If you’re anything like me, you probably LOVE the idea of “passive income.”
It’s okay to admit it.
It’s a buzz word we’ve all been hearing about for years now, and let’s be honest… who wouldn’t want several large paychecks to finance their lifestyle? Would it be so bad if those paychecks kept coming in month after month, year after year, for the rest of your life, regardless of whether you kept working?
Yeah — passive income sounds like a dream come true alright, but we’ve all had people try to sell us on this before.
Back when I was a new investor, I heard the same sales pitch about all kinds of new business opportunities, investment funds, real estate courses and multi-level marketing schemes. Everyone talked about it like they had the “keys to the cash flow kingdom,” but when you hear this much hype about something, it’s easy to grow a thick layer of skepticism toward the idea. Obviously it sounds great, but come on, is this really possible?
Most of us have a hard time believing in things like passive income. We understand it conceptually, but when you’ve never seen it or experienced it firsthand, it’s just hard to know whether this stuff is a myth or a reality. It definitely looks good on paper, but is it really that simple? Can anyone actually show me the money?
Dealing With Reality
When I was in college, I was fascinated by the idea of buying rental properties. Like most of us, I had read all the Rich Dad Poor Dad books, seen all the late-night infomercials and spent hours scouring the internet for answers. All the books made it sound like the smartest thing you could do with your money, and everyone on TV made it look like candyland… but whenever I talked to the REAL landlords I knew in my life, I heard quite a different story.
Most of them would tell me how difficult it was to deal with tenants, describing one horror story after another. It seemed like they were constantly feeling burnt out and disillusioned with the foolish dreams they once had of being a landlord. If I didn’t know any better, I would’ve thought they were miserable!
You’ve probably heard some of the horror stories too, am I right? Maybe you’ve even experienced some of them yourself. Perhaps you know exactly what it’s like to deal with irresponsible renters, exploding toilets, bug infestations, leaking pipes and evicting the “tenants from hell.”
When I heard these kinds of stories, rental properties sounded more like a nightmare than a dream come true. It always left me wondering, why are so many landlords willing take this kind of abuse? If passive income is really attainable from real estate, why does everyone have such a hard time finding it?
Nevertheless, I remained cautiously optimistic that I would find what I was looking for.
The Dream Becomes Reality
When the day finally came for me to take the plunge and buy my first rental property, I was pleasantly surprised to find that passive income really did exist. It’s wasn’t just a sham after all! I was able to find some for myself, and there’s no reason you can’t do the same.
The truth is, there was only one reason I ever got to experience this phenomenon firsthand. It happened because I found the right property management company.
Without question, my property manager has had a MASSIVE impact on the success of my rental properties. If I didn’t have a good, competent property management company running the show, I never would have survived in this business. It’s just that simple.
Get to Know Your Rental Property Manger
As I eventually learned from my conversations with other rental property owners, I apparently got lucky with my property manager because they’re not all created equal. Even though some of them are EXPERTS who are very good at what they do, others are quite the opposite and represent all that is wrong with the industry.
Finding the right rental property manager is a big deal! After all, these people are going to be your eyes, ears, hands and feet on the street. Their actions will have a major impact on whether you own a profitable and efficient portfolio of rental properties or a business that is constantly struggling to keep its head above water.
If you decide to hire a property management company, you need to understand who you’re working with BEFORE you give them the keys to your property. When I went shopping for property managers on my first duplex, I used a series of questions that helped reveal just how experienced and competent each candidate was and whether it made sense for them to manage my specific property.
The questions worked astoundingly well. In about 30 minutes, I was able to establish a reasonable level of trust (which was a lot better than gambling with my life’s work just to “test them out” in the real world).
Here’s what I asked them…
Regarding Their Experience:
- What kinds of properties are you most experienced in managing? (i.e. single family homes, multi-family, apartments, commercial, etc.)?
- How many rental units do you currently manage?
- How long have you been active in the property management business?
- How many rental properties do you own personally?
Regarding My Properties:
- In your opinion, what are the best areas in town to own rental properties?
- What are the average vacancy rates in these areas?
- What is unique or special about these areas?
- Do you think these areas are improving or declining?
- When you look at my property (or the property I’m looking to buy), does it strike you as a good investment for the price I’m paying? Why or why not?
- If you were buying a new rental property today, which areas would you focus on and what types of properties would you be targeting? Why?
- How many people are on your staff?
- How is your company’s work divided (i.e. how many units does each person manage)?
- What portion of your maintenance work is contracted out vs. done in-house?
- How does your tenant screening process work? What steps do you take to find good, long-term tenants?
- How does your eviction process work? Tell me the timeline of events, starting from the first day rent is late.
- What are the tenant’s responsibilities in your lease agreement (e.g. cleaning, furnace filters, yard care, etc.)? What happens when a tenant doesn’t handle these responsibilities?
- At what point will you come to me for approval of expenditures? What’s your spending limit?
- In what ways will you be able to improve the profit margin on my properties (e.g. increasing rent without losing tenants, sharing late fees, etc.)?
- Are there any other ways you can add value to my overall operation?
- How does your management fee structure work? What kinds of things are included or excluded (advertising, placement fees, etc.)?
- Can I review a copy of your lease agreement?
- Can I review a copy of your management agreement? (Note: it is very important to understand what’s in this document.)
- Can you give me 3 references? (Be sure to call them and follow up.)
Other Things to Consider:
- How often will you provide me with an accounting statement for my properties?
- Will you deposit each month’s rent into my account via direct deposit or via check?
- Do you have the appropriate license(s) to be a property manager?
- Do your contractors carry their own liability and workman’s comp insurance?
- Are there any regularly occurring times you’ll be visiting my tenants/properties?
While I was at it, I made sure to check out their website and drive by a couple of the properties they were already managing. This gave me a good idea as to whether their properties fell in line with my overall expectations and whether they were going to be a good fit with the types of properties I was planning to buy in the future.
They Will Make Time for You
I realize this list of questions is quite thorough, and in some cases you may run across a property manager who is just too busy to sit down and answer them for you.
I understand that property managers are busy people (I am too, believe me), but I also know that if they have any desire to grow their business and bring on new clients, they will set aside a few minutes and answer them for you.
Some property managers will be pretty obvious about the fact that that they don’t have time for this silly little interview (and that’s their prerogative). If you’re getting this vibe from a potential property manager, you can take this as their way of saying:
“We don’t have time for your business. Get lost.”
If a property manager doesn’t have time to answer your very simple questions in this interview, do you really want to put them in the driver’s seat? Do you think they’ll treat you any better after they’re controlling the fate of your business? Just speaking for myself, it’s not something I’d want to leave up to chance.
Pass the Torch (and Stop Micromanaging)
There’s one more dilemma that many of us have to wrestle with. It’s called micromanaging.
This challenge seems to be particularly difficult for those of us who have already been managing our own properties for years, but are trying to get out from under the burden of it.
If you’re well-versed in the management of your own properties, you probably know exactly how you like things to be done – right? You know how your properties ought to look, you know what kinds of tenants you want in each one, and to be fair, you probably do know what you’re doing — so there is some validity to your thought process.
The problem is, the whole point of hiring a property manager is to make your life easier, and part of this transition process involves you letting go.
I don’t always like to admit it, but sometimes I’m a downright control freak. I remember when I bought my first rental property, every dollar mattered, and I spent every waking moment watching my property manager like a hawk. I was constantly on the lookout for things that weren’t being handled the way I wanted them handled. It was an ongoing internal battle to keep from harassing them with questions like:
- Why hasn’t that tenant been evicted yet??
- Why is this unit rented yet?? It’s been on the market for 2 hours!!!
- Why haven’t those repairs been made?
- When am I gonna get my money?
- Don’t tell me something else is broken!!
It’s true… even with my fantastic property manager (who I still love to this day), I remember a brief window of time that left me wondering whether these guys knew what they were doing and whether I could do it better myself.
If you’re passing your keys off to a property manager, there’s a good chance you’ll have to deal with your own paranoia issues at some point too, so I want you to remember this quote from Tim Ferriss:
“Develop the habit of letting small bad things happen. If you don’t, you’ll never find time for the life-changing big things, whether important tasks or true peak experiences.”
I’m telling you right now, there will be the occasional moments of inefficiency. It’s gonna happen no matter who your property manager is, so just plan for it.
You might lose a few weeks of rent here and there, there’s a good chance they won’t baby the property like you would and there may be some minor maintenance issues that get neglected for a few days longer than you would’ve let them go.
Do you know why? It’s because they’re running a business and they know how to major on the majors and minor on the minors. It’s the same thing you should do if you want to focus on growing your business and enjoying your life. Your business will be FAR better served when you spend your time finding the next opportunity instead of figuring out how to take care of trivial things that have very little impact on your bottom line.
Of course, if there comes a time when you’re getting repeat cases of terrible tenants, maintenance issues that are NEVER getting resolved and you’re losing a noticeable amount of money, you’ve probably got another issue on your hands. At the same time, keep an open mind to the possibility that you may be suffering from the same case of perfectionism that many of us have.
A rental property business will never operate at a perfect level of efficiency, even when you’re at the helm. Give it some time and keep your eyes peeled for patterns of unfavorable outcomes, but in the meantime, keep calm and let your property manager carry on.
Now it’s your turn to weigh in: What are your best tips on how to choose a rental property manager?
Leave a comment below, and let’s discuss!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.