Do you daydream of making money in real estate by owning or renting commercial properties, residential properties, or both? Be aware that success in this venture is unlikely unless you fully understand and abide by best practices for tenant management. Without good tenants, you will not be able to enjoy profitable real estate investments. Bad tenants will cause problems and make you sink more money into your investment than you should have to. Anyone who is interested in owning or renting commercial and/or residential properties should recognize that good tenants, and a positive relationship with those tenants, are the foundation of real estate investment success.
- Commercial Tennant Management
- Residential Tennant Management
- Screening Tenants
- Tenant Rights
- Real Estate Insurance
- Performing Regular Maintenance
- Property Management
In this article, we will provide you with a comprehensive overview of commercial versus residential tenant management, and go over screening of those respective tenants and their rights. Then we will turn to real estate insurance for commercial and residential real estate properties, and discuss performing regular maintenance on commercial and residential property, as well as property management of commercial and residential properties.
COMMERCIAL TENNANT MANAGEMENT
According to a 2011 study by the real estate market research firm Kingsley Associates, your tenants are three times more likely to renew their lease if they are satisfied that their needs have been met by you and by the property itself. Dissatisfied tenants can mean vacant properties and the associated income loss – and unfortunately, per a research study by the commercial real estate firm Jones Lang LaSalle, it can take up to two years to make up for such losses. A written strategic plan for tenant management is the first step toward avoiding this and other undesirable circumstances. This plan should include an assessment of the tenant’s real estate needs, along with a detailed action plan to ensure those needs are met. Keep it simple and streamlined for your tenants by establishing a communications hub, with a single point of contact and an assessment program that can measure their level of satisfaction using relevant metrics.
RESIDENTIAL TENNANT MANAGEMENT
A satisfied tenant is always more likely to renew their lease, regardless of whether the property is residential or commercial. If you plan to manage a residential property yourself, making it a point to personally meet your tenants and establish a point of contact not only makes an excellent impression, but can be beneficial in the long run. Take the time to learn their needs and do what is reasonable to ensure that those needs are met.
Both commercial and residential tenants place a significant priority on safety and security. Residential tenants in particular find this of utmost importance – having one’s home broken into feels like a personal violation and robs tenants of their sense of safety, which no dollar amount can restore. This is understandably a bit different than stolen office equipment or broken windows on a commercial property.
You can deter criminal activity on any type of property by installing a high-quality alarm system, keeping the exterior well-landscaped, and using appropriate lighting at night.
When searching for reputable tenants, a great deal of due diligence will be required from you. The costs of failing to find good tenants are both literal and figurative – you not only lose money, but time and effort. Good tenants should abide by all the terms set forth in the lease and communicate any concerns in an appropriate, respectful manner. When screening for commercial or residential tenants, perform a comprehensive background check including criminal and credit history, income verification, and reference checks. An interview is another essential part of the process, and will provide a more complete impression of the tenant. At the end of the day, listen to your instincts – some things (and people) look good on paper, but turn out to be quite problematic.
Screening of commercial tenants
Screening commercial tenants can be rather complex, as many firms form corporate entities that they use for tax or other purposes. We do not recommend relying on information about these entities alone when screening for commercial property tenants, but investigating the persons behind them as well. Information can be found by checking with your Secretary of State.
To learn more about your prospective tenant and get a sense of whether they will be able to bring in sufficient funds to pay you, you can request to review their business plan. This is especially recommended if they are a new business.
A non-standard security deposit is an effective way to screen out potential renters who are questionable or not sincere about the transaction. A standard security deposit is one month – a non-standard is more, such as two or three months. How a potential tenant responds to these terms will indicate whether they have the cash flow required for a substantially larger deposit, and the ability to abide by the terms of the lease. If hesitancy is shown on their part, you may have dodged a problematic tenant.
An additional way to protect yourself is to obtain a personal guaranty from the principal. A personal guaranty protects you from losses in the event of a tenant’s loss of income and/or rent in arrears by allowing you to lay claim to the assets of the principal if the firm happens to go bankrupt.
Screening of residential tenants
Screening residential tenants tends to be a bit less exhaustive, but it is no less important. You should do the investigative work yourself, rather than relying solely on information provided by applicants. For example, you can obtain copies of their credit reports from the three major agencies who offer them, and contact an employer directly to confirm employment. A bank statement will help you determine whether they have the cash flow to pay the rent on time. You are also free to ask for a non-standard security deposit, as with a commercial property.
Aside from financial considerations, a criminal background check is also a must, as well as checking the references the prospective tenant has provided. Always ask for multiple references – unfortunately, some current landlords will lie in effort to more easily remove a bad tenant.
There is much you can do to determine whether a tenant is reputable and unlikely to cause problems, but you must take care that your screening avoids discrimination and does not violate federal Fair Housing Laws. These laws state that that you cannot discriminate against prospective tenants based on race, origin, religion, sex, familial status, or disability. There may also be local fair housing rules to keep in mind. For example, certain states also prohibit discrimination based on certain criminal offenses.
Landlord-tenant disputes can be very expensive and time-consuming, not to mention quite stressful. The best way to avoid them, in addition to selecting good tenants, is to draft a clearly written and highly specific lease outlining their rights as well as what you can and cannot do. Make sure to return the security deposit once your tenants have vacated the premises (they are entitled to this if they adhered to the terms of the lease).
Rights of commercial tenants
The rights of commercial tenants are typically written into the lease. In disputes, courts tend to decide cases based on whether the terms of the lease were adhered to, regardless of what those terms were. In this way, residential tenants have more protections under the law than commercial tenants. This includes instances of foreclosure, disputes over maintenance and repairs, and entry to the property by the landlord.
To facilitate a strong landlord-tenant relationship, you will want to make sure your lease terms are outlined clearly and in detail. Regarding entry to the property, define what constitutes “adequate notice.” If you need to make major repairs to the property that could affect tenants’ business operations, make sure to provide more than adequate notice to minimize challenges. Tenants whose businesses require some level of confidentiality will especially appreciate your consideration.
Rights of residential tenants
A landlord’s right of entry into a residential property is a sensitive topic for many tenants, and not a small number of conflicts arise from whether the landlord entered the property inappropriately. Again, make sure you are very clear about rights of entry in the lease, and that your terms follow state and local laws to the letter. This will minimize the chances of conflicts or lawsuits.
Another major aspect of tenants’ rights concerns the habitability of the space, which is your responsibility under state laws and the regulations of your local housing authority. These requirements include sufficient heating, waterproofed structural elements, water, electricity, absence of pests and other unsanitary conditions, and adherence to electrical codes. Aside from these general requirements, there are other items to keep in working order, such as smoke detectors and locks.
If you do not meet these basic requirements, the tenant may, depending on the city or state in which your property is located, withhold part or all of the rent, or make the repairs themselves and put the expense towards the rent they owe you.
REAL ESTATE INSURANCE
A rental property is a highly valuable asset, and requires insurance for sufficient protection. There is only so much you can do to prepare for your tenants, and unfortunately, they may still damage your property, deliberately or inadvertently. There are other unpredictable factors that can impact your property, such as weather. Unfortunately, many homeowners and real estate investors have lost hundreds of thousands of dollars for want of comprehensive insurance policies.
Make it a point to review all policies you hold at least once yearly to make sure that they are up-to-date and as inclusive as possible. You can also procure the assistance of a financial advisor – but make sure to hire an advisor, not a broker, as a broker may be financially motivated to upsell you additional policies you may not need.
Obtaining real estate insurance for commercial properties
There are several steps you must take to obtain building insurance for a commercial property. First, you will need to get a certified appraiser’s valuation of your property. Make sure to take inventory of the property inside the building, such as appliances and flooring, that would need to be replaced in case of loss. Then you can speak with an insurance company about the costs of property, flood, and liability insurance, as well as umbrella insurance, which will cover what falls outside of your liability limits. You can provide additional security for your investment by looking into “loss of use” policies that cover the rental fees for a new building if your existing property suffers a disaster and is out of commission for a period of time.
When reviewing different insurance policies, take stock of their level of detail and comprehension. For example, will you be covered in a once-in-a-lifetime event, such as a natural disaster, or would you need to take out an additional policy? Ideally, you would never need to use this “extra” insurance, but few come to regret opting for the more comprehensive policy.
Obtaining real estate insurance for residential properties
As you would with a commercial property, get a certified appraisal and take inventory. Your credit will be a factor in your insurance premiums, so if you have any outstanding issues to resolve, make sure to settle them before approaching an insurance company.
There are various insurances to hold for coverage of a residential property. Landlord contents insurance will cover damage to the inside of the space. Rent guarantee insurance will allow you to receive rent even if the tenant does not pay, and is usually purchased in conjunction with a tenant screening. Natural disaster insurance is a must, of course. Lastly, if you employ maintenance workers, employer liability insurance can protect you in the event a worker makes a claim against you.
PERFORMING REGULAR MAINTENANCE
As Andrew Zezas, President and CEO of the Real Estate Strategies Corporation, writes on his blog, outstanding landlords “maintain the heck out of their properties.” Regular maintenance is a cornerstone of your success: not only does it minimize depreciation of the property, but it facilitates tenant satisfaction over time. Many disputes between landlords and tenants arise over misunderstandings and delays regarding maintenance, which can cost you considerable time, rental income, and legal fees, and possibly even the renewal of a lease.
Commercial property maintenance
You can require that commercial tenants are responsible for the maintenance, as long as the provisions are noted in detail in the lease agreement. You should also indicate what the tenant, and/or their contractors, can and cannot change on the property. If you wish to assume responsibility for maintenance and repairs, you can pass on the estimated costs to the tenant in rental fees and/or common area maintenance (CAM) fees.
Residential property maintenance
Unlike the typical practice with commercial properties, residential property maintenance is usually the landlord’s responsibility. If you perform regular maintenance, and use a simple and efficient system to see requests through to completion, you can avoid high costs down the road and minimize tenant disputes. Regular maintenance includes but is not limited to post-storm assessment of leaks and water damage, assessments of grout and caulking, ensuring smoke and carbon monoxide detectors are in working order, and flushing of water heaters.
If you choose to invest in real estate properties, there are many resources available to you, including those provided by local real estate boards, real estate networking groups, and property management software. Due to the scale and complexity of commercial properties, you are encouraged to employ the services of a property manager or property management firm to assist you with the various aspects of their management.
Being a landlord of a commercial property
Commercial real estate tenants have a unique tie to the landlord in that the success of their business can directly affect the return on the landlord’s investment. If you are able to speed up a planned renovation, for example, or help co-market their business, you can help facilitate your tenant’s success. After all, a successful and satisfied commercial tenant is more likely to renew the lease.
Being a landlord of a residential property
The landlord of a residential property is responsible for not only ensuring their tenants adhere to the terms in the lease, but for holding themselves accountable for meeting tenant expectations. Take care to ensure a secure and sanitary space. Communicate clearly and frequently about any changes to the property or proposed changes to the lease terms. Provide prompt and high-quality maintenance as outlined previously.
Employing a property manager/management firm for a commercial property
When considering the services of a commercial property manager or firm, there are many aspects to evaluate. A property manager will serve as the first point of contact for your tenants. Their performance is key to tenant satisfaction, so vetting an excellent manager or firm is as important as tenant screening.
There are several areas to focus on when looking to obtain the services of a property manager or firm. First, you should ask whether they are licensed and determine their legal capacity and experience with the market in which your property is located. Will they be able to keep your costs down and the rent competitive? What are their fees? Are they willing to provide contact information for references?
Once you have selected a suitable manager or firm, work out a plan that includes benchmarks for assessing their success, and regularly evaluate their progress towards your goals.
Employing a property manager/management firm for a residential property
You can evaluate prospective residential property managers or firms with the same general blueprint you would use to evaluate a commercial firm. Select a firm or manager that is local and licensed, with strong references, with experience in planning, legal matters, and addressing problem tenants. Once again, regularly evaluating their performance is essential to your success, as is a plan for ensuring tenant satisfaction and profitability.
Commercial tenant management software
As mentioned previously, commercial tenant management is a complex venture with many variables. Real estate management software can help you smoothly manage all of these moving parts. A recent review gave LandlordMAX top honors for professional property management, citing a robust suite of accounting and document management features.
Residential tenant management software
Business News Daily recently recognized Quicken Rental Property Manager as especially helpful to smaller property owners or managers who may not be incorporated. LandLordMAX also provides comprehensive residential property management solutions to landlords.