October 6, 2022
Recession is a mixed bag for property managers. On the one hand, since fewer people can afford to buy homes, rental demand stays strong while supply remains stable. Prices can even rise: as home prices fell during the Great Recession, rent plateaued for a few years before a steep increase after 2010; in 2022, rents are up 7.2% compared to 14.8% in 2021.
On the other hand, an economic downturn increases the risk of defaults, evictions, and churn – but despite the pitfalls property managers face in an economic slump, there are opportunities to adapt business and pricing models to navigate a slower economy. You can’t control interest rates or stock indexes, but you can control your marketing and strategy.
To that end, Proper’s accounting brain trust has several hot tips—from software solutions to standard operating procedures (SOPs)— that lower risk and boost the bottom line before and during a recession.
1. Estimate expenses conservatively with tighter budgets.
Prepare for higher churn and turnover costs during a downturn, and do NOT underestimate expenses. Use reporting and forecasting tools to communicate future trends and action plans to owners and tenants.*
Don’t overlook costs for:
- Maintenance and repairs
- Management fees
- Insurance (property and rent default)
- Staff, accounting, bookkeeping, and administrative overhead
- Depending on the property, maybe even account for vandalism, break-ins, or bad tenants.
2. Refinance before interest rates rise.
Inflation takes a while to deflate, meaning interest rates will probably take time to come down. If you plan on refinancing your assets or equipment, do it sooner rather than later for several reasons:
- Rates may be rising, but they’re still historically low. Refinancing now avoids a rate spike in the future.
- You may be able to tap the equity for cash on hand.
- Pay off your loan sooner. Refinancing to something shorter-term with a lower rate might raise your monthly payment, but pay off the loan more quickly, with significant long-term savings.
- A slight reduction in your interest rate still results in considerable savings over time. For example, a 30-year fixed-rate mortgage at 8% ten years ago can still lock in a lower rate for the next twenty years, with interest currently hovering around 6%. If interest rates drop again in the future, it can be refinanced again to further lower payments.
Talk to an expert to consider a refinance’s potential savings or costs.
3. Streamline workflows with automation and standardize the way you work.
Standard Operating Procedures (SOPs) are clear process maps for your team and the best way to manage workloads. In the best of times, SOPs maintain quality and consistency, which keeps you from losing control (or money). In times of hardship, when you’re likely managing a heavier workload with fewer staff and resources, SOPs are critical.
Many property managers lack the expertise, staff, or infrastructure to create process maps or optimize their existing software automation. Proper’s team of property management accounting specialists will not only review your current SOPs but offer time and money-saving improvements.
4. Create protective lease agreements.
Depending on the renter, ill-defined lease terms can be costly: when the economy slows, folks might seek looser, shorter lease terms, break leases early, or try to ignore lease stipulations.
To lower the financial risk of bad tenants, consider lease terms for items like:
- Move-In/out statement of conditions
- Guest policies
- Regular inspections
- Utility responsibility, malfunction, and overuse
- Property liability
Longer leases are worthwhile to retain good tenants, but protective lease terms establish liability and allow you to deduct from the security deposit.
5. Prioritize tenant retention.
Not only are good tenants priceless, but tenant turnover is expensive. In addition to the time a unit sits unoccupied (i.e., unprofitable), you often need to repaint, repair and replace items around the property. That’s in addition to the time and expense of marketing, showing, inspecting, and screening the unit for new tenants.
Outside of accounting, finding tenants is one of the most time-consuming aspects of property management, but shortcuts lead to bad tenants (see above).
Take care of good tenants. Appreciate them even when performing inspections or enforcing lease terms.
Consider the following:
- Stay current with your market: ensure amenities and pricing are competitive.
- Consider high ROI improvements or adding desirable amenities.
- Ask renters for improvement suggestions, and identify the best investments. Pay particular attention to ideas from good renters.
- Implement a referral program. Word of mouth is the best advertisement, and folks who live near friends and family are less likely to move.
- Be responsive to maintenance and repairs. The longer repairs sit, the more expensive they become, damaging the property and your relationship with the tenant. Keep tenants in the loop—even when there is no news to report—so they know you’re on top of things.
- Conduct exit interviews to determine why tenants move and what changes might have persuaded them to stay.
- Get rid of bad tenants. Full stop. Don’t renew bad leases or —with the moratorium lifted— don’t fear eviction proceedings. Good renters don’t want to live near noisy, dirty neighbors.
6. Hire an expert and cut costs.
Digital solutions like online tours, scheduling, rental applications, leasing, virtual property management, and cloud-based accounting are excellent ways to save money. Still, fancy software is only going to get you so far without the expertise to use it.
Any technology, particularly for accounting, is an expensive burden if it’s the wrong fit for your asset class or your team lacks the aptitude to optimize it. Software with a steep learning curve is a liability when trying to lower labor costs. As with all things related to property management accounting, if you need a hand selecting or optimizing your accounting software, we can help.