A Preview into Professional Property Management
Published Tuesday, August 9, 2022
Property management is a fast-growing area of real estate. Because there will always be people who need to rent out properties, this career is consistently in high demand.
With that being said let’s introduce the fundamentals of Property Management and get a preview of what happens in this area of real estate.
What is Property Management?
Property management is a real estate career opportunity that deals with a property's day-to-day operations. A real estate license is required if a property manager or a property management firm engages in licensed leasing activities.
In Illinois, any individual, partnership, or corporation that provides certain property management services for another for compensation or the expectation of compensation must have an Illinois real estate broker license. Those services include:
· Renting or leasing real estate
· Offering to rent or lease real estate
· Negotiating, offering, attempting, or agreeing to negotiate the rental or leasing
of real estate
· Listing, offering, attempting, or agreeing to list real estate for rent or lease
· Dealing in options on real estate
· Supervising the collection, offering, and attempting to collect rent for the use of
· Advertising or representing themselves as being in the business of renting or
leasing real estate
· Assisting or directing in the procuring or referring of leads or prospects
intended to result in the lease or rental of real estate
· Leasing or renting or offering to lease or rent real estate at auction
A licensed property management company or real estate brokerage firm that manages property may employ a licensed real estate broker or licensed residential leasing agent to assist in licensed property management activities.
What does a Property Manager do?
The role of the property manager is to perform the tasks assigned to them by a property management agreement and to preserve the value of the properties they manage while generating income. The property manager completes the necessary steps for acquiring tenants for the building, qualifying tenant applications, and negotiating the lease period and terms. They also coordinate the building's maintenance needs, track financial information, and keep the building's financial records up to date.
The Property Management Agreement
The property management agreement is a legally binding agreement that establishes the duties and responsibilities of the property owner and the property management company.
Provisions of the agreement include:
· Names of the owner and manager
· The length of the agreement
· Description of the property
· Description of the services
· Identification of who collects the rent payments
· Identification of whose employees work at the property
· Identify who maintains various building licenses (elevator, boiler, etc.)
· Description of insurance requirements and who secures the policies
· Definition of the management fee compensation
The Property Management Plan
The primary responsibility of a real estate property manager is to understand and implement the owner's goals and objectives. To accomplish this, the property manager will develop a management plan.
The Budgeting Process
The purpose of the budget is to develop a means to track the property's performance and organize the various types of income (such as rent, miscellaneous income, etc.) and expenses (such as utilities, insurance, payroll, etc.) in a meaningful way.
The Income and Expenses Analysis
Real property can generate income from many sources. Tenants pay rent, but additional income can come from other areas such as parking, vending machines, laundry services, late fees, roof antenna(s), and exterior signage. Gross Potential Rental Income is the maximum income a property can generate from all sources. It represents the total potential income from fully occupied units or spaces as well as all amounts owed by the tenants that are being collected in full. Since vacant spaces do not produce income, and sometimes tenants do not pay for all their lease obligations, actual income can be less than the gross potential rental income. This difference is referred to as vacancy and credit loss, and it is subtracted from the Gross Potential Rental Income. Effective gross income is calculated by adding the potential gross rental income with other income and subtracting the vacancy and credit costs of a rental property.
What are the Operating Expenses?
Operating expenses are the costs associated with running and maintaining a property. Examples include:
· Utilities – Natural gas, oil, electricity, water, Internet, and telephone costs.
· Repairs & Maintenance - Costs associated with keeping the property safe
and operating efficiently.
· Grounds Maintenance – Costs associated with keeping the exterior areas
attractive and clean.
· Snow removal – Expenses to clear snow from sidewalks and parking lots and
apply ice melting products.
· Trash removal – Expenses incurred to collect and remove all trash, including
· Janitorial – Costs to keep the interior areas clean.
· Real Estate Taxes – Costs related to property taxes, generally including any
· Insurance – Includes liability and property damage, rent loss, boiler, and
· Management Fee – The fee charged to the owner for professional
· Administration – Costs associated with running a management office include
computers, printers, and other office equipment.
· Payroll-related costs – Salaries, overtime, payroll taxes, medical insurance,
workers compensation, etc.
Net Operating Income
Net Operating Income is one of the most useful and commonly calculated figures. It represents the money that remains after Operating Expenses are subtracted from the Effective Gross Income. A common goal of most property managers is to work diligently to help ensure that the Net Operating Income remains positive and steadily increases over time. Net Operating Income is not only a critical measure of the property's ability to pay its bills, but also one of the components often used in calculating a property's investment value.
Cash Flow is used to determine the owner's Return on Investment. The Return on Investment is used by investors to decide if a potential investment is worth purchasing. This is calculated by taking the Cash Flow divided by the initial cash investment. One of the advantages of a Return-on-Investment calculation is that it enables an investor to compare different types of investments to decide which one to choose.
Reports and Records
Two major systems are used to keep a property's financial records organized.
First, a Chart of Accounts is utilized to classify each of the different types of income it receives and expenses it pays. Similarly, Operating Expenses may contain many categories. Typically, each of the accounts is assigned an account number, and collectively they are called a Chart of Accounts. Grouping similar income and expenses together assist in making a better comparison between different properties and can highlight variances year-to-year.
The second major report is the monthly Operating Statement. This report serves as a report card on the property's performance and the manager. It usually contains all the property's actual income and Operating Expenses for the month and compares them to the budget.
The Lease Agreement
A lease is a written contract between owner/landlord (Lessor) and tenant/(Lessee) to use the real property and outlines each party's rights and responsibilities. A lease's fundamental components include:
· Parties to the lease
· Description of the property being rented
· Term of the lease
· Security deposit amount
· The rental amount and late fee
· When rent is due
· Use provision - what the premises will be used for
· Insurance provisions
· Maintenance provisions
· Casualty provision in the event of damage
· Default provisions for unpaid rent and other breaches of the lease agreement
· Sublease and Assignment Conditions
When a lease expires, a tenant vacates or remains, and a lease extension amendment is prepared and signed by all parties. If neither of those acts occurs, then either a Tenancy at Will or a Tenancy at Sufferance is created. A Tenancy at Will is a leasehold possession. It usually occurs in the absence of a written lease and can occur after a lease expires, but the resident/tenant continues to occupy the space and the landlord continues to accept the rental payment. Either the landlord or tenant may terminate the leasehold interest at any time by giving reasonable notice, which is typically 30 days, or it may be stated in the lease. A Tenancy at Sufferance (or holdover tenant) occurs after the lease has expired and the tenant continues to occupy the apartment or space without the landlord's consent.
The Property Maintenance
Effective and regular maintenance enables the property to operate efficiently and helps ensure that the equipment will function when needed. There are four categories related to maintenance – Curative, Deferred, Routine, and Preventive. Curative maintenance involves fixing or repairing something after it has already broken. An example would be fixing a broken sink faucet. Deferred maintenance is an everyday item that is not performed when a problem is discovered. For example, the manager notices some minor paint peeling in a stairwell but delays hiring a painter until more painting work is needed. Routine maintenance relates to the cleaning and upkeep that is needed every day. An example is vacuuming the carpet in the building hallways. Preventive maintenance is a planned activity that is routinely performed to extend the useful life of the building and its equipment.
If you are passionate about real estate, interested in investing in real estate, or just looking for a new career with growth potential, a real estate license could be the right move. People can get started in real estate investing without a license and do ok. But those who want to take their investments to the next level, have control of their assets, build their network, and have direct access to the MLS need to get realtor training and get their real estate license. Does this sound like you? If so, give us a call at 630-844-0222 to get started in real estate today and build your new career now!