Profiting From Mismanaged Properties – Part 3
Here’s the final Part of this article stream of profiting from property mis-management.
Poor record keeping of rental income, repairs, employee payments, property management documents and even lack of formal lease agreements are clear signs of an incompetent owner. It is surprising the number of owners who run their business with cash and little documentation. This type of owner eventually must “wake up and smell the taxman”. A business can only survive like this for so long before the owner must change their ways or sell.
Repositioning means turning a property into its highest and best use, which is what we have been talking about this far, essentially ensuring the highest potential earning capacity of a property. Let’s touch on the repositioning process.
A property that is very accessible to all amenities and transportation could be categorized as an “A” area, but the property could be older, run down and may have significant vacancy, therefore categorizing it as a “B” or even “C” property. A cash injection to improve the property to the standards of the “A” area may allow significant rental increase. Once the building is renovated and can justify higher rents with less vacancy, it is easier to refinance to get most or all of your renovation capital out, allowing you to repeat the process on another property.
Unfortunately we can’t reposition all properties. There are many building where the cost of improvement is excessive compared to the increased income expected, or perhaps the area just doesn’t warrant the effort. Proper diligence is everything.
When repositioning a property, implement a strategy for both the repairs and the management simultaneously. For the repair phase, make sure to:
- Get at least 3 repair quotes to formulate a budget
- Hire a project manager if the repairs are extensive; otherwise hire handymen who specialize in particular trades. Make sure they have referrals of past clients you can call, proper insurance and are willing to work within a schedule
- Schedule the maintenance with the contractor or handyman for the quickest turnaround time and put the expected timelines in the contract, including bonuses for being on or under budget and time or penalties for being over
- Base your contract on materials and labour separately
- Make cosmetic improvements to create a safe and pleasant environment maximizing curb appeal. This will attract better tenants to the property and command a higher resale profit
For the management phase:
- Hire a reliable caretaker or property manager; making sure they have referrals (call the referrals!)
- Create a marketing plan to attract higher income tenants
- Create a screening system and a tenant retention program for your caretaker or property manager
If you are keeping existing tenants, have your new manager:
- Notify each tenant of the new management and give them a schedule for the upcoming renovations to their unit and the grounds
- Give each tenant a repair request sheet(s)
- Give the tenants a copy of the new “house rules” outlining expected behavior of both tenants and guests
- Collect any rents which are in arrears and begin immediate eviction proceedings on those who refuse to comply
- Alert the tenants of new rental rates on all renovated units. You can get exceptions from some Landlord/tenant boards to raise your rents higher than the annual allotment based on significant renovations or additions
- Pay any non-compliant tenant a “moving” fee to leave
- Begin new leases with all compliant tenants if possible
Repositioning properties is kind of like becoming the new coach of a losing sports team ¾’s through the season. Use your skill and experience to inspire and help coordinate many non-functioning parts into an entity which has chemistry and gels.
If you’d like more info, to find out about training/coaching or to learn about how you can participate in cash flow real estate which provide above average returns, schedule a free 15 minute call by filling out the form below. And we assure you, no pressure or sales will accompany the call. Look forward to speaking with you!