Real estate investments struggle, fail without strong renters

newrenters

Without great property management you won’t have great tenants. And great tenants are the key to a successful real estate investment.

Rental property sales are ripe and on the rise for investors, provided investors know how to attract the best tenants.

“This might seem counterintuitive to the novice real estate investor, but when we look for places to invest in properties we always begin with the tenant in mind,” said James McClelland, CEO and president of MACK Companies.

“A real estate investment works when you have steady, dependable income. And the best way to get that is by having excellent tenants,” he added.

He ought to know.

Tinley Park, IL-based MACK Companies manages some 570 single-family rentals, owning 370 of them. It manages the other 200 single-family homes for real estate investors who purchased the homes through MACK Companies. MACK Companies currently has a tenant waiting list of more than four months.

With housing prices at rock bottom levels it’s relatively easy to invest in properties with a cash-flow that will cover operating expenses and allow investors to rake in a decent profit.

John Burns Real Estate Consulting recently found investor buys comprised nearly 30 percent of all transactions in the first quarter of this year in 167 metro areas, up from the low point of about 24 percent in the fourth quarter of 2009.

“Our on-the-ground research leads us to believe second quarter activity exceeded first quarter, and since last quarter, investor activity has already spiked 2 percent. Most investors are buying homes below replacement costs, or at prices that allow for a reasonable rental return, said
Erik Franks, a senior research analysis at John Burns.

Tempting top tenants

However, if dollar signs become blinders and investors overlook the fundamentals, hot markets can melt down even experienced investors.

And it’s often not for the reason they think.

“There is a misconception that people fail in their real estate investments because they didn’t buy the right property or it wasn’t in the right location,” says McClelland.

“Of course, those factors come into play, but to be a successful real estate investor, property management has to be a priority. Without great property management you won’t have great tenants. And great tenants are the key to a successful real estate investment,” he adds.

The process of obtaining the best tenants begins with finding the right property in the right location and continutes with careful tenant screening and rolling out the red carpet.

Location – Go where the tenants are. Seek real estate investment properties near thriving, vibrant downtown or other commercial corridors near employment centers with a diverse economy. In addition good jobs tenants wans what all households want – clean and vibrant parks, highly-rated medical facilities, well-funded police and fire departments, good schools and access to public transit.

Also look for locations with a high ratio of homeowners-to-renters, where homeowners keep their homes in good condition and help fuel rising home values.

“It’s much easier to depend on owner occupants to keep their properties up than other landlords,” McClelland said.

Plan to manage the property? The nearer the better. Buy it no more than an hour’s drive away so you can be reponsive to your tenants’ needs.

Condition – Choose properties that attract renters, or upgrade to make it so. Much distressed properties can be purchased for a song but their condition is a different tune. Long vacant properties can be in all levels of disrepair. A property with a condition that’s inline with the surrounding community is a better deal.

If you do purchase a fixer-upper, be prepared to bring it up to new construction standards. Young investors should avoid homes with potentially costly foundation or structural issues.

“The best tenants are long-term tenants. And the best long-term tenants tend to be families. We want properties that a family would be proud to call home,” McClelland said.

Because the best long term tenants are families, MACK suggests investing in single-family homes with three or more bedrooms, at least one-and-a-half bath, two living areas, a nice yard space and a two-car garage.

Protect your investment – Property management of one or more single-family homes can become a full time job – especially if it’s more than an hour away – and hiring a responsive management company will likely be more attractive to renters than an “I’ll get to it,” reply to requests for help.

Keeping top tenants

With a property in place working to attract good tenants, it’s up to the investor to follow through, weed out the bad seeds and grow a healthy tenant-landlord relationship.

Screening – Along with an application (with a request that no spaces be left empty), screening tenants should include a credit cehck, an interview with their current landlord, a visit to their curren home, employment check, especially regarding the prospects for their long-term employment, a skip trace and criminal backgroun check.

It sounds intrusive, but good investors don’t roll the dice when it comes to someone who will be housed in the investment for some period.

Roll out the red carpet – On tenant day give the tenant a handsome housewarming gift, something new households almost always need – extra sets of keys, window security devices, a can of touch up paint, even an emergency preparedness kit – not a fivilous bottle of wine and basket of cheese and crackers.

Also, introduce the tenant to the home, the neighborhood and area attractions and conveniences

Provide maintenance tips on care and upkeep of appliances and equipment and suggest when to do-it-themselves and when to call management for help.

Collecting rent – Online rental collection and banking sites can automate the rent collection process and even reduce costs, however, property managers who visit the propert to collect the rent can also spend time conduct a site survey to verify the condition and upkeep of the property.

“Does collecting rent in person take time? Absolutely,” said McClelland.

“But you know what takes more time? Finding great renters. Or making costly repairs to the property because you haven’t checked on the tenant in weeks and then come to find the property poorly maintained,” he added.

About the author

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