{"id":78416,"date":"2016-06-07T11:00:59","date_gmt":"2016-06-07T17:00:59","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=78416"},"modified":"2024-01-27T10:02:39","modified_gmt":"2024-01-27T17:02:39","slug":"2016-06-07-property-management-lie","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2016-06-07-property-management-lie","title":{"rendered":"The Biggest Lie Investors Are Told About Property Management"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">Like all of you guys, I receive BiggerPockets newsletters in my email box. Like most of you, I skim to see if anything piques my interest &#8212; something did! There was another article on a popular subject of gurus.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The article was entitled &#8220;<a href=\"\/renewsblog\/2016\/05\/31\/21-traits-scammy-real-estate-investment-guru\/\" target=\"_blank\">The 13 Tell Tale Traits of a Real Estate Investment Guru<\/a>.&#8221; \u00a0While I do not necessarily disagree with the article, I have a few counterpoints to offer. So, with all due respect, here are a few thoughts.<\/span><\/p>\n<h2>&#8220;Guru,&#8221; Defined<\/h2>\n<p><span style=\"font-weight: 400;\">According to Merriam Webster, a non-religious definition of the term guru is:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">A teacher or guide that you trust<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">A person who has a lot of experience in or knowledge of a particular subject<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Well, hell &#8212; if the shoe fits, you know what I\u2019m sayin&#8217;?!<\/span><\/p>\n<p><span style=\"font-weight: 400;\">I am a teacher. I know lots of stuff about this business. And lots of you guys trust me. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">Like I said, if the shoe fits! \u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">So yeah, when I see an article like this, I get a smirk on my face.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">And with this, we\u2019ve arrived at the counter punch:<\/span><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-78312\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/05\/best-property-listing.jpg\" alt=\"best-property-listing\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/05\/best-property-listing.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/05\/best-property-listing-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><br \/>\n<em><br \/>\n<strong>Related:<\/strong> <a href=\"\/renewsblog\/2016\/03\/05\/manage-investment-properties\/\" target=\"_blank\">Why I Fired Property Management \u2014 And Began to Manage My Own Investments<\/a><\/em><\/p>\n<h2>Property Management<\/h2>\n<p><span style=\"font-weight: 400;\">One of the biggest lies in all of real estate investing is that you can outsource property management and see any success at all. Unless the project is large enough to absorb payroll, you cannot outsource PM. In fact, one of the most honest lines ever uttered on a BiggerPockets Podcast episode was by my friend and yours Serge S. in the by-now-infamous <a href=\"https:\/\/www.youtube.com\/watch?v=q-SX30T2qZI\" target=\"_blank\" rel=\"noopener\">Podcast 152<\/a> with Burke and me, when Serge told anyone who\u2019d listen in no uncertain terms &#8212; <em>you can\u2019t make money using property management<\/em>, and he is right!<\/span><\/p>\n<h2>For Example<\/h2>\n<p><span style=\"font-weight: 400;\">Let\u2019s just imagine a building with a bit over $70,000 in gross top line. After OpEx, CapEx, and debt service, let\u2019s just say that this building cash flows $18,000\/annum.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Now, if you were to outsource PM, it would cost you 10% &#8212; that\u2019s it, a mere 10%. If all you look at is that number, 10% doesn\u2019t look or sound too bad. And truthfully, the manager needs to make money for their effort, so it\u2019s not like plus or minus 10% is unfair either. Understand, my thesis here is not that all property managers are bad &#8212; only that bad or good, you can&#8217;t afford them!<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Why? Because realizing that this tiny 10% equates to a $7,000 annual fee on a building with $18,000 free cash flow after OpEx. CapEx, and debt service. If my math is right &#8212; and I&#8217;d sorta like to think that it is &#8212; you&#8217;ve just given the PM 39% of your profit margin<\/span><span style=\"font-weight: 400;\">. Now instead of $18,000 of cash in your pocket, you are looking at $11,000 &#8212; can you afford that?! If<\/span><span style=\"font-weight: 400;\">\u00a0you are buying this building and others like it so that you can replace your W2 income that\u2019s killing you, can you afford a PM? Can you afford to give up $7,000 out of $18,000?!<\/span><\/p>\n<p><span style=\"font-weight: 400;\">I know I can&#8217;t.\u00a0Not on this building, nor on any of the others. \ud83d\ude42<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This isn\u2019t rocket science, guys. Like Serge said, you can\u2019t afford property management if you are going to rely on this income. <\/span><\/p>\n<h2>One Exception<\/h2>\n<p><span style=\"font-weight: 400;\">The only exception to the rule is this:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Some of you are extremely highly paid professionals, and I am not talking $100,000 W2 income here. In this case, first of all, you are not buying buildings for cash flow &#8212; you are buying them for depreciation and whatever cash flow you can get. Secondly, your time, in dollar terms, is worth more than the actual and economic cost of PM. So, for you, yes, a PM is a good idea.<\/span><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-78225\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/05\/turnkey-rental-due-diligence.jpg\" alt=\"turnkey-rental-due-diligence\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/05\/turnkey-rental-due-diligence.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/05\/turnkey-rental-due-diligence-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<p><em><strong>Related:<\/strong> <a href=\"\/renewsblog\/2016\/01\/25\/property-management-worth-it\/\" target=\"_blank\">Premium Property Management Really IS Worth it: Here\u2019s What it Can Do For You<\/a><\/em><\/p>\n<h2>Conclusion<\/h2>\n<p><span style=\"font-weight: 400;\">If you are not one of the folks who fit the description in the above paragraph, please do yourself a favor and find someone\u00a0who will teach you every trick I\u2019ve learned about buying the right building, which attracts the right kind tenant. And while learning this may\u00a0cost you some money, I promise it will cost infinitely less than hiring a PM!<\/span><\/p>\n<p><em>Investors: Do you agree or disagree with this assessment of property management? Why?<\/em><\/p>\n<p><strong>Let me know your thoughts with a comment &#8212; and let&#8217;s discuss!<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Property management is a great way to make your rentals a hands-off investment &#8212; right? Think again with this compelling perspective!<\/p>\n","protected":false},"author":810,"featured_media":96166,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7400],"tags":[],"class_list":["post-78416","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-building-team"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/78416","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/810"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=78416"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/78416\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/96166"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=78416"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=78416"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=78416"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}