Managing rental properties can be a complex endeavor, especially for landlords with a small number of units. Ed Barone, co-founder of RentRedi, offers a wealth of knowledge gained from his experience and the data collected from nearly 200,000 landlords and renters using the platform. His insights provide a fresh perspective on common challenges faced by landlords with three to six units.
Barone’s expertise is particularly relevant for landlords like myself, who manage a handful of properties. My portfolio consists of three long-term rentals in Conroe, Texas. These properties are relatively new and require minimal maintenance, allowing me to focus on other ventures, such as a glamping site two hours east. When Barone addressed the unique challenges faced by “a landlord with three units,” I was immediately intrigued.
Understanding Late Payments: A Geographic Perspective
One of the most eye-opening revelations from Barone is the significant variation in late-payment rates across different states. According to RentRedi’s data, late-payment rates can fluctuate by up to four times, with states like Utah and Hawaii experiencing around 5% late payments, while states like Mississippi see rates as high as 20%. This variation underscores the importance of understanding the local market dynamics.
Barone emphasizes that a landlord with a few units might interpret late payments as a reflection of the tenant’s reliability or their own management style. However, the data suggests that geographic location plays a crucial role. “A landlord with a handful of units treats every late payment as a verdict on somebody,” Barone notes. “Either the tenant is a problem, or you’re too soft. Sometimes it’s neither, and some of that gap tracks to where the property sits.”
Implementing a Systematic Approach
To address late payments effectively, Barone recommends a systematic approach. This includes setting autopay as the default at lease signing, sending reminders before the due date, and establishing a consistent late fee policy. Small landlords often lose out because they charge late fees inconsistently. It’s essential to include the late fee in the written lease and apply it uniformly every month.
Additionally, landlords should familiarize themselves with state-specific regulations regarding late fees. For instance, in Texas, late fees cannot be collected unless specified in writing, and the fee is considered reasonable up to 12% of the monthly rent for buildings with four units or fewer. Exceeding this limit can result in legal repercussions, including fines and attorney’s fees.
The True Cost of Not Raising Rent on Good Tenants
Barone also highlights the financial implications of not raising rent on good tenants. According to RentRedi’s data, the average unit rent increases by about 46% over roughly 6.8 years. For a $1,500 unit held flat for five years, the forgone rent amounts to approximately $6,000, or $18,000 across three units. However, my own calculations suggest that this figure might be higher, depending on the annual rent growth rate.
The arithmetic is straightforward: annually, subtract your frozen rent from the market rent, multiply by 12, and sum the gaps over five years. At a 3% annual growth rate, the forgone rent for a $1,500 unit would be about $8,400. At 4%, it would be around $11,400. Compounded annually at 5.7%, the five-year number approaches $16,600. While the exact figure may vary, the direction and magnitude of the cost are clear.
Balancing Rent Increases with Tenant Retention
Barone’s advice extends beyond mere numbers. He argues that raising rent isn’t always the right decision. Tenants who pay on time and maintain the property bring intangible value that doesn’t appear on the rent roll. The cost of turnover, including vacancy, cleaning, re-listing, and screening, can easily offset the benefits of a rent increase. Barone’s poignant statement, “A high rent with a bad tenant can cost a landlord far more than a fair rent with a good one,” encapsulates this dilemma.
To make informed decisions, landlords should compare their rent to market rates using comps from actively listed units within a mile that match their bed and bath count. If the rent is within a few percent of the market rate, it’s reasonable to leave it unchanged. However, if it’s 15% below market, the landlord is essentially subsidizing the tenant. Small annual increases are preferable to a single large adjustment that could lead to vacancy and turnover costs.
The Importance of Regular Bookkeeping
Many small landlords procrastinate on bookkeeping until the week before taxes are due. This approach can be costly, both in terms of missed deductions and delayed problem identification. Barone points out that the annual scramble to reconstruct deductions can result in overpaid taxes, potentially amounting to hundreds or thousands of dollars across a few units.
Moreover, delaying bookkeeping can hinder the timely resolution of tenant issues. A tenant who has been consistently late with payments may be a footnote in January but a solvable problem in month two. Regular bookkeeping allows landlords to spot trends, such as a tenant’s rent drifting later each month, and address them promptly. Dedicate 20 minutes on the first of each month to categorize transactions, photograph receipts, log mileage, and check rent payment dates. This proactive approach can save both money and stress.
By adopting a data-driven approach, implementing systematic policies, and maintaining regular bookkeeping, landlords can navigate the complexities of property management more effectively. These strategies not only enhance financial stability but also foster better tenant relationships, ultimately contributing to long-term success.
