trip over bicycles and children’s toys left lying by the entrance? Are the stairwell handrails fastened solidly? Could children fall through deck rails or get their heads stuck between the rails? Are there any slippery surfaces? What about icy spots in winter? Trip-and-fall injuries are very common, especially in wet areas or where tenants (or guests) cannot see because of poor lighting.
3. Families and children
How about the playground? Is it safe? Has all the dry rot been repaired? Does it have a soft landing surface should a child fall off a swing? Is there a bench so that the parents can watch their children? Are playground rules posted for the parents to read? You cannot expect your onsite manager to be a substitute parent. What are your policies for dealing with latch-key kids? Does the manager know all the tenants personally, as well as their children and their guests?
4. Swimming pools
Swimming pools may attract new tenants, but they also attract problems: loud parties, glassware, alcoholic beverages, the potential for unsupervised kids at play, and resulting injuries. Apartment properties do not usually have lifeguards, but pool owners need to post pool rules and hours. Diseases or fungi can spread, especially if chemicals are improperly mixed or pool areas are not kept scrupulously clean, and outsourced pool maintenance can be efficient but costly.
5. Management training
Managers need to be sufficiently trained to solve building-maintenance and social problems, in addition to their clerical duties in the rental office. However, they must also be prepared to handle emergency situations. Be prepared for the considerable cost of hiring adequately qualified staff and providing for ongoing training and upgrading measures.
6. Insurance
We know you or your manager cannot be everywhere. So, it is important to think ahead. Buy an insurance policy that can reduce your risk. You should consider a $2,000,000 liability policy, together with adequate fire, flood, and earthquake or other disaster coverage to go with it. You should always consider a replacement cost policy and building ordinance addendum. Because building codes have changed quite a bit in the past five years, you need enough coverage. If you have a loss, the building will be rebuilt to current building codes, often involving costly seismic engineering.
It is also a good idea to require tenants to provide annual proof of contents-insurance coverage.
It is clear that investment properties do not run by themselves. Onsite managers need continual training to protect the property and the owner from potential future loss or liability. Understanding the risks and your insurance coverage is critical. Take the time to meet once a year with your insurance agent. All insurance is not equal: you must find out what is covered and what is not. Now is the time to use your common sense!
Adapted from an original article by Clifford A. Hockley