The Apartment Consultant

The last blog, I wrote on two basic yet oh so important things to know like the back of your hand before you buy. In this blog, I want to share with you 2 very important things to watch after you buy. This will save you a lot of heartache and delays of getting paid a monthly check.

There are many “important things” to watch out for right after your acquisition, but what I’m writing about right now comes from what’s happening to me personally. Here are two of them.

The first one is…knowing the quality of your tenant. You’re in the income property business, right? Therefore, doesn’t it make sense to make sure your income source is reliable? Putting in so-called paying tenants out of desperation and hoping they pay is a disaster waiting to happen. In fact, the disaster happened when you decided to approve that tenant to move in. Please realize that buildings don’t cause problems, but the people in them do. I focus daily on the 4Ms of apartment operations – Money, Marketing, Maintenance, and Management. If you examine closely enough, you’ll see that if you have poorly qualified tenants, then you have no chance of succeeding within the 4Ms. You want the best tenant possible for your apartment, no matter what size…2 units or 100 units. Marketing to and placing the ideal tenant leads to steady income, predictable operating expenses and repairs, normal or better than normal tenant turnover, and a good community reputation. These are priceless attributes of an apartment business and lead to quality sleep on a nightly basis! On the other hand, and you’ve probably have seen or heard of properties like this, where the apartment has a bad neighborhood reputation, has a bad appearance from the street view, tenants hanging around outside way too long, and the list goes on. This is all caused by selecting poor quality tenants. And this is not a market problem, but a management problem.

The second important thing after a purchase is something that probably does not excite you much, but it is oh so important…and that is…bookkeeping. Many new investors want to be wealthy in real estate, but not pay the price of success and riches. The price to pay is to know your cash and payable position at all times, down to the penny. This goes for any business. I personally believe that additional blessing comes upon those who have proven to be good stewards over the things they are in charge of. If you take care of your business, then you deserve more. If you don’t, then you don’t. This is not only a Godly principle, but a universal one. I am in the midst of a small apartment acquisition, performing the financial portion of my due diligence. The owner of the apartment complex has supplied me with hand-written rental income and operating expenses. This is not acceptable and there is no good reason to have ever done so. Pure laziness is what I think happened. Even though I’m still interested in the deal, the price and terms has to be re-negotiated because of this (in my favor). The seller will have to give up hundreds of thousands of dollars in profits just because the property data was never recorded properly. Expensive lesson to learn!

Till next time,
Peter Harris, TheApartmentConsultant.com

First of all let me make it clear that there are other significant causes of apartment investment failures such as making a bad deal, investing in a declining market area, having too much debt, and incurring lawsuits, but the number one cause is, by far, poor property management. Now this goes for apartments being managed by its owners or by professional management companies.

Here are four of seven of the most common mistakes that poor property managers make. I will include the other three next week. Here’s some good advice to being successful in the apartment business: don’t make these same mistakes!

Mistake #1: Have none or very little property management skills. You can see here I used the word “skills” and not “experience”. I know a few property managers who have years of experience but lack the skills to manage their property most profitably. The skills I am referring to can be obtained through supervised training and education. Poor skills lead to poor choices which lead to poor results. And failure is the inevitable outcome.

Mistake#2: Lack of market knowledge. Not knowing levels of rents for the area and vacancy rates will guarantee subpar results for your apartment investment. Not having an aggressive marketing plan or not targeting your ideal tenant profile is a very common mistake. You can’t just hang a sign outside and expect to have your 50-unit apartment building at 100% occupancy with a waiting list – it’s not going to happen. Know your market and its demographics like the back of your hand.

Mistake #3: Not watching the flow of money like a hawk. Human nature says to the property manager, “money is available and I can surely spend it, so I will”. Poor cash control is a property killer. It’s like giving your ten year-old his college education savings in advance and asking him to make sure he takes care of it. Human nature will take over and he will look for opportunities to spend it unwisely and/or foolishly. Know the cash position of the property on at least a weekly basis. Make an effort to understand monthly financial reports of the property. How can you make sound business decisions concerning the direction of the property if you don’t know how much money is in the bank or is due to come in?

Mistake #4: Now knowing the ins and outs of the property, literally. If you don’t know the strengths and weaknesses of your property, how do you then go against your competition? You should easily know the rents and square footages of your one and two bedrooms, what makes them appealing, what amenities (pools, laundry, club house, internet, etc.) are on the premises, highlights of the surrounding area, and so on. You should also have a grasp of the property’s incoming rent amounts on a monthly basis and a deeper grasp of its operating expenses. The more you know, the better the decisions that can be made.