Originally posted by @Brett Vandervort:
@Eric Fernwood : Excellent and thorough response! It sounds like the best thing to do right now is, painfully enough, nothing. I'll keep saving so I won't need a loan from my parents once I do find the right deal. I do have a couple of questions though. Why is managing your own properties such a bad idea? Wouldn't it make it cash flow better? I respect your experience and opinion, but I've had other investors tell me to manage my own, while others say have a management company do it.
Sometimes the hardest thing to do is to do nothing at this time. Based on what I know, doing nothing appears to be the right choice at this time.
Why should you use a property manager? Most new investors think that the only value a property manager provides is collecting the rent. Absolutely not true. A good property manager contributes value at all stages of the investment process. I created the following graphic listing some of the property managers contribution by phase:
Market Evaluation
Many people spend a small fortune on real estate seminars, coaches, books, videos, etc. While the lessons learned through these channels can be very valuable, little of it applies to any specific local because they are all different. So, what might work great in Portland, Maine might be disaster in Houston, Texas. Successful investing requires local knowledge, not general knowledge. The local knowledge you need includes:
• Type: Condo, high rise, single family, duplex, single story, two story, etc.
• Configuration: Two bedroom, three car garage, mud room, etc.
• Location: Usually a very specific area. For example, west of 23rd St and south of the river, etc.
• Rent Range: If the majority of the population to which you want to rent are willing and able to pay $1,000/Mo to $1,300/Mo. you should only be looking at properties that you can purchase, rehab and profitably rent in the same rent range.
• Property laws, taxes and regulations: This is a catch-all category of local/state issues that affect landlords. An example is evictions. In Las Vegas an eviction typically takes less than 30 days and costs less than $500. Clients tell me that in California, if a tenant knows what they are doing, an eviction can take up to a year and can cost thousands. Nevada and Texas have no personal income taxes so a 5% return is actually a 5% return. If you buy a property in a state with a high personal income tax rate, you need to factor this into your actual return.
Where can you get the local knowledge you need quickly and at no cost? Property managers. Every day they work with properties and tenants. Property managers know the type, configuration, location and rent ranges that rent best. They are also experts on the local/state issues that affect landlords like evictions, rent restrictions, taxes, etc. So, if I were considering investing in a market, I would interview 3 to 5 property managers for the position of my (future) property manager. I have a list of property manager interview questions and if you (or anyone else) would like a copy, drop me an email.
Property Selection
I have owned 20+ investment properties and for the last 7 years I have almost exclusively dealt with investors. Six (and sometimes 7) days a week I am involved with finding properties that meet the dual criteria of sustained profitability and probable appreciation and overseeing rehabbing properties for my clients. Based on my experience, I feel I stay well informed on the rental market here in Las Vegas. However, I NEVER consider a property unless the property manager approves. She has saved us on multiple occasions by alerting us to properties that rent poorly. Always have your property manager review and approve every property you buy. Remember that they are on the same side as you; the last thing they want is another un-rentable property. Also, get their opinion on rent and time to rent.
Due Diligence
During due diligence, two people you want in the property ASAP are the property inspector and the property manager. The property inspector will produce a report of what is defective but does not care about the property cosmetics. If the walls are painted back and ceiling pink, they do not care as long as the paint is not pealing. The property manager will provide a report on what needs to be changed cosmetically in order to make the property market ready. In general, I do most of what the property inspector recommends and all of what the property manager recommends.
On rare occasions, the property manager will notice things about the property that will make it an undesirable rental property and you may cancel due to their recommendation. This "final" evaluation is very important.
After close of escrow
Light rehab & cleaning
Most property managers I have worked with will handle light rehab: replace carpets, paint, minor plumbing, etc. In my case, I have a trusted team of contractors that can do the rehab faster and at a lower cost than most property managers.
Marketing
The only way to find tenants is through marketing. The property manager I work with posts the images and description on the MLS, Craigs List, Postlets, etc. Marketing is not just about posting the property's photos and information on various marketing channels, they must also follow up on each lead and get potential clients into the property and get them to submit completed applications.
Prospective Tenant Screening
Proper tenant screening is critical to finding good tenants. Some of the aspects of tenant screen include:
• Credit - These days may renters have bad credit but the key is understanding why their credit is bad. A recent applicant had a combined credit score in the mid 500’s due to medical collections. Her child got very ill and she had no where near enough money to pay for what was needed and the result was medical collections. If we did not consider the medical collections, her combined credit score was in the low 800’s. Another applicant had a reasonable credit score but upon further examination we discovered that in the past they had two collections for back rent.
• Criminal History - If the applicant has any criminal history (federal, state, county, sex offender, etc.) you do not want them.
•Back Child support & Alimony - If it comes down to meeting a court order or paying rent, you lose.
• References - The current landlord is not relevant because if the tenant is a problem, they will likely give good reviews just to get rid of the tenant. The one that matters is the prior landlord. Essentially, you ask if, “Would you like them back?” If the answer is yes, we may have a winner.
Collect all the rent on schedule
The most important task of a property manager is collecting the rent. The process is likely different where you are but below is a simplified description of how it works in Las Vegas:
1. Rent due on the 1st
2. On the 3rd a pay or quit notice is pasted on the front door.
3. A few days later an eviction notice is filed.
4. About 20 days later the tenant is removed from the property with the assistance of the constable.
While the above sounds easy, if the tenant does not pay all of them on schedule it takes a lot of time. And, while you may be willing to accept sad stories in lieu of the rent, property managers have heard it all and they want the money. Are you really prepared to do this in the face of a really, really good excuse for not paying the rent?
Long term tenant/cost management
There are multiple aspects to this issue including whether the tenant's living habits are damaging the property. If so, then the property manager needs to be proactive on this. How would you know if there is damage? I know of two ways: 1) Whenever there is a need for maintenance, the property manager's handyman enters the property for the repair and reports back to the property manager if they see any issues. 2) Periodic inspections. In the lease agreements I have seen the landlord has the right to enter the property at reasonable hours with a 24-hour notice. Most landlords do an inspection at least once a year.
Asset preservation
All properties need preventative maintenance. For example, if there are tree limbs toughing the side of the house or the roof, long term you are going to have (expensive) problems. Periodic HVAC service, guarding against snow buildup, etc. Small problems can become expensive disasters if they are not corrected early.
Brett, I hope the above explains some of the contributions of a good property manager which I believe to be far beyond collecting the rent.
Best Wishes,
