In Part 1 of this series, we went over some of the basics for getting a tenant into your newly purchased GO Zone property. In this article, we will go into more details on the options you have for getting that tenant and, more importantly, starting that cash flow as soon as possible.
As you may remember, there is a lot involved with getting to that first rent check. All the marketing, potential tenant due diligence, and then management of the tenant after they get into the property can be very taxing on an individual.
RENTING FROM LONG DISTANCE
All the previous discussions are further complicated depending on how far you live from the property. Take it from me, trying to do all the lease-up work and property management yourself from a long distance is an all consuming task; one which I do not recommend to anyone who has other obligations (i.e. a life). More on this shortly.
PROFESSIONAL PROPERTY MANAGERS
Enter the professional Property Manager. Typically, a property manager gets paid for both the lease up of a property, and also on the management of the tenant once in the property. During the lease up, property managers spend very real dollars advertising the property and thus they typically can command a lease up fee. In many locations (both inside and outside of the GO Zone), this typically equates to a charge of 1/2 of the first month’s rent.
In addition, a management fee is also received by the property manager on a monthly basis and is a percentage of the monthly rent amount. For long term leases, this averages in the 10-12% range. Note that the actual management fee can vary widely depending upon the area where the property is located, the type of property, etc.
OPTION 1: DOING IT YOURSELF
If you are like the overwhelming majority of GO Zone investors, you most likely do not live near your GO Zone property. In this situation, as a property owner and a real estate investor you need to think hard about taking on the property management task yourself.
With the Internet, you may be tempted to do some of the marketing on your own. However, there still is the need for the local presence on the ground for showing the property to potential tenants, getting contracts and agreements in hands, reviewed and executed, and for knocking on the door when rent is late.
In addition, if you are new to real estate investing and new to rental properties, it is probably not a good idea to try this on your own from a distance. It is usually recommended that you try your hand at self property management in your own back yard first before even considering the task of doing this long distance.
OPTION 2: COMBO PLATTER 1
Here is the case where you would pay someone else to lease up your property, and then you manage the property yourself. For this, you may get a property manager, licensed professional or other lease-up specialist to go out and market your property, find a tenant, do the tenant screening, etc.
Unfortunately, not many professionals, rental managers, etc., want to do all this work and only get some of the front end funds. IF you can find someone to take on this portion of the front end business, you should really also consider the additional lease up time that may be required; especially if they are managing other similar properties where they also get a portion of the monthly rent that comes in.
The only time that this situation works well for all parties is if you know of a real estate professional (or other person) that already knows of a tenant and does not have an available property to put them in.
OPTION 3: COMBO PLATTER 2
In this case, you try your hand at doing the front end marketing and obtaining the tenant yourself. Similar to the above situation, You figure that you may be able to save on some front end marketing costs (i.e. 1/2 of the first month’s rent as the front end cost) if you can do it on your own.
However as previously mentioned, you not only need the local presence on the ground for the showing of the property and getting the tenant into contract, but there is still something to be said about meeting the (potential) tenant face to face as part of the screening and having someone who is geared up to do this on a day in and day out basis do this for you. The old expression of “Penny-Wise, Pound-Foolish” comes into play here.
OPTION 4: PAYING SOMEONE ELSE
As implied by the above, this is where you let someone else completely to the front end work, get the tenant into your property, and completely manage the tenant and the property for you. As someone who is and out of state real estate investor, this is the most common path you will likely go down.
From the GO Zone property point of view, you do want to have your hands in the pot some to make sure that you are involved in the management process. This may be as simple as working closely with your property manager on screening criteria, final approval of tenants (if outside of your normal criteria for screening), etc. Make sure, however, that you are very responsive in this situation as time is critical with getting someone into a property.
When you hire someone else to completely manage your property for you, you are typically signing an agreement with them (usually for at least 12-months) that spells out all the terms, fee schedule, services offered, payment/rent collection and the transfer of funds to you (after expenses, etc.).
OPTION 5: LEASEBACK WITH BUILDER (SEE NOTE)
Remember that this article series is about getting your GO Zone property rented as soon as possible and getting cash flowing into your pockets quickly. While this option is not really a property management solution in the traditional sense, it definitely solves the issue of rent-up times.
I will point out again (as I did in the first part of this series), that you should not run out and start getting properties that are offering lease back just on that merit alone. Remember that as an investor, the property still needs to stand on its own and “make sense” before a leaseback offer is even thrown on the table.
Some property owners and builders may throw a long-term leaseback into the deal to sweeten things up and make the overall sale attractive. You need to ask yourself, how will the property rent out without the leaseback? Is this a situation where a developer may have excess inventory on hand and is offering a leaseback on everything to make the sale (and adding it to the pricing as well)? So as an example, condos on the beach in the Mississippi Gulf Coast. Without the leaseback these do not seem like a very sound investment based on the strong competition from the casinos for short term rentals and given the fact that the Mississippi Gulf Coast is really not a hot beach destination. In this case a leaseback does not make sense.
In the case where a builder of single family homes has 1 or 2 model homes that they would like to build, use as a model home, and would also like to keep that off their builder’s line, then offering a 12-month (with additional options typically) leaseback while building out that phase of the community makes perfect sense. Here you would only need to convince yourself that the community is where you would like to invest in.
Advantages of this option, other than the obvious cash flow from day 1, is that you do not have to spend any funds on marketing fees or even on property management fees since you are dealing with the builder directly.
Another advantage of this option is that if your tenant (i.e. the builder) is