When you purchase an investment property, you have two management options: property management or self-management.
Regardless of what you decide to go with, rental management includes all tasks related to rent, tenants, property maintenance and repairs, business operations, and more.
Hiring a property management company means you will pay a percentage of your monthly rental income (usually 7–10 percent) to someone else to fill vacancies, respond to maintenance requests, collect rent, and get the property ready for the next tenant after a lease ends.
A Note on Self-Management
Rather than paying a property management company to complete these tasks, some investors choose to retain that management fee as profit and perform all the rental management duties themselves.
Self-managing rental property is a great way to stay connected to your portfolio and your tenants. And if you have long-term tenants and low maintenance (read: new) properties, the job can be fairly easy.
On the surface level, self-management seems pretty straight forward: collect rent, coordinate maintenance and repairs, and find new renters when the current tenants want to move out. Simple, right?
But below that shiny surface of easy landlording are the nitty-gritty details of rental management. What happens when you have a problem tenant? Or when the rent is always late? Or if the rent doesn’t show up at all this month? What about when your tenant decides to move out when you have a vacation planned? Or when a renter drives through the front of the house, leaving you to coordinate a major repair?
It’s in situations like these that deferring the hard work to your property manager pays off. Property managers specialize in the the day-to-day operations of maintaining a profitable rental property and the once-in-awhile nightmare rental scenarios.
Even if you don’t have nightmare renters, a couple middle-of-the-night maintenance calls can suddenly be worth paying 10 percent of the rental income to a property manager to handle.
Here’s a look at some rental management tasks that you may encounter with your investment property. You need to consider these situations when you decide between self-management or property management for your investment portfolio.
When you encounter a renter who fails to pay rent or violates another lease term, you need to move forward with the eviction process. But you must follow your state’s law for legal evictions or you could be subject to fines or worse—like owing your rule-breaking tenant money!
To begin an eviction, you must first identify the lease violations and give your renter the opportunity to fix them. For example, if the tenant has failed to pay rent on the due date, you provide a “cure or quit” notice, giving the tenant official notice to pay rent or move out. If the tenant does not pay rent or move out on the specified date, you can file for an eviction. Each of these steps takes time and energy, either from you or your property manager.
If the eviction goes to court, you will have to take the time to show up to the hearing and then follow through with the ruling.
Evictions are a long legal process. A property manager will be trained on your state’s laws about completing an eviction legally and effectively. Plus, your property manager will be obligated to follow the lease in a clear black-and-white fashion and won’t give in to excuses or sob stories from your renters.
When your tenant moves out, you need to put a new one in place with as little down time as possible. Vacancies are one of the scariest prospects to your bottom line and can be one of the biggest cash flow killers to your real estate investment.
There are several tactics you can employ to avoid rental vacancies, including managing lease expirations rather than waiting for a tenant to send you a notice to end tenancy.
A lot of states only require a renter to give 30 days’ notice for intent to vacate. However, a month might not be long enough to find another tenant to move into the vacant property. Instead of waiting for a renter to send a 30-day notice, a smart landlord or manager will contact the renter 60 to 90 days prior to a lease expiration date to find out the renter’s plan to renew or move. If the renter is planning on moving, you will have extra time to market the property.
If you only have one property and one lease, staying on top of lease expirations is fairly easy. But the more properties and lease agreements you are maintaining, the more time you will need to devote to following up with the tenants to avoid vacancies.
Other ways to avoid rental vacancy include promoting renewals, marketing the property effectively, screening your tenants, and staying on top of turnover tasks.
Raising the Rent
If you have great tenants, the idea of raising the rent can be daunting. It’s not uncommon to ignore the annual re-evaluation of fair market rent when you have a tenancy that is going smoothly. But neglecting a routine rent increase can mean that your property suddenly falls hundreds of dollars behind fair market rent. So when you do decide to implement a rent increase that is above 10 percent, your tenants will be hit with sticker shock, and you’ll suddenly become the target of their anxiety, stress, anger, and frustration.
To avoid extreme rent increases that could price your current renters out of the property, I always advise that you build routine rent increases into the lease agreement. I am talking about $25 each year. A $25 rent increase once a year is easier for most people’s budgets to accommodate, compared with a $100 rent increase once every four to five years.
Regardless of routine or one-time increases, you may have to deal with pushback from tenants when rent increases are discussed.
In order to keep your investment profitable, you will need to raise the rent on your tenants at some point. You need to decide if you want to have these conversations with tenants or if you would rather defer the responsibility to a property manager.
Managing evictions, vacancies, and rent prices are some of the biggest tasks a property manager can take on to help alleviate your responsibilities.
If you started investing in real estate but have lost your motivation to continue to build your portfolio, you might consider hiring a property manager to handle the time-draining tasks involved in self-managing your investments. You need to assess how your time plays into your rental analysis for providing a profitable return on your investment.
Are you considering using a property manager? If so, which tasks are looking forward to NOT doing?
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.