Whether you have a residential property or a commercial property, how you manage your property is one of the most decisive factors in the success of your real estate assets.
Having a complete understanding of what property management entails is crucial to your success.
What is Real Estate Management?
Real estate management describes the day-to-day duties that go into operating rental property and maximizing its return potential; from tenant-facing duties to maintenance and upkeep to deducting taxes on the income, a lot goes into effective management.
For those just starting out, it can be difficult to know where to begin in this process.
There’s a lot of work that goes into running a successful property, but it’s not impossible. When you have a stronger grasp on what makes for effective real estate management, you can make the decisions that promote your financial success.
What to Expect From a Real Estate Manager
Here are a few key areas that you ought to consider before stepping into a management role for your rental property.
Real Estate Managers Conduct Tenant Screening
Your tenants are the lifeblood of your rental property. Their rent sustains your property, making tenant screening an absolute necessity for functional property management.
Bad tenants can be a nightmare for landlords. Delinquency will shut down and seriously disrupt the cash flow from your property. Evictions can be costly and time-consuming and often drag both landlord and tenant to court, which adds even more costs.
Tenant screening is the process through which you evaluate prospective tenants. Thorough tenant screening, you can have greater confidence that the tenant will abide by the rental agreement you’ve set for the lease.
There are a few ways in which property can screen prospective tenants.
Real Estate Managers Screen Rental Applications
One of the most common first steps landlords set in renting their property is the completion of a rental application.
A rental application is a form that assesses a baseline evaluation of the prospective tenant. The information requested on a rental application can vary between different property managers. In general, they tend to ask for basic information like:
- Proof of income
- Employment history
- Rental history
- Date of birth
- Social security number
- Credit score
Real Estate Managers Conduct Background Checks/Credit Reports
Most property managers ask for the information they can use to run a background check and credit report on the tenant.
In some states, background checks and credit reports require written consent from the prospective tenant. Be sure to educate yourself on the housing laws in your area when putting together your rental application.
Rental applications may have a fee to offset the costs of running background checks.
In-depth tenant screening processes can be costly and time-consuming. Many landlords opt for third-party services to handle tenant screening.
Real Estate Managers Accept Deposits
Towards the end of the application process, the property owner usually asks for a deposit from the tenant.
A deposit is a money paid to and held by the landlord over the course of the lease. Deposits are usually set to the monthly rental amount and are held to pay for any damages the renter causes to the property.
Depending on the condition of the property when the lease ends, landlords take money from the deposit to offset repairs—everything from cleaning fees and repainting to more serious damages.
The remaining deposit is returned to the tenant when they have fully moved out.
Writing A Rental Agreement/Lease
If you approve your tenant, then draw up the rental agreement and start the lease. The lease sets the legal guidelines both you and your tenant must follow.
Failure to uphold the lease on either the tenant or landlord’s end can lead to serious expenses. Having a clear lease is an essential part of successful property management.
Most leases cover these subjects:
- Names of the tenant(s)
- Type of rental agreement
- Duration of lease
- Type of rental agreement
- Monthly rent
- Who pays for utilities
- water, electricity, gas, trash collection, etc.
- How much is the security deposit is
- Terms to return the security deposit
- Responsibility for repair
Clarity on these subjects and other stipulations you include in the rental agreement will save you from headaches.
The more in-depth your rental agreement, the less likely you’ll find yourself in a situation that requires the courts to get involved.
To set a monthly rent that ensures you’re receiving a positive cash flow from your rental property, you must consider the operating expenses first.
Depending on the rental agreement reached with your tenant, you may not have to pay all these expenses what you do pay for factors into your cash flow.
Operating expenses don’t just help you calculate your monthly rent but may serve you as tax deductions at the end of the year.
Here’s what you can expect to pay on operating expenses for your rental property.
As with any property, you must pay property taxes on your rental property. Property tax varies from state to state—oftentimes, local governments may levy their property taxes.
Property taxes can be deducted in the year in which they were paid.
It is highly advisable to ensure your rental property. There are two types of insurance landlords may want to consider to protect themselves.
The first is property insurance, which covers the dwelling, other structures on the property, and personal property kept onsite that the landlord uses to maintain the asset: snowblowers, lawnmowers, etc.
Landlords may also consider purchasing liability insurance. In the event that a tenant injures themselves on your property, and a court concludes you were at fault, you could be subject to any medical costs paid by the client.
You should account for potential repair costs on your rental property. From burst pipes to leaky faucets, repairs can be a costly operating expense. Normal wear and tear also add up over time, which you should factor into your cash flow and tax deductions.
Depending on what you include in your rental agreement, you may be paying for utilities. What you do pay can qualify as an operating expense.
What Is Depreciation?
Through depreciation, investors can lower their taxable income and increase their cash flow on their real estate assets. Rental properties have a huge benefit that incentivizes property improvement and proper maintenance called depreciation.
How Does Depreciation Work?
This process allows rental property owners to deduct the depreciation in the asset’s value during the course of its useful life—the estimated length of time in which an assessment can reasonably be used.
In the case of residential properties, the useful life is 27.5 years; for commercial properties—39 years.
Over the course of a rental property’s useful life, its value can be expected to decrease due to wear and tear. This decrease comes from “phantom expenses,” assumed expenses that will have to be made in order to maintain the property.
How Do You Find Depreciation?
Distributed over every year of its useful life, rental property owners can deduct the depreciating value of their property from the income earned from it.
For example, if a rental property earns 10,000 dollars in rental income, the yearly depreciation amount on the property can be written off on that earned income.
To calculate depreciation, the rental property owner must:
- Find the property basis
- Establish the cost difference between the land and the buildings
- Establish the basis for the building
Finding Property Basis
Basis of assets refers to the total capital investments in real estate assets for tax purposes—essentially, its total cost.
A property’s basis is the cost paid by the property owner to buy the property.
Property, in this case, means the land and the buildings on the property in total. Additional expenses in acquiring the property can be included in the basis, like closing costs, legal fees, and transfer taxes.
Difference Between Land and Structure(s)
Depreciation only allows rental property owners to deduct improvement and maintenance expenses on the actual structures of their property.
The value of the land must be established as distinct from the value of the buildings, as the land is not subject to depreciation.
Separate the land from the structures and the additional fees on the property basis.
Establish The Basis of the Structure(s)
Your starting point for depreciation is the basis of the structure(s) on the property.
Suppose the basis for the structures on your property was $60,000. The IRS stipulates that 27.5 years is the total duration a property can be depreciated. Divide the basis by 27.5, the useful life of the residential property.
The depreciation for your rental property is 2,181.81 dollars—that amount can be deducted from your rental income.
Rules For Depreciation
The IRS outlines a strict set of standards to qualify depreciation.
Here are the key rules:
- The property is used either for business or income-earning investment.
- There is a clear, useful life established for the property.
- The useful life is established to be at least one year.
These standards must be abided by for the full tax year.
If not, the property is disqualified for depreciation. Depreciation can only be started when the property is qualified for leasing. Once the property can be put up for rent, depreciation begins.
Get Help Finding Depreciation
The Tax Cuts and Jobs Act introduced changes to how rental property owners can utilize depreciation. Consulting a professional real estate firm may help you get a better understanding of how the new laws can help rental property owners keep more of their income.
Hiring A Third Party
If this all seems like too much to handle, you wouldn’t be the only one.
Many rental property owners turn to third-party property management companies or professional real estate firms to manage their real estate assets.
Bringing in third-party management will almost certainly reduce your time and stress spent on running your property, maximizing your profits, and getting every tax break possible. Put your assets in the hands of professionals who know how to run a successful operation.
Invest With The Best Managers in the Market
To manage a real estate asset, you need to be a landlord, a lawyer, an accountant, a plumber, and an electrician.
Otherwise, your assets simply won’t give you a good ROI.
Christina has thrived for over four decades in one hyper-prime real estate market in the country: the Westside region of Los Angeles.
In that span of time, we’ve learned one thing: it’s not the value of the property but the value of your managers that get the best returns.
Get started with Christina and get yourself the best possible return.
How Rental Property Depreciation Works | Investopedia
Topic No. 703 Basis of Assets | IRS
Publication 946 (2021), How To Depreciate Property | IRS
New rules and limitations for depreciation and expensing under the Tax Cuts and Jobs Act | IRS