Landlording & Rental Properties

8 Reasons Why Using Property Management Is a Waste of Time

Expertise: Landlording & Rental Properties
32 Articles Written
excuses

This post is likely to rankle a few feathers, especially for the property managers out there. But first a disclaimer — I have 24 rentals that I manage and maintain myself.

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I manage and maintain a property for another person, and I have a real estate license. I even have a full-time job. I have used a big name property manager in the past, with 100 percent of tenants provided by them that did not make it a year.

So I know a bit about property management and property management companies. I know many other owners who have had similar trouble with property management firms.

8 Reasons Why Using Property Management is a Bad Idea

If you are making over $200k per year in your real estate investing, you can skip this article; you do not have time to read it. You can make more by doing, not reading. If you are only making ~$150k per year, like myself, continue reading.

 1. You sacrifice your cash flow.

When you hire a property manager (PM), expect to pay about 8 to 10 percent of your rents to the PM.

Related: How to Be a Terrible Cash Flow Investor (7 Guidelines for Ultimate Failure!)

In reality, that doesn't seem like much, but you are actually giving up a significant part of your cash flow. At $1,000 a month rental, that's a $100 fee. If you invested $20,000 in a property that you expected to get a 10% cash-on-cash return, you will get back approximately $2,000 annually, after the PM fees.

Skip the property manager, and your return would be $3,200. That’s a whopping 60% higher! In addition to the monthly fees, paying a month’s worth of rent to actually place a tenant blows the numbers out even further.

2. You have a higher motivation.

Secondly, many PMs have never invested themselves. They have never managed an investment property of their own, yet they seem to think they know how to manage yours.

Even if they have worked for a PM firm, they have not felt the pain of a bad tenant and have never had to open their own checkbook to pay for it. Their motivation is to make the commission, not make you money.

Thirdly, a PM doesn’t have to be close to the property. They just have to make calls. In one PM contract I read, they only guarantee four hours per year of on-site time to handle the property.

Everything else is additional at $75 per hour. I think $1,200 for working four hours a year is pretty good wages. Where do I sign up?

real-estate-negotiation

Related: 10 Tasks a Property Manager Will Take Off Your Plate (to Free Up Precious Time!)

3. They make money at every turn.

Property managers make money when they fill a rental.

They make money when they do maintenance, as a markup. They make money when they have to do an eviction (for their bad tenant). They make money when they turn a rental for a new tenant. They make money when they place a new tenant.

The more a PM churns a unit, the more they make. You make more money with a buy and hold strategy, keeping a tenant as long as possible. The only way to make sure you make the most money is to make sure you take charge of the property management decisions. No one is more concerned about your profit than you!

 4. Their “guarantee” doesn’t guarantee all that much.

When a PM brings in a tenant, they usually guarantee the tenant.

But the PM’s guarantee isn’t a refund like you get at Walmart; the PM just gets you a new tenant, an exchange. Sort of like the weatherman getting a weather forecast wrong. They just do another forecast.

That new forecast is likely wrong, too. The PM doesn’t guarantee the rent. They do not pay out of their own pocket to bring your rental back to the condition it was in before they brought in the subpar tenant. They do not refund your eviction cost or your lost rent.

In my own rentals when I was first starting, I had a PM bring in two sets of tenants. One tenant got laid off and wanted to move out-of-state after nine months. The other I had to evict, at my expense.

My replacement tenant lasted about 8 months, where the tenant had to move due to her kid being picked on at school. These situations could have happened to anyone, but they have not happened to me since I started doing my own property management. And I have four times as many units as I had back then.

5. You may want to live close to your property anyway.

I am a firm believer that a rental property should be close enough to walk to.

That is a bit of an exaggeration, but if you are over an hour’s drive from your rental, you probably need someone to do some of your work for you. That work costs money, and your investment return will be less.

Related: Grow Your Real Estate Network; Get Involved Locally

If you take the attitude that you can increase your return by as much as 60% just by looking closer to home, you can look for opportunities that may bring in more profit even though the cap rate might be less. Looking closer to home mitigates many of the unknowns about property investing.

You do not have to live close by your property, but you may be able to exponentially increase your profitability if you do. You know your neighborhood — use it to your advantage.

6. You have the ability to wear two (or three) hats.

When you are a property investor, you need to determine your strengths.

Often, you can be good at multiple things and increase your revenue. Just as companies either buy other companies or do their own work in-house to save money, you can too.

 First, you are an owner or investor. If you are an LLC or Corp, you are already doing some of the work in-house. As president, you make the decision to buy a property. You go back to the shareholders to get the capital to buy it. Often, the president and shareholder are one in the same.

Once you buy a property, you need a property manager. You can hire it out to an outside firm and give away up to 50%+ of your cash flow, or you can manage it in-house. Create your own PM company, sort of a subsidiary to your investment business. You can do this even if you only manage one property — your own. You do not need a separate legal entity, just the mentality that you have one.

When you are in the PM role, take off the owner hat and put on a PM hat. Skip the owner emotions when you are making PM decisions, but know that when a tenant damages a property, you pay, not the owner. You will make a better decision. It would be nice if all PMs could be held accountable that way.

painting-supplies

Related: The Fine Print: 5 Items to Look for BEFORE You Sign a Property Management Contract

7. You can take the middle man out of maintenance calls.

When you have the skills and tools to do some maintenance, you can do a similar hat switch.

In the real world, a tenant will call the PM and describe a problem. The PM will call a maintenance guy. The maintenance guy will fix the issue 90 percent of the time.

If it is a larger issue, they will let the PM know, so the PM can get an authorization from you to fix it. And you have no choice but to authorize. You are generally at their mercy. What are you going to do, say no to a new furnace and have an un-inhabitable place?

So, you have your own PM company and your own maintenance department, which may consist of a single part-time worker (you). You answer the call directly from the tenant.

You might troubleshoot it over the phone. Maybe the tenant sends pictures via a text message or email. You can determine the skills it would take — i.e. plumber, electrician, HVAC, handyman, painter, cleaner, carper cleaner, handyman, etc.

You can call a maintenance guy to head over and fix the issue (or troubleshoot it further). If you have the tools, skills and time, you can do the fix yourself.

Odds are, no matter how busy you are, you have enough time to stop and make $100 per hour. You schedule a fix when you have some time and get it done. An emergency might require a faster action and subcontracting out the work if you do not have the skills or time. If you fix things at home, you can fix it in a rental.

In the 25 rentals I manage, I average one or two calls per week, maximum. Many weeks, I do not get calls. That’s 50 to 100 per year.

It works out to a maximum of two or three calls per year, per unit. Many are just questions, no on-site visit required. There might be one or two calls per month that need maintenance. That’s about a half a call per year, per unit, for maintenance. Some units call more often, some never call. I am hardly ever called at night.

8. The internet is there to help you.

So, you can be a PM and be anywhere in the world, as long as you have internet or phone access.

You need a phone, a rolodex, or Google. A short list of contractors helps, but there are thousands of companies that do all of the work that might be required if you cannot be there to do it yourself.

Save money, increase your profitability, and be more self-sufficient by taking on more roles.

[Editor’s Note: We are republishing this article to get input from investors who have found BiggerPockets more recently. Be sure to let us know where you stand with a comment!]

Have any of you regretted using a property management company?

Be sure you leave your comments below!

Eric is a 55 year old, soon to be former, computer professional. He started several years ago to replace his “work income”, with other alternate streams. He is well on his way to retirement at age 56, and is currently making more money at extracurricular activities, than he is working at his full time job. Whether that is Financially Independent, or just old fashioned entrepreneurial spirit, is in the eyes of the beholder.
    Brad
    Replied about 4 years ago
    Hi Eric, Interesting article and while I agree with your points, I have PM for 10 units because my work prevents me from being able to self manage at this time. One point I do want to make in support of using a good PM is that I have found they generally know the market better than a small scale landlord and will rent properties for higher amounts. In some cases, the PM fee may even be covered by the rent difference. Brad
    Joe
    Replied about 4 years ago
    Thank you for reading! A PM may well be able to get top dollar, and raise rents without emotion. And tenants will move out more often if their rent is right at the top of the market. If you have a full-time job that takes a lot of work, it is more difficult. Better tenants are more easily managed, and can even help manage the property that they live in. I keep tabs on my market, as I have many in the same area. If I was spread out, or only received a few turnovers a year, I may use a PM myself.
    Chad Hale Property Manager / Investor from San Jose, CA
    Replied about 4 years ago
    As an investor, owner and PM I do think about and value my clients properties as my own. Many of the issues that people complain about PM’s for comes down to integrity. If you operate out of integrity and do what is best for the property owner / customer it will be a win win arrangement. There are good reasons for hiring a PM as well as self-managing. It comes down to personal preferences, skills, priorities, liabilities, etc. If you have a bad PM, fire them and get someone that cares about your property. Just as tenant selection is one of if not the most important part of a rental properties success so is finding the right PM that you can trust.
    Joe
    Replied about 4 years ago
    You are 100% correct. The problem becomes when a landlord doesn’t know how to do it themselves, they have to rely on a PM that may not know what they are doing either. Other than taking a test, a PM needs experience. Knowing the laws is great, but knowing how to avoid a disaster tenant takes time and a few bad tenants. No one wants to hire a PM that learns on their own dime.
    Joe
    Replied about 4 years ago
    You are 100% correct. The problem becomes when a landlord doesn’t know how to do it themselves, they have to rely on a PM that may not know what they are doing either. Other than taking a test, a PM needs experience. Knowing the laws is great, but knowing how to avoid a disaster tenant takes time and a few bad tenants. No one wants to hire a PM that learns on their own dime.
    Christopher Smith Investor from brentwood, california
    Replied over 3 years ago
    My experience is much different than some above. I have had an absolutely great experience with my property managers. They take 8% of my gross and 12% of my net and do nearly everything under the sun for me. I haven’t had to do one thing of substance for any of my properties in over 10 to 12 years in either of the markets I own properties. In fact I’ve never met a single tenant (and have absolutely no desire to do so), yet I have had only a 1% vacancy rate across all those years across all my properties. The PMs have turned what could have been a full time job (and a pretty darn ugly one at that) into a tremendous totally passive cash cow generator. The only minor issue I have had in one market was the PM needing to be a little tougher on outside contractor repair work charges, which after I expressed this desire is now coming well into line. Another important point for me is the one jurisdiction where I have most of my properties is a very litigious area of the country where folks have no hesitation whatsoever to sue each other and the laws there are also very tenant favorable. For the legal liability issue alone, I would not want to touch being an active PM there unless I had many years of experience (as my PMs do) navigating those troubled legal waters. Keeping my fingers crossed I have had no tenant legal actions ever taken against me. My conclusions would be if you get a true seasoned professional as a property manager (not always easy to do, but very possible with appropriate due diligence), they are worth their weight in gold. They earn every dime of what they make and for someone like me far beyond that.
    Christopher Smith Investor from brentwood, california
    Replied over 3 years ago
    P.S. I’ve never had to evict a tenant either.
    Eric D. Investor from Eagan, Minnesota
    Replied over 3 years ago
    Thank you for reading! PMs can definitely be great. Far too often, and investor trusts an inexperienced PM and has a disaster.