Rent Collection, Setting Rents, and Managing Funds

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Rent Collection, Setting Rents, and Managing Funds

Rent payments are the meat and potatoes of a property management company. In fact, the property management industry brings the U.S. a whopping $76 billion in industry revenue each year. Without the right people and processes in place to bring in profit each month, a property management team has no chance of success. When a property team gets it right, however, real estate investors are able to reap the benefits.

To ensure a property management company can bring in the right monthly rental income, ask these questions when interviewing potential companies:

Setting Rates

How do you determine rental rates?

A successful property manager will study the local property market and constantly compare your property to a bulk of similar rentals in the area. If a property team uses the old 1% rule, consider that a red flag. The 1% rule simply means charging 1% of your property’s value for monthly rent. Although that can get the price close to fair, setting rental rates based on current market data is the only way to guarantee your price is fair and competitive. Pricing that follows the current market trends is more likely to have prospective tenants within one month.

What is your process for raising rental rates?

Although 88% of property managers increased rental rates in the past year, maximizing rent is not an art – it is a science. Like we said before, it is all about monitoring the local market data on a regular basis. To keep your rates competitive in the market, property management companies should be reviewing rates at least once a year. If lease renewals or vacancies happen before the one-year mark, it is still a good idea to survey your pricing against the market.

What if you need to raise rental rates mid-lease?

Property management companies can work in something called ‘contractual escalators’ to their lease agreements. This means the tenant agrees to allow rental rates to raise without notice or explanation. Since tenants must understand and agree to this prior to signing the lease, it gives your property team the power to adjust rates at any point, if needed. However, keep in mind that sudden rent increases will not be favored by tenants. Make sure the property management company escalates contracts in an ethical manner, so current and future tenants feel they were treated fairly (otherwise, queue the bad Yelp reviews!).

Rent Collection

How do you collect rent payments?

With today’s technology, property management companies should allow tenants to make payments online or set up automatic monthly bank withdrawals. Only accepting checks or money orders increases the workload and time it takes to get paid. Online payments also increase the chance that rent will be paid on time, every time. If a company only accepts checks or money orders, technology may be one of their weak spots. For the sake of today’s clients, lack of technology can be a deal breaker.

What if a tenant goes delinquent?

Tenants are only human. Property management companies should have a process in place that is strong yet sensible. Without a strict policy, tenants will continue to make late payments. Allowing the policy to be reasonable, however, allows wiggle room for tenants in a short-term bind. If a tenant begins to make late rental payments, the property team should keep a close eye on their account. If the tenant catches back up on rent within the next month, you have now created a trusting relationship with that tenant. If the tenant continues paying late, it is time to start the collections process to prove the company is serious about its policy.

What if a check bounces?

A bounced check is a warning sign that your tenant is struggling to pay rent. Since one bounced check may lead to future payment trouble, a tenant should be prohibited from writing personal checks for rent for at least 6 months after the initial check bounced. If they can build at least 6 months of good payment history following that, personal checks can once again become an option. Also make sure there are terms in the rental agreement to make the tenants responsible for the maximum fees associated with bounced checks.

When is rent due? Is there a grace period?

Most property management companies expect rent to be paid on the first of the month. From there, a grace period may extend through the 5th of the month. Any longer than that will allow significant delays in payment timeliness.

How do you handle late fees?

The #1 concern for any property management team is non-payment of rent. Although 88% of property managers increased rental rates in the past year, maximizing rent is not an art – it is a science. If a tenant pays rent past the due date or grace period, a property team should have an established and expected late fee policy. Although late fees generate extra revenue, the true purpose of a late fee is to nudge a tenant to get back on track with rent payments. Late fees typically run between 3 and 10 percent of the monthly rental rate, but some property management companies add additional late fees each day to encourage tenants to pay rent as soon as possible.

How many accounts are currently delinquent?

This question is important in understanding how strict the property management team is when handling rent payments. It can also be a great indicator for how well they screen prospective tenants. A lot of what you find through the tenant screening process will indicate the chances for on-time payments each month.

What is your eviction process?

Every property management team should have a well-defined and documented process for handling tenant evictions. Although every eviction will need to be handled on a case-by-case basis, it is important that the property team is able to act quickly, while still moving forward in a legal and ethical manner.

Property management companies that are especially confident in their eviction and tenant screening processes will offer eviction insurance to their property owners. Eviction insurance allows a property owner to pay a small monthly fee that ensures the property management company pays for all attorney and court costs associated with an eviction. Not all property teams offer this option but consider it a great sign if they do.

How many evictions did you experience in the last year?

The 2016 eviction record average fell slightly below 10%. The lower the number, the better. A high number of evictions can mean the property team has a poor tenant screening process and does not work to maintain healthy tenant-landlord relationships.

Rent payments are your biggest source of cashflow. For this reason, it is crucial that you choose a property management team that knows how to pick the right tenants and have processes in place to make sure all debts are collected.

Rent payments are also your biggest source of funds to pay for day-to-day property maintenance and repairs. Read on to learn more about the process you should expect from a property management company when it comes to Maintenance and Repairs. A well-oiled preventative maintenance program will keep a lot of those rent collections in your pocket!

Hiring a Rental Property Manager

Typical Property Management Services

Fees and Contracts

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