If you plan to make money in real estate by owning and renting commercial and/or residential property, then it is important to understand and abide by best practices for tenant management. Good tenants are the lifeblood of profitable real estate investments, while bad tenants can not only give you headaches, they can torpedo your financial goals. It is important to understand how to find good tenants and manage your relationships with them to ensure the success of your investment.

Tips for Better Tenant Management

© Shutterstock.com | Tom Penpark

In this article, we will explore, 1) commercial tenant management, 2) residential tenant management, 3) screening of commercial and residential tenants, 4) commercial and residential tenant rights, 5) obtaining real estate insurance for commercial and residential real estate properties, 6) performing regular maintenance on commercial and residential property, and 7) property management of commercial and residential property.

COMMERCIAL TENANT MANAGEMENT

According to a research study by the commercial real estate firm Jones Lang LaSalle, it can take up to two years to make up for the income lost by the loss of a tenant. And a 2011 study by the real estate market research firm Kingsley Associates notes that the chance of lease renewal by a satisfied tenant is triple the chance of lease renewal by dissatisfied tenants. To ensure that your commercial real estate tenants are satisfied with their residence in your property, it is important to develop a written strategic plan for tenant management. The plan should include an assessment of, and a plan to meet, their real estate needs. You should develop a regular communications program with a single point of contact, as well as an assessment program with appropriate metrics that measure the level of tenant satisfaction.

RESIDENTIAL TENANT MANAGEMENT

As with commercial real estate tenant management, a satisfied tenant is more likely to renew their lease; and communication is key to satisfied tenants. Particularly if you plan to manage a residential property yourself, you should meet your tenants and establish a point of contact. Take the time to learn their needs and do what is reasonable to ensure that those needs are met.

One key need of both commercial and residential tenants is security, but security takes on an added, personal dimension for residential tenants. Whereas a commercial tenant’s insurance might cover the cost of lost equipment in the case of a break-in, no insurance can cover lost sentimental items, or sense of safety, in the case of a residential break-in. A proper alarm system, light landscaping, and lighting, can deter criminal activity.

For both commercial and residential tenant management, tenant screening, constructing proper lease agreements, and maintenance are three of the biggest priorities.

SCREENING OF TENANTS

Failure to find reputable tenants, who can and will abide by all the terms set forth in the lease can cost you greatly in time and money. A considerable amount of due diligence is required. Whether you are dealing with commercial or residential tenants, you should not only check their credit history and references, and verify their income, you should interview them as well. Listen to your gut, in addition to poring through their background.

Screening of commercial tenants

Many firms have formed corporate entities for tax or other purposes. It is critical to find out who the people are behind the entity and assess them as well as the firm. You can usually find this by checking with the Secretary of State in the state in which the firm is incorporated.

You should also request – and obtain – a personal guaranty from the principal. This will allow you to lay claim to the assets of the principal if the firm happens to go bankrupt. Without such a guarantee, a tenant’s bankruptcy may net you nothing to cover the loss of income and/or rent in arrears.

You should ensure that your tenants are able to pay and will abide by the terms of the lease, not just through income statements and references. You can require a non-standard security deposit. The standard is one month, but requiring a two or three month deposit, may indicate to you that the tenant has a healthy cash flow, and indicate to the tenant that they should adhere to the lease terms strictly to ensure the return of their money. Those who balk may very well have been problem tenants.

Finally, review the prospective tenant’s business plan, especially if they are a new business. If it does not make sense to you, this may indicate that they will not have the funds to pay you.

Screening of residential tenants

Screening residential tenants is just as important as screening commercial tenants. Obtain their credit reports from the three credit reporting agencies, rather than rely on those they bring you. Get proof of employment, and ask for a bank statement, so that you can ensure that they have either the cash flow and/or the assets to pay the rent on time. Run a criminal background check, and check references thoroughly. Ask for more than one landlord reference, as the current landlord may lie and give a prospective tenant a good reference in order to get him/her out of their property. As with a commercial tenant, you can ask for a non-standard security deposit, and/or non-standard lease terms, which may indicate their willingness and ability to meet the lease terms.

It is critical to understand and adhere to the Federal Fair Housing Laws, which say that you cannot discriminate against prospective tenants based on race, origin, religion, sex, familial status or disability. There may also be local Fair Housing Rules you have to follow; for example, certain states also prohibit discrimination based on certain criminal offenses.

How To Screen Tenants – Landlord Tips For Beginners

TENANT RIGHTS

Be very clear on the rights of your tenants before drafting a lease, and make sure to adhere to them. Landlord-tenant disputes can be very expensive and time-consuming. The best way to avoid them, in addition to selecting good tenants, is to be very clear on what you can and cannot, and crafting a lease agreement that falls squarely within those parameters. Make sure your lease terms are clear and specific. Also make sure that after they vacate the premise that you return their security deposit (to which both commercial and residential tenants are entitled if they have adhered to their lease terms.

Rights of commercial tenants

In general, the rights of tenants are inscribed in the lease. Courts tend to decide cases based on adherence to lease terms even if the terms seem to violate aspects of basic fairness. Residential tenants have far more protections than commercial tenants do under the law. For example, there are protections for residential tenants in instances of foreclosure, lack of landlord maintenance, and entry to the property by the landlord.

To facilitate a positive landlord-tenant relationship, spell out lease terms clearly. Regarding entry to the property by the landlord, define what constitutes “adequate notice” clearly in your lease. This is especially important for tenants whose businesses require some level of confidentiality. Make sure that you ensure more than adequate notice in cases of invasive maintenance that may affect your tenant’s business operations.

Rights of residential tenants

Your entry into your tenant’s space is also in issue in residential landlord tenant relationships. Spelling out what constitutes adequate notice in the lease is wise, and may help you avoid a violation of local or state law, as well as a lawsuit.

Most states require that you ensure that the residential space meets basic habitability requirements as fully defined by your local housing authority. These may include heating, waterproofed structural elements, water, electricity, absence of pests and other unsanitary conditions, and adherence to electrical codes. These are basic requirements, but you should also ensure the implementation of related measures, like the installation of smoke detectors and properly functioning locks, to ensure tenant satisfaction.

Understand that if you do not meet these basic requirements, the tenant may, depending on the city or state in which your property is located, withhold part or all of the rent, or make the repairs themselves and charge the expense against the rent they owe you.

Insights In Law: Landlord and Tenants legal Rights

REAL ESTATE INSURANCE

To protect your assets, insurance is key. Because you have no direct control over what your tenants do on your property, you cannot stop them from damaging it deliberately or inadvertently. Further, the impact of externalities – such as inclement weather – on your property, cannot be predicted. Many a homeowner and real estate investor has lost hundreds of thousands of dollars for want of comprehensive insurance policies.

You should also review all policies at least once a year to make sure that they are up-to-date and as inclusive as possible. Get a financial advisor to review them as well (not a broker who may receive a commission by upselling you policies you do not need).

Obtaining real estate insurance for commercial properties

To obtain building insurance, you should get a certifier appraiser’s valuation of your property, and take inventory of the property inside the building, such as appliances and flooring, that would need to be replaced in case of loss. Speak with an insurance company about the costs of property insurance, flood, and liability insurance, as well as umbrella insurance, which will cover what falls outside of your liability limits. Also, look into “loss of use” policies that cover the rental fees for a new building while your existing property is repaired in case of a disaster.

Review how comprehensive the insurance policy is. Will it cover you in the case of a once-in-a-lifetime weather event? Or do you have to pay extra for that? Remember that hindsight is 20/20, and opt for the more comprehensive policy, where financially feasible.

Obtaining real estate insurance for residential properties

As with commercial property, get a certified appraisal of your property and take inventory. Understand that your credit will be a factor in your premiums, so take steps to clean up any items on your credit record before approaching an insurance company.

Purchase Landlord Contents Insurance, which will cover damage to the inside of your property and its contents. Take a look at Rent Guarantee insurance that ensures that you receive your rent even if your tenant does not pay it. This type of insurance usually can be purchased when the insurance company does the tenant screening. Also, buy Natural Disaster Insurance, and Employer’s Liability Insurance, the latter if you employ anyone to handle maintenance or do work on your property. This covers you in case of any claims from these workers against you.

Rental Properties Insurance – Investor Guide to Rental Property Insurance

PERFORMING REGULAR MAINTENANCE

Andrew Zezas, President and CEO of N.J.-based Real Estate Strategies Corporation, writes on his blog, Corporate Advisor, that “landlords entitled to be called great, are those who […] maintain the heck out of their properties.” Regular maintenance is a must, not only to ensure you suffer no loss of property value, but because disputes over what a tenant believes is contractually stipulated maintenance can cost you considerable time, rental income, and legal fees. Further, maintenance issues drive down customer satisfaction, and therefore, the chance of a successful lease renewal.

Commercial property maintenance

With commercial real estate leases, you can require that the tenant is responsible for the maintenance, as long as you spell it out clearly. You also must spell out what the tenant, and/or their contractors, can and cannot change on the property. If you are to assume responsibility for the repairs and maintenance, you can pass on the estimated costs to the tenant in rental fees and/or common area maintenance (CAM) fees.

Residential property maintenance

Residential property maintenance is usually the province of the landlord. By employing a regular program of maintenance, you can avoid extensive costs down the road, as well as tenant disputes. Such a program should include monthly exterminations; post-storm assessment of leaks and water damage; regular assessments of grout and caulking, tests of smoke and carbon monoxide detectors, and flushing of water heaters.

PROPERTY MANAGEMENT

Regardless of your reason, if you choose to be a landlord, there are resources available to you, including those provided by local real estate boards, real estate networking groups, and property management software. If you are purchasing commercial property – especially of a type with which you are either somewhat or completely unfamiliar, and/or if you are looking to manage a large portfolio of properties, you are likely better off employing the services of a property manager or property management firm.

Being a landlord of a commercial property

Commercial real estate tenants, while holding their tenants to the lease terms, should try to do what they can to facilitate the tenant’s success. That may include speeding up a planned renovation, or co-marketing their business. After all, a successful commercial tenant is one who can pay the rent, and may well renew the lease.

Being a landlord of a residential property

In general, landlords should make sure they strictly hold tenants accountable for following the terms of the lease, as well as follow the expectations for themselves defined therein. These include ensuring a safe, secure and sanitary premise, communicating any changes to the property or proposed changes to the lease terms in a clear and timely manner, and providing proper maintenance.

Employing a property manager/management firm for a commercial property

The screening of a commercial property manager/firm can be as important as screening your tenants. They will be the first point of contact with your tenants and therefore be key to your ensuring tenant satisfaction. You should ask a prospective property manager/firm how they can help you keep costs down and rent competitive; whether they are licensed; what their experience is with the market in which your property is located is; what their legal experience/capacity is; what their fees are; and what the contact information of their references is. Once selected, work out a plan jointly with the manager/firm, complete with benchmarks for assessing their success, and regularly oversee their progress towards your goals.

Employing a property manager/management firm for a residential property

A residential property manager/firm should be selected with many of the same criteria as a commercial property manager/firm. Look for local, licensed managers/firms with experience in planning, dealing with legal matters and problem tenants, and with good references. Once again, oversight is essential, as is a plan for ensuring tenant satisfaction and profitability.

Commercial tenant management software

The number of elements needed to manage a single real estate property successfully multiplied by your properties and the number of your tenants in those properties, can yield a large number of variables. To manage all of these moving parts, you should consider using commercially available real estate management software. A recent review gave LandlordMAX top honors for professional property management, citing a robust suite of accounting and document management features.

Residential tenant management software

Business News Daily gave Quicken Rental Property Manager kudos for those smaller property owners/managers who may not be incorporated. LandLordMAX also provides robust residential property management solutions.

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4 comments

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1

Really good article! Great tips!

2
Manoj Agarwal (@AGARWALESTATES)

Good read and very informative.. especially for Property Managers & Tenant Managers....

3
Kendall Everett

I loved that you point out how hiring a good commercial property manager is a good way to ensure your tenants are happy. If you hire a property manager that does their job well and gets along with the tenants you'll have more success in your rental property business. Asking your current tenants who they have worked with in the past may also help you decide which property manager to go with.

4

I have a question. Regarding commercial tenants, can I or should I ask what the potential renter is currently paying per month or per square footage?