I fly quite a lot, and over time I have learned that the best stories, and sometimes the wildest, I hear on flights. The neighbor sitting next to you on the flight, or someone who recognizes your face from social media, will tell you his problems, and when he discovers (if he didn't know in advance) that you work in real estate in the country you are flying to, he will ask for advice or legal services.
I met Amit on a flight to Bucharest. He sat in the seat next to me and toward the end of the flight, during which I had been working on my laptop on a legal document, he turned and asked to share his tribulations. Amit had saved for several years and decided, after consulting various financial advisers, to invest in buying an apartment in order to start generating passive income for himself (so claimed all those who advised him). Since the capital he had accumulated was not large, and after checks he carried out from which he learned that the current yield would be higher abroad, and moreover his equity was enough to buy an apartment without needing a mortgage, he decided to buy an apartment in Romania.
The broker who located the apartment for him did, in his words, an excellent job, and helped him with the purchase procedures. Amit felt secure in the purchase process, and relied on the broker when he recommended a management company to manage the apartment for him. Before the apartment was offered for rent, a cosmetic renovation was done in it, he said.
“From the moment I connected with the management company the problems began,” he said. “The first tenant was a good tenant. He paid on time, and after a year he asked to leave the apartment. The company recommended painting the apartment. I agreed. The second tenant they brought did not keep up with the monthly payments. There were constant delays, until at some point they decided, with my consent, to evict him from the apartment. It turned out he had left electricity and water debts, which I was required to pay.” He went on: “And then after 6 months they brought a third tenant and asked to charge again for a legal agreement and again a fee for finding the tenant.”
It turns out that the third, fourth and fifth tenants also did not last too long in the apartment (whether because they were removed after falling behind on payments or because they left abruptly of their own accord), and each time a tenant was replaced they asked to charge Amit for the legal agreement and for finding the tenant. In between, they charged Amit for cleaning the apartment between the various tenants. The quarterly reports promised to Amit at the start also stopped arriving, and the income kept dropping from quarter to quarter. A month before the flight Amit fired the management company, and now, he said, he was on his way to Bucharest to find a new management company.
“Do you perhaps have a management company you could recommend to me?” he asked.
“I don't really like to recommend, but I'd be happy to understand what criteria you are looking for in a management company before I decide whether to recommend any company to you,” I replied.
“I don't have search criteria. I want someone reliable,” he replied.
“Besides reliability, what do you want the company to do? How do you want it to operate?” I tried pressing him.
Amit did not have a clear picture of his criteria or requirements for the management company, and that is not surprising since a large share of the investors I have met over the years did not know how to check, what the management company is supposed to do (other than find a tenant, collect payment and transfer it to the owners), what its capabilities are, and so on. It is no accident that you hear stories about properties that stood empty for months, tenants struggling to meet payments, unplanned maintenance expenses and more. Contrary to common belief, the stage of buying the property is not the critical stage for a successful investment (although it is important and critical in itself for the success of the investment); rather, the success of the investment depends on proper management of the property that will ensure a stable yield and prevent a decline in the property's value. To that end, the management company you contract with must know how to screen tenants and choose reliable tenants for you, check their financial background and rental history (yes, ask to speak with previous landlords) and interview them. In addition, the management company must carry out preventive and ongoing maintenance to preserve the property's value and save costs in the long run, carry out periodic inspections and fix faults early. And you too, as owners, need to pay attention and monitor income and expenses on an ongoing basis (and if it is possible to contract with a management company that uses an advanced computerized management system, that will only help you control the processes). You also need to pay attention to regulatory changes such as tax updates or new rental requirements.
Managing your property is a strategic tool that can turn the investment into a success and increase your yield.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית