Real Estate Deal Analysis & Advice

The Biggest Mistake I Made as a New Investor (& How You Can Avoid It)

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227 Articles Written
newbie-mistake

The biggest mistake I made as a new investor was not hiring a property management company. When I purchased my first single-family home, I had no idea the amount of work that came with it.

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As you may have heard, tenants can be a headache. They aren’t all troublesome, but most of them can be. Yes, a management company charges a fee from the gross rent, but the peace of mind it gives you is worth the money and time. You can always make more money — but not more time.

Distancing Yourself

I once told a tenant to feel free to call me. That was a very bad idea. Every little thing that happened, I got a call. Most of the calls were outside the realm of my management of the property. In fact, they were usually personal matters. I do not have time to be a shrink for tenants. This is why it’s good to have a property management company.

Related: The 6 Most Common Mistakes New Investors Make (Including Thinking It’s Easy!)

Being an investor, an owner, and a property manager generally proves too many hats to wear. Now that I have a management company, I can just oversee them and delegate tasks to them. That way, I can focus less on micromanaging the properties I already own and more time purchasing new properties. Focusing on higher value activities is what drives business.

Other People’s Problems

Some people actually enjoy being involved in other people’s crises, and often those people make good property managers. They actually want to hear about their tenants’ problems. To them, it’s like watching a talk show. I am not one of those people. I love investing, but that does not include hearing about why your cousin’s dog destroyed the carpet in your guest room. Or how your nephew doesn’t have a job. Or how your sister is dating the wrong guy again.

Related: The Rookie Landlording Mistake Most New Investors Make

Investors invest. Property managers manage properties. That requires solving the everyday issues that occur on a property, which necessitates having the time to listen to tenants’ problems.

[Editor’s Note: We are republishing this article to help out our newer readers.]

Investors: Do you hire out management for your properties? Why or why not?

Let me know with a comment!

Sterling is an multifamily investor specializing in value-add apartments in Indianapolis and other Midwestern markets. With just under a decade of experience in the real estate industry, Sterling was involved with the management of over $10MM in capital, which is deployed across a $18.9MM real estate portfolio made up of multifamily apartments. Through the company he founded Sonder Investment Group, he owns just under 400 units. Sterling was featured on the BiggerPockets Podcast and has been contributing content to BiggerPockets since 2014, with over 200 posts on topics ranging from single family investing and apartment investing to wholesaling and scaling a business.

    Curt Smith rental_property_investor from Clarkston, GA
    Replied almost 4 years ago
    Hi Sterling, I self manage our 29 rentals, so I know first hand what you are talking about, re getting too much exposure to the tenants problems. And I agree that one solution is to give up 10% of the rent and half or more of a first month to a property management company (or if your own PM then you are transfering the rent from your bank account to that of an employee). Lets step back and determine what is is you want solved? No phone calls day and night about non-maintenance items. We agree with this goal! This is how we solved it. It starts with understanding where do tenants who don’t have daily drama live and what they want. To shorten the story quite a bit: – Buy rentals in top high school districts. Good renters care about education of their kids. Good renters who care about education also have educated themselves and they have good jobs and in general they have less drama in their lives. – Use a list of “renter qualifications” that includes: must have satisfactory recommendations by the past 2 landlords, no evictions, no charge offs in the credit report (MrLandlord.com). – low drama renters pay their bills, don’t get evicted, have past landlords who give them thumbs up, want their kids in good schools and have good jobs. I never hear from my tenants in our rentals! I don’t need to push them off to someone else (for a cost). Our other properties which numerically we have more of than the rentals are “rent-to-own” tenants. We moved to buying super cheap homes in small towns. We definately would have your problem if we also didn’t do something else when we started growing our portfolio with cheap homes more then 1 hr away. We moved to rent to own. Banks don;t finance these cheap houses so we got into seller financing (Dodd Frank compliant) after 12 months. It was instinctive for us to take this risk, believing that “bounce back” families will also be as low drama as families who prize education (our rentes in top high school districts). This has been 99% true. They fix things themself, only call with a roof leak or AC stopped working but occationally they do have financial struggles. The baby got sick and because we don;t have health insurance the Dr visit and prescriptions ate the rent. You’ve heard this story, it will always be in folks lives who don’t have good office jobs with insurance. So rent-to-own has also culled low-drama renters as yet another way to filter the pool of renters down to: low drama, low stressed lives renters. So we don’;t get those “personal issues” calls either (mostly) but its because we twisted the system on it’;s head and asked how do we solve the problem without just pushing the issue off onto someone else. Design the system to be “drama free” intrinsically. The general solution is: culling down the renter pool to stable, no stress, no drama renters. There are more than just 2 ways I’m sure like over fixing, charge higher rent (counter intuitive), but start with buying in a location where low drama renters want to live. Or offer a solution low drama renters want: a path home owner ship. We do agree with creating one’s own PM company, and are doing so. Not at all because of pushing problems off onto someone else. We will both be employees of the PM company that we will have a management agreement for a fee with ourselves. We are doing this to have the right to create a solo-401k that each of us will move our SD-IRA houses into. It’s another topic of why I hate managing rentals within a self directed IRA custodian and why moving rental ownership from our SD-IRAs into our solo-401k (with check book control) has so many advantages. Just google why a solo-401k. I mentioned buying in good school districts… Let me drop the other shoe. Landlords who buy in the cheap areas of town acknowledge that they get the “drama tenants”, but what this blog didn’t mention is that my math of those landlords portfolios doubts that they make much money either (if they do). One is lured into buying in the cheap areas by the theoretical spreedsheet math cap rate. Yet I rarely hear about the trailing 24 months ACTUAL cap rate. After 3 turn overs, damage, theft of appliances, older homes have higher CAPEX. Until the cheap areas landlords open up their books, I seriously doubt buying cheap houses out performs buying houses in better school districts, over fixing a bit and culling for young families who never leave. My phone never rings and I pretty sure my bank account grows faster as well. Just offering some useful food for thought for the readers. Tnx Sterling for opening up a useful topic!
    Alice Wang
    Replied 10 months ago
    Thank you, Curd, for sharing your down-to-earth experience! Super helpful!!!
    Sterling White rental_property_investor from Indianapolis, IN
    Replied almost 4 years ago
    Those are all great points you stated above. I totally agree. Thanks for shining some more light on the subject
    Brett Snodgrass investor from Indianapolis, IN
    Replied almost 4 years ago
    Great article Sterling. So true!
    Sterling White rental_property_investor from Indianapolis, IN
    Replied almost 4 years ago
    Good to hear from you! Do you currently use PM company or self manage?
    Douglas Skipworth rental_property_investor from Memphis, TN
    Replied almost 4 years ago
    Thanks for sharing, Sterling. I like the way you elaborated on the concept that investors always have to pay for property management. They either pay with money or with their time. When I had more time, I self managed. When I needed more time, I hired a property manager. Both have their pros and cons, but at the end of the day, it comes down to what is going to be help me grow my business. These days, I need more hours in the day to keep things moving forward so using a professional manager allows me to focus on working on the business instead of working in it. In the old days, it was the opposite (that is, I had a lot more time on my hands so I handled all of the day-to-day property management myself). In many ways, neither option is ideal so it just comes down to the lesser of two evils.
    Douglas Skipworth rental_property_investor from Memphis, TN
    Replied almost 4 years ago
    Great article, Sterling. I like the way you elaborate on the concept that investors always pay for management . They either pay with money or they pay with their time. When I had more time, I self managed. When I needed more time, I hired a management company. Both options have their pros and cons so it usually boils down to whether time or money is more important to an investor at that moment. Today, I use professional management because I need to focus on working on my business instead of working it in. In the old days, I had a lot more time so I was the one-man property management company for my properties. Neither option is ideal. I view it as which is the lesser of two evils based on the opportunity costs I have in front of me.
    Douglas Skipworth rental_property_investor from Memphis, TN
    Replied almost 4 years ago
    Great article, Sterling. I love how you elaborated on the concept that investors always pay for management. They either pay with money or they pay with their time!
    Andrea Shields investor from Lehigh Acres, Florida
    Replied almost 4 years ago
    I personally manage my homes myself. I am still growing my business and do believe tenant selection and doing your homework may not completely solve all the drama but will make a big difference. I work a full time job and my spouse manages the day to day issues. I also refuse to purchase in certain zip codes ( no rent, stolen appliances, property damage) its just not worth the hassle. PM have a poor reputation and I have seen this first hand. I refuse to give my tenants less by hiring someone and paying them for not doing their job. Great article!
    Sterling White rental_property_investor from Indianapolis, IN
    Replied almost 4 years ago
    Thank you for the read. Great to hear about the above criteria you have set in place. Totally agree with your viewpoint. Looks like you and your husband make a great duo! Best of luck in the new year
    James
    Replied almost 4 years ago
    Sterling, Thanks for making me LOL, i.e. “I do not have time to be a shrink for tenants. ” Like Curt and Andrea, I self manage my properties and have done so for years. I learned quickly and now everything is on autopilot. I often feel sad when I open my email for days and even months on end and don’t have any request from a tenant. They pay their rent like clockwork and renew their leases year after year. It’s time for me to buy another property or look for more real estate deals that can keep me busy. Happy 2016 Everyone!
    Sterling White rental_property_investor from Indianapolis, IN
    Replied almost 4 years ago
    Glad you were able to get a kick out of that line. Great to hear about your success and I wish you the best of luck in this new year! Now Go And Be Great!
    Dawn A. rental_property_investor from Milwaukee, WI
    Replied almost 4 years ago
    I manage the properties myself. Sometimes people will make an off hand comment about something happening in their life, but that’s small talk. Otherwise usually unless there’s a repair, I don’t hear from them. People usually don’t want to become best friends with their landlord.
    Sterling White rental_property_investor from Indianapolis, IN
    Replied almost 4 years ago
    Thanks for the comment Dawn. Totally agree with your comment. Glad to see the self-managing has been working for you in your business. I wish you the best of luck in 2016.
    Michael Boyer investor from Juneau, AK
    Replied almost 4 years ago
    Yes, DIY management is not for all. There are some basic diagnostics you can do to see if this is the case for you. One of my simplest … If you can’t maintain your own house, you probably don’t want a half dozen more to handle, for example. That is just one example on the property side. You can also gauge your ability to be a good DIY landlord on the people side, too…Your ability to navigate the people pitfalls will depend on your interpersonal skills, tenant selection strategies, and others factors. Best practices like some mentioned above help…as does experience working with all types of people (or at least those in your market). About any personality type can be a good landlord with the right communications and conflict management strategies, however. Using the right scripts and cues, for instance, can prevent having to enter a tenant talk show in my view. Some of the best lanldord books and resources also cover communication strategies. That said, I do like using management as a partial exit strategy to escape the day to day management, but I prefer owner financing (for paid off properties);if I am not going to manage, I prefer the note and first mortgage, as I think the agency costs can exceed the ten percent fee unless you have a great manager… Neat topic and some great comments here …
    Sterling White rental_property_investor from Indianapolis, IN
    Replied almost 4 years ago
    Great points up above especially “If you can’t maintain your own house, you probably don’t want a half dozen more to handle” I agree fully with this statement. Thanks for the read! Best of luck in the new year!
    Bryce Ewing rental_property_investor from Lincoln, NE
    Replied over 3 years ago
    I agree with most of this! I am a 20 year old intern at s property management LLC here in Lincoln that has mostly low income housing. The amount of drama and damage reports I handle is ridiculous. I feel like the owner is losing a large amount of money, but it’s part of the game I suppose. I have had a great experience and learned how to be a landlord at such a young age. I will probably manage my own properties in the future because I plan on buying in higher income areas, or renting to middle-upper class college students who have financial backing by their parents. I have found these students pay on time much more often than low income families, and they are willing to rent the same quality of homes.
    Curt Smith rental_property_investor from Clarkston, GA
    Replied over 3 years ago
    Hi Bryce, you are seeing first hand what my comment (the top comment) is talking about. And you instinctively are moving up scale to avoid drama and the need for a PM. A PM is only “the” solution when you haven’t thought about avoiding this problem in the first place. In other words, The need for a PM is mainly NOT because the owner does not have time. I have a day job and no time as well, yet i self manage 34 rentals. So why do I not need a PM? Because I thought about why one needs a PM and bought houses that had characteristics that lead to low effort and low numbers of touches per year. Bryce offers student housing as one tactic to get rent paid on time. There are many other tactics, some I tipped above.
    Andrew Lee rental_property_investor from Cleveland, TN
    Replied almost 3 years ago
    Bryce, I think you’re on the right track. I’m a university professor at a private college, and I bought rentals in a nice nearby neighborhood to rent out to the college students. Usually my tenants end up having first been top students in my classes, so I know their character and maturity. It’s worked well for 6 years now and I have a wait list of students wanting to move in as the current batch graduates. So far it’s been consistently low-maintenance for me doing the management myself.
    G. Brian Davis from Baltimore, MD
    Replied almost 2 years ago
    I’ve been on both sides of that coin. I’ve not hired a property manager (and then wasn’t available enough to do a good job managing my units), and I’ve hired a bad property manager. A good property manager is worth their weight in gold!
    Grant Arias
    Replied almost 2 years ago
    Hi Sterling, I was able to get involved in a multi-family deal with about 20 residents. It is absolutely a balance you need to find and if you are looking to keep investing do not give them your number! I believe we got lucky and we entered into a high end private university down in Texas. The rents are not very high but a little higher and it weeds out most drama residents. I am definitely not the most experienced in this but I already see the difference.