GUIDE TO DEVELOPING AND

OPERATING SMALL SCALE RENTAL PROPERTIES

Developed with funding provided by the
MacArthur Foundation's Windows of Opportunity Grant
November 2012

SMALL SCALE RENTAL PROPERTIES

GUIDE TO DEVELOPING AND

OPERATING SMALL SCALE RENTAL PROPERTIES
ABOUT THIS GUIDE
A majority of the nations rental housing stock is made up of properties with less than
20 units and most of these units serve low income tenants. Over time, these properties
have become difficult to operate sustainably, limiting housing choices in many
communities. This guide gives some direction to affordable housing organizations on
how to evaluate small scale rental deals and develop and manage them successfully.
The guide is the result of a three year project sponsored by the MacArthur Foundation
through a grant to the Florida Housing Coalition. Efforts were initially focused on
developing the capacity of nonprofit housing providers in Florida to acquire,
rehabilitate and operate aging rental properties with project based rental assistance.
Several pilot projects were selected and completed. The process of selection for
eventual management and operation revealed a gap in the decision making and
analysis that revealed the pitfalls of operating small scale rental projects as opposed to
larger standardized developments. The nature of smaller rental projects can doom
success if not viewed in this context. Financing, project selection, organizational
capacity, and management are scrutinized in this guide with the scale of the project in
the forefront.

SMALL SCALE RENTAL PROPERTIES

Table of Contents
Introduction ..................................................................................................................... 4
Part 1: Small Scale Rental Projects: An Overview ........................................................ 5
1.1 Is There a Problem with Small Scale Deals? .......................................... 5
1.2 A Move Toward Larger, Higher Priced Developments .......................... 6
1.3 What to Do? ............................................................................................ 7
Part 2: Is Small Scale and Scattered Site Rental a Good Fit for my Organization? ..... 7
2.1 Does rental housing mesh with the organizations current mission? ...... 8
2.2 Do you have the right staff? .................................................................... 8
2.3 How will you finance rental units? ......................................................... 8
2.4 How will you plan for sustainability? ..................................................... 9
2.5 How will the property be managed? ....................................................... 9
2.6 Do you have clearly written goals? ......................................................... 9
2.7 Do you have good written policies and procedures? ............................ 10
2.8 Do you have a clearly written and pertinent document set? ................. 10
2.9 Do you have an exit strategy? ............................................................... 11
Table 2.1 - Assessment of Capacity to Develop and Manage Scattered Site Rental
Properties ......................................................................................................... 12
Part 3: Early Decision- Making the Go or No-Go Decision ................................ 16
3.1 Site and Use Approvals ......................................................................... 16
3.2 Infrastructure ......................................................................................... 16
3.3 Scattered Site or Remote Properties ..................................................... 16
3.4 Property Condition ................................................................................ 17
3.5 Construction Standards ......................................................................... 17
3.6 Rehabilitation Standards ....................................................................... 17
3.7 Historic Properties ................................................................................ 18
3.8 Compliance Period ................................................................................ 18
3.9 Projects of Last Resort .......................................................................... 18
3.10 Marketing Concerns .............................................................................. 18
Part 4: Financial Considerations ................................................................................. 18
4.1 Cash flow Unit-by-Unit Basis vs. Portfolio ....................................... 18
4.2 The Capital Needs Assessment and Replacement Reserve Analysis ... 19
4.2.1 Replacement Reserves Analysis ........................................................... 19
4.2.2 Typical Replacement Items................................................................... 20
4.2.3 Anticipated Capital Repairs- Example.................................................. 21
4.2.4 Replacement Reserve Analysis Example and Discussion .................... 21
Table 4.1 - Sample Replacement Needs Summary ................................................... 23
Table 4.2 - Replacement Reserve Analysis ................................................................ 25
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SMALL SCALE RENTAL PROPERTIES

Part 5: Property Management Considerations for Small Scale Rental Projects ......... 27
5.1 What is the Job of the Property Management Company?..................... 27
5.1.2 Pre-Occupancy and Lease Up ............................................................... 27
5.1.3 Maintenance and Tenant Services ........................................................ 28
5.1.4 Property Management Concerns ........................................................... 29
5.2 Property Management: In-House or Out Source? ................................. 30
5.2.1 Experience and Capacity....................................................................... 30
5.2.2 Project Size and Scale ........................................................................... 31
5.2.3 Monitoring and Compliance ................................................................. 32
5.2.4 Geographic Location and Property Management ................................. 32
5.2.5 Maintenance and Repairs ...................................................................... 33
5.2.6 Supportive Housing .............................................................................. 33
Table 5.1 - Management Considerations Out-Source vs. In-House ............................. 34
Part 6: Property Management Software ....................................................................... 36
Part 7: The Case for Consolidated Management of Small Scale Rental Projects ........ 37

SMALL SCALE RENTAL PROPERTIES

INTRODUCTION
The growing inventory of small rental properties has been noticed in the past several
years as they became available as bank owned real estate and eligible for purchase
under the Neighborhood Stabilization Program (NSP). Other funding sources such as
housing credits in Florida have prioritized existing properties over new construction.
Market changes have led long established housing providers experienced in
developing new homeowner housing to consider acquiring, rehabilitating and
operating small rental properties. This is a market niche demanding a specialized
focus, especially before jumping in to this market segment. With careful consideration
in advance, projects can be seriously evaluated and projections made on revenues,
expenses and maintenance.
This guide is prepared for nonprofit affordable housing providers or their grantees who
are considering owning and operating small scale rental properties. This guide is not a
comprehensive guide to the development of affordable rental or supportive housing.
There are other resources that provide excellent guidance on the big picture. The
focus of this guide highlights specific areas in the small scale rental industry where
planning and decision making can be pivotal to the success of the projects, both in the
short term and over time. While scattered site rental housing is frequently described in
this guide, it is also not a comprehensive overview of that particular affordable
housing challenge that has received increased attention over the past several years
mainly in the Neighborhood Stabilization Program (NSP).

SMALL SCALE RENTAL PROPERTIES

PART 1: SMALL SCALE RENTAL PROJECTS: AN OVERVIEW

Rental properties with less than 20 units make up most of our nations rental stock.
According to the 2010 American Community Survey, 75 percent of all renters in the
U.S. live in buildings with 19 or fewer units. Just over 52 percent of all renters live in
buildings with one to four units.
Floridas numbers are similar to the country at large. Again, according to the 2010
American Communities Survey, 72 percent of Floridas 2.2 million renters live in
buildings with fewer than 20 units. Just over 49 percent live in buildings with one to
four units.
With small rental deals making up most of the rental stock in the country, it is no
surprise that small rental developments house most of the nations lower income
renters. According to Multifamily Rental Housing, a background paper for the
Millennial Housing Commission Finance Task Force, over 70 percent of all lowerincome households live in one- to four-family properties. (Donovan, 2002)
1.1

IS THERE A PROBLEM WITH SMALL SCALE DEALS?

Small scale rental deals are more likely to be less well managed and less well
maintained than larger developments. As Apgar notes, owners of small-scale rental
units are less well-capitalized and are excluded from the economies of scale that are so
important to making tenant and property management economically viable. As a
result, small scale owners typically have little if any reserves available for unexpected
or even predictable repairs. It is therefore not surprising that Stegmans research on
Baltimore rental property owners in the 1970s found a correlation between small-scale
ownership; poorly maintained, physically deteriorated properties; and abandonment.
Some more recent data has also confirmed the difficultly with receiving a positive
cash flow from a small details.
According to a 1995 Census report fewer than half of the owners of two- to fourfamily properties made an operating profit from their buildings, compared with nearly
three-quarters of the owners of apartment buildings with 50 or more units. This same
study showed that even those that are profitable tend to have total expenses only
slightly lower than total income. Such budget stress adversely affects the maintenance
and repair activities of absentee-owners of 1 to 9 family structures. Despite the fact
that their units are most likely among all property types to have structural deficiencies,
14 percent report spending nothing on maintenance, while 22 percent defer required
major and minor repair.
While larger apartment buildings are often owned by partnerships, real estate
investment trusts (REITs), or corporations, small rental properties are truly mom and
pop operations. Nearly 90 percent of one- to four-family properties and three-quarters
of five- to nine-family properties are owned by an individual or a couple. In addition,
few private owners of small rental properties are full-time landlords. The majority hold
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SMALL SCALE RENTAL PROPERTIES

other jobs from which they make most of their living. Indeed, fewer than half of the
owners of two- to four-family properties made an operating profit from their buildings,
compared with nearly three-quarters of the owners of apartment buildings with 50 or
more units.
Less than 40 percent of the owners of one- to four-family properties made an operating
profit from their buildings, compared with nearly three-quarters of the owners of
apartment buildings with 50 or more units. This lack of profitability results in small, if
any, reserves for unanticipated expenses. It is this budget stress that adversely affects
the maintenance and repair activities of absentee-owners of small scale deals.
1.2

A MOVE TOWARD LARGER, HIGHER PRICED DEVELOPMENTS

Given the difficulty in earning a profit on small scale affordable rental developments, it
should come as no surprise that as these complexes age they are coming off line, and are
not being replaced with new affordable small scale developments. More than one in 10
single-family detached homes, which made up over a quarter of the low-rent housing
stock in 1999, were permanently removed by 2009. Loss rates for multifamily properties
with 24 units, accounting for a quarter of the 1999 low-cost stock, were even higher at
15.1 percent
Low-cost units (renting for less than $400 in 2009 dollars) are most at risk of permanent
loss because, as we have seen, the modest rent they earn is often insufficient to maintain
the properties in good condition.1 In 1999 - 2009, 11.9 percent of low-cost rentals were
permanently removed from the stocknearly twice the share of units renting for $400
799 and four times the share of units renting for more than $800. In addition, decade-long
loss rates for vacant low-cost units (20.6 percent) were nearly twice those for occupied
units (10.9 percent).
As these smaller, less expensive units are lost, the market is replacing them with higher
priced units in larger developments. According to the Joint Center for Housing Studies,
in 1999, 13 percent of new rental apartments were in buildings with 50 or more units. By
2009, this share had tripled to 39 percent. In 2009, construction and land costs for units in
new multifamily structures averaged about $110,000, and the median asking rent was
$1,067. To be affordable to the median renter in 2009 (at the 30-percent-of-income
standard), the rent would have to be at $775 or less.
At the same time, many of the lowest-cost rentals are being permanently lost from the
stock, largely because the rents they earn cannot cover the costs of adequate
maintenance. In fact, the American Housing Survey indicates that despite the net
addition of 2.6 million rentals, the number of units with rents of $400 or less in 2009
inflation-adjusted dollars fell from 6.2 million in 1999 to 5.6 million in 2009. Many of
the losses were due to demolition and other forms of permanent removal. By 2009,
nearly 12 percent of the low-cost rentals that existed in 1999 had been losttwice the
share for units renting for $400799, and four times the share of units renting for $800
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SMALL SCALE RENTAL PROPERTIES

or more. Many of the low-cost rental units that remain are in older, more at-risk
buildings.
1.3

WHAT TO DO?

So, most of the affordable rental housing in this country is in small developments that
are being lost, and replaced with larger more expensive options, pricing out the low
income renter. As noted previously the operating expenses of these small developments
often exceeds the receipts. How can this stock be kept affordable? One option is for
nonprofit developers interested in this business line to acquire a number of small
developments. By having at least 70-100 units in a portfolio, the owner can begin to
realize the economies of scale that come with managing a large number of units. Central
to this strategy are that the units are located in reasonable proximity to one another, and
to the greatest extent feasible, the units have similar fixtures and finishes. This simplifies
maintenance and allows for bulk purchase of parts for repairs as well as at the time of
replacement.
Another option would be to create a Real Estate Investment Trust (REIT) that specializes in
small scale affordable developments. This would facilitate the transfer of ownership from
individual to institutional, producing enough scale to obtain professional management
and, potentially, more flexible capital.
References:
Apgar, W., & Narasimhan, S. (2007). Enhancing Access to Capital for Smaller
Unsubsidized Multifamily Rental Properties. Revisiting Rental Housing: A
National Policy Summit. Boston: Joint Center for Housing Studies.
Joint Center for Housing Studies (2011). The State of the Nations Housing 2011.
[Link]
Mallach, Alan (2009). Challenges of the Small Rental Property Sector. New England
Community Developments. Issue 1. Federal Reserve Bank of Boston.
Narasimhan, S. Why Do Small Multifamily Properties Bedevil Us?
[Link]
Newman, Sandra J. (2005) Low End Rental Housing: The Forgotten Story in
Baltimores Housing Boom. The Urban Institute.
White, Douglas, et al. (2010). The State of Floridas Housing. Shimberg Center for
Housing Studies.

PART 2:

IS SMALL SCALE AND SCATTERED SITE RENTAL

A GOOD FIT FOR MY ORGANIZATION?

New construction of affordable for sale housing was the bread and butter of a majority
of housing nonprofits in Florida for the past 20 years. Now, these same organizations
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SMALL SCALE RENTAL PROPERTIES

are finding they need to expand their business lines to succeed in the post bubble
housing environment and scattered site rental housing may be a good option for some.
Some housing organizations may have become inadvertent landlords due to an
inventory of unsold NSP homes, while others may be thinking of a strategic way to
enter the world of small scale rental by acquiring single family homes, 2 -4 family
properties or small apartment complexes.
Social Service and support organizations might see a need for affordable rental
housing for the low income clients they serve and may be contemplating acquiring
their own rental units to fill that need.
Here are some questions to ask before you add small scale rental to your business line.
2.1

DOES RENTAL HOUSING MESH WITH THE ORGANIZATIONS

CURRENT MISSION?

Expanding your mission to add rental housing is generally in line with the goals of
nonprofits who have previously focused on for sale housing to low income buyers.
However, social service organizations will likely need to restructure their mission to
include affordable rental housing. Consider a nonprofit that provides job training to
veterans and finds their clients are unable to locate decent, safe affordable apartments.
To develop, own and operate rental housing, this organization would need to rewrite
their mission, obtain board approval, amend their bylaws, seek different funding
sources and develop staff capacity. Some organizations find it is easier to partner with
existing affordable housing nonprofits to develop appropriate rentals for their clients
or set aside units in existing properties, rather than getting into the rental housing
business themselves.
2.2

DO YOU HAVE THE RIGHT STAFF?

Acquisition, development and management of rental housing require a specific set of

skills. Do you have the time and money to bring on additional staff with the necessary
expertise? Also consider new accounting needs. Properly tracking rental income is
more complex than reconciling the sale of a single family home and youll need to
make sure whoever does your books understands how to properly account for this
ongoing revenue stream.
2.3

HOW WILL YOU FINANCE RENTAL UNITS?

In order to charge lower, more affordable rents, yet still be able to pay operating
expenses, you will need to secure grant subsidy during the acquisition and
development phases. The funding sources used to fund these projects have regulations
that can be more complex that those used to finance ownership housing. For nonprofits
just entering the housing arena, there is bound to be a steep learning curve not only
regarding regulations, but in identifying and competing for these limited resources.
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SMALL SCALE RENTAL PROPERTIES

In addition to public and private grant financing, you will often need to fill funding
gaps by obtaining bank loans. Is your organization prepared to meet rigorous
underwriting standards? Typically a lender will want to review current financial
statements and your most recent audit. These documents should show you are a
stable, solvent, credit worthy business.
Youll have significant startup costs as well. It takes time to fully lease up and youll
have expenses in the interim. Do you have sufficient cash on hand to operate the
property until then?
2.4

HOW WILL YOU PLAN FOR SUSTAINABILITY?

It is crucial that rental housing be sustainable over the long term. This requires a
careful evaluation of the operating proforma to ensure expenses are properly estimated
before you buy even one unit. Failure to properly forecast expenses or budget for
future repairs may mean an additional infusion of grant funding or a restructuring of
the projects finances. It is important that qualified staff carefully monitors the
propertys financial performance over time and be prepared to take action when
needed.
2.5

HOW WILL THE PROPERTY BE MANAGED?

Whether you plan to manage the property yourself or hire a management company,
youll have a lot of decisions to make. Youll need to start thinking about how you
will use background checks, how much youll charge for late fees, and who will
handle evictions, just to name a few. You will need staff expertise to guide your
organization in these decisions and oversee the management of the property for the
long term. You can probably make do with a good Excel spreadsheet if you are
operating 25 units or less, but more than that requires a professional property
management system which adds to your startup costs.
2.6

DO YOU HAVE CLEARLY WRITTEN GOALS?

Short and long term goals of a nonprofit organization are commonly summarized in a
Strategic Plan. The plan should be thoughtfully crafted so there is a clear picture of
the type and number of rental units planned for your portfolio. While there are distinct
economic advantages to having a portfolio of 70+ units, the consideration of your
organizational capacity (time, money, staff) in determining how large and how fast to
grow your rental housing business is essential. Too many projects in the pipeline at
one time can be a drain on finances and staff time, while too few may not be an
effective use of resources. The strategic plan should be reviewed every year and
adjusted as needed based on development progress.
Another consideration is the availability of suitable properties. While an organization
may have staff time and money, if there are no properties/land for sale in your target
area, at your target price, your Strategic Plan should be adjusted accordingly.
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2.7

DO YOU HAVE GOOD WRITTEN POLICIES AND PROCEDURES?

From creating the feasibility analysis for a potential property to collecting past due
rent, there are a myriad of rental housing policies and procedures that need to be
created. Policies are working documents, so in addition to the initial version, they
should be reviewed and improved on an annual basis. Below is a sample list of
policies and procedures that need to be drafted.
Real Estate Acquisition
o How is the decision to buy a particular property reached?
o What due diligence is needed and who will be responsible?
o Who will create the feasibility analysis/proforma and what parameters
will be used (rents, vacancy rate, debt service coverage, operating
expenses)
o Will you retain an attorney/realtor/title company/capital needs
inspection firm?
o What funding sources are anticipated?
Renovation
o Scope of work/energy efficiency
o Solicitation and bid process for contractor(s)/architect
o Project management (inspections, lien releases)
Marketing
o How will you advertise for initial lease up?
o How will you document affirmative marketing efforts?
o How much is budgeted for marketing expense?
Property Management
o Hire a professional management company or manage in house?
o Tenant rules and regulations
o Tenant selection plan and criteria
o Lease execution
o Income certification and recertification
o Rent collection procedures
o Security deposit procedures
o Late fees
o Partial rent/ security payment guidelines
o Eviction procedures
o Handling tenant complaints
o Repairs and maintenance
o Long and short term capital needs review
o Budget and property performance
o Property turn over
2.8

DO YOU HAVE A CLEARLY WRITTEN AND PERTINENT

DOCUMENT SET?

One of the advantages of hiring a professional property management company is that

they typically have a stock set of documents. If you are doing the management in
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SMALL SCALE RENTAL PROPERTIES

house and install property management software some of the forms below may be
included. Regardless, youll need:
Rental Application
Credit release form
Background check document
Lease
Income certification forms
Rent logs/tracking system
Security deposit logs/tracking system
Work order/completion forms
Invoice tracking system
3 and 7 day tenant notices
Lease renewal/income recertification letter
Move In /Move out forms
2.9

DO YOU HAVE AN EXIT STRATEGY?

Owning and managing rental property is a long term commitment not without
potential pitfalls. A property generating positive cash flow in year 4 may be one leaky
roof away from running in the red by year 10. Maintaining a healthy operating reserve
that can pay for unexpected repairs is crucial. In addition, having good relationships
with your funders is important should you need to restructure debt or obtain an
additional grant to fix that roof. Sometimes rental property owners have unrealistic
expectations on the rents that can be attained, lowering the monthly $25/month to
achieve full occupancy can be devastating to the bottom line in an affordable property.
Regardless of the reason, it is a good idea to think about an exit strategy should things
turn south. Transferring title to another, better positioned nonprofit or housing
authority may be an option. Refinancing outstanding loans is another. Depending on
the funding sources and any outstanding affordability periods, selling the property may
be the way to go. The key to success is keeping a close eye on property performance
and making quick adjustments as needed. A form that can be used to evaluate an
organizations capacity to develop and manage scattered site rental housing can be
found in Error! Reference source not found. 2.1.

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SMALL SCALE RENTAL PROPERTIES

TABLE 2.1 - ASSESSMENT OF CAPACITY TO DEVELOP AND

MANAGE SCATTERED SITE RENTAL PROPERTIES
ASSESSMENT
CATEGORY

ASSESSMENT
CRITERIA

Organizational Experience
Affordable
housing
development
experience
Complexity of
deals
ED and Senior
Management
experience
Staff Experience

ASSESSMENT

Notes

Number of rental and single

family homes completed. Current
pipeline. Performance of
completed deals.
Number and type of financing
sources
Detailed summary of experience
Detailed summary of experience

Roles/
Responsibilities
Organizational
structure
Housing
Department
Job Descriptions

Functional org chart

demonstrating authority and
communication
Dedicated to housing, report to
ED.
Demonstrate relevant experience

Dedicated
project staff

Assigned staff has time allocated

to project. Minimum .5 FTE

Contract
Execution

ED or designee has contract

signing authority

Board

Active, functional and

knowledgeable Real Estate
committee evaluates deals

Policies and
Procedures

Written procedures detail

decision making process and
policies include appropriate
geographic and demographic
targets and feasibility analysis
parameters.
Regular time dedicated to project
progress reports to ED, Real
Estate Committee and Board.
Mechanism for troubleshooting,
re-evaluation in place if needed.

Progress
updates

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ASSESSMENT
CATEGORY
Internal Staff
Expertise

ASSESSMENT
CRITERIA

ASSESSMENT

Financing
MechanismsAcquisition and
Rehabilitation

Staff understands appropriate

funding sources, application
cycles and processes, regulations.

Capital Needs
Assessment

Staff has capacity to perform

C.N.A. for multifamily

Real Estate
Acquisition
Process
Knowledge of
Local
Government
Development
Regulations
Knowledge of
Predevelopment
and Planning
Tasks
(exercising due
diligence)
Knowledge of
Site and
Property
Selection
Criteria
Knowledge of
How to Manage
Contractual
Relationships
with Qualified
Third Party
Experts

Staff understands process, has

checklist

Co-Developer
Needed
/Identified

Staff can evaluate complexity of

funding and project to determine
need for co-developer.
Understands how to locate
development partner and
negotiate contracts.

Notes

Staff knows regulations or knows

where to find them and how to
interpret them.
Staff understands
predevelopment process, has
checklist

Staff has clear direction on

location/size/price

Staff understands that when

internal expertise is lacking,
vendors & consultants can be
hired. Clear process for
engagement (RFP, RPQ,
established relationship)

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ASSESSMENT
CATEGORY
Network
Relationships

ASSESSMENT
CRITERIA

ASSESSMENT

Established
Relationships
with Experts

Developed network of housing

and development experts
(environmental, engineers,
architects, attorneys,
development consultants).
Mechanism for evaluating and
contracting.

Established
Relationships
with
Government

Has good relationship with HUD

field office, local government staff
(housing, planning, building
depts.)

Established Peer
Network

Has relationships with other

housing developers, technical
assistance providers, nonprofit
advocacy networks

Educational and
Training
Networks

Has training budget, staff and

management attend HUD
trainings and FHC Annual
Conference

Organizational Management
Personnel
Polices

Notes

Written organizational policies

exist and are regularly updated.
Policies include conflict of
interest provisions

Board Policies

Written Board policies exist and

are regularly updated and include
conflict of interest provisions.

Monitoring &
Audits

Monitoring reports from funders

are reviewed and guide internal
operations. Organization
undergoes professional audit
annually and uses outcome to
improve controls.

Property
Management
Policies

Written procedures detailing

tenant selection, maintenance
procedures, rent collection, fee
schedule and eviction process
exist and are regularly updated

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SMALL SCALE RENTAL PROPERTIES

ASSESSMENT
CATEGORY

ASSESSMENT
CRITERIA
Financial
Policies

ASSESSMENT

Internal
Accounting
system

Sophisticated accounting system

in place and utilized

IT Capacity

Updated hardware and software

in place that is functional and
adequate for reporting and daily
needs.

Property
Management

Professional property
management software in place
and utilized

Board
Committee

Qualified Board Finance

committee meets regularly to
review finances including cash
flow and budget variances

Internal Capital

Cash on hand sufficient to meet

operating expenses, reserve
requirement and to invest in
predevelopment. Line of credit in
place for cash flow.

Access to
Outside Capital

Financial statements and balance

sheets prepared and reviewed
regularly. Credit and cash flow
sufficient to attract outside
capital.

Fundraising

Formal plan to raise operating

funds and fill project gaps

Grant Writing

Expert staff in place or contracted

to research and write grants.

Notes

Written policies exist and include

internal controls and accounting,
relative authority for
disbursements and reconciliation
procedures

Technological
Resources

Financial
Resources

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PART 3:
EARLY DECISION- MAKING THE GO OR NOGO DECISION
When a project is being initially considered, there are several situations that should
raise red flags and could provide enough information to terminate the inquiry. Some
of these are based on the property and some on management and operations. This
review should not be considered a comprehensive due diligence checklist but rather
specific areas where characteristics of a small scale project would raise a red flag
requiring further review.
3.1

SITE AND USE APPROVALS

Zoning, land use and site plan approval can be lengthy, expensive and contentious.
Some older properties are non-conforming to current zoning or land use restrictions.
If the density or other site characteristics such as setbacks, number of parking spaces,
or lot coverage do not meet current standards, it will be very difficult or prohibitively
expensive to get the permits needed to do a full rehabilitation. If rehabilitation of the
property triggers a requirement for re-zoning and land use changes, the deal might be
infeasible given anticipated timeframes and available cash on hand. Another concern
is if the intended use is an authorized use of federal housing dollars as defined as a
need or strategy in the Consolidated Plan. If not, federal funds may not be eligible
until the plan can be amended.
3.2

INFRASTRUCTURE

Upgrading water and sewer are high cost improvements that could sink an otherwise
feasible budget. Even if funds are available but the installation expense increases the
level of debt service, this could have a negative impact on the future operation of the
project. Double check the availability of water, sewer, electric, cable, phone, and
recycled water for irrigation. Check the local capital improvements plan to see if there
are improvements planned that will result in an assessment that could be an
unexpected expense.
Sewer and water connection fees could be a cost not anticipated or included in
budgeted funds. A new project or newly rehabilitated may be required to pay these
connection fees if the property is converted from a single to individual meters. Impact
fees may be incurred if the number of units is increased. These expenses can be quite
significant in some areas and should be carefully considered as part of the rehab
budget.
3.3

SCATTERED SITE OR REMOTE PROPERTIES

If a property is part of a portfolio of other small rental projects, it is important to

consider the distance separating the properties. The cost of inspections, showing the
property to perspective tenants and maintenance calls can increase operating expenses
whether the management is being done in-house or through a third party management
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company. Map the properties and measure the mileage between them- an outlying
property may decrease efficiency in management.
As we have noted, having enough units to benefit from property management
economies of scale is essential for a successful scattered site rental program. A
portfolio in the range of 60-80 units typically allows for sufficient cash flow to cover
the cost of property management and often provides enough revenue for maintenance
staff. The geographic location of the properties is very important. Units that are in
close proximity to one another results in reduced travel time for both property
management and maintenance staff.
3.4

PROPERTY CONDITION

If a building or site will require extensive rehabilitation, both the time to complete the
work as well as the expense should be carefully considered. Before committing
resources to the extensive analysis that should be done on a property in poor condition,
the decision to walk away from the project might be the best. The length of time for
any special permitting or local approvals should be considered. Conducting a Capital
Needs Assessment is critical to determine the current and future repairs and
maintenance needs of the property. (See Part 4)
3.5

CONSTRUCTION STANDARDS

In addition to meeting the locally designated construction standards, the building

materials composition and interior elements should be sustainable and require normal
maintenance and replacement treatments. Many developers avoid stick built
buildings, favoring only concrete or masonry. The age and condition of major systems
including windows, HVAC, electrical and plumbing may be too costly to replace upon
purchase or will require replacement in the future with more efficient but higher cost
components.
3.6

REHABILITATION STANDARDS

As with any rehab program, rehab standards are extremely important when acquiring
and rehabilitating units for a scattered site rental program. However, unlike with
owner occupied rehab programs, when replacing components, scattered site rental
standards should not replace like with like. Instead, scattered site rental programs
should focus on universal components for all units. This helps reduce the cost of
maintenance. In some instances it is not possible or practical to use the same
components in all units. In these cases the developer should develop a database that
lists the type and year of each appliance, HVAC system, plumbing fixtures, etc. for
each unit. This database can be used by maintenance staff when service calls are
received, and asset management staff when planning for capital expenditures.

17

SMALL SCALE RENTAL PROPERTIES

3.7

HISTORIC PROPERTIES

Some older small scale properties may be located in a historic district or be listed as
historic. While this in and of itself should not be a deal killer, the future rehab
requirements should be investigated by reviewing the standards and the process for
permit approval. Often there are grants available to help offset the additional costs of
meeting historic rehabilitation standards. Some communities offer zoning or building
code relief (non-safety related) for the preservation of historic properties. In the
proper treatment of historic buildings, it will be essential to build an experienced team
including the architect and the builder.
3.8

COMPLIANCE PERIOD

Will the property physically survive and cash flow for the compliance period? The
Capital Needs Assessment should indicate any major issues that would predict serious
expenditures required during the affordability period. Surrounding land uses may give
some insight into the future marketability of the property. Future infrastructure
assessments should be considered by checking the Capital Improvements Plan of the
local government.
3.9

PROJECTS OF LAST RESORT

If you are offered a property that has been turned down by multiple investors, there is
probably a good reason. Inspections and evaluations should be carefully reviewed.
Unless it is within the mission of the organization to pursue such projects, then red
flags should be heeded.
3.10

MARKETING CONCERNS

The number of bedrooms along with other characteristics such as parking, fencing,
storage space, outdoor patios or decks, stairs vs. elevators, and security are features
that your target market will consider when deciding to rent a unit. For example, if
your target market is seniors or people with special needs, 1 and 2 bedroom units will
be most marketable, along with security and easy access.

PART 4:
4.1

FINANCIAL CONSIDERATIONS

CASH FLOW UNIT-BY-UNIT BASIS VS. PORTFOLIO

For a variety of reasons, not the least of which is legal liability, large rental
developments are often owned by a single asset, Limited Liability Corporation.
Because of this, property owners are used to determining the cash flow of a rental
project on a property-by-property basis. With small scale scattered site properties, it is
also important to know whether each property has a positive cash flow. However, as
18

SMALL SCALE RENTAL PROPERTIES

has been noted elsewhere in this guide, owning a large number of properties enables
nonprofits to benefit from the economies of scale that are vital for a successful
business line. Small scale owners therefore need to not only evaluate the financial
health of each property, they should also look at the overall financial health of their
entire portfolio.
There are factors beyond the control of management that can result in a rental unit
experiencing a negative cash flow. Lets look at an example of a single family unit that
rents for $850 per month and has a positive annual cash flow of $1,800 per year. If two
months of rent are lost due to an eviction, and $1,000 is needed to make repairs, that
unit will go from $1,800 of positive cash flow for the year to operating $900 in the red.
However, if the developer has 50 units, and they each average $1,800 of cash flow for
the year, the other 49 units will make up for the $900 loss on the unit in our example.
Unanticipated repairs and having units occasionally offline is inevitable when owning
rental housing, and our operating proformas are designed to account for this. While the
financing of each property needs to be structured so that it generates a positive annual
cash flow, when dealing with single family and small scale properties, some years will
be positive and others will be negative. A property that operates in the red for a year
should be evaluated to make sure the operations of the property are not flawed and that
the shortfall is not repeated annually. Individual small scale properties will
occasionally have an off year. It is therefore important to annually evaluate the overall
financial health of the portfolio and not make decisions based on one property having
an off year.
4.2

THE CAPITAL NEEDS ASSESSMENT AND REPLACEMENT

RESERVE ANALYSIS

A Capital Needs Assessment (CNA) provides an extensive analysis of building

systems, recommendations for specific improvements, and funding estimates for long
term maintenance. This analysis, also known as a Physical Needs Assessment (PNA)
estimates a propertys repair and replacement needs over an extended period of time,
often analyzing the way in which resources need to be accumulated to pay for these
needs (reserve analysis). When acquiring existing buildings, a high quality CNA, with
a replacement reserve analysis, is a critical part of the due diligence process.
4.2.1

REPLACEMENT RESERVES ANALYSIS

With new construction, property owners and lenders have historically used a standard
rule of thumb for allocating annual contributions to reserves. For many years people in
the industry have been using $360/unit/year ($30/unit/month) as a guideline. This in
fact was the first standard used by the Massachusetts Housing Finance Agency
(MassHousing) when it began requiring reserve studies in the mid-1980s (Daily and
Whiston, 2005). Being over 30 years old, it is not surprising that this number is no
longer sufficient to cover the replacement cost of components as they wear out. In
market rate housing, paying down first mortgage debt, combined with annual rent
increases offers the owner the ability to borrow money when components need to be
19

SMALL SCALE RENTAL PROPERTIES

replaced. Affordable housing developments can rarely support much debt; the
majority of the financing for an affordable housing rental deal comes from subsidy,
which usually does not disappear over time. Even if it did, rent restrictions needed to
maintain long term affordability, continues to limit the amount of debt a property can
support. A high quality reserve analysis is therefore extremely important when
acquiring existing affordable rental units.
A replacement reserve analysis should list the inventory of components, the estimated
remaining life of each component and the estimated future replacement costs. This
information is then used to establish the per unit per year amount that needs to be
deposited into a replacement reserve escrow account.
4.2.2

TYPICAL REPLACEMENT ITEMS

The items below are the typical types of repairs/replacements that are considered
capital items and are therefore eligible expenses from a replacement reserve escrow
fund. The list can also be used as a checklist when reviewing the completeness of a
capital needs analysis conducted prior to acquisition.
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
11)
12)
13)
14)
15)
16)

Replacement of refrigerators, ranges, and other major appliances in the

dwelling units
Extensive replacement of kitchen and bathroom sinks and countertops,
bathroom tubs, water closets and interior and exterior doors
Major roof repairs, including major replacements of gutters, downspouts
and related eaves or soffits
Major plumbing and sanitary system repairs- including septic, sewer or
package systems
Replacement or major overhaul of central air conditioning and heating
systems, including cooling towers, furnaces, temperature controls, boilers,
and fuel storage tanks
Major overhaul of elevator systems
Major repaving/resurfacing/seal coating of sidewalks, parking lots and
driveways
Major repainting of the building exterior and interior common areas.
Extensive replacement of siding
Extensive replacement of exterior (lawn) sprinkler systems
Replacement of or major repairs to a swimming pool
Projects involving finished floors, floor tile and floor coverings, which
are not routine maintenance in nature
Glass replacement projects
Significant replacement of windows, including jambs, casing, sash, aprons
and sills
Significant upgrading or replacement of fire alarm systems, components
and fire stop systems
Certain payables. e.g. to avoid utility shut off in extreme cases

20

SMALL SCALE RENTAL PROPERTIES

17) Consultations with Engineering, Architectural and other necessary

professional firms for design services, bid preparation and third party
construction monitoring of capital projects
18) Capital Needs Study
19) Common area refurbishment and renovation
20) Fencing replacement projects
Source:
[Link]
1_0_0_18/Replacement_Reserve_Policy.pdf
4.2.3

ANTICIPATED CAPITAL REPAIRS- EXAMPLE

Table 4.1 is a summary of the anticipated capital repairs/replacements, by type, by

year, for a 40 plus year old, 32 unit multi-family building that is for sale. Future costs
are based on historical inflation rates for each type of repair. Over the 20 year planning
horizon, the building is expected to need $1,364,106 in repairs.
4.2.4

REPLACEMENT RESERVE ANALYSIS EXAMPLE AND

DISCUSSION

Table 4.2 is an example of a replacement reserve analysis for the building in Table 4.1.
It shows that the building currently has a reserve balance of $15,172 and the current
reserve contribution is $288 per unit per year. Not only is the current reserve balance
insufficient to cover current year improvements, the replacement reserve contribution
will only result in $184,320 over the next 20 years, well short of the estimated
replacement costs during this same timeframe.
One possibility for the successful acquisition of this building would be to capitalize a
replacement reserve fund with $763,760 and increase the replacement reserve
contribution from $288 per unit per year to $450, with an annual increase of 3 percent.
Capitalizing a reserve with such a large amount can be difficult to do under most
affordable housing programs. Another alternative would be to undertake at acquisition
the repairs identified as needing to be completed over the next five years. This would
enable the public sector housing dollars to be used in a timely manner and would still
result in anticipated replacement reserves being sufficient to cover replacement needs
over the next 20 years.
In some instances, the affordable rent structure may make it impossible for the
replacement reserve contribution to be increased. In this example, if the year 1
replacement reserve contribution is kept at $288, and the $763,760 worth of repairs are
completed at acquisition, $156,241 would have to be deposited into a replacement
reserve account. While it varies by the source, affordable housing programs will often
allow their funds to be used to capitalize a reserve, provided the funding of the
reserves is required by the conditions of a first mortgage from a lender. This usually
cannot be done if the only financing source is public sector affordable housing funds.
21

SMALL SCALE RENTAL PROPERTIES

It is important to note that the results of this analysis should be used when deciding
whether a deal is viable. Acquiring an existing building without adequate money for
current and future repairs may simply result in a new owner for the same slum
property.

22

SMALL SCALE RENTAL PROPERTIES

Table 4.1 - Sample Replacement Needs Summary

Construction Date: 1970

Number of Units: 32
2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

Site
Parking Lot

$75,074

$656

$7,373

$2,666

$2,644

$0

$9,059

$1,957

Drainage

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Site Subtotal

$75,074

$0

$0

$656

$7,373

$2,666

$2,644

$0

$9,059

$1,957

Mechanical

$0

$0

$0

$1,093

$0

$0

$836

$0

$0

$0

Electrical

$2,500

$0

$0

$0

$0

$0

$0

$0

$0

$0

Elevators

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Mechanical/Electrical Subtotal

$2,500

$0

$0

$1,093

$0

$0

$836

$0

$0

$0

Structural and exterior

$29,906

$12,047

$0

$0

$4,760

$16,208

$0

$0

$5,357

$0

Roof systems

$0

$120,414

$0

$0

$0

$0

$0

$0

$0

$0

Lobby Halls Stairs

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Community Room

$524

$0

$0

$0

$0

$607

$0

$0

$0

$0

Building Subtotal

$30,430

$132,461

$0

$0

$4,760

$16,815

$0

$0

$5,357

$0

Living

$47,807

$28,641

$29,500

$30,385

$640

$658

$678

$699

$720

$742

Kitchen

$53,663

$34,673

$35,714

$39,407

$2,701

$2,784

$2,865

$0

$0

$0

Bath

$45,335

$26,095

$26,878

$27,684

$0

$0

$0

$0

$0

$0

Mechanical/Electrical

$35,558

$13,769

$14,182

$14,608

$2,172

$2,237

$2,305

$15,843

$16,319

$16,808

Units Subtotal

$182,363

$103,178

$106,274

$112,084

$5,513

$5,679

$5,848

$16,542

$17,039

$17,550

Total Capital Costs

$290,367

$235,639

$106,274

$113,833

$17,646

$25,160

$9,328

$16,542

$31,455

$19,507

Mechanical/Electrical

Building

Units

23

SMALL SCALE RENTAL PROPERTIES

Table 4.1 - Sample Replacement Needs Summary (continued)

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

Year 11

Year 12

Year 13

Year 14

Year 15

Year 16

Year 17

Year 18

Year 19

Year 20
Site

$3,091

$0

$0

$0

$3,091

$0

$10,497

$881

$0

$3,583

$0

$0

$0

$0

$10,497

$881

$4,791

$0

$0

$0

$0

$0

$3,583

$0

Parking Lot

$0

$0

$0

Drainage

$0

$4,791

$0

Site Subtotal
Mechanical/Electrical

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Mechanical

$3,895

$0

$0

$0

$0

Electrical

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Elevators

$0

$0

$0

$0

$0

$3,895

$0

$0

$0

$0

Mechanical/Electrical Subtotal
Building

$44,967

$0

$6,030

$0

$0

$16,782

$6,786

$0

$29,837

$0

Structural and exterior

$0

$0

$0

$0

$0

$0

$147,000

$0

$0

$0

Roof systems

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Lobby Halls Stairs

$704

$0

$0

$0

$0

$816

$0

$0

$0

$0

Community Room

$45,671

$0

$6,030

$0

$0

$17,598

$153,786

$0

$29,837

$0

Building Subtotal
Units

$763

$786

$810

$834

$859

$885

$911

$939

$967

$996

Living

$5,999

$6,179

$6,365

$6,556

$0

$4,985

$5,135

$5,289

$5,448

$0

Kitchen

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Bath

$17,312

$2,672

$2,752

$2,834

$2,919

$15,827

$16,452

$22,095

$22,758

$3,384

Mechanical/Electrical

$24,074

$9,637

$9,927

$10,224

$3,778

$21,697

$22,498

$28,323

$29,173

$4,380

Units Subtotal

$72,836

$9,637

$26,454

$11,105

$3,778

$46,773

$176,284

$28,323

$63,801

$4,380

Total Capital Costs

24

SMALL SCALE RENTAL PROPERTIES

Table 4.2 - Replacement Reserve Analysis

Replacement Reserve Balance

$15,172

$474/unit

Current Reserve Contribution

$9,204

$288/unit

Interest Rate on Reserves

1.00%
Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

$15,172

$498,361

$288,170

$205,849

$115,760

$121,612

$120,671

$136,257

$145,490

$140,653

Contributions Indexed at 3%

$450

$464

$478

$492

$507

$522

$538

$554

$571

$588

C) Total Annual Reserve Funding

$9,204

$14,848

$15,296

$15,744

$16,224

$16,704

$17,216

$17,728

$18,272

$18,816

D) Interest on Reserves at 1.0%

$593

$10,600

$8,657

$7,999

$7,275

$7,515

$7,698

$8,047

$8,345

$8,501

$290,367

$235,639

$106,274

$113,833

$17,646

$25,160

$9,328

$16,542

$31,454

$19,507

$288,170

$205,849

$115,760

$121,612

$120,671

$136,257

$145,490

$140,653

$148,464

A) Reserve Balances
Starting Replacement Reserves
B) Annual Funding

Total Funds Available

F) Total Capital Cost
G) Reserve Balances
Outside Funds

$763,759

Adjusted Reserve Balances

$498,361

25

SMALL SCALE RENTAL PROPERTIES

Table 4.2 - Replacement Reserve Analysis (continued)

Year 11

Year 12

Year 13

Year 14

Year 15

Year 16

Year 17

Year 18

Year 19

Year 20
A) Reserve Balances

$148,464

$103,817

$122,713

$125,819

$145,143

$172,868

$158,759

$15,921

$20,580

$776

Starting Replacement Reserves

$606

$624

$643

$662

$682

$702

$723

$745

$767

$790

$19,392

$19,968

$20,576

$21,184

$21,824

$22,464

$23,136

$23,840

$24,544

$25,280

C) Total Annual Reserve Funding

$8,797

$8,565

$8,984

$9,244

$9,680

$10,199

$10,311

$9,141

$9,453

$9,531

D) Interest on Reserves at 1.5%

$72,836

$9,637

$26,454

$11,105

$3,778

$46,773

$176,284

$28,323

$53,801

$4,380

F) Total Capital Cost

$103,817

$122,713

$125,819

$145,143

$172,868

$158,759

$15,921

$20,580

$776

$31,207

B) Annual Funding
Contributions Indexed at 3%

Adjusted Reserve Balances

26

SMALL SCALE RENTAL PROPERTIES

PART 5:

PROPERTY MANAGEMENT CONSIDERATIONS FOR

SMALL SCALE RENTAL PROJECTS

The residential property manager oversees an income-producing residential property on

behalf of the owner. Properties can be one unified site, scattered site, detached single
family homes, condominiums or mixed residential and commercial. Property management
companies vary in experience and services with some focusing only on large scale
multifamily properties and some managing portfolios of small, scattered site properties.
This section describes the responsibilities of residential property management in the
context of smaller properties, and compares fee based professional companies to property
management done in-house by the nonprofit owner.
5.1

WHAT IS THE JOB OF THE PROPERTY MANAGEMENT COMPANY?

Property management duties include all aspects of marketing, leasing and operating.
Management duties begin during the pre-development and development period.
Management decisions should be carefully evaluated because the results can determine the
eventual success or failure of the venture. Perhaps the most critical decision for any owner
of rental units is whether or not to manage the property or properties in house or to hire a
third party management company. Property Management Companies serve clients of all
types including for profit investors, nonprofit organizations, and supportive housing
organizations.
The following summarizes the activities and responsibilities of property management.
5.1.2

PRE-OCCUPANCY AND LEASE UP

Develop a marketing plan during the development phase. Identify a target market
income level, demographic characteristics and geographic area and decide how best to reach
out. Prepare a marketing budget for pre-leasing advertising and marketing and during leaseup. Identify competition and develop a plan to be competitive. Identify incentives that will
ensure timely lease-up with the desired mix of tenants. Prepare materials and media for
production.
Establish leasing policies and procedures. Develop operating policies and procedures,
application forms, agreements and riders. Decide the level of maintenance that will be
required of the tenants and what will be handled by the owner. If this is a lease purchase
program, prepare policies and agreements as needed.
Prepare for meeting Fair Housing and Affirmative Marketing requirements. A plan
will have been required during underwriting but make sure the full board of the organization
is aware of its content and responsibilities. Make sure all notices and statements are placed
appropriately. Make sure ADA (Americans with Disabilities Act) and Section 504
accessibility requirements are being met as appropriate.
Establish monitoring plan and checklists. Determine what entities will be monitoring the
loans and grants supporting the project. Examine all loans, grants, and applications made to
27

SMALL SCALE RENTAL PROPERTIES

determine responsibilities and commitments made, such as computer rooms, playground

equipment, tenant services and unit mix.
Establish Utility Allowance. Identify the most current utility allowance and rent levels
allowed based on subsidies. The local public housing authority utility allowance is
acceptable unless a customized amount is prepared in conjunction with the local utility.
Small scale properties often vary widely in type of construction materials, age and energy
efficiency measures which can require a closer analysis when establishing the utility
allowance.
Establish Rent Levels and Fixed/Floating Units. Rent levels also may vary depending on
the funding source. The property manager establishes the rent levels according to the loan
or funding document requirements. When there are a variety of sources and vouchers
involved, the calculations are critical not only in compliance but making sure adequate
income is received. Small scale properties are very sensitive to rent levels. If the project is
mixed income the fixed units must be identified with assurances that they are equal in
amenities, scale and location.
Show Units to Prospective Tenants. The leasing agent is responsible for showing units to
potential tenants and taking applications. The leasing agent is the point person with the
tenant applicants. It is important to select quality tenants that meet income qualifications.
The leasing agent negotiates the lease period and terms. The lease terms must contain the
appropriate program information.
Information collected must meet compliance
requirements in anticipation of monitoring. The leasing agent also assists the new tenant
with move-in and utility connections. The leasing agent is responsible for the move-out
when the process begins again.
5.1.3

MAINTENANCE AND TENANT SERVICES

Appoint someone (property manager or staff contact) to serve as the point of contact for
tenants when they move in or out, and on a day to day basis. Ensure they respond in a
timely manner to requests and anything that impacts the building or premises.
The property manager or designated staff should work with maintenance personnel or
contractors on routine maintenance and repairs, keeping records of unit, date, event,
expense, and completion. They should also maintain and manage record keeping for payroll,
insurance, loan payments, contractors, taxes, and budgeting.
The property manager is responsible for regular contacts with the owners including reports,
expenses, and property events. It is the owners responsibility to ensure the communication
remains abundant and on a regular basis.
The manager is responsible for implementing the tenant services commitments found in the
loan documents. This is an important compliance issue that can be difficult for owners of
small projects to oversee. Scattered site properties that do not have a centralized location on
site for these legal documents need a system for easy access to them for both managers and
monitors.
28

SMALL SCALE RENTAL PROPERTIES

5.1.4

PROPERTY MANAGEMENT CONCERNS

Whether small scale rental projects are managed in house or outsourced, there are some
common concerns that affect the successful operation of properties.
Staffing. Smaller properties and portfolios many not have the income needed for full time
staff for leasing and maintaining the units. It is difficult to find experienced staff who are
willing to work part time. Sharing staff among organizations is a possible solution. Hiring
bi-lingual staff is a plus. This can help with marketing and in establishing good tenant
relations. In larger multifamily properties, leasing agents are paid a commission and bonus
for leasing up units and keeping them occupied. This is not affordable in smaller projects.
Smaller projects also may not be able to afford a vehicle for maintenance or for inspections
and site visits to geographically dispersed properties. An allowance paid to the staff for the
vehicle is a common solution.
Building permits. As municipalities seek more revenue, many are requiring permits for
ordinary repair items that did not previously need a permit. This can break the budget of a
small scale property if contractors must be hired to replace hot water heaters or AC
condensers, for example. These items will need to be replaced at some point, so it is
important to budget for these costs.
Supportive service funding for case workers. As state budgets reduce funding for these
services, the impacts can be felt by both supportive housing organizations and property
management companies. The lack of case workers may mean that certain types of housing,
such as group homes, are no longer feasible. Projects with a committed set-aside of special
needs units are at increased risk as tenants may not have the services needed or units may
not be leased in bulk by designated support agencies. Better networking and coordination
will be required to offset this shortage.
Tenants. The most critical item affordable housing program monitors consider is the
income eligibility of tenants. This must be correctly certified and available for inspection.
However, property managers often find that while it is not difficult to find renters with the
right income, they cannot afford the designated rents. Layering multiple funding sources
can result in a slim definition of income eligibility and this, along with the property location
or demographic target may hinder full occupancy. In small scale projects, occupancy is of
great concern. A ten percent vacancy rate in a ten unit complex can be devastating to the
operating budget. Rental proformas typically use a 5 percent to 7 percent vacancy/collection
loss rate to project net operating income. In this 10 unit deal, a 10 percent vacancy rate
could be realized with only one un-rented unit. It is critical to ensure in the planning stages
that there is an adequate market for the desired tenants to ensure not only compliance but
full occupancy.
A small nonprofit owner may not have the legal expertise to handle evictions and lease
violations. It is especially important to have this covered because non-payment of rent or
lengthy eviction battles in small projects can cause serious budget problems. Tenants have
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access to free legal assistance in most areas but for the landlord, good legal counsel and
proper training are essential.
5.2

PROPERTY MANAGEMENT: IN-HOUSE OR OUT SOURCE?

Property managers operate income producing rental housing on behalf of the owner with the
objective of protecting and maintaining the investment. Affordable housing is operated with
the objective of providing safe and decent housing for low income tenants, but the lenders
and funders also expect the investment to be protected and enhanced. Each rental property
owner or perspective property owner must make the critical decision of deciding whether or
not to outsource property management. The ongoing management of the project will
determine its success or failure in the future. This is why choosing the right type of
management is so important.
Factors to consider include:

5.2.1

Experience and staff capacity

Project size and scale
Monitoring
Location
Maintenance
Supportive Housing
EXPERIENCE AND CAPACITY

If the owner lacks experience in property management and does not have available staff
resources to undertake the activities described in section 5.1, then outsourcing is probably
the best decision at least in the initial years of operation.
The mission of many nonprofit affordable housing providers is to increase the inventory of
affordable housing opportunities in a given community. This broad vision encompasses fund
raising, advocacy, partnership building and development. Once the housing is financed,
developed and ready to occupy, some find that current staff do not have the same skill sets
that the operation and maintenance of housing requires. Many housing providers are
experienced in homeownership development or purchase assistance but are not prepared for
the ongoing day to day maintenance of rental housing.
The promises and commitments made at the time of application for funding from affordable
housing programs are contained in the loan documents as well as the Land Use Restriction
Agreement (LURA) or Extended Use Agreement (EUA.) Program monitors often find that
inexperienced property management or owners do not maintain those commitments that
were made upon application for the funding. These shortfalls involve tenant services or
amenities as well as maintaining uniform physical condition standards. Small scale
properties have a tight budget for operating and if there were commitments for such items
that are not adhered to either due to budget issues or management oversight, findings by the
monitor can lead to negative consequences.
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In an effort to contain costs, owners of small scale rental developments are often tempted to
hire inexperienced, and therefore less expensive, property managers. Unfortunately this
often leads to even higher costs.
Untrained property managers can make mistakes when calculating income and end up
renting to a family that is over income. This can result in serious consequences that could
require the repayment of subsidy funds.
Inexperienced property management personnel also tend to go astray in adhering to Fair
Housing laws by their actions or by not maintaining the proper documentation on site.
These shortfalls can lead to costly problems that may diminish operating capacity for some
time due to legal fees or the cancellation of loans.
Other problems with inexperienced property management personnel occur when there may
be property management experience but not in affordable housing. Occupancy ratios will be
a priority, rather than proper selection of income eligible tenants. Another occupancy
problem with a small scale property is that one or two vacancies can seriously impact the
operational capacity of the project. One long term vacancy in a ten unit complex causes a
tenth less income which could be devastating.
Maintenance is an important consideration when delegating these duties to inexperienced or
low cost staff. The lack of proper training can lead to poor decision making such as
disconnecting smoke alarms or taking down amenities that were guaranteed in the loan
documents and LURA. These can be corrected but it is not desirable to have them observed
by monitors.
Finally professional management companies have in place operations manuals, systems and
policies. The new entrant into small scale rental ownership will require the preparation of
the legal documents, leases, maintenance schedules, management plan, compliance and
monitoring plans, etc. The cost of developing these policies, procedures and documents
must be included when making property management decisions.
5.2.2

PROJECT SIZE AND SCALE

Larger projects most often hire a fee based property management company that specializes
in all aspects of managing and operating affordable multifamily properties. New entrants
into the business must evaluate the scale of their operation and in-house experience in
making this important decision. This should be a decision made in the very early stages of
considering the acquisition of properties. Small scale property owners who own one or
more properties that may be on scattered sites need to carefully evaluate their staff capacity
as well as operating budget to determine if they outsource the management during the
planning stages. This should be part of the due diligence and feasibility evaluation when
considering a project.
Small scale properties are much more critically impacted by vacancy than larger sized
properties. One vacancy out of ten results in a ten percent reduction in income. Indirect
operating expenses however, remain the same. An experienced and capable manager,
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whether in house or not, will be sensitive to this and strive to maintain the highest
occupancy possible.
5.2.3

MONITORING AND COMPLIANCE

One of the areas for consideration is how the project will be monitored. It is informative to
understand the role of project monitors and what their main concerns are for small scale
properties. Basically when a project undergoes credit underwriting and receives financing
from public sources, in particular HUD or tax credits, monitoring is part of the program for
the life of the affordability period. The main job of the monitor is first to ensure that the
occupants meet income qualifications. Closely following income certification is the
determination that the project is meeting the requirements of the loan documents, the LURA
or the EUA.
Monitoring entities do not draw a distinction between the owner and manager- errors by
management are viewed as an error by the owner. The management entity, either by in
house staff or third party is extremely important to maintaining the program requirements.
The outcome of the monitoring process is to determine if the property is in compliance with
the funding source and other requirements. Monitors may note a concern that indicates a
problem is looming, or a finding that indicates a violation of a rule or procedure. Monitors
report to funders and lenders and a finding of non-compliance is a serious issue that can
result in the repayment of funds. For small scale properties the requirements are the same
but there are fewer staff to make sure documentation is correct and that project rules and
commitments are being followed.
Monitoring occurs either remotely or on-site and follows a regular schedule. It is important
that property managers provide monitors access to materials and properties.
Monitors examine documents and policies governing the items in the list below. While a
small number of units may mean a shorter monitoring visit, it does not mean that the
monitor will review fewer items.

5.2.4

Recordkeeping
Eligible Costs/Subsidy Layering/Cost Allocation
Initial and Ongoing Rents, Incomes and Occupancy
Property Standards
Eligible Costs
Construction Management
Loan Servicing
GEOGRAPHIC LOCATION AND PROPERTY MANAGEMENT

Ideally, property managers should be located in reasonably close geographic proximity to

the properties they manage. Long travel times result in higher costs when showing or
checking on units. Being able to conveniently drive by the properties allows the manager to
check for rule violations and some maintenance issues.
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5.2.5

MAINTENANCE AND REPAIRS

Whether properties are managed in house or by a property management company, it is more

cost effective to have employed staff available to respond to repair requests, clean and
prepare units for move-in, and maintain building and grounds. Work requiring permits will
require licensed contractors which will either means outsourcing the work or employing
licensed staff. Leases should specify what, if any, maintenance responsibilities are to be
handled by the tenants. Some organizations specifically assign tenants to various
maintenance duties to cultivate skills in preparation of homeownership or as part of the
program to enhance life skills.
Maintenance staff not only respond to repair calls, but also pressure wash, paint, remove
trash, and make basic repairs when units turn. While the cost of hiring a company to paint a
unit could exceed $1,500, the in house cost is estimated at $300 for materials, and the time
for staff to complete the job. Lawn care and landscaping may be one example that it is cost
effective to hire out due to the expense of maintaining and transporting equipment.
Some municipalities are requiring permits for repairs that previously did not. The cost of
hiring a contractor to replace a hot water heater or air conditioning condenser can greatly
affect a budget for small scale rental properties. It is optimal to begin with fully
rehabilitated or newly constructed properties.
Owners of multiple properties maintain an inventory of standardized fixtures and
equipment. Property management companies with multiple clients will maintain separate
inventories of specialized items but will draw from company inventory for common items to
avoid excessive tracking of expenses. Larger properties will have a storage area on site to
keep equipment and supplies but for smaller properties a common warehouse is needed to
store not only supplies such as light bulbs and air conditioning filters, but landscaping
equipment, if applicable.
5.2.6

SUPPORTIVE HOUSING

It is presumed that the target market for the property is well established in the mission of the
organization. Supportive housing projects must also decide whether to use in house staff for
management or to outsource it. Monitors often find that supportive housing organization
staff are more committed to the mission of serving people with special needs than in
adhering to the complex array of affordable housing rules. This can result in lapses in
compliance and basic management needs of occupancy, maintenance and collection of rents
and fees.
Property managers find that it is easier to manage when the demographics of the tenants is
similar, for example, all elderly or physical disabilities. Some properties have a certain
percentage of units set-aside for tenants with special needs. It is optimal if those units are
rented in full by a support agency as this will not only stabilize revenue, but ensure there are
case managers available to assist the residents. Another consideration is the capacity of
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supportive housing staff to carry out the impersonal duties of rent collection, rule
enforcement, and eviction.
The table below compares these considerations among a large for profit property
management company and a large nonprofit housing provider. The property management
company manages properties for both nonprofit and for profit clients. The nonprofit
housing organization manages its units in house with staff employees. The comparison
shows how each responds to common management concerns. The size and scale of the
nonprofit and its programs is an indication of the importance for smaller programs with less
experience to exercise great caution in going it alone with their housing units.

TABLE 5.1 - MANAGEMENT CONSIDERATIONS OUT-SOURCE VS.

IN-HOUSE
Management
Consideration
Experience and
Capacity

Project Size and

Scale

Monitoring and
Compliance

Sample Real Estate Property

Management Company (for
profit)
Begun in 1969 as developer,
managed own portfolio and
clients. Today manages over
13,000 units nationwide.
Independent agent in Florida
manages close to 3,000 units of
subsidized or supportive
housing. Hires leasing agents
and maintenance staff to cover
multiple properties in estimated
ratio of 2 staff per 150 units
Parent corporation manages
projects with over 300 units but
Florida agent manages units
ranging in size from 4 to 62.
Approximately 65% of parent
corporations clients are
nonprofits.
In house compliance
department reviews and
approves every move in.
Annual re-certification of ALL
residents, all files audited
internally annually. Copies of
LURAs and program
requirements kept on site. All
leasing staff attend fair housing
training annually. Each

Sample Nonprofit Supportive

Housing Organization
Managing In-House
Begun in 1970 as nonprofit to
serve people with mental
disabilities with services and
housing. Today serves 1,200
residents in over 40 properties
in six Florida counties. In
house services and property
management by team of 25
employees, 14 of whom
directly in housing property
management and maintenance.
Management duties include
administration of
approximately 200 vouchers,
12 HUD 811s with maximum
number of units in a property
20. Housing types include
group homes, supervised
apartments, permanent
supportive housing.
Property managers are
assigned units based on
funding source, ex. HUD 811,
HOPWA, ESG, Safe Haven.
Managers develop file for
monitors and prepare for all
scheduled visits or desk
reviews. Managers maintain
program requirements for each
property assigned. Multiple

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SMALL SCALE RENTAL PROPERTIES

property has an operating

manual and set of documents.
Manuals are customized by
lender requirements as needed.
Location

Maintenance and
Repairs

Supportive
Housing

Large distances between

properties require coordinated
appointment of leasing agents
and maintenance staff. Staff
receive an auto allowance and
use personal vehicles. Some
properties have resident
managers. Quarterly
inspections made of each unit
interspersed with monthly pest
control inspections.
Full and part time maintenance
staff are employed and assigned
to certain properties. They use
their own vehicles and receive
an allowance. Staff cleans and
maintains units and grounds.
There is a customized
maintenance schedule for each
property. The parent company
provides expertise in
replacement reserve analysis,
capital needs analysis and HUD
inspections.
Many of the units managed are
supportive housing- either by
set-aside or the client is a
supportive housing provider.
Financial planning in the predevelopment stage ensured that
the rents would cover the
outsourcing of property
management expenses. In some
cases the set-aside units are
rented in bulk from the support
agency. Reductions in funding
levels for supports threaten
programs with abandonment of
units and non-compliance with
set-asides.

funding sources results in

frequent monitoring visits by
different agencies. The
nonprofit is a fair housing and
ADA advocate and staff are
trained in compliance.
Units are scattered over six
counties with large distances.
All units inspected annually
with some twice per year.
Assisting move-ins and
move-outs provides more
access to units.

Full time maintenance staff

and a supervisor are employed.
Personal vehicles are used but
there are also vehicles owned
by the organization. Long
term financial forecasting for
replacement and operating
reserves is conducted in-house
by staff and augmented with
consultants as needed.

Property managers are

assigned to units according to
type. Case workers are in
house social services staff.
Most residents are part of a
program with the agency.
Sometimes residents have to
be moved to other locations
due to health or other issues.
Recent reductions in funding
for support services resulted in
the closing of a group home
with residents moved to other
housing.
Maintenance staff assist with
transporting residents in vans
owned by organization.

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PART 6: PROPERTY MANAGEMENT SOFTWARE

In-house property management requires the purchase of a good property management
software package, one of the best investments you will make. While it is technically
possible to keep track of rent payments, security deposits and repair invoices with a series of
excel spreadsheets, the ability to automate rent collection and expense records with your
general accounting system is an invaluable and time saving tool.
Property management software provides a wide array of services ranging from
organizational tools and printable forms, to tracking income and expenses, and generating
reports. Free basic software is available for download on the Internet, but do consider
investing in a more sophisticated system to gain the maximum benefit. A good property
management system can track rent payments, monitor work orders, automate bill paying,
consolidate information for taxes and insurance, organize income and expenses by tenant,
unit, building or portfolio; create application forms and lease agreements, automate credit
and background checks, and generate notices and letters. To ensure your asset is being
managed properly, this software can easily create long and short term financial performance
reports so you can make adjustments as needed.
A quick internet search for affordable housing property management software will yield
the names of many firms that provide this service. RentRight, Yardi Systems, LandlordMax
and CornerStone are a few examples. RentRight, currently boasts more than 23,000 users
worldwide and Yardi Systems, has won numerous awards for its property management
applications. CornerStone is a Windows based accounting and affordable housing property
management software which claims to integrate rent, accounts payable and general ledger
entries, track subsidy information and fully automate the income certification process. The
system has a Wizard component, a built in feature to check for compliance errors and offers
on line help with live chat.
To select the software that is right for your organization:
Make sure the program specializes in affordable housing and can capture the data
youll need for compliance reports on all the different layers of funding that may
be in the project.
Ask about start up training and ongoing technical support. Investing in a system
that staff cannot successfully operate is a waste of resources.
Take advantage of the free trials offered by most vendors. Make sure that end users
have a chance to test each software package under consideration, or you may find
that youve chosen a system that is more complex than you need.
Ask other owners of affordable rental properties for recommendations. Try to
arrange a visit to their property management office so you can see the system
live. Ask what they like and dislike about their current system.
Consider a system that allows data to be reviewed before it is entered into the
accounting system to safeguard against incorrect entries. Some software packages
automatically populate the general ledger and if a mistake is made, then both the
compliance data and accounting data is wrong. A stop and review approach is
preferable.
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Ask about integration fees. Some firms charge a separate annual fee to integrate
other software packages with your property management software. For instance
some software companies charge to integrate the property management software
with your current accounting software or applicant screening tools.
Match your software to the size of your portfolio. Some software is priced perunit and some have an annual fee. While you want your property management
software to be sophisticated enough to handle a growing portfolio, you dont want
to pay now for features you wont need for years.

PART 7: THE CASE FOR CONSOLIDATED MANAGEMENT OF

SMALL SCALE RENTAL PROJECTS
This guide has covered many areas of heightened risk and responsibility for the owner of
small scale affordable rental properties. One of the major areas of concern is management
and operations. For organizations new to owning affordable housing or for those who own
few units, outsourcing property management is the best option. However, depending on
your location, you may find that a property management company specializing in small
scale rentals is not available. Would it be possible to coordinate with other affordable
housing providers in a region to form a management company that would serve all the
projects of the participating organizations? Costs would likely be reduced since, instead of
having four different people at four different agencies managing 12 units each, for example,
you would be able to have one person managing 48. Increasing the number of units may
also provide enough property management fees to hire a professional property manager, as
opposed to having the duties tacked on to the workload of an already busy person.

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