Property management risks can appear regardless of who manages the property. It is the owner’s or asset manager’s job to discover these risks before they become problems. In this episode, Charles discusses how to identify property management risks.

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Talking Points:

• When I speak to new real estate investors, I always stress that they manage their property or properties for at least a couple of years. Of course, if they are highly paid professionals, this doesn’t make sense, but if it is possible, it will teach you the whole property management business in a relatively short period.
• The second benefit of this is that once you graduate to hiring a third-party property manager and become an asset manager, your knowledge of property management will also make you a better asset manager. Check out episode SS126 to learn more about real estate asset management.
• When you are performing due diligence on a new property you are interested in purchasing or reviewing your current property, there are two different due diligence reviews you or your team will be performing; physical and financial/legal.
• Physical Inspection
  • A complete property walk-through, looking at everything from roofs to mechanicals and creating a list of immediate and future repairs that will be required. For future repairs, I really want to know the time frame. If a roof has 5 years left, I will start putting money aside for this now, but I will not replace it now. Compare that to a water heater at the end of its life cycle or one that is already leaking.
  • The second part of this requires more knowledge of local laws and regulations. This is the property’s compliance with local building codes, fire regulations, etc. This is especially important with older properties that are not up to code but have been grandfathered in. Usually, these properties will not have to be brought up to the same standards as a new build, but they might need a fire alarm system installed. Not knowing this might become a costly mistake.
  • The main part of the physical inspection is that you cannot understand the true physical condition of a property without walking it. Yes, I can see on the financials that we have been spending more money than normal on our HVAC repairs or repairs and maintenance in general, and this should alert you to the fact that things are being patched up, not replaced. Still, it does not show the exact physical condition of the property.
  • The physical inspection will also bleed into the financial and legal portion since replacing or repairing something costs money. Suppose you identify an issue with the sidewalk, for example. In that case, you might speed up the repair before your insurance policy expires to ensure you can renew it while fixing it, which also lowers your legal liability of someone tripping.
• The second method of inspection is financial and legal.
  • Review all financials, mainly the rent roll and the t-12 or trailing 12-month financials. Look where you are spending money and compare it to previous years. Maybe you are spending a bunch of money on HVAC repair; maybe it is time to replace those units that are consistently having problems or possibly find another contractor that may be less expensive.
  • Consistently review the lease agreement you are using with tenants and update it as required. I would add clauses into our leases when I self-managed as something happened like, we are not responsible for snow off our building to a car or items stored in the basement are stored at your own risk.
  • Make sure that your tenant screening process is thorough and that there are no holes where less-than-ideal tenants make it into your units. Review your evictions and delinquencies year over year to see what direction your property is heading.
  • Consistently review similar properties in your local area to see where rents are. What do the property and the units look like for those rents? How can I best maximize the value of my property? Maybe perform some simple renovations to bring your units to market rent.
  • Always review vendor contracts; when in doubt, send them to your attorney for review.
  • Are there any repairs that need to be completed? Receive quotes from licensed and insured contractors for larger jobs outside your handyman’s scope for these repairs and start budgeting for them.
  • Are there any issues with current tenants? Are any of them risking being delinquent? Do you think you might need to evict one? Start putting together a plan now for a potential tenant issue in the future.
  • Speak to your insurance agent; are there any less expensive insurance options that might have become available since your policy renewal? How can you lower your insurance premium?
  • Is there any new software or technology you can incorporate into your business? It is best to speak with other landlords to see what they use. Ask them about the pros and cons of the software.
• It is important to thoroughly vet any property before purchasing it since a lack of due diligence is typically a major mistake investors make. Secondly, investors should regularly inspect their current properties to uncover potential problems that can usually be fixed now for less money and less hassle than they would be in the future.

Transcript:

Charles:
Did you know that the majority of property management issues and risks can be avoided? I was not aware of this until I looked back over all the property management problems I’ve encountered over the past two decades. And today I’m sharing what I’ve learned with you.

Charles:
Welcome Strategy Saturday, I’m Charles Carillo, and today we’re diving into a crucial topic, how to identify hidden property management risks. Whether you are a new real estate investor or a seasoned investor, identifying, fixing these risks can save you money and prevent unnecessary headaches. So let’s get started and take your property management to the next level. When I speak to new real estate investors, I always stress that they manage their own property or properties themselves for at least a couple of years. Of course, if they are highly paid professionals, this doesn’t really make sense, but if it’s possible, it will teach you the whole property management business in a relatively short period.

Charles:
The second benefit of this is that once you graduate to hiring a third party property manager and become the asset manager, your knowledge of property manager will make you a better asset manager. Check out episode SS 126. That’s SS126 to learn more about real estate asset management. But when you’re performing due diligence on a new property, you’re interested in purchasing or reviewing your current property, there are two different due diligence kinda reviews. You and your team will be performing. The physical one and then the financial legal one. So let’s start with physical inspection. So a complete property walkthrough, looking at everything from roofs, the mechanicals, and creating a list of immediate and future repairs that will be required for future repairs. I really wanna know the timeframe. If a roof has five years left, I will start putting money aside for it now, but I’m not gonna replace it right now.

Charles:
And compare that to say a water heater at the end of its lifecycle or one that is already leaking, which you’re gonna do that immediately. Now the second part of the physical inspection portion is gonna be the what requires more knowledge of local laws and regulations. Now this is the property’s compliance with local building codes, fire regulations, et cetera. This is especially important with older properties that are not the code but were grandfathered in, which is with the properties that I started investing into, they were like a hundred plus years old. There’s always some sort of something that had to be fixed or brought up to a new code, but the properties would never, they would never reach what would be the standards of a new build though. And usually with these properties they’ll be brought up to kind of some sort of same level as a new build, but they’re never gonna have everything right.

Charles:
There might be some things that are grandfathered in. For example, they might not have ingress and egress, which like two stairs cases or something like this going up to the unit. But they might have like a fire escape and then irregular front door for the unit. Other things they might need, which we had to do a lot of, which was like fire alarm systems and not knowing this is gonna be a costly mistake. And I had this mentor years back and he was working for a large investment brokerage back in like the eighties. And it was when he was in LA and a lot this is when the Japanese economy was on fire, if they were coming to the United States to buy everything right? And they were buying this high rise, it was 40 or 50 floor office building in LA and it was an older building and they were just throwing money and they bought this property not knowing that code was changing and they were gonna have to put fire sprinklers through the whole property, which was like a million dollars back then per floor.

Charles:
Now obviously that was a huge costly mistake because they didn’t do their due diligence. Not only on the property itself, you could walk through and go, oh, this is great, but if you didn’t do your due diligence on local codes, which they didn’t which is kind of one of the problems too of having too much money when going into any kind of new investment or property or building or business in general. But if they had done their due diligence, they would’ve uncovered that this is gonna be a huge CapEx item and it would’ve just negated the whole possibility of this project working. Now the main part of the physical inspection is that you cannot understand the true physical condition of a property without walking it. Yes, I can see on the financials that we have in spending more money than normal on our HVAC repairs or repairs and maintenance in general.

Charles:
And this should alert you that in fact, things are being patched up, not replaced. So it does not show the exact physical condition of the property. Now the physical inspection will also bleed into the financial and legal portion. Since replacing or repairing something costs money, suppose you identify an issue with say the sidewalks for example. In that case, you might speed up the repair before your insurance policy expires to ensure you can renew it while also fixing something that you’re gonna have to do anyway, which also lowers your legal liability of someone tripping. Now the second method of inspection is the financial and legal portion. And this is where you’re reviewing on the financials, mainly the rent roll in the T 12 or the trailing 12 month financials and a look where you were spending money and compare it to the previous years.

Charles:
You know, maybe you’re spending a bunch of money on HVAC repair, maybe it’s time to replace those units that are consistently having problems or possibly find another contractor that may be less expensive. I’ve had to do that before and consistently review the lease agreement you were using with tenants and update it as required. You know, I would add clauses into your leases when I self-manage properties as something that happened like we are not responsible for snow off one of our buildings to a car or items stored in the basement are stored at your own risk. And those were those were different, you know, clauses that we added on because we had issues with that. And so for people that renting, Hey, this is it, you can store stuff in the basement, but that’s all at your own risk. And you know, if you’re parking list buyer, you know, buy one of the properties, buy one the roofs, just be aware that, you know, something comes off the roof you are at it’s your responsibility and make sure your tenant screening process is thorough and that there are no holes where less than ideal tenants make it into your units.

Charles:
And obviously if you’ve listened to the show before, I am a huge proponent of really thorough tenant screening and review your evictions and delinquencies year over year to see what direction your property property’s heading. Okay? Now the one thing when you’re doing property management is there’s not gonna be an immediate change. Okay? you can’t just say, okay, we’re tightening up tenant screening and two months from now we’re not gonna have any more evictions. No, it’s gonna be something that’s gonna take many months, maybe even years for that to come out. Right? As you have bad tenants that are transitioning out, they leave. And when those new tenants come in, you are really going through them thoroughly and making sure, and then you can really get an honest idea of where your property’s going. But you really have to start charting it.

Charles:
And you have to look back, back, you know, 12, 24 months to really figure out what’s happening and consistently review similar properties in your local area to see where rents are. I mean, what do the property and the units look like for those rents? How can I best maximize the value of my property? Maybe perform some single renovations to bring your units to market rent and always review vendor contracts. When in doubt send them to your attorney for review. Are there any repairs that need to be completed? Receive quotes from licensed and insured contractors for larger jobs outside of your handyman’s kind of scope for these repairs and start budgeting for them. Again, with the roof five years out, maybe there’s something else that you see and you’re gonna go, this has to be replaced in three years. This has to be repaired in or replaced in five years, whatever it might be.

Charles:
You can start budgeting for ’em and you can know exactly kind of what it’s gonna cost. So getting and being proactive about that is gonna make it better. It’s also when those items actually go bad, or maybe it’s over the summer and you know, you have a furnace and your contractor comes to you and goes, listen, you know, we don’t have that much work. We’ll give you a deal on doing these furnaces, which has happened to me before. And that’s another thing too. And you’re like, okay, let’s do it. I have some money aside already. And we’ll do these jobs right now ’cause I know they have to be done. Now are there any issues with current tenants? Are any of them risking being delinquent? Do you think you might need to evict one? Start putting together a plan now for a potential tenant issue in the future?

Charles:
Possibly speak to your attorney, drop them a message. Once you do more work with your attorney, they’re not gonna be charging usually by hour for these evictions and stuff like that. It’s usually something they’re gonna be on a per tenant basis. And it’s something like letting them know, Hey, I might have some the potential coming up, or I have a question about this. And they’ll be able to walk you through of what you’re gonna need to do, what you need to do. So the time comes, you’re not scrambling for documentation, it’s really they can handle it all for you and speak to your insurance agent. Are there any less expensive insurance options that might have become available since your last policy renewal? Maybe they brought on new carriers and how you can lower your insurance premium maybe by doing some sort of renovations to your property.

Charles:
I don’t really find that these really help that much with your premium, but it, it’s always something that you can ask and they might look through and say, well, this is older over here. This has to be done. And maybe it’s something that you were gonna repair anyway. So now when you know that’s been repaired or that’s been added or replaced, you can reach out to your insurance agent. We had this before with like I said before, fire alarm systems. We had to put those through older properties in these property that I owned in Connecticut. And it was something where I, I didn’t know, I had haven’t done, they were required by the city, right? So we’d do like one, it was like a few thousand dollars per property, maybe a little bit more. So you’d do one and then maybe a year or two later we’d do another one as they kind of went through the neighborhoods and kind of canvassed everything and told us we had to do it fine.

Charles:
So the thing that was that, what we did was, I didn’t know this, but after when I was coming up to my second one, I spoke to my insurance and it’s like, oh, let us know. I didn’t know you had that. So now it’s gonna lower your premium. So no matter what they lower it, it’s gonna be a win-win ’cause you had to do it anyway. Now, is there any new software technology that you can incorporate into your business? Bring on a virtual assistant. Is it best to speak with our landlords and kind of see what they use? This is one of the things I found because you can like search online, you find all the software and maybe a lot of it’s not really applicable to your business. But if you’re going to any masterminds or conferences or local meetups and you find investors with maybe, you know, same properties that you are working with, but maybe they have a bigger portfolio, which is great, and kind of figure out what they’re using and listen to what they’re doing, what issues are they having and kind of how they’ve corrected it, what kind, I, I just love asking about the software ’cause you’ll find out, usually it’s a lot simpler and less expensive than when you search online and you’ll, you know, and someone’s trying to sell you this in really in in-depth system that’s not even for any type of portfolios near your size.

Charles:
And also ask them about the pros and cons of software. So some people say, eh, I use this, but it’s not that good. This is the one I really want to go to. But, you know, getting over there is is gonna be a problem with moving everything over we haven’t done yet. And this is information there. It just saves you a whole bunch of time that, you know, maybe I’ll just start with the one that they’re moving to instead of starting with this one and kind of working my way and going through the same kind of growing pains that they’re going through. And you know, it’s important to thoroughly vet any property before purchasing it. Since a lack of due diligence is typically a major mistake investors make. Secondly, investors should regularly inspect their current properties to uncover potential problems that can usually be fixed now for less money and less hassle than they would be in the future.

Charles:
So I hope you enjoyed, please remember to rate, review, subscribe, submit comments on substantial show topics at globalinvestorspodcast.Com. If you’re interested in actively investing real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is a syndicationsuperstars.com. Look forward to two more episodes next week. See you than.

Charles:
You always want to invest in real estate but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding, and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income while we wait for appreciation in the future and take advantage of tax laws while we’re waiting. And unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out and invest with harborside.com. If you like the idea of investing in real estate. If you like the idea of passive income, partner with us@investwithharborside.com. That’s investwithharborside.com.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax, legal, real estate, financial, or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of syndication superstars, LLC exclusively.

Links Mentioned In The Episode:

• SS126: Real Estate Asset Management

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