We have two types of owners. Those who prefer that we handle every aspect of managing their property including tenant acquisition; and those who wish to be more involved, particularly in selecting the tenant for their rental. At Progressive, we allow our owners to participate in certain aspects of the management of their property. Particularly having a say on the tenant who will be occupying their rental. However, we caution about the owner meeting prospective tenants. Here is why. If an owner has already agreed to the qualifications and worthiness of a tenant, what good can come of them meeting?
Mandatory Section 8 for All Owners? That Can’t Be Good, Can It?
There is a move afoot to require landlords to accept Section 8 applicants. As written, SB-329 would eliminate “source of income” as a reason to deny an applicant. What does that mean and what does it have to do with Section 8? First let’s discuss Section 8.
Section 8, a federally funded program, helps almost 4 million households with a portion of their rent and utilities and is a 33-billion-dollar program. A household must apply and pay 30% of the income towards rent. The government (or the local government Housing Authority) pays the balance. The landlord must charge a “reasonable” rent and that figure must be agreed upon by the Housing Authority.
Although an owner may not receive market rent, they accept a tenant who may stay in the unit for a longer period because there is a shortage of Section 8 housing units and they are guaranteed the portion of the rent paid by the government. If a tenant doesn’t pay the portion of the rent they are required, they can be evicted like any other non-Section 8 tenant. So, if you could obtain market rent and be guaranteed payment by the government, why not accept Section 8 tenants?
Like any other government program, there are a few negatives associated with participating in the Section 8 program:
- Before tenants can sign a lease or move in, the property must be approved by the Section 8 Housing Authority. This can take from a few days to a few weeks. During this period, your property sits vacant losing money. If Section 8 is not involved, a tenant can move right in after the previous tenant leaves and there is no delay. Also, it may take weeks, or even months before you receive your first check from the government. Since the tenant is on Section 8, usually they do not have funds for a security deposit and that is not provided by the government.
- The Housing Authority decides on the monthly rent and any rent increases. A tenant may be willing to pay $1,800 for your rent and contribute $600 to the monthly lease, but Section 8 may not. They will compare your rent to comparable rentals in their system and may only agree to a lower amount. The same holds true for rent increases. The market may bear a 5% increase, but the Housing Authority may only allow a 3% increase.
- All time frames take longer. For a non-Section 8 rental, if we want to increase the rent 5%, we give the tenant 30-day notice and either they accept, or move. For Section 8, any increase requires a 90-day notice and must be approved by the Housing Authority.
- All Section 8 housing is subject to an interior inspection of the property every year. Some tenants take this opportunity to ask for improvements or have the owner correct wear and tear issues created by the tenant. If called out by the inspector, they must be corrected regardless.
As you can see, Section 8 is not for everybody; unless the government requires it. Some owners love Section 8 and buy properties specifically to attract and keep Section 8 Tenants: but that is by choice. It has been our experience, whenever a governmental third party is involved, such as the Public Housing Authority, life is made better for tenants but more difficult for owners and property management companies.
Management Software Options for SMIPOs
Whether you manage just one property, or hundreds, there are plenty of property management software solutions at a variety of prices and features. This list is not exhaustive, but provides some insight on your options:
– The minimum you should have is this software. As long as you classify each credit or debit properly, you can track every financial aspect of your rental. It is not software designed for property management, but fills the bill nicely for a do-it-yourselfer.
– Here is the best aspect of this software: it is free! That is right, free. It does not have all the bells and whistles (why would it, it is free), but has features that make property management easier: contact information, online payments, online application and many features. They make their money on the application fee they charge the tenants who apply for the rental. Did I mention it was free?
– Also free up to a certain number of units (75) they make their money on the application fee from tenants and a vendor portal they charge to owners ($35/month).
– This is the management software that started it all. It started out managing big commercial buildings and retail but now services the residential sector. Yardi is like drinking from a fire hose. It is user friendly for those who know how to use it. Very robust and can handle any type of property. It is less intuitive and user friendly for tenants.
– A relatively newcomer, Buildium seems to be more cost effective and popular for companies that manage fewer than 200 units. I used Buildium in the past but when audited, learned that it was not BRE compliant.
– This management software company has excelled in the property management space. A bit more expensive that Buildium, it is more mobile friendly, easy to use for staff and tenants, and they are constantly improving the software. We use Appfolio and must receive 5 to 10 updates and improvements each month. They offer a solution, at a cost, for every property management issue.
There are websites you can visit to get reviews, pricing and details about each software solution. There is a software for every budget and portfolio size and no reason for an owner not to take advantage of these great programs.
It’s official. On June 11th, the Long Beach City Council voted into local law a new ordnance which goes in to effect August 1 requiring owners of four units or more to pay tenants to move from their property.
Called, “tenant assistance”, here is what an owner would pay the tenant to relocate:
- $2,706 for a studio
- $3,235 for a one-bedroom
- $4,185 for a two-bedroom
- And as much as $4,500 for three bedrooms or move to relocate.
Landlords must also report to credit agencies if the tenant pays as agreed to help them boost their credit scores and they must also provide renters with a city-provided and produced information sheet detailing their rights.
What properties are excluded?
- The landlord owns four or fewer units within the city boundaries.
- The landlord lives in a unit of the building they own.
- If the owner is relocating the tenant to move a family member in that unit.
- All buildings built after 1995 to keep in compliance with the Costa-Hawkins state law.
What triggers the relocation fee?
- A landlord increases the rent by 10% or more in a 12-month period.
- The tenant has been in the unit for 12 months or more.
- The owner needs the tenant to move to rehabilitate the unit.
What does this mean to owners of rental properties in Long Beach and other areas where tenant comprise most households (Anaheim, Santa Ana, etc.)? This is a work around of Just Cause Eviction. As a reminder, with Just Cause Eviction, the tenant cannot be removed for any reason as long as they pay and behave as agreed. Now the tenant can be given notice to vacate if the owner is willing to pay this fee.
There are a couple of unintended consequences because of this new law:
- Since owners can increase rents 10% without triggering this fee, I suspect many owners will increase rents up to 9% to start collecting funds to pay for this future relocation fee. A tenant currently paying $1,500 a month might experience a 9% increase (of $135) to pay for their relocation 3 years from now.
- It now pays for a tenant to be difficult. An enterprising tenant may want to make the life of an owner so difficult such as annoying other tenants, bending the rules, disturbing the general piece of an apartment complex, that an owner will pay to restore the peace. The owner will find a better tenant and the former tenant walks away with a little over $4,000 in cash.
There is little doubt that tenants in other cities will clamor for a similar tenant relocation assistance. What tenant wouldn’t want a lump sum payment to move? Between their returned security deposit and this fee, that could mean $6,000 in hard cold cash.
The intent of the law is to allow tenants to stay in their rentals longer, but as the saying goes, hell is paved with good intentions. The next steps seem obvious: annual rent caps and then, ultimately, the implementation of Just Cause Eviction because even though tenants like the additional cash to move, they would prefer to stay where they are for as long as they want.
There are typically 2 business models in property management: charge a flat percentage of the rent collected, or charge a flat fee. If the expected rent were $2,000 a month, and one company charged 5%, they would collect $100. If another company charges a flat fee of $100, the effective rate would be 5%. But if the collected rent were $3,000, the flat fee company would still charge 5% or $150, while the flat fee company would only collect $100 for an effective fee of 3.3%. So, which model is best for you?
We’re Not Afraid of HOA Management
When I was just in residential sales, my broker friends told me to avoid residential property management. Because it was the three t’s: toilets, tenants and troubles. There was too much litigation, the profit margins were small and never ending grief with tenants. I rejected their advice and started Progressive Property Management at the end of 2011 with no doors under management.
In 8 years,
we have grown to almost 900 properties under management. And that growth occurred ‘organically’, we did not purchase any contracts or properties from another management company. We grew by appealing to self-managing owners who wanted us to better protect their asset. And to savvy investors who wanted us to squeeze more income out of their rentals. And to tenants who wanted a better rental experience.
Over the years we have received inquiries from associations unhappy with their current management company, but my fellow management company owners have told me to avoid association management, because it is the three p’s: (dog) poop, parties and parking issues. The profit margins are even thinner than residential management, boards are difficult to please and owners will make your life miserable when you enforce the rules. I have again rejected the advice of my peers, and this year we started our association management division: Progressive Association Management.
We currently manage a 225-unit complex, and have started to market to other associations and management companies the fact that not only do we offer association management services, we offer a better experience to boards and their owners. We offer four performance guarantees, so if we don’t perform as promised, we pay a real financial price. More importantly, we have structured our company to offer the highest level of service possible. Our Community Managers don’t manage 1,000 to 2,000 units like the traditional company: they manage no more than 400. Our licensed Property Managers serve as the Community Managers, and provide a higher level of expertise and knowledge than the typical manager.
Many association boards are not happy with the current association management company but don’t think they can find better. Well, they can now. We can offer the same price they are paying with far superior service. We intend to set a higher standard in association management as we have in residential property management.
How to Get a $1,000 Pet Damage Guarantee
Pet Protection Program
Over 50% of tenants have a pet. Many owners instruct us to not allow any pets in their rental, but there are 3 problems with this policy:
- The tenant will lie. They will say they have no pets, but then mysteriously, a pet is on their premises after move in. Although this is technically a violation of their lease, and we could post a “3-Day Notice to Cure”, after we spent $1,300 to $2,000 to get the case heard in front of a small claims court, the pet would just as mysteriously disappear. The bottom line, the tenant won’t put down their pet to comply with your pet policy.
- The tenant will re-classify their pet as a “comfort” or “emotional support” animal. It only takes a few minutes at the computer, less than $50, and their pet is no longer a pet. For a comfort animal, by law, there can be no additional monthly fee or an increase in the security deposit to compensate for their existence. It may not be right, but it is legal and increasingly common.
- The tenant will not lease your property. Many tenants will abide by your wishes and not be willing to lease your rental. You will lose 50% of potential tenants. They will gravitate to a “pet friendly” rental, which are becoming increasingly common.
Here is our solution, offer the tenant a Pet Protection Program. There are 3 aspects to this program:
- The tenant is directed to Petscreener.com. For a low fee per pet (and no fee for service, comfort or emotional support animals), the tenant uploads pertinent pet information such as vaccinations, licenses, breed type and contact information. They are provided a link, so when they go to a groomer or veterinarian, who also require this documentation, they can easily provide this to them.
- After putting in this information, the pet is awarded a 1 to 5 “paw score”: the higher the rating, the lower the risk of the pet. A pet with a five score would pay $10 per month for this program, and for a pet with a one score, pay a $30 monthly fee. com does not charge for a service or comfort animal, but does collect the certification to make sure the animal does qualify for this designation.
- Since we encourage our owners to collect two month’s rent as the security deposit, and the tenant cannot pay a larger fee to compensate for possible pet damage, we guarantee to the owner $1,000 of pet damage over and above the security deposit.
This is a proverbial win, win and win. The tenant has a new home for their pet, our owner has an additional $1,000 as protection, and we earn a fee to moderate the program and pay for any potential pet damage. We encourage our owners to be pet friendly, but also protection program wise.
Our Tiresome Walk on the Capital
I have been a Director for the Pacific West Association of Realtors (PWR) for 10 years (about 13,000 Realtor members) and a Director for the California Association of Realtors (CAR) for 10 years as well (over 200,000 members). As you may know, to manage properties for another person, you must be a licensed agent. I have been a Broker since 1997, and prior to owning a property management company, I was a very active agent, selling over 70 homes a year at one point. I decided to serve on these boards to better understand our industry and protect the private property rights of our clients.
as part of serving as a Director for CAR, we journey to Sacramento to lobby our elected officials. Sometimes we lobby for bills that will help owners and buyers. Other times we fight bills that may hurt private property rights. For the past 10 years, Assembly members, Senators and even Governors took great notice of our visit and trembled at our demands. Why? We are a very large organization with a wide reach. Realtors network to generate business, if the average Realtor can impact 150 voters, that is practically every qualified voter in the state. Also, CAR has a lot of money and spends it aggressively to defend housing rights and its business. Each Realtors pays about $1,000 a year to practice real estate. About $30,000,000 a year of that goes to CAR for lobbying. CAR supports candidates that agree with its issues, and fights those that do not.
The major issues for CAR over the past 10 years has been:
- Limiting rent control
- Rejecting just cause eviction
- Stopping point of sale mandates (e.g., requiring every homeowner to install low flow toilets)
- Providing incentives to home ownership (e.g., allowing a 55+ homeowner to sell, move up or down, and keep their property tax basis)
- Encouraging the construction of additional housing.
In the past,
just a visit to an elected official and an explanation of our position, or threat to spend money against a bill would be sufficient to get our way. We did not compromise, we did not negotiate, and it was our way or the threat of removing a person from office if they insisted on doing their way. Those days are past.
For the first time in the history of CAR, we are not killing bills that are a detriment to investment property ownership, we are actively compromising. We are not opposing rent control or rent caps, we are working to make the final law less onerous. We are not averse to changes in Costa-Hawkins (the law that only allows rent control to be imposed on 2 or more units that were built before 1994) we only hope to limit the expansion to older than 20 years. This is the new reality in Sacramento: renters have real power and elected officials are crafting laws to appease them. We don’t call the shots any more. We analyze what shots are being taken and limit the negative impact to owners.
This is the first year in this trend.
We have every reason to believe that going forward, as we become a renter state, more laws will be introduced to protect renter rights at the cost of owner rights. We pick our battles, and play nicely in the sandbox with policies we don’t agree with. But this is an uphill fight. It may take years for sufficient new housing to be built to take the pressure off ever increasing rents. And until this occurs, if ever, the trend will be to make tenants a protected class. One thing is for sure: the government won’t pay for that housing or endure the cost of a bad tenant who can’t be removed from a rental property because of legal protection: private property owners will.
What’s more important, protecting your real estate asset or improving the monthly cash flows?
At Progressive Property Management, we provide both.
We have found many people who manage their own rental begrudgingly raise the rent for a tenant who pays as agreed and takes good care of their property. It is not unusual for an owner not to raise rents at all for a few years. Usually the reason for this is the owner feels the tenant is protecting their asset. Higher rents and better cash flows are secondary to their property being well maintained.
There are a few reasons why this is not good strategy:
- Everything else is going up in cost. Property taxes, utilities, dues and just about everything else associated with the rental will increase by the rate of inflation, or more. By failing to increase rent, this owner is losing 2 to 3% a month.
- Tenants start keeping a low profile. As the rent the tenant pays falls below market value rents, the tenant may decide not to bother the owner with maintenance issues because that would indicate they are not caring for the asset. And if the repair costs money, it might cause the owner to increase the rent to compensate for this cost. Better to be tenant silent and let sleeping landlords lie.
- Major repairs may be just around the corner. Smart owners stash money away into a reserve account for the inevitable major repairs the rental will require. The tenants may not bother the owner with minor issues, but water heaters fail on average every 10 years, dishwashers 9 years, furnace 20 years, air conditioner 12 years and a roof may last 30 to 40 years. You need the extra income to finance these projects.
- There is the constant threat now of statewide rent control. It will only take the vote of the California Assembly and Senate and a signature from the Governor to implement statewide rent control. If that does occur, and it includes your type of property, and depending on the maximum rent increase you are allowed by law, if you are 10% to 20% below market rents, it could take many years to bring your property to market rates.
A professional property management company should improve your cash flows.
We will bring your rents to market. We recommend increase the monthly rents a minimum of the Consumer Price Index (CPI) published each year. This is rate of inflation and what you can expect all goods and services to rise.
We use the best vendors at the lowest cost. Because of the high volume of business, they address our issues first and charge us fairly. All our vendors have been vetted and are either “Approved”, we have secured their insurance information, or “Preferred” and they are our go to vendors.
We strive to have the lowest vacancy rates possible. We do this by making your property ‘rent ready’ as quickly as possible, and by aggressively advertising your rental through every possible market channel including the Multiple Listing Service (MLS). Our average days on market before securing a paying tenant is 22 days. Every day your property sits on the market without a tenant costs money.
The difference between enjoying your investment property and not, depends greatly on the quality of the tenant you or we place in your rental. We use a Better Tenant System which works well for us and standardizes the process to a large degree. But there are five qualities to focus on with regards to finding the best possible tenant:
Statewide rent control, in some form or fashion is coming to California. What can you do as an investment property owner to prepare for this new reality? This is not the end of laws to assist tenants and restrict owner rights; it is just the beginning. You should not wait to act, but start protecting your rights ad your investment property asset immediately:
It’s official; the state legislature is pursuing statewide rent control.
This comes as no surprise since Governor Gavin Newsom, at his “State of the State Address” in February, in front of his colleagues and cameras, announced, “bring me a good bill on rent stabilization, and I will sign it”. What will it look like? I think the statewide rent control recently passed by the State of Oregon provides a good indicator. Here are the details of their new law: