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Are You Really Saving Money by Being a Landlord?

by Ali Boone on November 17, 2013 · 57 comments

  

Are you really saving money by being a landlord versus paying a property manager?

Last week I wrote an article that explained the difference between active and passive income (See: The Truth About Active Income vs. Passive Income). In it, I talked about which investing methods fall under which income category. I identified having rental properties as being in the passive income category.

Guess what though… there is a hitch I left out. Are you ready? If you own a rental property, it requires management in order for it to produce income. The method of management you choose may change your property from being a passive income investment to being an active income investment.

Ready?

Options for How to Manage a Rental Property

You have two choices on how to manage your rental property. You can:

  1. Manage it yourself, i.e. be a landlord
  2. Hire a property manager.

The difference? If you choose to landlord the property yourself, you force yourself to work in order for the property to continue providing income. Doesn’t that change that income from passive to active? Absolutely! But what impact does that change in designation cause? More than you might think.

The Financial Breakdown

Let’s use one rental property to break this thing down. This one rental property (owned by you) cash flows, after all expenses, $300/month. On average, this property requires five hours per month to maintain properly (some months will require no work towards management and others will require more, so just taking a ballpark here).

Scenario 1: You manage the property yourself. If you manage the property yourself, and you make $300/month doing it, that equates to you getting paid $60/hour for the work that you put in ($300/5hrs). That’s not too bad.

Scenario 2: You hire a property manager (PM). Property manager fees run on average about 10% of the monthly rent collected. We’ll say this property brings in $1,000/month so you have to pay your manager $100/month. Now you cash flow $200/month ($300 – $100 PM fee). You do no work on this property.

The two options can be summarized as:

Scenario 1: five hours’ work per month = $300 income

Scenario 2: zero hours’ work per month = $200 income

You earn $300/month for doing five hours of work or you earn $200/month for doing 0 hours of work. It’s a difference of $100, so for five hours that means a $20/hour difference.

Whoa! Now this changes things. If the difference between working on the property and not working on the property is only $20/hour, that means you are in fact only profiting $20/hour, not $60/hour as suggested when we first looked at scenario #1. You would only be making $60/hour if the alternate, scenario #2 (not landlording), gave you no income. But that’s not the case because not landlording the property yourself does in fact still pay you income.

So now we are looking at $20/hour profit for landlording your own properties. That sounds okay, right? Well it depends on what you would otherwise be doing during those hours that you weren’t working on the property. If you only sit in front of the TV and eat popcorn during those extra five hours per month, then it would behoove you to go ahead and get to landlording because you will make more money doing that.

But if you have another job or other work that you do, if it pays more than $20/hour, then it is actually costing you money to landlord the property. For example, if you make $35/hour in your normal job, it would cost you $15/hour to landlord this property yourself. See the math there? You could earn $20 in an hour by landlording this property or you could make $35 in an hour by working your other job during that time, so you are losing $15/hour during that time being a landlord.

Now check this out. This is where everything gets really crazy. Let’s say you go with scenario #2, using a property manager, and during those five hours that you would have otherwise been landlording, you work your other job instead. That job, remember, pays $35/hour. Remember too that using a property manager on the property provides for $200/month income which breaks down to $40/hour for those five hours you would have had to work. You earn $40/hour from the property and now you decide to spend those now-available five hours working your other job which brings in $35/hour. So now you are making $40/hour plus $35/hour! Wait a minute, so you are actually earning $75/hour by using a property manager? Yes! That is more than the $60/hour had you managed the property yourself and had no other option.

I beg someone to tell me how not using a property manager saves you money.

Ah, okay, a critic. You just thought, “Well what if I don’t work another job during those five hours so I’m not making any extra income? Wouldn’t $20/hour be better than nothing?” Maybe, but it depends on what you would be doing during those hours. For most everyone, I’d imagine that you would use those five hours to spend time with your family, enjoy your hobbies, hang out with friends, or learn something new. Is $20/hour really worth giving those things up and replacing that time with the menial task of landlording? For only $20/hour? You would be taking on headaches and stress every month all to make an extra $100. I know some of us can be stingy, but come on. You can’t tell me that amount is worth it.

So again, I beg someone to tell me how not using a property manager is better, either financially or mentally.

Rental Properties and Lifestyle Design

In last week’s article too, I talked a lot about lifestyle design. The whole point of lifestyle design is to be able to live the life that you want, regardless of what that may be. The whole point of investing in rental properties, whether residential or commercial, is so you can have passive income which allows you to do whatever else it is you want to be doing in life while not having to worry about income.

Who have you ever heard talk about financial freedom in relation to wholesaling or flipping properties? No one, because both of those are based on active income, meaning you have to work in order to reap the profits. If you are working, how can you be doing whatever it is you want to be doing at the same time? You can’t. Now, if rehabbing properties and all that is something you love and would do it as a hobby regardless of the income, then that is a different story.

If a rental property is meant to produce passive income, how exactly does that really happen if you are spending time managing it?You are then working for your income, meaning it is active income, meaning you can’t be doing other things that you would rather be doing. Never mind the fact that this whole example was based off thinking of just one property! Uh, hello, if you own 10 properties you aren’t still only working five hours on all of those. You better be calculating five hours per property! With 10 properties you are looking at 50 hours per month of work. I won’t even start in on that math.

If your goal is to have financial freedom, or maybe even just financial “relief”, you need to understand what that really means. Earning extra income by “working” an extra five hours a week isn’t quite the point of rental properties. It’s great if you are cool with it being a side job and you like gaining the experience, but if some level of freedom or relief is really what you are striving for, landlording isn’t the way to see that. You could get a side job doing anything if it’s just about five extra hours of income per month. And I’m nearly certain any other job on this planet would leave you with less headaches than landlording. Again, if you enjoy landlording, rock on and keep doing your thing. But if you don’t enjoy it, it is in fact a boatload of headaches.

Last Thoughts

Since I started into real estate, I have worked with one mentor in particular (not a known guru) who has really driven me into this idea of lifestyle design. We’ll keep his identity under the radar by calling him “Matt B.” I was recently talking to Matt B. about lifestyle design and he summed it up perfectly:

Time and mobility are the two currencies that enable lifestyle design.  Control of those resources is what enables us to live fulfilling lives, maximize our freedom, and design our lifestyle.  People who don’t understand that are willing (or feel they are forced) to trade their time for money.  Losing proposition.  Lifestyle designers will trade money for time all day long because they understand how much more valuable it is.”

Did you notice something Matt B. said there that I didn’t even hit on in the article? Mobility. Add ‘mobility’ to the list of things landlording your own rental property(ies) takes away from you!

And my very last thought-

Think of Robert Kiyosaki (or any other wealthy investor, but I like Robert just because I follow all his principles). Think of all Robert’s net worth valuation which is roughly $80 million. If Robert had managed all of his own properties rather than outsourcing the management work like he did, what do you think his net worth would be at right now instead of at $80 million? Ummm… I’m pretty sure the question wouldn’t even be applicable because no one would know who Roberto Kiyosaki even is.

Aside from general comments being welcomed, I want to hear two other kinds of comments as well:

Landlorders, can you give me real-life examples of how you actually benefit financially and/or mentally by landlording your properties yourself?

-and-

Lifestyle designers, what does your dream life consist of?

Photo Credit: Rafael Souza ® via Compfight cc

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{ 57 comments… read them below or add one }

Alex Craig November 17, 2013 at 8:42 am

Also, take into consideration a good Property Management can get maintenance done cheaper too. I did a presentation to local investors in my REIA and was surprised the cost difference on what local landlords who managed properties themselves were paying for basic services.

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Ali Boone November 18, 2013 at 1:19 pm

I absolutely agree Craig. That is something a lot of people don’t realize… the property managers or people who do this full-time or in larger quantity tend to get work done a lot cheaper because they can and do buy in larger quantities, all the while knowing people deeper in the biz who can get the work done quicker. Great comment and so true.

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Brad November 17, 2013 at 9:21 am

I’m a slow learner maybe it has to do with my last name :) I control about 50 units now and just turned over a 16 unit apartment building to a PM and I can tell you so far I’m really happy and I’m often checking my phone to see if its on, wondering where all the meaningless phone calls are going. Work smarter not harder. God bless

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Ali Boone November 18, 2013 at 1:20 pm

Good for you Brad! If you enjoy doing that, definitely do it. Sounds like you have a great handle on it.

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Kyle Hipp November 17, 2013 at 9:25 am

The only thing I think about is that I can pay $20,000 for a downpayment to purchase a property and if I spend 5 hours a month on landlording I increase my cashflow 50%. If $20,000 is worth $200 a month surely I can spend 5 hours a month for $100. As I have grown my real estate business I have learned to dramatically increase my efficiency. Another thing is my latest call as a landlord a week ago. If a property manager was called that the furnace was out I could have have a minimum $100 charge just to get a tech out there. I went and a kid put rocks in the vent and flue pipes. Problem solved for free (well an hour) and corrected the issue going forward.

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Ali Boone November 18, 2013 at 1:23 pm

Kyle, as I said, if you are willing to spend the time doing it, go for it. It’s not for me, but there are plenty of people it is for. As far as the property manager and repair call goes, you are right that most would call a contractor and it would cost a lot. The trick, and no small trick either, is to find an actual ‘good’ property manager who would have done just as you did and get the rocks out themselves, no contractor needed. Those PMs do exist, you just have to find them.

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Brandon Turner Brandon Turner November 17, 2013 at 9:36 am

You asked, so I’ll answer :)

I believe property management is actually FAR more expensive than most think. Yes, 10% is usually what’s advertised. However, most management companies also charge an extra 50% of the first month’s rent when the property is rented out, which tends to average out around 12%. In addition, PM companies upcharge everything, so a $50 bill from a plumber gets billed to you are $75. Furthermore, the average vacancy rate for a PM in my area is around 8%, where I average 2%.

So –

I have 42 units, average rent of $500 per month, or $21,000 per month in gross income. So monthly, I could assume $2,520 for management on these. I also spend around $1000 per month on maintenance, and with the more expensive contractors a PM uses plus the upcharge, I would be paying closer to $1500 per month. Then there’s vacancy. I’m averaging $420 per month in vacancy (2%) versus a PM at 8% which would be $1680 per month.

So total – a PM would cost me $2520 + $500 (extra maintenance) + $1260 = $4280.

So, for me, it would cost $4280 per month to have a PM manage my stuff. Ouch. There is my entire cash flow, completely gone – 100% of it. My “lifestyle” business of passive income is now nothing.

Now, a few additional thoughts:

1.)I made the mistake of buying these properties with the assumption that I’ll manage. I don’t recommend others do this. However, I don’t think I’d have 42 units either without accepting this going into it. But who knows- maybe I would have fought harder for better deals? So now I advise everyone to buy AS IF they will have a PM, whether or not they actually do.

2.) You mention there are 2 ways to do it: with a manager or self manage. I actually run a third – and that’s a hybrid system. I manage myself, but I hire a part time office assistant to answer calls, show units, schedule maintenance, and pretty much everything else. Total cost: $500 per month plus $100 per vacancy that gets filled. I spend perhaps 5 hours per week and my wife spends another 20 or so on our rental business. So perhaps 25 hours of work total to get this.

So anyways, all that to say – as a business gets larger, I believe there are ways to scale using hybrid systems instead of a flat out PM. Yes, I would LOVE to just have a PM and envy those who do. I hate drama, and my 5 hours a week are all drama. But as you can see, there are reasons to manage yourself, or at least hybrid-manage.

Thoughts?

(crazy, this could have been a blog post in itself!)

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Brad Boone November 17, 2013 at 10:04 am

I have the PM send me all requests for repairs and then I fix them or have my guys do it. I have worked in this business since 1990 but can only see my kids grow up for a few years, so I can understand both sides I just choose to be a equal time father at this point.

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Ali Boone November 18, 2013 at 1:30 pm

Great hybrid system Brad. And we share a last name! Very cool :)

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Reed DeLisle November 18, 2013 at 8:51 am

You stated my thoughts exactly and well. I had hoped to get a company to manage my units to free up some time to pursue other opportunities. I was shocked as I began to get quotes for PMs. Charges for periodic inspections were add-ons, and one even stated an additional fee for making a file! I’d be paying them to take all my profit. I manage my few units out of necessity, not choice.

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Ali Boone November 18, 2013 at 1:32 pm

Reed, that means you only found bad PMs. There are PMs out there who won’t nickel-and-dime you like that. Those charges are crazy! A file? Good grief. You can still go the PM route, you just have to keep interviewing people. It took me over a year of searching PMs in Atlanta to find the rockstar I have now. It can take a while and it can be frustrating, but once you have a good one, you’re golden.

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Ali Boone November 18, 2013 at 1:28 pm

Good comment Brandon! Definitely things to think about, especially for anyone who could benefit from the hybrid system themselves. Only a couple comments and then I’ll leave your comment for everyone else to think about, one being the quality of the PM. As I just mentioned in last post, it is about getting a good PM. My PM doesn’t upcharge any maintenance or repairs, I pay the straight cost charged by the handyman (note, handyman and not contractor…huge price difference there). If any PM upcharges maintenance, that is a sign of a bad PM. For the money you would spend on PM-ing that you broke down, that goes back to the part of my article that talks about what you would otherwise be doing with your time. If you were to spend that extra $4k on a PM and not do anything significant with the time you just bought yourself, then yes you are wasting the money. But if you were working another job or starting a company or who knows what, or just traveling or enjoying things, then it is worth it. It all comes down to what you are doing in place of maintaining the properties yourself.

Great comment and great for people to consider!

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Liam Goble November 21, 2013 at 11:21 am

Brandon,

I found your post outlining your real estate trajectory over at Paula Pant’s blog. I assume the numbers you present in that blog are for you managing the units yourself. If so, when you analyze properties to buy, do you include repair reserves in your estimate?

Thanks. Liam

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Mark Ferguson November 17, 2013 at 10:24 am

I am in process of starting my own property management company. That way I can have te best of both worlds. I will not be handling any of it myself except for initial set up and management of my staff.

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Ali Boone November 18, 2013 at 1:29 pm

Now that is a great way to go, Mark. At least by setting up your own PM company you are formatting it to where you aren’t spending all the time to do everything yourself and you can also take on other people’s properties for profit!

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Al Williamson November 17, 2013 at 10:28 am

Sister Boone,

Brilliant post – but I think it over simplifies many things. However, the bottom line is that for your goals, PM is the right move. But one size does not fit all.

My counter augments would cover:
1. How the $100 per month ($20/hour) difference, compounded over time, is HUGE.
2. Happiness and portfolio size don’t scale at the same rate.

(I would go on, but my 3-yr old wants me to work on a puzzle)

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Ali Boone November 18, 2013 at 1:38 pm

Ha, Al. I hope you guys figured out the puzzle!

Yes, I absolutely put out the most simplified explanation of this that I could. That was my goal. What makes RE so hard sometimes is it’s really hard to learn the big pictures. Most people tend to learn (not intentionally) by seeing and reading tons of details and they get overwhelmed and it’s frustrating, not even just in RE but in any industry, so what I try to do is put out the biggest picture possible and then people can drill down from there. Look at this article alone, it’s the perfect example- I put out the overly simple big picture, so people read that first and get a feel for the principles and big picture concepts. Then, people add awesome comments, especially Brandon’s on here and now yours, who point out finer details. So, tell a person the big picture first, then point out the finer details. It’s so much easier to learn that way!

With that said, you have great finer details. Portfolio size is most definitely a consideration. It would be good for people to figure out their happiness-to-portfolio ratio even. My portfolio size I’m willing to manage is 0 because I spend 100% of that time doing other happiness things. Some people may be great with 4 properties, but not 6. And larger multis, maybe someone does want to manage them all. It’s all personal preference and something for everyone to weigh.

For the compounding comment, you’re right, but the same argument could go for compounding happiness too. You just can’t quantify that one with a number, so it’s easy to forget.

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Danae November 17, 2013 at 11:14 am

We just recently began using a property manager for our properties. I didn’t realize that we were as far under market rent as we were. For me, with 2 small children, I would rather price a little on the low side and only have to show the place to 2 or 3 groups of people then have it higher and have to show it 20 times to get a renter. Once we hired the PM, they had the time to show it to the larger number of people to get a better price. They ended up raising the rent on 2 of our properties enough that it covered their costs. The other one covered half of their costs. Along with the other benefits, such as not having to take all of the calls, for this point in my life it makes a ton of sense for us to use a PM. It also has freed up my time to focus on acquisition. Thanks for the article.

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Ali Boone November 18, 2013 at 1:40 pm

Great comments Danae! Another good point not already mentioned- a PMs expertise of being more familiar with market rents and such, so just for that reason alone it can be worth the money. Probably plenty of people excited they are saving $100/month in PM fees while not knowing their rents are $200/month under market rents.

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Jim Pratt November 17, 2013 at 11:42 am

I use a PM for these of reasons: can buy properties out of local area, don’t have to answer phones, don’t have to show any property that’s for rent, they can screen a lot better then I can and best of all they usually get a higher rent then I would have charge.

In short, they cost me very little and saves me a lot of stress. I do most of the repairs myself otherwise get the bill straight from the contractor. Without a PM could only buy rentals locally which would limit my purchases.

Also, their fees are tax deductible, adds are free and I don’t have to show a property a bunch of times till it’s rented. For me that’s what I call passive income.

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Andre C November 17, 2013 at 12:05 pm

Ditto Jim Pratt

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Ali Boone November 18, 2013 at 1:41 pm

Double ditto Jim Pratt and Andre. Couldn’t agree more! I will never landlord my own stuff just for those reasons you mention. Too much work for me.

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John Thedford November 17, 2013 at 11:49 am

Great article and thought provoking! I suspect that most investors with small portfolios such as myself believe it worthwhile to manage the properties. Absentee owners don’t have that choice. Having a PM does cut into cash flow. Hiring a PM is a personal decision with quite a few variables. Fortunately, I rarely get calls or complaints so at this time I feel it is less expensive for me to handle any issues that arise. Give me 30 or 40 units and I would probably chance my mind FAST:)

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Ali Boone November 18, 2013 at 1:42 pm

Haha John. Totally. And I know what you are saying. My first property I had, after I fired one PM company, I managed myself for a year while I looked for a new manager. The tenant was flawless, so it worked. So you are right there, it’s easy to manage yourself with a great tenant. But come any problems, the game changes.

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Paula Pant November 17, 2013 at 12:25 pm

The type of property that you own also plays a major role in the time vs money situation. Some of my rental properties are freshly-renovated luxury rentals that tend to get stable, highly qualified tenants who rarely complain or give me any problems. They’re located close to my personal home and they have low turnover. I’m happy to self-manage these if I’m not traveling.

Other properties, however, have … er … more problems, based on the location of the property and the type of tenant it attracts. I’ll gladly pay a property manager all day long to handle these.

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Ali Boone November 18, 2013 at 1:44 pm

Totally Paula! I agree. As I just left in my last comment, I was able to manage a property of mine in Atlanta while living in LA, just because I had an amazing tenant with no problems. But my other properties, omg kill me. They are hard enough to manage with a PM in place much less on my own. So yes, I totally agree. If a property is nearby and with easy low-maintenance tenants, it may absolutely be worth foregoing a PM on those.

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Paul Salmela November 17, 2013 at 12:29 pm

I own and manage 20 SFH rentals all fairly close to my home. I currently spend about 15-20 hrs a month managing these. When I get a maintenance call/e-mail I forward this to my maintenance guy and consider it done. Most of the work I do is with marketing and getting tenants into my property so I can reduce vacancies (this is the part I enjoy). Since I started purchasing properties in 2009 I have not had a single vacancy.
Here are a few things that I feel I do better than most property managers:
When my tenants move out I usually have someone moving in the same day or the next day. I have heard of many property managers that want to wait until the property is vacant before showing the property. Either because the property is too dirty from the current tenant or because it’s too difficult to coordinate schedules to show the property. Property managers also charge one month’s rent to place a tenant or they charge a lease signing fee every year. If I had a vacancy every 2.5 years + I had to pay one month’s rent every 2.5 years that could cost me 48k* for every 2.5 years which comes to 19.2k/year.
* (My average rent is $1200/month. 1200 for and additional vacancy + 1200 for the property management fee =2400 *20units = 48k in additional fees every 2.5 years).
Many property managers take a cut from the maintenance. My maintenance guy charges me $25/hour for his work and does a great job. One of the most popular property management companies in my area charges $75/hour and a 2hr minimum. Most of my properties were fixed up when I purchased them so my yearly maintenance costs are around 15k. If I had to pay 3X as much this could end up being 30k/more a year.
If I add the costs above + the property management fee (288000 in gross rents *10% =28.8k ) I’m looking at over 70k/year which isn’t too bad for a part time job.
I work full time in addition to managing these properties and someday I plan to either hire a property manager or start a property management company. But for now I’m taking the additional money made by not hiring a property managers and purchasing more properties!

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Ali Boone November 18, 2013 at 1:46 pm

Paul, I’m thinking you should start a PM company! Lol. Don’t hire a PM. You sound like you have an amazing handle on everything. Which brings up another point that hasn’t been mentioned so far… there are ways of landlording yourself that are extremely streamlined and efficient, and if you can figure those ways out, it can be a game-changer. Sounds like you are all over how to get all the work done with the least amount of time involved, plus you like a lot of the work too so that helps. I’d say keep going how you are going and start that company later! You’d be great at it.

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Roy N. November 17, 2013 at 3:56 pm

Having a PM is our ultimate goal, but after interviewing the local property management companies we have concluded that their cost does not add value to our portfolio at this time:

1) Their vacancy rates are higher than ours. Yet, all the firms charge a base of 8-10% of gross revenue and most charge a full months rent for tenant placement and a half-month for renewal;
2) Their maintenance and repair costs are greater than ours – at least the cost to us is greater than our costs using our established trades and handyman;
3) With one exception the application and screening process used by the PM companies was not as rigorous as our own. One even asked if they could use our application form and our Schedule ‘A’ to the government standard form lease.
4) Two of the firms also own properties and could not guarantee they would not place filling their own vacancies ahead of ours;

As I said, we ultimately want to have a PM, but now believe our options are to either groom/hire our own or to purchase an interest in an existing property management company.

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Ali Boone November 18, 2013 at 1:49 pm

Roy, great notes about why a PM isn’t worth it yet. Good thing for people to consider but also things to ask a PM they may be interviewing. Most of the points you bring up are signs of a bad PM. I mentioned in a comment before, it took me a year of interviewing PMs before I found a good one. It can take forever and be really frustrating, and depending on the size of your market, maybe there really isn’t a good one. But there may be one. Just hard to find.

You are the second person to mention vacancy rates of the PM versus your own. Can you tell me how that determination comes about? Isn’t there a significantly different sample size between each, so the numbers wouldn’t match.

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Steve November 17, 2013 at 5:06 pm

Wow, so many good financial reasons listed here that I won’t reiterate them. Here is another twist… I actually enjoy getting my hands dirty and doing the hard work on occasion. No, I don’t want to do this for 40 hrs a week, but for my properties, I average about 10 hours a month (and that is on the high side). Of course, I can hire out anything I don’t want to do, but so often a maintenance call is simple, and therapuetic. Also, did anyone mention the tax benefits of material participation?

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Ali Boone November 18, 2013 at 1:50 pm

Steve, you are the exact person I refer to when I mention anyone who likes doing the job. There are definitely folks out there who really enjoy the work and if that is the case, I say definitely manage on your own.

What are the tax benefits of material participation?

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Steve November 18, 2013 at 2:37 pm

Ali, I almost wish I had not mentioned material participation! I am not even close to being a tax expert, in fact, it is my most dreaded subject. Bottom line is that active participation can allow the investor to be a real estate professional if certain guidelines are met, and this can help if you are ever in a situation where you have losses… but of course, we are not going to have any of those, right!? I’m sure someone else will chime in if I have screwed this up, or they have something to add.

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Ali Boone November 18, 2013 at 7:23 pm

Ha, no worries Steve. Well, “RE professional” is a real thing, but more complicated than that. Even if you have active participation in RE, it has to be a certain number of hours per year and that number has to be more than the number of hours you work any other job. So if you have a full-time job outside of landlording, you won’t qualify. Even if you can qualify, the “RE professional” standing only helps in certain situations, most of which you likely won’t benefit from that often.

I’m not an expert either, but for the most part, there are no tax benefits because of active participation.

Steve November 19, 2013 at 2:14 pm

Thanks Ali, Yes, I know it is complicated… been down that road of research and I do qualify, as rehab and management of my properties is my only job. There are definite, and possibly substantial, tax benefits if you have losses.

Kyle Hipp November 20, 2013 at 2:39 am

I would say that being able to utilize more than $25,000 in expenses and depreciation in a year is an extremely beneficial tax benefit of having a real estate professional status.

Ali Boone November 20, 2013 at 1:55 pm

Yes Kyle, it is, but to take advantage of it you have to have more than $25k in losses. Up to $25k of losses, everyone can write off. So it’s hard to qualify as an RE Professional already, but then you want to make sure it will even help you. It won’t always. But yes, if you do have more than $25k in losses, it’s great if you can qualify.

Shaun November 27, 2013 at 9:56 pm

Also keep in mind that it is >$25K in losses taken against other income after your rental income is brought down to $0 for taxes.
Not a big deal usually if all you do is land lording since there isn’t anything else to write it off against. This will be useful generally in only a couple situations. The first being that you have “active” income coming in from other RE related stuff that will still count towards the status, so if you also do rehab flips for example.
The other common one is if you are married filing jointly your status can offset your spouses non-RE related income.

Also talking to your PM to approve a repair counts as material participation just as much as doing the work yourself. You will get to your hours a lot fast if you do the work but that is the only “advantage” there.

*This is my opinion and interpretation from reading and studying this stuff and from several conversations with tax professional, this is not tax advice :)

David Tilney November 17, 2013 at 8:14 pm

I actually enjoy managing my properties and have done so since 1978. I enjoy the positive interaction that I have with my tenants. The key is to have good systems and develop good people skills. I believe that no one cares more about my money than I do and I further believe that if owners don’t know how to manage, they are ultimately just inventorying properties for those of us who do. Management is the most important skill to learn in this business. This is a great business that will give you the freedom you want if you will spend the 10,000 hours that it takes to become an expert. My wife and I spend 8 mos in FL and 4 mos in CO (along with other travels). We have no employees and manage all our CO properties from wherever we are. With systems in place it takes no more than 5 hours each month. Property management can be a very rewarding and fulfilling business. Just my two cents.
David Tilney

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Ali Boone November 18, 2013 at 1:53 pm

Ooh David, do you know how many people would benefit by reading your book if you were to put one out! You sound like you have the golden setup. Saving all the money of the PM but having all the benefits of using a PM. I had just mentioned in a comment above, yes landlording can be done more efficiently with the systems in place so you aren’t doing that much work. I know a lot of people would benefit from hearing how you accomplished that. But like you said, it took about 10,000 hours of figuring it out yourself. It’s all about the investment. For me, I don’t want to spend 10,000 learning that, but a lot of people would.

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David Tilney November 18, 2013 at 4:39 pm

I haven’t written a book on property management (yet), but I have taught a national PM seminar for 20+ years.

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Ali Boone November 18, 2013 at 7:24 pm

Nice, David! If you haven’t already, advertise it on BP. I think you’d get a huge response of people who want to check it out.

Justin November 18, 2013 at 8:02 am

I think it’s all relative to what your goals are.

I was just listening to an interview last night with a guy who owns (with his two other partners) approximately 52,000 units. He was talking about how one of the keys to their success is utilizing local property management companies.

It’s all about mindset. If you want to stay fairly small and be a landlord….so be it. If you want to scale the only option is a PM or creating your own PM company.

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Ali Boone November 18, 2013 at 1:53 pm

Agreed Justin.

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Liam Goble November 18, 2013 at 1:17 pm

It’s really interesting to read this thread. I own and manage three properties for a total of five units. I just spent about 500 hours plus an additional 150 hours from a friend to rehab half of a duplex. I doubt a PM company would have touched the property, but I know that my 500 hours will almost double the value of the duplex. The added value of the duplex is almost what I take home from my 50hr/week day job. I was able to complete this work at about one third the cost of having subcontractors complete the work (my day job is construction estimation).

I am curious if anyone has found a ‘sweet spot’ for when to use PM companies? Also, like Mark above, I plan to spin off a PM company when there is enough cash flow to warrant starting another company.

Lastly, when I am generating my APOD for a potential property purchase, I always include 10% PM fee, 10% vacancy and 10% for repair reserves (all from gross income). Only when a property still cash flows $100/month will I consider a purchase.

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Ali Boone November 18, 2013 at 1:57 pm

Great work Liam. You are bringing into the equation flipping, either to rehab and hold or fix and flip. So that is another branch of the debate tree. Since I don’t rehab or flip or anything, I can’t respond for sure but I would say the sweet spot is when the benefit of a PM outweighs the cost. If you are enjoying what you are doing and it’s not taking too much time, avoid the PM. But if you end up with a lot of headaches and are spending more time than you want to on a property, hire a PM. All personal preference and everyone’s sweet spot will be slightly different. I mentioned in a comment before, my sweet spot is ‘immediately’. But I also only buy out-of-state rentals and have so much other stuff going on, I could never landlord my properties. But everyone is different so their sweet spot may be a lot further along.

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JKC November 21, 2013 at 10:08 am

Ali,

I love your writing, and the thinking that goes on behind it. You have a great skill with numbers, and have obviously given lots of thought to Lifestyle Design. I always look for your posts and usually have a good think about what you’ve written.

I consider myself “mid-career”. I choose to manage my own. I think it is the best choice for me at this time, but that may change. I have built my “buy, fix, rent, manage” business to a point where it can support me and my family. One huge milestone for me was when the rental income was enough to allow me to quit my salaried “day job”. Before, during and after this milestone I gave a lot of thought to how I wanted to live (Lifestyle Design was not a big term back then).

Mostly, I wanted time freedom. When I quit my 40+ hour a week job I was managing 9 units by myself – and doing it fairly efficiently because I had to work! When I quit, I was instantly rewarded with 40+ wonderful hours to do whatever the heck I wanted to do! I slept late, I took a couple vacations, I played a lot of chess, I skated more etc. I had the proverbial 4 hour workweek (before the book was written). I also had what you might call “Financial Freedom” – although I lived very frugally. After a while I started to want to do more challenging work – so I bought my 10th unit. I was getting good at it. The motivation to buy was mostly because I had developed a nascent skill that I wanted to exercise. Secondarily, I knew that if I did it right it would help my income and I wouldn’t have to live quite so frugally.
So, the road goes on. My portfolio size has more than doubled since then. I continue to manage my own. I like it! I still have plenty of time freedom and I am my own boss. The business continues to grow at a pace I am comfortable with. When I get spread too thin I can always hire someone to help. There are many steps between “doing it all yourself” and “handing everything off to a property manager”. My first hire was a handyman. My second hire was a bookkeeper. My third hire will probably be a showing agent (although I enjoy doing it myself). If I hire a property manager he/she may end up being a direct employee.

There is a lot of value in the other comments above. I think it is a question of “do what works best for you”. I believe I do the job better than a third-party property manager would. I care more. Also, there is a lot of non-monetary value in the act of doing the work. I want to know the business I am in. What better way to learn it than to do it?

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Ali Boone November 22, 2013 at 2:33 pm

Great comment John, thanks for contributing! I totally agree…do what works best for you. While managing my own stuff doesn’t work for me at all, it does work for other people. Life is about enjoyment, and if managing gives you a sense of enjoyment as it sounds like it does you, then I am the biggest advocate of it!

Thanks again for sharing.

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Rachel November 21, 2013 at 8:13 pm

Very controversial topic Ali, nicely written!

It’s definitely a personal choice when it comes to managing properties. I’ve done both.

Managing your own properties can definitely be a learning lesson if done locally. To manage out of state can be very challenging. Though, I have heard others that have done it.

When I first started out, I managed properties myself. Though as my career progressed, I brought in property managers. I used different ones to get a feel for their style and way of doing things.

I learned the most from those who insisted on doing things the way they have done things based on experience. At first, I was hesitant but glad I used them in the end. The ones that agreed with me and did whatever I said I didn’t learn as much from and had to micromanage in the end.

Having both the experience of managing properties myself and working with property managers has only strengthened my skills in this area which has been a leading factor in my success. I’m a people person and enjoy talking with people. So, putting out fires and dealing with issues has been a regular part of my job — it’s all part of what I do.

The most important thing I learned (both from managing properties myself and working with property managers) is choosing the type of person who is placed in the unit. From all my years of experience, I have learned how to weed folks out and look for very low maintenance folks with very good landlord histories.

However, this only came as a result of experience — it takes a lot of time talking and meeting different types of folks to learn this skill. Some do not want to put in the time to learn this skill, it’s definitely a personal decision!

Interesting to hear your thoughts as well as others’ on this topic. Thanks for sharing!

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Ali Boone November 22, 2013 at 2:36 pm

Rachel, thanks for sharing and you are totally right… success comes down to putting in good tenants. No matter how good the property, or the location, or the management, if the tenants aren’t up to par, your entire investment can blow up. I have first-hand experience with this! So whether it’s a manager who knows how to vet people correctly or you spend the time doing it yourself, it has to happen or your money will go down the drain. My favorite property manager in Atlanta always takes longer to find tenants for my properties than other managers, but he also always ends up putting good tenants in too so it’s totally worth it. Nothing can tank an investment faster than non-paying tenants, tenants who get evicted, tenants who walk out, tenants who splash dark blue paint all over the carpets (I just had that happen), etc.

Sounds like you have a great handle on it and congrats for learning the trade secrets! :)

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Shaun November 27, 2013 at 10:19 pm

Ironically I read this as I was on hold with the electric company trying to figure out if they were going to shut of the power to a duplex I have on Thanksgiving after a tree came down and knocked down some of the lines.
Didn’t take them all the way down and the power is still on, just is a “safety concern”.

Not really what I envision as a CEO activity at 10:45PM the night before Thanksgiving…
Best part is I DO have a PM for this >700mile away out of state rental!
She happened to be away for the holiday as was the go to contractor I use there and my backup “boots on the ground guy”. God bless my PM for trying to help me find an electrician that was in town and taking calls at that point.
Issue is that she is a one woman operation so when she was gone there was no good system in place. Terrible timing all around but did highlight that we will have to work out a better system for when she is away for an emergency…

Sorry the delirium is getting me off track… :)
My point is more that those 5 hours a month can be a REALLY bad 5 hours that can happen at any time. It isn’t like you set aside 2.5hrs before lunch on the 2nd and 3rd Tuesday of the month for “land lording”.

Happy Thanksgiving everyone!

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Ali Boone November 28, 2013 at 12:12 am

Lol, Shaun, so true! About those 5 hours. Sorry to hear about your delirium and holiday not-so-fun. That is wild that she doesn’t already have backup in place. I can’t imagine she never goes away or is never unavailable. But even if she was away, I’d expect her to be the one making the calls to get it all fixed! She may be a super nice woman and she may do a great job at managing when she’s there, but I don’t pay managers for me to have to make emergency repair calls, ever, not even just on holidays! Eek.

Great comment, thanks for chiming in! Hope your Thanksgiving goes a little smoother :)

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Shaun November 28, 2013 at 7:29 pm

Well I also have somewhat of a “hybrid” situation. We work on an a la carte type service where I can pick and choose what I need and what I can do myself and only pay for the services that I use.
So once a tenant is in place she more or less handles things I ask her to and takes some maintenance calls, and only bills me for things I have her do. Pretty nice since the only thing that PMs do a lot of months is collect rent and maybe write a couple of checks then send you a “report” to that effect.
I don’t mind having the tenants just pay me directly. :)

Anyway so I hadn’t paid her a dime on that property for probably 3-4 months. There is a roll of the dice aspect to it and definitely rolled snake eyes this week! In this case the timing was just so bad that my 2 back up people were both also out of town. The handful of other times she has been away I just had to make one additional phone call to get things taken care of.

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Ali Boone December 2, 2013 at 12:17 pm

Oh that’s a cool setup actually! I wonder if PMs are normally open to things like that. I would tend to say not since they are so dependent on what little income each house brings in (dependent, not suggesting they are desperate but dependent as in each monthly payment is what makes up their total income each month).

Shaun December 2, 2013 at 11:02 pm

Yeah it is an interesting setup. One that I do think is more of a benefit to the investor, which is probably why I’ve never seen it anywhere else. :)
Though interestingly there are at least 2 other local providers that offer similar services because people like that model so once someone starts doing that stuff people need to compete.

In her situation part of the business model is vertical integration for sure. She is an agent that works with mostly investors so you blasts out possible listings. Her boyfriend is a contractor and will give you an estimate on the work. Then they can manage the property for you. And of course if you want to sell she can re list retail or sell to another investor for you fast.
I also think one of the keys to making it work is they just don’t offer doing the financial stuff. While it can be tough to see getting charged 10% when they only collect the rent and write once check and send you a 1 page report detailing that there is a fair amount of work they need to put in getting that system set up and to do all these reports for a large number of units and of course some months there is a lot more to do than that.

philip July 2, 2014 at 11:50 pm

Great article I actually came to basically this same conclusion by myself a couple of months ago and started to phase myself out. I actually chose to train a property manager instead of hire one of the big units and so far it has been going great!

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Ali July 3, 2014 at 11:22 am

Ooh good idea Philip! That is a great way to deal with a manager for sure. Train ‘em how you want ‘em :)

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