All Systems are GO! How to Build Repeatable Processes for Your Rental Business (Part 2)

We reviewed the first half of our systems last week and talked about how they can help you streamline your business and help you grow to new heights. Today we will go through the second half of these processes that make our rental business tick. Remember, in our case, these types of systems helped us (2 guys) acquire and manage 50 properties, all as a side hustle. Of course, now it’s a legitimate business that we can run off the side of our desks.

We already talked about:

• Rent Collection
• Repairs
• Rehabs
• Make Ready
• Tenant Acquisition

Let’s now dive into the rest of the systems that make us money:

• Lease Renewal
• Evictions (Heaven forbid!)
• Managing the Books

Lease Renewals

Usually, we sign our tenants up for one-year agreements. However, we always offer the tenants a two-year lease option as well. Here’s our reasoning for this lease length. Often you would think a shorter agreement would give the owner more opportunity to then raise rent for the next lease period; however, we value tenant longevity over raising rents, and here’s why. Since we are managing this enterprise ourselves, anytime we have tenants move out, it causes us a loss in income and an increase in our time demands as we have to get the property ready again. If we can spread out these potential tenant turnover events by signing our tenants up for longer leases upfront, then it reduces our time demands to focus on what we like to do most, which is buying more real estate. Usually, the tenants will see this longer lease as a win-win as well because they know that their rent won’t change for at least two years.

When a tenant’s lease is up, they hardly ever contact us to start a new one. Our leases default to going to month to month after expiration, and we don’t change the rent price, so there’s minimal incentive for the tenant to renew. This decision helps us in two ways.

1.  Gives us the flexibility to tackle the lease renewal when we are ready, and doesn’t cause a fire drill when the lease expires
2.  Allows us to more effectively time and “smooth” our lease expirations out across the year.

For #2, There is a fine line of what we are trying to accomplish with our lease renewals. For us, our hardest time of year to find good tenants is in the winter. We can still attract new renters; it just seems like there are fewer qualified applicants, and the market is slower. Having a house go empty at the beginning of December means we won’t have somebody till January 15th potentially (especially with the holidays). That’s over a whole month in lost rent! If the same house goes empty in June, we can usually get that sucker rented again in 10 days.

By having our leases expire in October instead and then go month to month, we then can let them ride until the spring and then sign them up for another year, thus changing the expiration to a better time for us.

Therefore, in theory, we’d love to have all our leases end between March and August. However, we are only two people, and if we had ten houses suddenly go vacant, the two of us would start to have an incredibly chaotic life trying to get them rented again. It’s a careful balance we regularly monitor to make sure we don’t have too much exposure in the winter months but also that not all the leases end in May or June either.

Evictions

The worst part of being a landlord, in my opinion, is having to kick a family out of a house because they can’t pay their rent. In 6 years it’s only happened to us about three times. Luckily none of them have been ugly, but still, it’s always painful to have to go through the process, and the work and cost involved isn’t fun either! Thanks to our uniquely structured relationship with the tenant, this process can go better than if they knew we were the owner.

Once we decide that the tenant can’t make rent and can’t even go onto a modified payment plan by paying one week at a time (In advance), we have to file an eviction to get our asset back.  We used to go through all the effort of “posting” a 3-day “pay or quit” notice on the front door and then filing with the local court system. However, now for a few hundred bucks, we use Nationwide Eviction, and it has been amazing. They do all the filing and make sure it’s done right. Worth it in our experience to outsource this potentially messy step. It has been such a relief on the few evictions we experience to have them do all the heavy lifting.

Communication is key

The key to a successful eviction is communication.

Picture this scenario. The 1st of the month comes, your tenants’ rent doesn’t arrive. Then the 3rd comes, still no rent. Now the 5th, you reach out and no answer. On the 7th you drive by the house, and there’s a car there, but nobody answers. You post a three-day pay or quit on the front door. On the 10th, you file for eviction, still no answer from the tenant. By this point, you are worried they are just going to squat or trash your place. A week later, you have a court date, and of course, the tenant doesn’t show, so they are evicted. Constable goes by to force them out, they are nowhere to be found, although some of their stuff is there, and it has to be cleaned out.

This situation was a real-life experience for us.  It happened when we had a property manager, which we eventually fired. Granted, it wasn’t that bad in the end as we got to keep their deposit, and they didn’t trash the place, but it could’ve been so much worse.

Now, we train our tenants to talk to us and communicate any future rent issues so that we can work out a plan AHEAD of time. I always tell them, the more time we have, the more options YOU have. Now they will contact me a few days or even a week before the beginning of the new month and tell me the situation. I work out a plan with them, and if there’s no plan to be had, then we plan the most graceful way to them to exit while doing as little damage to the property as possible. I often incentivize them to leave quickly or make sure to leave it broom swept, by promising not to file a real eviction or a broken lease on their credit. Sometimes I even will give back a portion of the deposit if the situation warrants it.

Communication with your tenants is what will help minimize costly evictions and maximize cash flow and profit on each of your properties.

Managing the books

Now to maintain this formidable enterprise, we don’t use anything fancy. We are both finance/IT guys, and all we use are spreadsheets. We are so revolutionary, I know. We looked at different property management and accounting software solutions, but in the end, what works best for us is to run it all from one Excel workbook. It’s glorious.

We have a P/L for each property. This setup is critical, as it lets us know how each asset is performing and allows us to see where changes needed to be made to make underperforming assets act more like their better behaved “siblings.” It only takes us a few minutes each day to update, or if we don’t look at it for a few days, it might take 20 minutes to get current.

At the end of the year, we do import data into QuickBooks and then hand that over to our CPA to do our taxes.

Systems are the Magic Glue to Achieving Freedom

In the end, our systems are a big part of what makes our business successful. They are simple, repeatable, and robust. They allow us to scale our business while still giving us time for our day jobs and, most importantly, spend time with our families. In the end, we all have the same amount of time in a day. We just need to figure out how to maximize it. Good luck with finding the systems in your life that can help you do the same!