INVESTING & PROPERTY MANAGEMENT
Friday, January 18
I have had lots of people over the years ask me in my opinion, what is the most important thing about investing in real estate. Everybody always assumes its price, location or timing the market correctly.
After over 1300 real estate transactions primarily to investors worldwide, I can say without a doubt that property management is the single most important piece of the investing puzzle. In real estate you can make a mistake on price, pick an iffy neighborhood, or hire a bad contractor and still be profitable. Hire the wrong property manager and you can lose your shirt overnight. Don't get me wrong, location, price and rehab are huge factors in real estate investing and are very important. With the right property management company in place though you can make a mistake or experience a down turn in a market or neighborhood and still realize a good return on your investment through positive cash flow. A good property manager protects your investment long term.
Obviously the next question is-How do I find a good property manager? Here are a few tips on picking a good management company.
1. REFERRALS-Get a referral. Typically when you invest there are people in your peer group or circle of influence that are investing in the same market you are or know of someone who is also investing in that market. Ask them who they are using, who they used to use and why they switched. Find out what they like about their management company but more importantly find out what they don't like about them. The management company may do a great job of placing tenants but are lacking in the communication department. Access to your management company is very important for the investor peace of mind. There is nothing worse than leaving a message or sending a couple of emails and all you hear is crickets in the background. At 1st you assume they are busy and will get to you soon. After awhile though investors start wondering why no one is responding and panic sets in. Did the tenant leave. Did the management company run off with my money. DID MY HOUSE BURN DOWN! Generally none of the above is true but a good property manager will respond within 24 hours of your inquiry.
2. REFERENCES-Ask the management company that you are considering doing business with for references. Ideally you want references from clients that have been using the management company longer than 1 year. When you get the references, CALL THEM. Ask them the same questions about what they like and don't like. I believe you should get 5-10 references.
3. PROCEDURES-Get a list of policies and procedures from the management company. You need to know how they handle marketing of the properties for tenants, late payments, evictions, maintenance calls, inspections, accounting, owner disbursements etc... A good management company will have this information readily available.
4. STATE COMPLIANCE-Find out if the management company is licensed in the state you are investing in. Most states require that the property manager is a licensed real estate broker and are held accountable to their state real estate board. There are many "property managers" out there that are not but have taken this opportunity to increase their income while investing is hot. DO NOT USE AN UNLICENSED MANAGEMENT COMPANY!
5.SOFTWARE-Find out what software program the management company uses. There are a few good property management software programs that are web based such as Buildium and PropertyWare that give the property owner a portal login so you can access your account via the web 24 hours a day. A good property management company will log all tenant calls, maintenance concerns, payments, late notices etc... in the software program. This is beneficial to both parties as a majority of an investors questions or concerns can be addressed by logging into the software program and looking at the info at hand thereby eliminating a lot of phone calls between the property manager and the owner. It also helps the owner to narrow down questions or concerns by addressing specific information found in their portal.
6. ACCOUNTING-The reason for investing is to get paid. You need to know when the money comes in, where it's at, what your expenses are and when do you get your payments. Most management companies reconcile accounts 1 month in arrears. Rents collected in 1 month are disbursed the following month for the simple fact that not all expenses come in time to get an accurate accounting to disburse rent proceeds in the same month. Each management company is different but should be able to tell you to the day when to expect payments on a monthly basis. You also need to know when to expect the quarterly or annual accounting needed for your tax man. Again, a good software program makes this much easier for the management company to keep track of and share with you.
7.FEES-To me the fees that a management company charges are important but not as important as the previous items in this list. I have seen it over and over where somebody picks one management company over another based solely upon fees. 3-6 months later after dealing with terrible tenants, bad accounting practices and more, the few hundred bucks they saved cost them literally thousands of dollars. Here is a brief run down on the fees you can expect to pay.
A. Monthly Management Fee. Usually 7%-10% of collected rents depending on the market you are investing in. Higher rental amounts usually equate to lower monthly fee percentages and lower rents are higher percentages. A few companies will have a set monthly fee of somewhere between $50-$100 per month.
B. Leasing Fee- Usually 50%-100% of the 1st month's rent again depending on average rent amounts. Most property management companies employ commissioned leasing agents that are usually paid a percentage of this fee up to 50%.
C. Set up Fee. This is charged for the time it takes to set up the new accounts, generate bank accounts etc... Usually around $100.00
D. Vacancy Fee. Some management companies will charge a flat fee per month on a vacant unit. Their reasoning is that a vacant unit still requires someone to keep tabs on that property usually on a 1-2 week cycle to verify that the property is secure, yard is in good order, rental signs are in place and visible etc... I have found that only about 50% of property management companies charge for this service. Unfortunately I have also found that 1/2 of the ones who don't charge for this are not checking the properties periodically and sometimes a small issue turns into a bigger more expensive issue down the road.
E. Advertising Fees-Most good property managers do not charge extra for the marketing of the vacant units to potential renters as they are paid when the properties become occupied and the advertising expense is covered by the leasing fee. Some property managers will give you the option of extra paid advertising if you have a property that is tougher to rent than usual.
F. Maintenance Fees. Most management companies use maintenance as a profit center. Some more than others! Due to the volume that some management companies do they are able to procure vendors at a much lower rate than what you could get on your own thereby allowing them to make a profit on certain maintenance items. Yard mowings are a great example of this. A large management company may be mowing 100 yards a season and can negotiate a volume deal at $15-$20 per yard to them. They in return "sell" this service to you at the market rate of $25-$30 per mowing. It is still a good deal for you as you are hands off and would expect to pay them same price if you were only contracting to have 1-2 yards mowed. On the other hand, some management companies go to excess on other maintenance issues such as repairs after a tenant has moved out. Typically the security deposit should cover most items necessary to make a property re-rentable unless a bad tenant was placed and they have trashed your property. Some management companies use this as a way to increase their profits by over charging for these repairs. I recommend having a 3rd party inspect and/or bid any repairs that seem excessive to you.
Hopefully this gives you some insight and will help you make the right decision in choosing your next property manager.