To Self Manage or Not to Self Manage?
Saturday, February 23
One of the topics that has come up quite a bit recently on the Creating Wealth podcast is the notion of self-managing vs. hiring professional managers to oversee the income properties in your portfolio. The genesis of this topic came when Jason’s property manager in San Antonio went out of business. In response to this, Jason began to self manage his property by collecting the rent directly from his tenant and placing them in charge of collecting quotes from contractors for repairs. His experience has been quite smooth, and has prompted him to comment that managing a property 2,000 miles away has been the same as managing one 20 miles away.
The allure of self managing your properties is understandable in the current environment. There are some property management companies that have reacted to the current difficult economic environment by increasing lease-up fees, charging extra fees for lease renewals and charging vacancy fees. We view this as antithetical to our philosophy of paying for performance. A management company should be compensated for rendering services that directly contribute to your success as an investor.
Our belief is that charging fees for vacancy and lease renewals incentivize exactly the wrong behavior. When a management company earns their commission as a percentage of rent collected, they must keep a qualified tenant in the unit to earn their revenue. When a property is vacant, the incentive should be to fill it up quickly. When a tenant is up for renewal, the incentive should be to keep rents in-line with market rates, not lowball the rates and collect an easy re-lease fee in the process without the necessity of finding tenants who are willing to pay market rates.
In some cases, there are property managers who cross the line of ‘questionable’ charges to outright fraud. There are some management companies who source their repairs to companies who kick back a percentage of the (inflated) repair costs. In addition to this, there are others who set-up shell companies that source all of the repairs and sublet to other contractors. These shell companies then invoice for inflated rates that are billed back to the investor.
This is not to say that all management companies are intrinsically bad. There are many management companies that provide useful and ethical service. The whole reason that investors use management companies in the first place is to remove themselves from the day-to-day management of an income property. So when is the right time to keep a management company and when is the right time to seek other options? This brings us to the topic of self management. Self managing your income properties offers some distinct advantages and also presents some unique challenges.
Lower Management Cost: You will save an average of 8% per month of rent that is usually paid in commission to the management company.
Less Chance of Sketchy Repairs: By empowering the tenants to arrange for repairs by submitting multiple bids, it gives the tenant a greater feeling of ownership and lowers the probability that bids will go to contractors who are providing kickbacks to a management company.
No Lease Renewal or Vacancy Fees: Avoiding these fees will lower the cost and smooth the process of acquiring new tenants or keeping your current ones in place.
Tenant Acquisition: You will need to coordinate the acquisition of new tenants with a local real estate agent.
Complexity of Management: By self managing your properties, it will require more time commitment than would otherwise be necessary with a management company handling all of the details. (Although it may not be that much more of a time commitment if you’re constantly having to look over the shoulder of your management company)
Organization and Tracking: Self managing your income properties will require you to keep excellent records so that the associated costs and revenues from each of your properties are kept straight for income tax reporting purposes.
On balance, the decision whether or not to self manage your properties is unique to each individual investor. It is certainly more complex to self-manage, but the rewards available can be quiet lucrative. In the end, it comes down to whether an individual investors is willing to invest the time necessary to self-manage effectively. There may be some cases where the current manager is doing a fantastic job and the investor wants to avoid disruptions in a process that is working well. There may be other cases where the investor is dissatisfied with the quality of their property management and is seeking a better way. There is no one answer that will be right for everybody, but each investor should give the prospect of self management due consideration for inclusion into their income property portfolio.
Action Item: Evaluate your income property portfolio regularly to determine whether self-management makes sense. It is important to do this perpetually, as circumstances have a way of changing. It may be that you can increase your cash flow considerably by making a few small changes in the way you manage your portfolio. (Top image: Flickr | Keith Allison)
The JasonHartman.com Team
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