During the last three (3) years, my wife and I invested in several residential properties with the intent of holding them as rental real estate investments. In lieu of hiring a professional to manager our investments, we decided to manage the properties ourselves. Our objectives in performing this service included:
- A better understanding of residential real estate as an investment class,
- An enriched knowledge base related to the Shreveport/Bossier real estate market, and
- Financial savings
Based on our experiences managing these properties, we identified the following three (3) areas as primary functions of this activity:
Leasing Real Estate. In order to realize positive cash flows from rental real estate investments, owners (i.e., investors) must lease properties to suitable tenants and limit vacancies. Leasing activities encompass a wide range of responsibilities, including:
- Marketing the property through signage, word-of-mouth referrals, online postings (i.e., Craigslist, Zillow, Trulia, etc.), trade publication advertisements, and connections to real estate professionals.
- Screening potential tenants in a non-discriminatory manner consistent with local law. We utilized a number of free, online forms for the purpose of identifying a suitable candidate and complying with Louisiana law. I strongly recommend consultation with a real estate attorney familiar with statutory requirements in your area.
- Negotiating the terms of the lease agreement between yourself and the tenant(s). There are numerous items to document between the parties, many of which are negotiable in finalizing the agreement. Again, I recommend seeking counsel from an attorney well versed in local real estate law. Some of the terms to document in the lease agreement include price, length of stay, security deposit requirement (for both the tenants and their pets), contract dates, and possibly an option for an additional period of time.
Managing Real Estate. Similar to the routine upkeep of your home, residential real estate must be adequately maintained, serviced, and cleaned. Maintenance activities of residential properties are grouped among the following categories:
- Routine Maintenance. The essential chores of cleaning bathrooms and floors, replacing light bulbs, changing air filters, power washing driveways and sidewalks, and lawn maintenance improve the desirability of rental properties. While the financial responsibility of these costs are a negotiable item between landlord and tenant, we require our tenants to fund these expenditures during the term of their lease. Owners incur these costs when vacancies occur, exacerbating downside risk during vacant periods.
- Minor Repairs. From leaks in A/C condenser lines to shortages in electrical outlets, residential rental properties require frequent repairs to numerous items. Unless you are blessed with the knowledge and skills to make these repairs yourself (my wife and I were not), employing the services of a “handyman” can save owners considerable time, effort, and money. We were fortunate to discover that my wife’s uncle possessed the necessary attributes of a qualified handyman, and we struck an agreement with him wherein he became our “on-site” repairman for an agreed upon hourly rate. This service-provider proved to be an invaluable resource by not only making the requested repairs, but by saving us significant amounts of time and anxiety by serving as our agent responsible for fielding tenant inquiries and demands. As such, we recommend hiring an honest handyman to fill this role.
- Maintenance Agreements & Service Contracts. Similar to having a trusted handyman for repairing minor items, owners should include trade specialists as part of their team. In contrast to the services provided by a handyman, specialists will be needed to assist in maintaining the mechanical, electrical, and plumbing systems of residential properties. These systems are essential features of an owners investment, and they must be adequately serviced to maintain the marketability and attractiveness of the property. We utilized an annual maintenance agreement with a local HVAC company wherein they inspect the system twice a year, replace filters, and assist in identifying potential problems before they create a significant crisis.
Real Estate Finance, Accounting, & Taxation. Residential real estate is a unique asset class that offers investment opportunities by way of numerous financing alternatives. Likewise, the income tax treatment of rental income is unique when compared to other income produced from investment capital. From an accounting/bookkeeping perspective, rental property investments often require active participation on behalf of owners, and these records can represent essential documentation that supports financing and tax compliance functions. A brief overview of the financial activities, alternatives, and strategies are provided below.
- Financing Alternatives. In my opinion, the uniqueness of our nation’s residential real estate market arises from the fact that it is heavily regulated by the federal government. The economic, political, and social interests related to housing make it a primary target for fiscal policymakers, and it creates a compelling platform for use in advancing political motives. This environment has resulted in a unique industry that allows significant flexibility in the financing alternatives available to homebuyers and investors. The specific options available to market participants go beyond the scope of this article, but my point is that current market conditions provide investors the opportunity to acquire significant amounts (in dollar terms) of residential real estate with disproportionately smaller amounts of up-front capital. The difference in these amounts can be made up with debt (a strategy commonly referred to as leveraging) payable over relatively long-term time periods at historically low interest rates.
- Tax Compliance. My post dated August 10, 2015 titled Rental Real Estate Taxation provides detailed information related to unique income tax issues of rental real estate investments. In general, investment returns (in the form of tenant lease income) have the potential to be tax-deferred cash inflows with ordinary and capital gains tax liabilities recognized upon sale of a property.
- Accounting Considerations. Maintaining accurate records of cash receipts and disbursements for residential real estate is an essential function of property management. This information is often required by accountants in connection with annual tax filings, as well as, bankers in loan covenant reviews. In my opinion, best practices include a separate bank account and an organized accounting system (preferably by way of a software application) for real estate properties. These practices assist owners in keeping property finances separate from personal funds, and they can provide a basic “chart of accounts” template complete with standard operating accounts.