Experienced Out of Town Landlord vs. Property Manager. Who wins?

47 Replies

Who would have more BOTTOM LINE PROFIT at end of the month?

Experienced Out of town landlord vs. "turn key" Property manager ?

Assumptions

1. Each has EXACT same hypothetical properties to manage

2. Properties are in "C" neighborhoods.

3. Mix of private pay and section 8 tenants.

Are you asking if a landlord managing his own properties makes more money than a landlord who hires a property manager? The landlord who manages his own properties doesn't have to pay a property manager so all things being equal, the experienced out of town landlord makes more money. It really doesn't matter who the tenants are. 

Depends on what exactly you mean by "profit". I may save 10% of the properties' income each month by not paying a PM, but what is my time worth that I lose by having to manage it myself? I can pretty much promise it's worth more than the 10% of rental income. So in my book, I have a wayyyy higher bottom line "profit" by using a PM because I don't spend one minute of my other-occupied life dealing with properties.

Major value of time vs. dollars confusion in your question.

@Ali Boone

thanks for the response. In my experience, it just doesn't take that much time to manage rental property. If it does, it's being done wrong. Also I have found that the downside to using a property manager is MUCH more than 10%. It can go as high as 30% to 40% with additional "repairs" and phantom service calls.

I have found it easier to manage the tenants directly as opposed to managing the manager. If you are ONLY paying 10% then that's great. My hunch is you are paying more than just the 10% in fees and "repairs" but I could be wrong. :)

@Rob Beland

agree

Honestly as much I hate to say  it depends on the demographic. I handle my own properties including those located across the country BUT I class A property tenants and not the ones that you mentioned. My tenant basis allows for a lot of "trust" because they have huge skin in the game. I am not sure I would be able to obtain the same success in my current management styles and therefore margins dealing with the demographic you mentioned. 

Here are two articles that I have written for BP that give an idea on how I self manage from afar and why I am not sure this would work for a different demographic. 

https://www.biggerpockets.com/renewsblog/2015/10/1...

https://www.biggerpockets.com/renewsblog/2015/11/2...

All of my properties, except one, are being managed by Property Managers.  And I will compare my returns to ANYONE who claims they can manage from afar!  Remember, IF you have a local person to show, inspect, keep an eye on and otherwise check on your property, THEN YOU HAVE A PROPERTY MANAGER.  People claim they manage their own properties from afar but then they say they have a local agent to show it when vacant, they have a local handyman to make repairs and they usually have one or two more people that help watch the property.  Managing from afar means that YOU get on a plane and stay for a week or more when the property is vacant, to do clean up and make ready, to advertise, to show and to rent it out.  Yes, month to month collecting rent is easy and if that was ALL that was needed, I would manage ALL of my properties from California.  But let's say a storm blows through Oklahoma and Texas and damages 8 of my properties.  How am I going to coordinate repairing damage to properties I own in two different states? The cost of that headache is mind boggling!  And yes, it happened this year!  NO THANK YOU.  I was in Russia when a rental of mine failed a Section 8.  Would YOU rush home or do you have boots on the ground locally to help you?

i think the case can be made on both sides depending on who is doing the managing.  this is after all a people business on the management and the tenant side.  i have owners that could manage themselves and save a bit of money but as Ali said they value their time quite a bit.  Also I would say that in some cases having a manager is a sort of insurance policy.  While I may not need to do much on your property for an extended period of time there are the days/weeks/months when drama happens and I spend time daily resolving your issues for you.  I have spent this week dealing with ice damage for over 35 owners.  I have gotten trees trimmed electrical service repaired and skylight leaks stopped all in just a matter of a few days and they have not had to lift a finger or even think about it.  There should be some value in that to many folks.  I guess it may come down to your tolerance for stress in your like?

Originally posted by @Faisal Sami :

@Elizabeth Colegrove

I think it can work for lower demographics as well, especially with guaranteed government rent. We are doing it. Most landlords get into trouble because of neglect. 

 True, but I count on my tenants alot to take care of the unit and call me when there are issues/meet venders. A few investors that i have know who have worked in the demographic (FYI I don't know anything beyond beer conversation) they needed boots on the ground to help maintain the property and ask questions. So that is the side I don't know about long distance management. Plus my tenants show future tenants units etc.

"Plus my tenants show future tenants units etc."

I am curious, do your tenants expect some type of compensation for showing to future tenants or do they do it out of the goodness of their heart?  If so, then your tenant is also a property manager.  I own 20 houses that I have NEVER seen, and the other's I have seen were mostly by accident or I used to live in them.  I went and saw one rental this year, out of state, and was so upset I almost started cleaning up the tenants messy house.  My personal standards are much higher than a PM's and it should be that way.  Paint and carpet fix 90% of move out issues!  What is the real irony here is that I have gone back to work, and I work for, get this, a Property Manager.  We manage about 4,500 units!

Yep, you're wrong :) If you are getting phantom calls and up-charged repairs, you are working with a bad PM. Which, in your defense for suggesting it, is often the case because so many PMs are bad, but there are good ones too. Any sign of up-charges like that or suspicious repair calls should be a major red flag into the worth of your PM.

To each their own. If you are that good at landlording your own properties, that's awesome and I would say definitely don't use a PM. But not everyone would be that good at it, or want to do it, so not sure it's fair to completely discount (ha, pun) the idea of a PM. I'd feel really bad if you convince someone that landlording their own properties is the way to go and they were horrible at it and cost themselves a fortune and a headache trying to do it. I think education should be given for both ends of the spectrum. There is no "right" way, and no one way that saves more money than another because every situation is different.

@Ali Boone , appreciate the thoughts. I used to think like that too. That somehow you needed to be an "expert" or a "professional" to landlord your properties. 4 property managers later when I finally HAD to do everything myself , I found it MUCH easier in my case to manage my own tenants than managing the manager.

I think you hot the nail on the head: there are a lot of bad property managers out there. You mentioned there is risk in someone reading this and thinking they could landlord their own properties but the reverse is also true. It's funny how everyone says property management works IF you have a good property manager.. That's a really really big if. I have seen the same exact thing happen to investors namely lose a fortune in properties managed by manager only to find out many months later they are being taken for a ride. Many a would be investor has given up in this fashion as well and lost tens if not hundreds of thousands .

Key I think is do your own due diligence but I think people put WAY to trust and faith in the hands of property managers when with a little effort, study and patience a lot of the same work can be done more cost effectively.

Bottom line in my experience : NO ONE is going to care as much about your property as you are. :)

@Mike McKinzie
I think we are talking about two different things. What you are describing to me as a handyman or a realtor who leases a unit for a landlord is more better termed a "landlord extender". There is no law that says landlords literally can't use ANYONE to help them. To the contrary a landlord using landlord extenders is totally different than a peppery manager sitting in the income/rental stream.

Your landlord extender does not have his/her hand in the cookie jar. This is a MAJOR problem with managers. IF they agree to have rents directly deposited into your account FIRST that is a different story. That's a manger worth talking to.

Faisal

You make my point exactly.  Whether you have a full time Property Manager, or just use a short term Property Manager to show or repair your rental,  you are NOT managing your property from afar.  I stand by my statement that if you have a local person assist with your rental, you are NOT self managing.  I hear other people talk about self managing and then they talk about their office staff.  Your so called "landlord extender" is a PROPERTY MANAGER.  You, the investor, is relying on them to check your property, repair your property, show your property, etc...  So all you do is collect rent.  A TRUE self manager will jump on a plane in Los Angeles, fly to Pittsburg, unclog the toilet, and then fly back home.  If an investor does not do that, then he has a Part Time Staff to assist with managing his/her homes, and he/she PAYS for that service.  And they are not self managing.  I have only been in the Real Estate Investing business since 1979 so maybe you have been at it longer than me, but in my experience, from California to Tennessee, a good Property Manager will MAKE you a lot more than they COST you.  Three of my last four purchases were due to my PM's giving me a good deal BEFORE it hit the market!

That's true, and all good points. The only part left out of it is the case of when someone has zero interest in dealing with their own properties. That'd be me! I'd rather hire and fire PMs all day long than deal with a property myself. Plus I'm 2200 miles from my property, so it becomes a little less feasible (dependent on how nice the property is and therefore the tenant quality....that makes a big difference). Even if I was local though, no thank you and not worth it.

But the overarching point is--which supports both of our sides of it--education is everything. Either know a ton about PMs and how to sniff out the bad ones or when to get rid of bad ones to prevent losing a ton of money, or know how to properly landlord. I'd even throw in there education on knowing risk factors--self-managing a B+/A property in a B+/A location is wayyyy different than self-managing a C/C.

You'd think with all the education we need on all of these topics, SOMEBODY would have implemented these teachings into the school system! :) Oh well, maybe next century.

@Faisal Sami   you really like to stir the pot  :)... section 8 is anything but government GUARNTEED .. and that rental demographic will eat most peoples lunch if they do not live in the immediate area.. I had 300 of those tenants I know a little about it.

for you to opine that its easy is really doing a disservice to many who really don't know any better... You can do it because your there its your business etc.

Out of area investor who owns a few rentals.. are going to get killed without a great PM we all KNOW THAT  and if we all DO NOT KNOW THAT we SHOULD   :)  keep selling it brother. 

Ali

Right on.  I could manage my own properties, with on site help for repairs and showings, but I just do NOT want to.  I probably know more than 95% of the PM's out there as I have owned my own PM business and I currently work for one.  But my current work is 100% accounting and ZERO tenant work, ZERO property work and ZERO field work.  Some folks enjoy landlording, and I did it for a long time.  But now is the time to enjoy life after all those years and let someone else manage my investments.

When you are a small time real estate investor, a pm is not necessary and the price of having one can spell the different of you being able to hold on to your properties.

Now when you becomes a big time operator, then you can probably can afford one because you have sufficient cashflow.  When you are small, if there is capital repair to made at the property, you don't have the comfort of scale of operation to spread the cost over a number of properties.  This where the large scale operators seems not to understand.  The beginners needs to learn property management themselves to keep expenses down and stands a better chance of surviving without a permanent pm on the payroll.  For the small investor, the property manager is a direct hit on the button line and may be the Waterloo for him/her.  Feet on the ground does not means you must have a pm with their hands in your pockets every month.  Some months you will not even hear from tenants for anything.  At the beginning when you are small, the pm is a liability not an asset.  As you get more properties at some point self management may become a burden.  This is the time you should look to delegate property management to a pm.  Also you will be more able to distinguish better the good pm from the bad one.  You will be able to interview them and more able to root out the bad ones.

@Jay Hinrichs  ,, lol,, I do stir the pot. All I can say is that I don't find it THAT hard as people make it out to be. I used to worship at the altar of property management but after pulling back the curtains a bit I realized that it's mostly common sense stuff mixed with failing your way to success. I am certainly no big Whig with 300 plus units or 10,000 posts (kudos to you for getting there) but like with any business it's about people , process and product. There are many a successful landlord that don't do any physical work and live far from their properties. Im not the first nor the last. 

I'll not only sell the dream @Jay Hinrichs,, I'll live it too ;)

@Faisal Sami depends on asset class the reality is most BP turn key or cash flow investors are looking for those 8 to 14% returns those get you into a rental class of Cand maybe some B... and anything that has to do with HUD rents are next to impossible to manage if your not living there , I am down to I think 9 A class rentals that I have and I self manage those.. but those are not section 8 those completely different tenant base.. I mean these folks have checking accounts ..

@Faisal Sami , sorry but there needs to be some clarification are you 30 minutes away from your rentals or 1200 miles?  It makes a huge difference.  If you need to get into a plane to get there in under 5 hours you are not going to be able to handle C class rentals.  You could do it with A class rentals, you could do C lass if you had a team of folks to help like realtors, handymen, and maybe an attorney.  What you described on phantom calls and other problems will break you if they are in your home town.  A crooked property manager is like having a hole in your canteen, it will never work.

Just out of curiosity how far out of town are you investing?  I cannot imagine needing to go out of town to invest if I lived in Cleveland OH.  What about your market would drive you to invest far away from home?  I would like to hear your reasons on that as I have looked at and invested in Ohio markets.

Originally posted by @Faisal Sami :

Who would have more BOTTOM LINE PROFIT at end of the month?

Experienced Out of town landlord vs. "turn key" Property manager ?

Assumptions

1. Each has EXACT same hypothetical properties to manage

2. Properties are in "C" neighborhoods.

3. Mix of private pay and section 8 tenants.

 Faisal, good questions, I think the answer is simple - experienced property manger will / should win out in this challenge, I do not think it maters if you are in your immediate area yourself as the landlord or you are a long distance landlord. If you are a long distance landlord even more reason to have a property manager. You want to make sure you define and vet your property manager, just like anything else. Your local property manager should have way more resources already in place to make your investment a success, municipal rules and regulation compliance. Our business we do not accept section 8 and we are in different area than the one you are refacing, but I know that a system and team, will be much more effective every-time. I think its important to also consider the condition of the homes as provided to the manager to operate. If your homes are sub par and just meeting basic minimum requirements, you will be capturing equally a lower quality tenant as well. I think the scenario you presented is substantially more complex than we define with the above (3) parameters. I know you may have a different view on this, but after being apart of a $80M+ scattered site single family residential property management company, I can speak from experience that it is substantially much more complex, but alot of the end results are associated with the condition and extent of the renovation. After eating this retail division of property management, we now exclusively only manage Turnkey assets for investors, the purpose here is to eliminate these misc. pitfalls associated with scattered site unique homes, the quality is sometimes not their however, the owner may feel they have something spectacular, we take out the unique element now and apply a uniform system throughout the entire spectrum of Turnkey inventory this enhances performance and value. As I said i think it is much more complex. 

Originally posted by @Jerry W. :

@Faisal Sami , sorry but there needs to be some clarification are you 30 minutes away from your rentals or 1200 miles?  It makes a huge difference.  If you need to get into a plane to get there in under 5 hours you are not going to be able to handle C class rentals.  You could do it with A class rentals, you could do C lass if you had a team of folks to help like realtors, handymen, and maybe an attorney.  What you described on phantom calls and other problems will break you if they are in your home town.  A crooked property manager is like having a hole in your canteen, it will never work.

Just out of curiosity how far out of town are you investing?  I cannot imagine needing to go out of town to invest if I lived in Cleveland OH.  What about your market would drive you to invest far away from home?  I would like to hear your reasons on that as I have looked at and invested in Ohio markets.

 Jerry, I agree with you lots of missing pieces to make a structured response, I mean so many variables can play into this question. Quality of the home in its current state, expectations, distance of landlord to property, lacing a local team to address concerns nd inspections as they arise. So many items go into this play. I can say is that usually a well oiled property management company can help you operate much more effectively and efficiently, they already have the staff and the system. take advantage of the economies of scale. You want to pay market rate for this service, however, you want to make sure you can count not hem to go above and beyond for you on every asset, on any issue and be their to forge a long term relationship.

Ali said it best, it just matters on your taste.  Even the newest newbie can make rental property work paying a PM.  As long as you do your Due Diligence BEFORE the purchase and factor in all the costs, you rate of failure will be low.  The only thing that really BREAKS a deal, is BUYING WRONG.  Of course I have had PMs steal from me, and I had to fire them.  But I have also had Auto Mechanic's do a horrible job, refuse to fix it, and had to go else where to get it done right.  There are 'bad apples' in all fields.  But as part of your Due Diligence, find a quality property manager, IF you want to use one.  Figure in the cost of a PM, and get your numbers from there.  If you want to self manage, educate yourself on landlord/tenant law.  Learn how to do evictions.  Learn how to talk with tenants.  Learn how to show and to QUALIFY a tenant.  Either way works.  But for me, my time is worth more than what a PM costs, so I use a PM.