This article was initially published in the Jan-Mar ’10 newsletter and has since been revised and republished in the Apr-Jun ’11 newsletter.
Background: Stott Real Estate, Inc. conducts business as The Stott Team for listings & sales of real estate and as Stott Property Management for managing rentals. We have two adjacent but separate offices for these two divisions. Our marketing area is the island of Oahu; we refer business on the neighboring islands to agents who live and work on the island where the property is located. My son-in-law, Tim Kelley, supervises our Property Management (PM) Division. His primary assistant, Karen Texeira, has been with us for over 18 years. We manage over 400 rental units, making us one of the largest PM companies on Oahu. Most of our clients are absentee owners; however, we also handle rentals for several owners that live on Oahu. Tim has personal experience as an absentee owner, as he and my daughter, Tracey, use PM’s to manage several investment properties they own on the Mainland.
There are many superb PM’s on Oahu; any negative comments made by me towards PM’s in this article are not indicative of Oahu PM’s as a group. Having said that, many of our accounts were listed with another Oahu PM and then shifted to us. This article will discuss some common errors made by PM’s and/or owners. The article is designed to help owners increase their net rental income by learning from mistakes made by others that have cost them tens of thousands of dollars.
1. Absentee Owner Acting as a PM: Hawaii law requires that an absentee owner have a representative living on the island where their rental property is located. It does not need to be a licensed real estate agent; i.e., it can be a friend of the absentee owner provided the friend does not represent more than one owner. Some absentee owners, knowingly or unknowingly, violate this law and manage their rental property themselves. This can create problems if a dispute arises that ends up in small claims court and the absentee owner cannot document that they have an on-island representative; i.e., the absentee owner is found to be violating the law.
The purpose of the on-island representative is to have someone immediately available to the tenant in case problems arise. Therefore, the on-island representative should be more than a mere figurehead. The tenant should be advised to contact the representative for problems and emergencies. We recommend that the representative’s name and telephone number be written on the rental agreement with any future changes also being in writing and dated.
Oahu General Excise Tax (GET) @ 4.5% is owed on all gross rental income. An owner acting as a PM should obtain a GET license for payment of this tax. The owner’s GET number is required on some sales forms used when an absentee owner sells a rental property. Plus, Hawaii may be actively searching for owners that are currently violating the law. A few years ago, I was erroneously billed for several years of GET on a property I own in Gulfport, MS. The bill would have been sizable: several years of back GET plus a penalty of 50% of the non-paid GET plus interest at 8%.
The attorney we use for evictions states that the majority of his most difficult and expensive cases involve owners acting as a PM that are not familiar with the Landlord-Tenant Code and proper tenant check-in/check-out procedures.
2. The Economy & Evictions: Job layoffs, cutbacks, forced furloughs, etc. are having a major impact upon the rental market. Tenants with financial problems are often individuals who had good credit during tenant screening with a secure job like working for the city or state. However, with forced furloughs and job cutbacks, they find that they no longer can afford their rental payments. In most cases, they advise us that they are vacating and agree to forfeit their rental deposit. However, in some cases the tenants merely stop making payments.
Evictions are an unfortunate but necessary part of the business. With 400-plus rentals in our current economy, we would expect to average one to two evictions in process at any given time. Some PM’s and/or owners avoid evictions like the plague. When we take over a delinquent account, it is not unusual for the tenant to be at least three months delinquent without an eviction having been initiated. There are an endless number of excuses delinquent tenants can create for failing to pay their rent. They always seem to need just one more month to work everything out. Then one day, you discover that they have flown the coop with no forwarding address and left the property in poor condition. Barring unusual circumstances, tenants that get behind on their rent by more than a month are usually unable to catch up.
An eviction action is initiated in Hawaii by sending the tenant a five-day demand letter. This letter states that the tenant has five business days from receipt of the letter to pay all overdue funds or their lease will be terminated. The five-day demand letter usually forces the tenant to negotiate with us in a meaningful manner. However, the owner must be prepared at this stage to spend money on an eviction attorney if the tenant doesn’t pay their overdue rent or agree to negotiate. A voluntary vacancy is usually far less costly to the owner than an actual eviction, particularly if the property is left in good condition. The eviction process usually costs $1-2 thousand dollars. We have used the same eviction attorney for years; his cost for our clients runs about $750. If the rent has not been paid by the end of the month and the tenant has not responded and/or provided us a satisfactory repayment plan, we normally start the eviction process by mailing them a five-day demand letter.
3. Changing Market: As this is being written in June 2011, the rental market is improving. On a selective basis, we are now increasing rents. The last time I wrote this section, the rental market had gotten soft and this section discussed actions to prevent prime-rent tenants from vacating. If you would like a Rental Market Analysis or Property Management Information, check the applicable box on the postcard and return it. We encourage all owners to conduct their own independent research as to what constitutes a fair rental rate. Two good sources of information are Craigslist Oahu (http://honolulu.craigslist.org/oah/) and classified ads in the Sunday edition of the Star-Advertiser (http://staradvertiser.com).
4. Communication: The most common problem that arises between Owners and their PM’s is poor communication. In almost every case where we obtain an account from another PM, there has been a period of poor communication between the owner and their PM. Larger companies, like ours, have in-office staff personnel and toll-free telephone numbers to assist absentee owners in addressing issues. Smaller companies usually have to rely on telephone messages. You should discuss communication with your PM including how soon you can expect them to get back to you if you have left a message for them to call. The PM should also provide you a list of applicable personnel for you to contact if the PM is unavailable.
5. Long Leases: Tenant leases should normally be written for a maximum period of one year thereby enabling rents to be increased annually if warranted. A one-year lease also enables the owner/PM to have far more control over a problem tenant. Merely threatening that the lease will not be renewed often works wonders. Lengthy leases can create problems in a rising housing market, as some owners may want to try to sell at the height of the housing market. A lease has priority over a sale i.e., the tenant can stay in the property until the end of their lease even though the owner sells the property.
6. Internal Inspections: Periodic internal inspections of a property are essential to ensure there are no major problems and the tenant is taking care of the property. We’ve taken over properties that were in horrible condition requiring major work by the owner as neither the Owner nor the PM had inspected the inside of the property for a number of years. Our policy is to conduct an internal inspection of every property we manage at least once a year by a member of our staff with photos available to the owner.
7. Inventory & Condition Report: An Inventory & Condition Report establishes the move-in condition of the property. It is approved by the tenant and establishes the basis for damages should the property not be maintained properly. Without this form, Hawaii law states that the condition of the property when the tenant vacates is the same as what existed when the tenant checked into the property.
One of the most common problems we encounter with absentee owners that have been acting as their own PM is their failure to have proper tenant check-ins. Sometimes, their property has been re-rented several times with each new tenant taking the home without any paperwork establishing the actual move-in condition. If you are an owner/manager, you might want to consider having someone video your property to establish current condition. We routinely video properties on our tenant check-ins, and we have found tenants tend to take far better care of a property when they know video exists of the move-in condition.
8. Unsupervised Repairs: Absentee owners acting as a PM sometimes will authorize work to be done by their tenant who is then compensated by a reduced rent. Such agreements sound marvelous in the discussion stage. However, the discussion is usually verbal without a clear definition of the exact scope of the work to be done as well as without any direct supervision. It is not unusual for disputes to arise over the quality and/or amount of work done by the tenant. The tenant, believing they are not being compensated fairly, may then stop paying rent and/or initiate an action against the owner in small claims court creating a problem for an absentee owner that is violating the law. We suggest that you not authorize unsupervised repairs or improvements by your tenant unless they are very minor like fixing a leaking toilet.
9. Good Tenants: Sometimes, owners will deliberately provide their tenant an under-market rent because they are such “good” tenants. Tenants should not be provided a large discounted rent merely because they pay their rent on time and take reasonable care of the property. That is what an owner has a right to expect. Granted, a particularly good tenant that has a “green thumb” or makes minor repairs and/or improvements may warrant a small rent reduction but not hundreds of dollars per month. We’ve taken over properties where a tenant had been paying the same rent for over ten years merely because they were considered to be a “good” tenant that the owner didn’t want to risk losing.
10. Befriending Tenants: Some owners make it a point to become personal friends with their tenant. They then tend to stop treating the rental as a business and end up losing money.
11. Kid Gloves Syndrome: Some owners treat a tenant with kid gloves because they believe the tenant might be a future buyer for the property. Perhaps, the tenant has said something like, “if you ever consider selling, please let me know.” Less than 1% of the sales on Oahu involve tenants buying properties they are renting. However, some tenants are aware if they act like potential buyers for the property, they may be able to forestall any rent increases.
12. Pets: Allowing pets will increase the number of prospective tenants and often enables an owner to get a higher rent while retaining flooring that otherwise might need to be replaced. If your flooring is not in good condition, consider allowing pets. Tenants with pets will almost always agree to pay a higher rent and/or elect to retain older carpeting (in lieu of having it replaced) if the owner will allow pets.
13. “For Rent” & “For Sale” Simultaneously: We have had considerable success listing homes “for sale” and “for rent” at the same time. Usually the owner prefers one to the other but only if they can achieve a specific price; e.g., they’ll continue to rent the property if they can get $2,500/mo rent otherwise they want to sell it. Or, they want to sell it if they can get $750,000 otherwise they want to continue to rent it. So, we try both simultaneously and take the first that is acceptable. If the owner is realistic concerning both the rent and the sales price, our experience is that it tends to be a toss-up as to which comes first.
Property Management Guidance
This article was initially published in the Jan-Mar ’10 newsletter and has since been revised and republished in the Apr-Jun ’11 newsletter.
Background: Stott Real Estate, Inc. conducts business as The Stott Team for listings & sales of real estate and as Stott Property Management for managing rentals. We have two adjacent but separate offices for these two divisions. Our marketing area is the island of Oahu; we refer business on the neighboring islands to agents who live and work on the island where the property is located. My son-in-law, Tim Kelley, supervises our Property Management (PM) Division. His primary assistant, Karen Texeira, has been with us for over 18 years. We manage over 400 rental units, making us one of the largest PM companies on Oahu. Most of our clients are absentee owners; however, we also handle rentals for several owners that live on Oahu. Tim has personal experience as an absentee owner, as he and my daughter, Tracey, use PM’s to manage several investment properties they own on the Mainland.
There are many superb PM’s on Oahu; any negative comments made by me towards PM’s in this article are not indicative of Oahu PM’s as a group. Having said that, many of our accounts were listed with another Oahu PM and then shifted to us. This article will discuss some common errors made by PM’s and/or owners. The article is designed to help owners increase their net rental income by learning from mistakes made by others that have cost them tens of thousands of dollars.
1. Absentee Owner Acting as a PM: Hawaii law requires that an absentee owner have a representative living on the island where their rental property is located. It does not need to be a licensed real estate agent; i.e., it can be a friend of the absentee owner provided the friend does not represent more than one owner. Some absentee owners, knowingly or unknowingly, violate this law and manage their rental property themselves. This can create problems if a dispute arises that ends up in small claims court and the absentee owner cannot document that they have an on-island representative; i.e., the absentee owner is found to be violating the law.
The purpose of the on-island representative is to have someone immediately available to the tenant in case problems arise. Therefore, the on-island representative should be more than a mere figurehead. The tenant should be advised to contact the representative for problems and emergencies. We recommend that the representative’s name and telephone number be written on the rental agreement with any future changes also being in writing and dated.
Oahu General Excise Tax (GET) @ 4.5% is owed on all gross rental income. An owner acting as a PM should obtain a GET license for payment of this tax. The owner’s GET number is required on some sales forms used when an absentee owner sells a rental property. Plus, Hawaii may be actively searching for owners that are currently violating the law. A few years ago, I was erroneously billed for several years of GET on a property I own in Gulfport, MS. The bill would have been sizable: several years of back GET plus a penalty of 50% of the non-paid GET plus interest at 8%.
The attorney we use for evictions states that the majority of his most difficult and expensive cases involve owners acting as a PM that are not familiar with the Landlord-Tenant Code and proper tenant check-in/check-out procedures.
2. The Economy & Evictions: Job layoffs, cutbacks, forced furloughs, etc. are having a major impact upon the rental market. Tenants with financial problems are often individuals who had good credit during tenant screening with a secure job like working for the city or state. However, with forced furloughs and job cutbacks, they find that they no longer can afford their rental payments. In most cases, they advise us that they are vacating and agree to forfeit their rental deposit. However, in some cases the tenants merely stop making payments.
Evictions are an unfortunate but necessary part of the business. With 400-plus rentals in our current economy, we would expect to average one to two evictions in process at any given time. Some PM’s and/or owners avoid evictions like the plague. When we take over a delinquent account, it is not unusual for the tenant to be at least three months delinquent without an eviction having been initiated. There are an endless number of excuses delinquent tenants can create for failing to pay their rent. They always seem to need just one more month to work everything out. Then one day, you discover that they have flown the coop with no forwarding address and left the property in poor condition. Barring unusual circumstances, tenants that get behind on their rent by more than a month are usually unable to catch up.
An eviction action is initiated in Hawaii by sending the tenant a five-day demand letter. This letter states that the tenant has five business days from receipt of the letter to pay all overdue funds or their lease will be terminated. The five-day demand letter usually forces the tenant to negotiate with us in a meaningful manner. However, the owner must be prepared at this stage to spend money on an eviction attorney if the tenant doesn’t pay their overdue rent or agree to negotiate. A voluntary vacancy is usually far less costly to the owner than an actual eviction, particularly if the property is left in good condition. The eviction process usually costs $1-2 thousand dollars. We have used the same eviction attorney for years; his cost for our clients runs about $750. If the rent has not been paid by the end of the month and the tenant has not responded and/or provided us a satisfactory repayment plan, we normally start the eviction process by mailing them a five-day demand letter.
3. Changing Market: As this is being written in June 2011, the rental market is improving. On a selective basis, we are now increasing rents. The last time I wrote this section, the rental market had gotten soft and this section discussed actions to prevent prime-rent tenants from vacating. If you would like a Rental Market Analysis or Property Management Information, check the applicable box on the postcard and return it. We encourage all owners to conduct their own independent research as to what constitutes a fair rental rate. Two good sources of information are Craigslist Oahu (http://honolulu.craigslist.org/oah/) and classified ads in the Sunday edition of the Star-Advertiser (http://staradvertiser.com).
4. Communication: The most common problem that arises between Owners and their PM’s is poor communication. In almost every case where we obtain an account from another PM, there has been a period of poor communication between the owner and their PM. Larger companies, like ours, have in-office staff personnel and toll-free telephone numbers to assist absentee owners in addressing issues. Smaller companies usually have to rely on telephone messages. You should discuss communication with your PM including how soon you can expect them to get back to you if you have left a message for them to call. The PM should also provide you a list of applicable personnel for you to contact if the PM is unavailable.
5. Long Leases: Tenant leases should normally be written for a maximum period of one year thereby enabling rents to be increased annually if warranted. A one-year lease also enables the owner/PM to have far more control over a problem tenant. Merely threatening that the lease will not be renewed often works wonders. Lengthy leases can create problems in a rising housing market, as some owners may want to try to sell at the height of the housing market. A lease has priority over a sale i.e., the tenant can stay in the property until the end of their lease even though the owner sells the property.
6. Internal Inspections: Periodic internal inspections of a property are essential to ensure there are no major problems and the tenant is taking care of the property. We’ve taken over properties that were in horrible condition requiring major work by the owner as neither the Owner nor the PM had inspected the inside of the property for a number of years. Our policy is to conduct an internal inspection of every property we manage at least once a year by a member of our staff with photos available to the owner.
7. Inventory & Condition Report: An Inventory & Condition Report establishes the move-in condition of the property. It is approved by the tenant and establishes the basis for damages should the property not be maintained properly. Without this form, Hawaii law states that the condition of the property when the tenant vacates is the same as what existed when the tenant checked into the property.
One of the most common problems we encounter with absentee owners that have been acting as their own PM is their failure to have proper tenant check-ins. Sometimes, their property has been re-rented several times with each new tenant taking the home without any paperwork establishing the actual move-in condition. If you are an owner/manager, you might want to consider having someone video your property to establish current condition. We routinely video properties on our tenant check-ins, and we have found tenants tend to take far better care of a property when they know video exists of the move-in condition.
8. Unsupervised Repairs: Absentee owners acting as a PM sometimes will authorize work to be done by their tenant who is then compensated by a reduced rent. Such agreements sound marvelous in the discussion stage. However, the discussion is usually verbal without a clear definition of the exact scope of the work to be done as well as without any direct supervision. It is not unusual for disputes to arise over the quality and/or amount of work done by the tenant. The tenant, believing they are not being compensated fairly, may then stop paying rent and/or initiate an action against the owner in small claims court creating a problem for an absentee owner that is violating the law. We suggest that you not authorize unsupervised repairs or improvements by your tenant unless they are very minor like fixing a leaking toilet.
9. Good Tenants: Sometimes, owners will deliberately provide their tenant an under-market rent because they are such “good” tenants. Tenants should not be provided a large discounted rent merely because they pay their rent on time and take reasonable care of the property. That is what an owner has a right to expect. Granted, a particularly good tenant that has a “green thumb” or makes minor repairs and/or improvements may warrant a small rent reduction but not hundreds of dollars per month. We’ve taken over properties where a tenant had been paying the same rent for over ten years merely because they were considered to be a “good” tenant that the owner didn’t want to risk losing.
10. Befriending Tenants: Some owners make it a point to become personal friends with their tenant. They then tend to stop treating the rental as a business and end up losing money.
11. Kid Gloves Syndrome: Some owners treat a tenant with kid gloves because they believe the tenant might be a future buyer for the property. Perhaps, the tenant has said something like, “if you ever consider selling, please let me know.” Less than 1% of the sales on Oahu involve tenants buying properties they are renting. However, some tenants are aware if they act like potential buyers for the property, they may be able to forestall any rent increases.
12. Pets: Allowing pets will increase the number of prospective tenants and often enables an owner to get a higher rent while retaining flooring that otherwise might need to be replaced. If your flooring is not in good condition, consider allowing pets. Tenants with pets will almost always agree to pay a higher rent and/or elect to retain older carpeting (in lieu of having it replaced) if the owner will allow pets.
13. “For Rent” & “For Sale” Simultaneously: We have had considerable success listing homes “for sale” and “for rent” at the same time. Usually the owner prefers one to the other but only if they can achieve a specific price; e.g., they’ll continue to rent the property if they can get $2,500/mo rent otherwise they want to sell it. Or, they want to sell it if they can get $750,000 otherwise they want to continue to rent it. So, we try both simultaneously and take the first that is acceptable. If the owner is realistic concerning both the rent and the sales price, our experience is that it tends to be a toss-up as to which comes first.