In a special five part series, investor Simmi Wadhera outlines the key lessons she has learned from dealing with property managers and advises fellow landlords on what they should consider before hiring one.
In the first part, Simmi outlined what questions to ask when interviewing potential property managers. Here, she explains what terms and conditions should be set out.
Set contract terms and conditions.
Be cautious and plan ahead. Set specific terms and conditions in your property management contract to ensure you know everything you’re getting yourself into. Think about the following:
1. Limit discretionary spending in your property management contract. Have you ever been surprised at the end of the month when you receive a summary of unexpected expenses from your property manager? To safeguard against this and maximize cash-flow, consider limiting the amount of discretionary spending the property manager is allowed to spend without your approval. In my opinion, discretionary spending by the property manager should be limited to $100 per month maximum for each property that they manage.
2. Select the appropriate lease term – yearly lease versus multiyear lease. There are pros and cons to signing a one year or multi-year lease with the right lease term, dependent on your goals for the investment property. Yearly leases are advantageous in providing you with more flexibility if you have to replace a bad tenant or decide to sell the property. On the other hand, multi-year leases provide you with the peace of mind of having guaranteed rental income for a longer period of time. This will avoid yearly lease up fees incurred in finding new tenants. My one word of caution with a multi-year lease would be to ensure you have a clause in the contract that allows you to raise the rent annually within allowable guidelines.
3. Ensure that the monthly rental cheques come directly to you instead of the property manager. This provides you with visibility of the total rental amount the tenant is paying. This not only decreases the chance of your property manager committing fraud but also ensures you receive payment on time.
4. Determine additional costs. Read the fine print and ensure that you are aware of additional costs to avoid any surprises. These may include costs for annual inspections, mileage charged for visits to the property, or for maintenance and repairs.
5. Establish lease contract terms with tenant. Make sure the lease contract is between you and the tenant. Some property managers have the lease set between the tenant and the property management company but this can often create unnecessary complexities.
Simmi Wadhera was named Newcomer of the Year at the Top Investor Awards at the Toronto Real Estate Forum.