What a Mattress That Caught on Fire Taught Me About Self-Managing vs. Hiring it Out
I get this question a lot: When is it time to shift from self-managing your rental properties to hiring a property manager? As someone who owns a property management company, you might think I’d always defer to hiring a property manager (more business for me, right?!). But that’s not the case. At least, it’s not that simple of an answer.
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Think of owning rental property like a puzzle. In order to complete the puzzle, all of the pieces must fit together properly. Owning and operating a real estate portfolio is no different. How you manage the property is just one of the pieces to the puzzle. Self-managing might work for some smaller, less complicated puzzles or if you have free time. Hiring a property manager often works best as the puzzle becomes more intricate and/or you are too busy with your day job.
Let’s take a step back and look at all of the different things property management entails.
Property Management Requires More Than Rent Collection
The most obvious duties are filling vacancies and collecting rents. But even those duties are more complicated than you might think. For example, a lot more goes into leasing than posting an ad on Craigslist. Leasing can take days or weeks, depending on your procedures and marketing techniques. Beyond advertising, you still need to respond to interested parties, coordinate showings, and then close the deal.
Then there’s the paperwork side of things. Rental agreements need to contain specific legal language in order to protect your assets and ensure compliance with local, state, and federal laws. Depending on the community where you own rental property, there could be a host of disclosures and paperwork the city requires you to provide tenants.
At some point, you’ll have to deal with repairs and maintenance. Some repairs and maintenance are routine; others, like capital improvements, can be more extensive.
And even the best-laid procedures sometimes result in problem tenants. Are you prepared to evict a tenant? Eviction procedures often vary from place to place and far too often require legal intervention. One misstep can derail the entire eviction, particularly if local laws were not followed to a T.
Related: 4 Lessons We Learned as Our Property Management Company Grew
It certainly seems like I’m advocating for a property manager, no?
But I’m not. I just think it’s important for investors to understand all of the work that goes into property management. In some situations, self-managers can take on all of these duties. In fact, some do it quite well—sometimes better than the property managers others have hired.
Let me explain.
The Kid Property Manager Who Wasn’t a Property Manager at All
My foray into property management started when I was in college. I was a placekicker at Cal Berkeley and on full athletic scholarship. Per NCAA rules, I wasn’t able to get a job, but I still needed some cash. So instead of “working” per se, I took a job as the property manager at my apartment building. I didn’t get paid, but the owner knocked a few hundred dollars off my rent in exchange. I wasn’t exactly looking to be a property manager, but at the time, the arrangement worked.
As property manager, I was responsible for all operations: move-in and move-out, all R&M, rent collection, and so forth. There were only 12 or 14 units, so it didn’t need my full-time attention. Or so I thought. I did this for about a year and a half. And for a while, it seemed like the property owner was getting a bargain compared to hiring a full-service property management company.
Then a fire broke out.
One of the tenants threw a mattress outside on the side of the building. I didn’t think much of it. I didn’t know that mattresses were a fire hazard. Why would I know that? After all, I wasn’t a properly trained property manager. I was just a kid trying to save a few bucks.
As I woke to yelling in the parking lot and two-story flames, I had to run through the building, knocking on doors and trying to evacuate tenants from the building. Fortunately, nobody was hurt. But truth be told, the fire never should have happened. It was my fault. My mismanagement led to the fire. I knew there was a good chance we (the property owner and I) could each be sued. Thankfully, we weren’t.
But the point here is that whether you’re self-managing or hiring a discount property manager, you always run the risk that policies and procedures are not properly followed. Self-managers, even those who take the time to learn as much as they can about property management, often don’t know what they don’t know. Some people try to fiddle with the electrical work. Others dispose of asbestos incorrectly. In my case, I didn’t know the liability associated with debris piling up outside the building that eventually led to a fire.
The property owner who I worked for in college thought he was doing the right thing, saving his own time and money by hiring me to manage the property at a discount. It backfired. No pun intended.
Looking back on it, my experience as a property manager was invaluable. I had a crash course on property management that has served me well over the years, as I’ve grown my investment portfolio and then launched property management companies. And that’s why I think self-managing can be valuable, particularly when investors are still getting started.
When Self-Managing Works
In my experience, someone with a full time job can reasonably manage two or four units on their own if they have enough general experience and time. It won’t always be fun. Tenants call in the middle of the night. Invoices need to be tracked. Contractors need to be paid. Sitting in traffic on your way across town to show a unit while your family waits for you for dinner – it can be a real drag. But it gives you the hands-on experience to understand all of the facets of property management, and helps you identify a good property manager in the future should you decide to hire one.
Self-managing can also save you some cash. Most property management companies charge between 8 and 12 percent of monthly rent receipts after you factor in all of the fees. This certainly adds up over time.
Related: 6 Advantages to Hiring a Property Manager (& Why I Wish I Did Sooner)
I get it. I’ve been there, too. But if you’re trying to grow your rental portfolio—if you really want to build an empire—at some point, you need to build a team and back off. Very few people can grow their portfolio on their own.
An important caveat: Be careful to screen property managers carefully. Sometimes the “cheapest” property manager can be the most expensive because of how poorly your property is managed. Vacancies and R&M expenses can quickly get away from you if not managed properly—just look at what happened when I was managing the apartment building in college at a discount. The fire was much more costly than hiring a skilled PM.
What’s the Value of Your Time?
There are only so many hours in the day. In order to quantify the value of a good property manager, I try to calculate the value of my time.
Say I earn the equivalent of $50 per hour during my day job. Say it takes me 20 hours to get a unit in rent-ready condition and leased. This is about $1,000 worth of my time. A good property manager, one who gets units in rent-ready condition and leased on a daily basis, can probably do it in half that time and for a fraction of the cost because of the systems he has in place. Yes, I could save a few hundred bucks. But how would I spend those 20 hours of my time otherwise? I can think of many better ways.
As my rental portfolio grows, I’ve focused on building a rockstar team of people to help me. I like to be hands on, but I prefer to be hands on in different areas of the business. Personally, I really like the real estate investing side of things. I like to find properties and craft a plan to reposition them. I like to hunt for the dog and turn it into a gem. I like strategizing the best ways to capitalize an investment property: How much equity versus debt should I be lining up, and what type of debt? Should I go for short-term or long-term financing? These are the aspects I find most fun about real estate investing. Life is too short to spend my time otherwise.
The Most Important Lesson About Risk
Even if the value of my time were the exact same or less as the cost of hiring a property manager, I’d still think about the risks of self-managing. When I only owned a few units, my risk was limited. But now, with more units under my belt, risk grows.
And if there’s one thing I’ve learned about risk, it’s this: Risk, in real estate, doesn’t matter until it matters.
You might be finding and screening tenants illegally for years before someone calls you out for violating a Fair Housing law. Maybe you’ve fixed 40 electrical outlets with no problem—until there’s a problem. Or maybe you let debris stack up outside. I did. It had never been an issue before—until it was. I didn’t follow local codes correctly and a fire broke out as a result. It can happen to anyone.
There’s value to self-managing your units. The experience you get, especially as a novice property investor, is invaluable. If you only want to own a handful of units, maybe this is the strategy you stick with over the long-term. But if you’re planning to grow your portfolio, you’re eventually going to need some help. Managing more than a few units quickly becomes a full-time job, and anyone who tries to manage it in part-time fashion exposes themselves to too much risk. One accident can cripple the entire portfolio you worked so hard to build.
What’s your take—when do you know it’s time to make the switch from self-management to hiring it out?
Let me know your thoughts with a comment!