After years of teaching property management to investors, there’s one term that signals to Jessica Sivels that she’s got a lot of educating to do: “passive income.” When students walk in the door with a dream of mailbox money, she sets them straight.
“They have to understand that it is hands-on,” the director of property management training at Community Investment Corporation said of what it takes to maintain and grow a rental portfolio. “Things happen, things break down, people lose jobs. … You have to be prepared.”
As a residential and commercial lender that’s certified as a community development financial institution by the Treasury Department, CIC focuses on the South and West sides of Chicago, though they can finance throughout Chicagoland. But Sivels noted that many of her students don’t ever get financing through CIC; they attend the workshop to learn how to improve their skills or to fulfill lender requirements for property management training prior to loan approval.
Sivels teaches a huge variety of students. “My class is a melting pot,” she said, noting she teaches everyone from leasing agents to mom-and-pop landlords to representatives from Habitat for Humanity. But real estate brokers are often her toughest customers due to their preconceived notions. “Realtors, they think they know everything,” she laughed.
So what don’t you know that you don’t know? Here are a few common missteps and important tasks to keep in mind.
Know your investment area
With initiatives such as the city of Chicago’s Invest South/West program, there are plenty of opportunities for reinvestment in the areas served by CIC. And while Sivels does believe that property managers can play a part in revitalization as community leaders, she also often cautions the uninitiated against being overzealous. “They have that gleam in their eye. They want to rebuild the community,” she said. “They have no idea the challenges of managing that.”
That’s why it’s important to start small and in a neighborhood you know well. “Your first investment is a place where you feel comfortable with,” Sivels recommended, adding that this isn’t just for community buy-in purposes; it’s also practical. If something goes wrong at the property you own, “Can you get there in a certain period of time?”
Structure renter requirements and screening processes with care
One element that’s often difficult for new property managers is defining renter requirements. Sometimes they’ll set them too high, and other times they’ll be too lax, according to Sivels. The reason this can be so difficult is the answer is different for each landlord. “It all goes back to what you can manage,” Sivels said. “It’s your business model. … You just have to be consistent.”
Landlords might initially want to only bring on renters who can prove they have four months of rent in reserves, but they need to realize that the property has to be able to match the expectations of such a tenant. “They’re watching the HGTV shows,” Sivels said. “People have those condo expectations now, and want to pay $500 a month” for them.
Also, it’s important to check your biases when it comes to Section 8 vouchers. Sivels recommends including a broad range of renters, from market rate to those needing housing assistance, because it provides stability. “It’s all about cash flow,” she said. “Always have a mix. … You still want to have that affordable piece.”
The COVID-19 pandemic proved her right. “Section 8 [properties] are winning because that income never stopped,” she said. “COVID-19 shut down a lot of those gig workers. … It never stopped that agency money.”
Protect your nest egg
Real estate professionals are often well versed in what they’ll need for a down payment and costs associated with owning a home, but they might underestimate preventive maintenance and wear and tear on a multi-unit property. Sivels often sees investors run into problems with this. “People are living rent check to rent check,” she observed, noting that one relatively small issue “can wipe you out if you don’t have a reserve.”
The COVID-19 pandemic highlighted the importance of being proactive about communicating with tenants. Sivels noted that some landlords expressed reluctance to call renters and inquire about how the pandemic-related shutdowns may have changed their ability to pay rent in the mistaken assumption that by picking up the phone, they might be giving them an excuse not to pay. But she downplayed that idea and often encourages her students to think of tenants as temporary partners in the investment. “These are your clients, so you want to make sure they’re OK,” she said. “It’s still a business. … If they’re not OK, they’re not going to be able to pay you.”
Stay out of trouble
Investors should become very familiar with the particulars of Chicago’s Residential Landlord and Tenant Ordinance as well as newer regulations, such as the revamped building code and the Just Housing Ordinance that went into effect this past January.
“The city of Chicago does not play when it comes to housing violations,” Sivels warned. And delegating this to another person is simply not an option for her students. “Even if they hire a property management company, they still have to understand what their legal responsibilities are.”
One of the more common legal slip-ups she sees is in dealing with security deposits, on which landlords legally must pay interest if they are collected. Sivels warned of so-called “professional tenants who know the ordinance better than the landlord” habitually going after investors who fail to follow the rules.
While Sivels is quick to note she’s not an attorney, she does dedicate much of her class to teaching these sorts of lessons. “I’m not going to court for you,” she said, “but I can help you sleep better at night.”
Play to your strengths
There are many different skills needed to be a good property manager, and it’s likely that one person doesn’t possess all of them in unlimited supply. Sivels tells her students to think about what they do well, whether it’s rehab work, financing, tenant communications or other tasks, and find ways to delegate what doesn’t come naturally.
And even if you plan to be pretty hands-on with the work, you may need to invest in tools that make communicating with tenants easier. “If you have more than five units, you should really consider using a property management software platform,” Sivels recommended.
Use your knowledge to generate future business
Following up is key to ensuring a solid pipeline of investment deals in the future. Sivels suggested agents keep an eye on the market, and then reach out to clients they’ve worked with on investment deals in the past and ask them if they’ve thought about how they want to reinvest the equity they’ve earned so far in real estate.
“Know your inventory, see what’s out there and then go back in that Rolodex,” she said. “They’re already invested in the neighborhood. … Go back to them. There’s nothing better than a repeat client.”