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How to Hire and Manage a Property Manager for Your Rentals

by Julie Broad on October 13, 2010 · 19 comments

  
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As a long distance landlord there have been far too many days where I felt like the saying “You can’t live with them, but you can’t live without them” is appropriate to our relationships with our property managers. And, I admit, there are still a few times where I am a bit frustrated by a decision or a lack of a response from one of our property managers, but my husband and I have come along way in my property manager relationships because we’ve come to realize a few important lessons.

When we began real estate investing in 2001 we worked hard to find a handful of properties, hired property managers to oversee them and then carried on with our lives. We bragged to friends and family that we barely knew we owned any real estate at all.

Then, almost overnight, everything started to fall apart. We had a property manager rob rent money from us, another one poorly managed a renovation project resulting in 2 units that couldn’t be rented out, and yet another property manager got charged with manslaughter and during his spiraling crash to misery he turned our six plex into a crackhouse.

We’ve learned the hard way that there is no such thing as passive income.

Even when you’ve hired a good property manager. You still HAVE to be actively involved in managing your property manager.

So – how can you make sure you’re not missing out on rent money because of a crooked property manager you made the poor decision of hiring?

Speak with at Least One Property Manager Before You Buy

Even if you plan to manage the property yourself, chat with local property managers before you buy a property. We like to do this when we’re not familiar with an area to confirm the rent rates, tell us about any potential issues with that area or even the property, and most importantly to find out if they would manage the property if you need a manager in the future. Not every property manager will manage every type of property.

If you’ve ensured there are competent and reputable property managers willing to manage your property before you buy it, then you know you have a back up plan if you can’t continue on as manager. If you haven’t done this you just might find yourself in a situation where you have to move across the country and hire the only guy who will take the job. And that just might be the day when you find you’ve hired someone that is so inexperienced that they use a $5,000 renovation budget to partially renovate two units instead of fully renovating one unit.

Cover Your Assets with Paper

Here’s the story where veteran investors laugh at our mistake and newbie investors say “well that’s just common sense I would never make that mistake.” But I think we all know how common it is to have common sense, don’t we??

After a huge dispute between two tenants during my MBA final exams I could not handle the stress of dealing with our tenants at a triplex we have in Toronto. I had made the incorrect assumption that because my schedule was flexible as a student I could handle the management of our property to save money on management. Unfortunately our tenants had an enormous fight and called the cops on each other – twice! I received over 20 voicemails during a 3 hour lecture right before my final exams. I couldn’t tell the tenants to wait until after I was done the semester. I had to deal with their crummy fight at that moment. I was a mess and I was done with property management for life.

Dave couldn’t take it one because he had a full time job and wouldn’t be able to handle calls during the work day so we decided we had to hire a property manager immediately. Unfortunately all the managers we found were so expensive. It was going to kill our cashflow to have them take a full months rent for new move ins and 10% each month in management fees.  So – after minimal research we hired the cheap guy.

About 18 months later, when two of our tenants moved out at the same time, we decided to move in to renovate the kitchen and bathroom in the two vacant units. We let our manager go and started collecting the rent from the third unit ourselves. When the tenants delivered the cheque to our door it was $100 more than we were expecting.

We didn’t have copies of the signed leases or copies of the past rent cheques. All we had was our bank statement showing what was deposited and the statements from the property manager showing what they had supposedly collected and spent.  The only thing we could prove was that the property manager statements we’d been receiving indicated we were taking in rent that was $100 less than what the tenants were paying us. The tenants confirmed that was the amount they had always been paying. We now suspect he’d been pocketing up to $300 of extra rent money each month and billing us for maintenance that wasn’t done.

Now we get and keep copies of every single lease. We ask for copies of the rent cheques and rent receipts and when we’re in doubt we ask for before and after photos of any maintenance work that is done  This one still bites us every once in awhile. It’s a story for another day but suffice to say that when we get lazy on this we’re leaving money on the table. That was proven to me once again on a property walk through we did just last month.

The bottom line is that we no longer take the property manager’s monthly statement as proof of what revenue our property is generating.

(By the way – we’re now paying our property managers on this triplex a full month’s rent to fill vacant units and 10% management fees. It hurts – but when you factor in the stolen money we’re probably about even on the cost to have the good managers in place versus the crook).

Tackle Tenant Turnover with a Vengence

Tenant turnover is the enemy of every real estate investor. The fewer turnovers you deal with on a property the more money you’ll make. If you find your tenants are turning over too much – try and figure out why. Perhaps you’re charging too much rent, your property manager isn’t responding to maintenance requests in a timely fashion or your property is no longer competitive with surrounding units. Whatever you can do to minimize turnover will help your returns in the long run. And when a  tenant turns over and the unit doesn’t rent immediately – get on top of that place right away.

Ideally, schedule a walk through of the vacant unit. It’s a good idea to check out the inside of your property periodically anyway, but if it’s not renting out quickly then you want to find the issue that is preventing the unit from renting. Last year, a property we’d owned for nearly 8 years was sitting vacant. Our property manager had always been great so we had come to trust his efforts and his word. And, we’d never had an issue renting this unit out in the past. The property manager explained that the rental market was slow because many of the new houses and condos were being rented out until the market picked up.

We let the first month of vacancy go because his reasons made sense. But when we learned that the unit was going to be vacant for a second month we arranged a walk through and started asking questions. Turns out the property looked tired and needed new kitchen countertops, flooring and paint. The yard was also a mess and needed some major landscaping work. It was easy to see why it hadn’t rented out – especially if it’s competing with brand new condo units.

Immediately after the walk through we got organized to do a small renovation. A week later, and only a few days into the renovation project we already had new tenants for the property.

Even if you’ve been working with an exceptional property manager for nearly 8 years check out each and every vacancy. Nobody cares about your money more than you do.

Watch for Small Leaks that Can Sink Your Big Cash Flow Ship

Benjamin Franklin is famously quoted as saying “Beware of little expenses. A small leak will sink a great ship” and this is so true with rental properties. $50 here and $75 dollars over there will quickly erode all your positive cash flow on a property.

My husband Dave reviews each bill for each of our properties on a monthly basis. Because he does it regularly it’s easy  for him to spot things that are out of the ordinary. For example, earlier this year Dave noticed the water bill on one of our rental properties in Nanaimo, BC was double what it usually is. He immediately contacted our property manager and asked that it be checked out. Turns out we had a water leak. The leak was quickly fixed and the next water bill was back around what it usually is. We pay the water bill on that little split level with a one bedroom basement suite so his swift action saved us hundreds of dollars at least.

We work with great property managers and most of the time there are very few things we need to get involved with. But we’ve learned that no matter how good the property manager is, nobody else loves and cares for our properties and money like we do. And now that we’re actively managing our property managers we’re making a whole lot more money than we did before.

Oh, and by the way, property managers have a tough job. If you have one that is doing a great job for you – be sure to thank them! Maybe they aren’t perfect but you’re not either. Do what you can to show your appreciation for the things they do well and act quickly on the things that need to be corrected!

First Image Credit: Julie Broad
Second Image Credit:Akud | Dreamstime.com
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{ 18 comments… read them below or add one }

Jeff Brown October 13, 2010 at 8:24 am

Hey Julie — Thanks for nothing. :) You reminded me of my first hands on experience. I got chills, and not the good ones. Back in the 80′s, Dad forced me to open a property management division of our firm. His intent was good, and I did learn a ton the next several years. That said, he’s dead and I still haven’t forgiven him for it.

I work with management companies in many states. Frankly, after what I experienced in the 80′s, I don’t understand folks who wanna manage for a living. :)

Hopefully this post has saved some investors from management hell. Good stuff, as usual .

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Julie Broad October 13, 2010 at 9:39 am

Jeff – I thought when my Dad forced me to clean toilets in the motel he built with my Mom that he was the worst father ever but I think that maybe your Dad would have given him a run for his money. :)

Seriously – property management is a tough job. I think you’re probably a better investor having gone through that experience but then again my Dad also thinks the 4 years I spent cleaning up after the boys who worked on the oil rigs and the weekend wedding parties provided me with a solid foundation for success too. :p

Thanks for your comment!!

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Steve Dexters October 13, 2010 at 9:41 am

You dont need property managers, even from afar. Check out this newspaper article where I talk about property managers
http://www.ocregister.com/articles/property-270138-time-better.html
I manage my 6 houses in Las Vegas and Phoenix from Orange County. No 10% fee, use my own fixit people so theres no mgr overide, and my cash flow is WONDERFUL

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Jeff Brown October 13, 2010 at 9:43 am

Crackin’ up cuz six minutes after I got my driver’s license, he got me a car, and Whamo! I was the company’s janitor the next couple years. We’ve officially bonded. :)

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Julie Broad October 13, 2010 at 9:51 am

That’s AWESOME!!! :) I so can relate …

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Shae Bynes October 13, 2010 at 5:13 pm

Another outstanding post, Julie. My hubby mentioned extending our business with a property management arm a couple weeks ago and even though he was half joking I almost choked on my lunch. LOL! All of this was good, but my favorite line is “Nobody cares about your money more than you do.” So very true.

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Julie Broad October 14, 2010 at 8:30 am

Thanks Shae – why not take a page out of Jeff’s Dad’s book and wait for a few years until your daughters are old enough? Once they are old enough, buy them a car and tell them to start up the PM arm of your company?? :)

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Neil Uttamsingh October 13, 2010 at 9:31 pm

Wow.

Julie, what an amazing post. Your write your posts so well, and with such a personal touch.

If you recall, some time back we chatted about the fact that I still managed all of my properties.

Those days are long gone. I have been slowly converting the properties over to a property manager and it is a good feeling.

I have noticed that the change over has reduced the amount of stress I experience in trying to manage everything myself.

Also, I am realizing that my property manager is actually BETTER at managing the units than I am!

I think that at the beginning, new investors think they can do everything. They try to take on everything for as long as they can.

Also, some of the newer real estate investors have not learned to ‘let go’. Learning to ‘let go’ and outsource to a property manager is a big step for a real estate investor who tries to control every aspect of their business.

Once again, awesome post. You are representing Canada well on BP! :)

Regards,
Neil.

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Julie Broad October 14, 2010 at 8:32 am

Hey Neil – congrats on your transition to a property manager!! As you grow your portfolio – especially when you still have a full time job and a heavy level of activity in your community like you do – it’s almost always to leave certain jobs to the folks who do it everyday. Property management is definitely one of those tasks. I love not having to deal with late rent payments or even maintenance requests.

In the beginning I think it’s good for an investor to try to do it all – that way they understand all of the aspects of their business enough to know what should and should not be happening when someone else does it – but yes, there are people out there that can do it better!!

Congrats!!!

And thank you SO much for your very kind words. I really appreciate your support and compliments.

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Julie Broad October 14, 2010 at 8:40 am

By the way Neil – looks like you got a gravatar!!! :) YEAH!!!

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Bilgefisher October 14, 2010 at 6:53 am

Julie,

Great post. I am still fighting a property management issue that has resulted in no rental income for 3 months. Thank god for reserves and a lucky timed refi. Just turning over to a new manager can be a very stressful as the wheels get turning.

Your 100% correct on small leaks. As well as costs, but tons of small problems with PM’s can be an indication of a much larger issue.

I guess we all have to learn the hard way in order to get our systems in place.

Jason

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Julie Broad October 14, 2010 at 8:38 am

Thanks for your comment Jason. You bring up a very important point – and it’s one that I didn’t get into. The water leak Dave found is just the surface of the issues we’ve been finding with that property manager. It’s actually a property management company we’ve been working with since 2001 but last year he bought out the other major firm in his market area. He added another 200+ rentals to his business AND at the same time he has put his 2 sons at the front of the business and stepped back a bit. The sons don’t work half as hard as he did and they have 3 times the work. The result is a lot less care and attention is being taken in the job that is getting done. There have been many little issues and we’ve come to realize it’s a big problem that isn’t going away. We are now slowly moving our properties away from them and either into our rent to own program or to a different manager. So thanks for your comment because it brings up a VERY important point!

Good luck with that rental!! Hope you get some people living in there real soon!!

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Paul Daniele October 14, 2010 at 1:52 pm

Hi Julie, I am also sorry to hear that water leak that Dave found. A good tool to use looking at any property is an infrared camera. It will show you water that is not visible to the eye and various other structural defects. On my web site I wrote an article about using the infrared camera and things it will see. Its in the article section of my web sit and the article is called “Using Infrared Technology – for Optimal Property Management”.

If you call around, a lot of water damage restoration companies now have these types of cameras and are usually pretty willing to inspect a property for a management firm at a relatively low price. Stay Dry!!! Paul

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Julie Broad October 18, 2010 at 12:43 pm

Good tip! Thanks Paul. I will check out your article!

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Neil Uttamsingh October 16, 2010 at 8:06 am

My pleasure Julie. You constantly put our great content and are are an inspiration for both new and experienced real estate investors!

And, yes, I finally have my Gravatar! It is only working on some sites though, and not others…

All the best,
Neil.

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Joel Owens October 17, 2010 at 10:59 pm

Julie,

Solid article.

I think just like contractors,home inspectors,property managers you have to do the due diligence upfront.In my state of Georgia you don’t even have to be licensed to be a home inspector!

So it really comes down to what type of training do they have,what kind of professional organizations do they belong to,and what type of references do they have??

I think also there needs to a a distinction between SFR homes,duplexes,tri-plexes,and quad’s.These type of investments still fall into the residential arena.

5 units and above fall into commercial finance and deal structuring.I would say when you said we went with cheaper alternatives because of the 10% pm fee that you overpaid on price.

It’s common to overbid or talk yourself into doing something instead of waiting to buy correctly.I am not talking about you but mentioning for other investors who may be new.

I can tell you I am a commercial only broker and I loathe property management.I also do not do leasing. I love the sales side and my own investment purchases and that’s it.

I like to go to http://www.irem.org as usually the caliber of PM managers is better but not foolproof. If you buy 50 units or more you can get a PM fee run well for 5%.

I like bigger commercial apartments because you can have a maintenance crew on staff and a big PM firm instead of an AGENT who might do sales,leases and dabble with everything in between.

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Julie Broad October 18, 2010 at 12:46 pm

Joel – thanks for your thoughts. Multi-family investing is a different beast than buying single family homes that is for sure. And the differences only begin at valuation and financing. Property management of them is also different as you’ve articulated. And you’re right – if you have a large building and you pay 10% of your income in property management fees you’re overpaying especially if you have an onsite manager that gets cheap or free rent. Shopping around always pays off but hiring the cheapest person for the job usually doesn’t. :)

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Jason October 23, 2010 at 4:36 pm

You speak with the authenticity of someone that really actually understands what it is like to work with not so good property managers. I had a property manager ruin my property by not checking in on the tenants. They had a couple of cats and a dog or two I am not sure actually and the tenants let the animals do whatever they wanted the property manager didn’t even know they had pets. I know now that I should have been checking in on what my property manager was doing. Maybe they would have paid better attention to my property if they thought I was keeping a good eye on them. Thank you for such a great article. I am sure you will help other investors with your sound and real advice.

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