Benefits of Owning Rental Property
Before a property manager can successfully oversee a rental property, it is important to understand what the owners expectations are for the property. A variety of benefits are available to owners and investors. The general benefits of the ownership of a rental property include:
Income is high on the list of owner benefits. Cash flow, the cash left over after cash expenses, is more important to some owners than others. Some owners, those who have a greater need for immediate cash on hand, might resist making improvements on the property. However, owners who focus more on the long-term generally seem to be more financially secure.
Over the long term, real estate values remain consistent. Although real estate investments do come with their own set of risks, owners can vary the degree of risk they're willing to take by the management plan they choose for the property.
Depreciation is the loss of value due to physical deterioration, functionally obsolete or economic obsolescence of a real property. Some owners recognize that a portion of their income can be sheltered from taxation by depreciating a property and its improvements. In terms of taxes, only the depreciation from a physical deterioration is deductible from a property's income. See your tax advisor for your special situation.
Capital gains taxation
Capital gains are gains on the sale of a capital asset, for our purposes, real estate -- which are subject to a preferred tax rate. Capital gains taxes vary depending upon many factors. See your tax advisor for your special situation.
Appreciation is an increase in value due to improvements of a real property. Investment real estate has risen in value as well as declined in value over the last few decades, generally in parallel with business cycles and supply-demand cycles. In recent years, the real estate recession has caused adverse impacts on commercial and investment real estate since demand for space has declined and unemployment has led to lowered residential rental occupancies. However, in difficult real estate cycles, the astute manager can sustain the investment property’s value and cash flow by making every effort to minimize vacancy, retain existing tenants, and keep rent levels as stable as possible.
Pride of ownership
The pride of ownership is ultimately having the ability to have the prestige associated with owning a trophy property. In the cases of owners the owners care about how the building looks and having good tenants, as well as making a profit.
Often, an owner desires a combination of these benefits. Overall, though, most owners who have property managers want a low amount of annoyance; as they have brought on someone else to manage their properties for them.
Taking Over a Property Management Contract
When a property management company takes over the management of a property, all existing terms of the lease and management agreement should be reviewed and changes made with the owner before taking over property. The following terms may show why these must be reviewed and/or change:
- Security Deposits – Who will hold the deposits? This can be determined by agreement within the lease or company policy.
- Pets – Are pets allowed? If pets are allowed what kind of pets?
State of the Property
Once a property is placed on the market for rental, it should be in great condition. Be sure that the property is in pristine condition and all trash is cleaned up, the property is repainted, and carpeting and windows cleaned.
When to Refuse Management
There will be times when the property manager might refuse an offer of the management for a property or owner, a property manager should always evaluate whether they want to manage a property before agreeing to do so.
In general, there are times when the practices of good business will dictate that you pass up the opportunity to manage a particular property. Below are some reasons you might refuse to manage a property:
- Slum lording – a situation in which the owner (known in this case as a slumlord) cares only about the rent money and nothing about tenant services, repairs, taxes, or other necessary property concerns. Typically these owners only care about cash flow and most tenants will leave the property.
- Unrealistic fees offered by the owner – being properly compensated for all work performed.
- Property has unresolved code violations that can result in health and safety issues or a liability to tenant or management company.
- Short-term opportunities in which you'll have to manage some unpleasant task in which the owner does not want to be involved like an eviction or a major remodeling job.
- Situations in which the owner doesn't trust you enough to give you a reasonably free hand in managing and when repair or improvements are needed spins your wheels requesting 4 or 5 different estimates not to do any of the work.
- Negative cash flow situations, in which the owner doesn't want to subsidize management activities.