My essay on stabilizing a portfolio
Posted in News From July on Nov 18th, 2009
This blog will be of interest to anyone who owns real estate in Ontario. I’ve been noticeably absent because I have been living in Ontario, having taken over active management of 243 units.
I mentioned in my July News in October newsletter that one of our decision making questions is whether we would be willing to move to where the portfolio is located as a worst case scenario. This decision is not made without adequate research first, about 60 to 80 hours worth, in order to determine the area’s demographics, economic fundamentals, amenities, etc. When our answer is yes, this means we are committed to the successful operation of that building. So far we’ve only had to spend a few weeks here and there to oversee renovations with buildings in Northern BC.
Between November 2008 to May 2009, we purchased seven apartment buildings in Thunder Bay, Ontario. Buying real estate is just the first step in the real estate investing process. The real business of real estate is in property management … pro-active property management.
It soon became clear that the property managers handling the portfolio had poor systems and controls. It became necessary to take extraordinary measures. This decision meant that we would be living in Thunder Bay for several weeks or months to stabilize the portfolio, establish clearly defined systems and controls, implement and enforce policies and procedures, create a maintenance schedule, streamline administrative protocols for everything from the rent roll, deposit procedures, move-in reports, move-out reports, auditing all tenant files, create a property management manual with all forms in a template format. The idea is to create a system that requires as little thinking as possible. This has been my job for the past four weeks.
The first order of business after firing the managers is to do an audit because the first order of priority is getting the money process under control. You must double check all of their information to ensure accuracy. I created a simple rent roll audit in Microsoft Excel with 36 columns, starting with the building, suite numbers, tenant name, tenant phone number, gross rent amount, discount rent amount, net rent payable, rental supplement portion, tenant portion payable of rent supplement, last month rent deposit in, last month rent deposit out, description area, move-in date, assigned parking spot, twelve months to schedule 90-day notice to increase rent, new rent increase amount, difference of rent increase, effective date of rent increase, and when to deliver the rent increase notice.
Review the entire contents of every tenant file individually and verify. Note the discrepancies and update any new information. Create a task list for every file. Trends will start to emerge. This template becomes your new master rent roll.
One of the trends I noticed immediately was something the property managers did not do. In Ontario, there is no security deposit or damage deposit. Any damage done to the suite must be invoiced separately. Landlords can only collect a last month rent deposit that must accrue interest according to the legislated amount effective January 1st of every year. According to the Residential Tenancy Act, Landlords are permitted to issue a 60 day notice to use the last month rent accrued interest towards their rent payment, instead of paying it out.
This may seem like a small amount on a yearly basis when you consider a 1.8% interest accrual on a $700 deposit is $12.60. I just issued a cheque request to refund the LMR interest to a vacating tenant in excess of $100. This refund amount could have been used to offset previous rent payments if previous management had chosen to implement it.
Once the rent roll is verified, the next step is to create a system for handling non-payment of rent. Our corporate policy is to issue a Form N4 Notice to End a Tenancy Early for Non-Payment of Rent on the second day of the month. You must train your tenants to pay rent on or before the first day of each and every month. When a Form N4 is issued, the Landlord must wait 14 days after the N4 is delivered before they can apply for an eviction. So if you issue an N4 on Day 2, the soonest you can apply for an L1 Application to Evict a Tenant is on Day 17. The L1 Application costs $170 and the Landlord Tenant Board schedules a hearing. Hearings occur every 2 weeks. By the hearing, you are already near month end. At the hearing, the judge makes the ruling. And it’s here where you really need your paperwork in order.
There are other forms at the Landlord’s disposal such as a Form N5 which can be used when a tenant disturbs the peaceful enjoyment of the community for others or willfully damages property. The delivery of two N5’s within a six month span is grounds for an automatic eviction. Or a Form N8 can be used to evict a tenant for the consistent late payment of rent. This information is available at www.ltb.gov.on.ca.
Your property management tools should include a copy of these files in binders: the Province’s Residential Tenancies Act, the local area’s city by-laws, animal/pet by-laws, Smoke Free Act, Landlord Tenant Board forms, and a binder with tenant forms.
The most common tenant complaint is excessive noise. There is a noise by-law in effect from 11pm to 7am. A Form N5 can be issued for tenants who disturb tenants during these hours. Registration of pets is mandatory. For example, the penalty for an unregistered cat is $155. The Smoke Free Ontario Act prohibits smoking inside public buildings. Fines start at $305 for tenants caught smoking in the hallways. There are fines imposed for pet owners who do not adhere to the local Poop and Scoop by-laws. My desire is to stop these nuisance calls coming in to the manager’s office and empower the tenants to call the appropriate enforcement office.
It is your responsibility to familiarize yourself with the local rules, regulations and laws. There are parts of the Residential Tenancies Act that the local property managers were not even aware of, which we are implementing. Just because you hire a property management company or manager(s) does not relieve you of your fiscal responsibilities.
The next area to tackle is to create a seamless move-in process. You can pretty much estimate how many turn-overs your building will have. Prepare a Tenant Move-In Folder with these 19 forms created in a template:
1. application form
2. credit check consent form
3. lease agreement (2 copies)
4. tenant rules and regulations (2 copies)
5. memo: rent cheques made payable to …
6. pet application
7. pet registration
8. move-in welcome letter
9. tenant insurance requirement letter
10. information for new tenants from the Landlord Tenant Board
11. memo: no tampering with safety devices (required by fire marshall)
12. memo: managing moisture in your suites (to reduce/eliminate condensation)
13. animal by-laws hand out
14. Smoke-Free Ontario Act hand out
15. Form N9 Tenant’s Notice to Terminate the Tenancy
16. suite condition prior to vacating
17. tenant move-out check list
18. end of tenancy report
19. inspection report
20. rewards program
Every tenant file is prepared with these forms ready to go. You will have noticed that the move-out forms are included in the move-in file. Prepare your tenants in advance of your expectations for when they eventually move out and how much it will cost them if they do not clean the suite according to your instructions. One copy will be the tenant file copy. The other copy will eventually become the tenant’s copy. There is a hard copy version and an electronic version.
Now that these systems are in place, I am writing up step-by-step instructions for the new manager(s).
Once this is done, our next assignment is to conduct a suite-by-suite inspection of all the units (again) and note any deficiencies, repair items, replacement items for a longer term maintenance project. This is something we do right after acquisition so we can schedule and prioritize our maintenance items and budget.
Your property manager is your business partner. The operation of any multi-family residential apartment building or complex requires partnership with many players. Keep documentation on your communications and monitor results. Poor performance can mean lack of understanding, lack of skills, lack of human resources or apathy. However, I’ve noticed that attitude is everything. The right attitude can overcome miscommunication, can acquire new skills, can attract the right manpower. The right attitude can create happy tenants, happy contractors and a well run building.
I’ll be here in Thunder Bay for a couple more months streamlining the systems we’ve put into place, hiring and training the right managers for the property, before I look at buying more property.
p.s. I may be here working but I am here by choice. The few weeks of effort that we put in now will pave the way for a lean, mean, passive-income, money-making machine.
November 17, 2009
