High Cap Rates Question with Property Manager

6 Replies

I'm new to the website and have enjoyed the wealth of information I've already come across - thank you to everyone who contributes here.  With a goal to maximize income so I have greater freedom financially my question is surrounding high cap rate properties.  In general I've gathered the higher cap rates usually come with lower income, more hassle factor rental properties (generalization of course).

That said, all the horror stories of being a landlord are surrounding stuff breaking, calls in the middle of the night to fix stuff, evictions, etc.  This stuff, one would imagine is more prevalent on high cap rate properties.  That said, what if your plan is to pay a property manager anyway?  I'm looking for this to be truly passive income.  I'm an investment adviser and the main draw for me to real estate is frankly the % of income you can return, safely, without worry that this withdrawal unsafely draws down my principal (Show me a mutual fund you can take 10% off of year in and year out no matter what the market does and that you won't deplete).

So if you're hiring a property manager who handles all the fixes, fields all the calls when stuff breaks, screens tenants, fills vacancies, evicts people who don't pay then how much of this really matter...doesn't it come down to the numbers?

***I'll concede that if the property is a piece of junk and 30% of gross rentals are going to repairs than obviously the Cap Rate in a lot of instances is mis-stated.  I have been following the 50% rule as I shop around.***

@Brad Schueler

Technically you are correct, except for it never works out that way.  The property manager is not the owner and will never act as one.   They can quit, they can mismanage, they can stop collecting rent.   Let's say a fire breaks out on your property, are you really going to leave it to the property manager to assess the damage and call the insurance company?  

Think about this like a business.  You are a business owner, and your property manager is your employee.  There ARE going to be situations where you would have to personally deal with issues.  I can't think of any employee (property manager) that I just blindly trust to act in my best interest.  

You can have these same issues of poor management, system failures, evictions, etc on higher end properties as well.

@Brad Schueler Many property managers won't be willing to take on these kinds of properties.

You are better off hiring a management company rather than just trying to find one person. The company will have maintenance personnel that can fix issue and the manager that deals with the budget. You can negotiate the terms of what they handle and you handle as well.

Even the best property manager can only do so much about long turn around times, higher than normal expenses, etc.  

If you are looking for truly passive income, then Class C or D (high caps) would not be for you.  You still need to manage the property manager and probably much more with these high caps than with Class A or B properties.

Look for Class A or B so that most property managers will be available to manage them (some of the best companies don't manage below a Class B).  You still need to follow up regularly with the property manager/company.

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