Landlord/Tenant

Darlene Higa (RA), MPM, RMP
Property Manager, Property Profi les, Inc. Past President, Oahu Chapter National Association of Residential Property Managers

Q. I own a single family home that I inherited when my parents passed away. I didn’t want to sell it because it was too emotional for me to deal with so I just rented it out. I fi gured it would provide some income and I can provide a home for a family that couldn’t afford to own a house. The problem I have is that the maintenance and upkeep are overwhelming and very expensive. Right now my house needs painting, the cabinets are falling apart, and the electrical is sub-standard because it’s an old house. How am I supposed to tackle all these expenses?

A. You are like most landlords who may need to sit back and evaluate how you are doing things. You have to remember that this is a “business”. You are in the rental housing business and you should run it like a business. No different than running a retail store, restaurant, or Microsoft for that matter. The basics are still in play. Your business generates income (via rental proceeds from the tenant each month) and you have expenses (property taxes, insurance, maintenance, etc).

You have to ask yourself, do you run this like a business? Does your business have its own checking account and accounting records? Does your business set aside money for current and future expenses? The problem I see is that a lot of landlords spend all the money they receive from their business and make no provisions or plans for future expenses. They just deposit the rent into their personal checking accounts, then spend the money like it came from a pay check. Whenever there is an expense that needs to be addressed with the house, they have to withdraw money from their personal account to pay for it thus it feels like they are “loosing” money thus creating aggravation and animosity towards the tenant and/or property itself.

So what are you supposed to do? As I said at the beginning, run it like a business. A business has its own financial records and checking account – you should have that as well. Second, do a budget and examine your current and future expenses. If you have a mortgage or utility bills that you pay each month, add those up for the year. Add in your other annual expense like the property taxes and insurance.

Next estimate the future expense such as exterior painting every 5 – 7 years, reroofing every
20 years, replacing carpets every 5 -7 years, replacing appliances, etc. You can annualize these expenses or even come up with a monthly allocation and that’s the money that should be set aside to pay those expenses.

If there is not enough income (rent) to cover these expenses, then your business needs an infusion of capital from you the owner to pay for these. If you are fortunate to have enough income to cover these expenses, then and only then can you think about paying yourself a “dividend” of excess profits. Failure to run your business as such is a formula for disaster and failure. Would a retail store, restaurant, or Microsoft survive if they spent every dime they took in each month with nothing set aside for future expenses? Of course not! So if you are running your business like that, you should expect it to run into difficulty or fail to survive.