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

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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.

Option 3: Experienced local hands on owner/landlord wins. Please note where I live before trying to tell me it doesn't work in cities where the RE is expensive ... the strategy is a bit different, but I can assure you it works; also I have out of state investments to compare against. Besides, Cleveland hardly fits that bill anyhow, so why look out of state when your backyard is full of REI buy-and-hold deals? Guess I don't understand the question given this context ...

Originally posted by @Mike McKinzie :

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.

 Mike, could not have said it any better, a PM can work and is designed to be way more effective than a single individual, just the systems and staffing alone will trump, you are so right your time is worth way more and no way you can be as diligent and efficient. Again, I just think hiring  a PM is the only way to go, especially if you are out of state landlord. 

The local person should win because he or she should be able to react and respond  to problems more quickly. The out of State Investors can develop a strong team like  a good local property owner who manage their own properties. They have one or two people that they call upon if you need to turn a unit or needs help cleaning out a unit. Having a strong team does not mean that you are a property manager. 

Can a person make more money self managing then by hiring a PM? If they are local, absolutely. If they are far away from a new market that is debatable and there are many variables at play.

However 

I don't understand the point of the topic.

Dinner is cheaper if I cook it myself instead of going to a nice restaurant but I don't have to cook it at the restaurant. Not cooking it is the point. Just like not managing the property.

The person who started this thread immediately bashed the first answer that tried to explain that the time saved by using a property manager is valuable. And agreed with the person who said yes you save money by not using a property manager. I feel like the thread was flamebait.

I really appreciate the answers and insight given here though. Thank you @Ali Boone @Mike McKinzie and others.

@Michael Henry , agree

Fascinating points by all.

@James Wise ,, I don't think the dinner analogy holds true. Respectfully, I think the dinner analogy is a lazy analogy. I don't go out eating dinner to make money. Eating out for most is a LUXURY and most people don't eat out as a viable business--unless maybe a mystery diner ?

People eat out because it's nice to have someone cook for you ONCE IN A WHILE and be served.  I eat out all the time. The price of the meal is disclosed up front and itemized . if I am in the mood for fast food I expect to pay under $20 bucks but if I want filet mignon , I know I can spend more than $100. Not true with property management in my experience . 

Enter the hands in the cookie jar paradigm. Why do property managers insist on collecting and holding on to all the money ? 

I have never really gotten a good answer to that question. Why not give it to the landlord directly and then bill for the monthly management fee and any suggested repairs to be approved by the landlord ? Does anyone actually do it this way ?

Is there a way to LIMIT and define what property management FEES are going to cost any given month upfront ?(please don't say it depends on the repairs needed) .  It's varied WILDLY from month to month when I had managers. After I took over , suddenly repairs were much less, tenants stayed longer and overall costs just went down. 

A more apt analogy than the dinner analogy I think is using a taxi to drive you around town all day long while trying to deliver gift baskets and earn a living. You will probably get from point a to point b in a professional , courteous and efficient manner but can you REALLY afford that level of retail service EVERY day in a business that is trying to cut down on costs? Is that really an efficient way to MAKE MONEY?

Anyway , could go on and on. From the comments it seems to me there are a subset of investors for whom a real estate investment is a wholly "touch me not" passive investment, like a mutual fund or a blue chip stock. For whom a fallen gutter or a late rent payment could be spooky event. Booh ! .  I get that . For them , sure a property manager can do the whole process and get paid handsomely for it like the hedge fund guys on Wall Street do, junk fees and all.

But what concerns me more is the dumbing down of the otherwise keen investor who wants to have a go at it and actually LEARN real estate. This investor who has been beaten down, paralyzed  into thinking that they simply can't make a move without the blessings of a real estate "professional" has been corralled into the same pen as the touch me not investor. This investor has been told that by only by being able to spout out what is happening on every street in every neighborhood can you pick the right investment house.

How did we get to this point? 

I was just talking to an investor friend today who absolutely swears by his property manager and what a great guy he is , knows all the neighborhoods and all the zoning laws,  but how he keeps losing him money, month after month after month. The manager has all the accolades, good references , and a nice office-- checked out in the "due diligence" department. Still a money losing proposition for the investor. Just doesn't make sense to me.

I don't mean to rain on anyone's parade who makes a living by selling turnkey properties and the ongoing management fees that go with them. Heck it's a GREAT business model-- sitting all day long in a stream of rental cash that is generated from the cash fountains in the pockets of investors who are obligated to cover every hiccup at a property with major surgery.  One rife with opportunity for abuse. 

I am open to being corrected on this. I by no means am any sort of real estate expert nor do I claim any expertise whatsoever.  I have literally failed my way over and over again making every mistake possible in my real estate investments. 

But it has and continues to be one heck of a learning experience and one I truly enjoy doing a few hours every single day. And over the years I can say that I have learned a thing or two but there are probably many out there that for sure know it better than me, may know a nuance or two more about real estate valuation , or may be able to spout off the latest statute in zoning laws. Who cares ? If it works it works. 

Happy investing 

@Dustin Graham

I don't even know what flamebait means. 

It's not that an investors time is NOT valuable. A better question might be how much does an investor actually pay per hour to a manager if we are to find out how many hours are ACTUALLY being spent on/in our property and what value do we get for those hours? 

Even Warren Buffet won't pay $20 for a single Big Mac even though he may be able to buy all the Big Macs in the world .

I guess for the TOTALLY passive investor that seems to be the way they are going. 

I hope people out there are making good returns.

@Jerry W.

I don't live in Cleveland. I am more than a thousand miles away. But I have cultured a team on the ground there who handle most of the day to day operations for my properties . I visit Cleveland 4 times a year,, sometimes more.

We have software in place to keep everyone organized. We have weekly conference calls to keep us on track to meet our goals. And everyone knows where they need to be and what they need to do. 

We train our team for problems and commonly occurring scenarios. We have a process in place to handle a tenant that decides to pay late. We have processes in place for how to handle tenant related city fines, tenant disputes, evictions, rehabs for tenant turnover, rehab for new property acquisition , dealing with Cmha section 8, EDEN section 8, VASH program for veterans, all manner of inspections ,, list goes on and on. 

We train and devlop culture in our people and a sense of working together for the long term benefit of the team. We treat tenants with courtesy and work with them to help them meet their goals for they stay with us. We sometimes act like innkeepers and I have teammates who bake cookies on their own for some of the tenants.

We are fair but we are also firm. We don't get taken advantage of because we set expectations clearly upfront and communicate that in person when signing leases and during follow up inspections.

I hold my team accountable. We work off task lists with global accountability in our software. All stakeholders can see what is going on in our business to the level of access they need. Often times our team hold each other accountable without my input. But I watch on the newsfeed from my iPhone.

We use WhatsApp for immediate and continuous communication between team members. I have teammates who message the group on their own at 3am to update the thread on what they have done.

Probably a longer winded answer. But a SMALL investment in people can go a long way. My two cents 

Originally posted by @Faisal Sami :

@Jerry W.

I don't live in Cleveland. I am more than a thousand miles away. But I have cultured a team on the ground there who handle most of the day to day operations for my properties . I visit Cleveland 4 times a year,, sometimes more.

We have software in place to keep everyone organized. We have weekly conference calls to keep us on track to meet our goals. And everyone knows where they need to be and what they need to do. 

We train our team for problems and commonly occurring scenarios. We have a process in place to handle a tenant that decides to pay late. We have processes in place for how to handle tenant related city fines, tenant disputes, evictions, rehabs for tenant turnover, rehab for new property acquisition , dealing with Cmha section 8, EDEN section 8, VASH program for veterans, all manner of inspections ,, list goes on and on. 

We train and devlop culture in our people and a sense of working together for the long term benefit of the team. We treat tenants with courtesy and work with them to help them meet their goals for they stay with us. We sometimes act like innkeepers and I have teammates who bake cookies on their own for some of the tenants.

We are fair but we are also firm. We don't get taken advantage of because we set expectations clearly upfront and communicate that in person when signing leases and during follow up inspections.

I hold my team accountable. We work off task lists with global accountability in our software. All stakeholders can see what is going on in our business to the level of access they need. Often times our team hold each other accountable without my input. But I watch on the newsfeed from my iPhone.

We use WhatsApp for immediate and continuous communication between team members. I have teammates who message the group on their own at 3am to update the thread on what they have done.

Probably a longer winded answer. But a SMALL investment in people can go a long way. My two cents 

 Does this "team" earn a salary?  Because it sounds like they do the job of a property manager, and unless they are all business partners, I believe they have to either be employed by you directly or licensed property managers to do leases, evictions, collect rent, etc., at least in the states where I do business.  So if they are employed by you, what percentage of rents (this is excluding any repairs) does their collective salary add up to, and is it comparable to the 8% of rents that I pay for my long-distance property manager?  Just curious as I self-manage one B property (actually travel 3.5 hours each way when necessary), but pay 8% for property management (plus repairs, which are higher than if I did it myself, but not excessively so) in the areas too far away from me to get there comfortably.  It sounds like you have the scale to afford to have what is basically private property management, which would be wonderful as my biggest problem with my managers is that they don't do it the way I would like, but I can't dictate how they run their business, just choose the firm that does it closest to my values and will work with me as much as possible.    

@Lynn M.

Lynn M.

You bring up a very good point. Must be a w2 worker to landlord property as a landlord extender. Can't be 1099 otherwise has to be licensed broker. So we pay w2 wages to stay in compliance.

I self-manage my six units a few miles from where I live. I may consider hiring a management firm and pay them so much a month to mange.  The key is HIRING THE RIGHT MANAGER.  This is not typically easy.  The time taken to get referrals, references, etc. is critical and time well spent.  The management firm needs to be honest, experienced, smart enough and willing to get the job done.  If I decide to hire a management firm, I need a checklist of all the tasks they will perform in some detail, and what functions they do not do etc.  In my mind, most managers I am not the RIGHT MANAGER.  Internally, they need to have sound systems with capable people executing the systems so it is win/win.  I would manage my management company to be sure systems are followed over time.

Interesting thread. Like @Jerry W. , I was wondering why the heck you would need to invest out of area from Cleveland?  Doh!  Secretly not from Cleveland but says is.

I don't want to fool with w-2 employees.  If I wanted that, I would own a 'regular' business like a Subway or something.  Knowing all those regs for that from a different state sounds like a whole new can of worms from what we are trying to do - invest in, and own and operate rental property. 

I am a DIYer that has both.  Half of my portfolio (18 units) are 'out of area' 40 minutes away.  I can't get there every other day to remove snow or install the storm windows.  Without a good maintenance man that also rents from me, it would not work.  No w-2 or 1099, though. No way.

Most of my sellers have thrown up there hands in surrender because the local PM co's are so horrendous. They've bounced from bad PM to bad PM and finally called me.  The $85 faucet drips and breaker flips were eating them alive. Oops - pipes froze from a winter vacancy.  Water heaters dying and central a/c's & furnaces going down from lack of maintenance.  Basements flooding from clogged gutters and bad grades.  No way I'm putting up with that.  No way I'm hiring someone who benefits from large repair bills (with 10% overrides) and benefits from vacancy with make ready costs and fill-fees.  Until the PMs goals and mine are better aligned, I will DIY.  Cheers!

Faisal, why did you propose the question IF you didn't want to hear differing views.  You make it sound like ALL Property Managers are nothing more than "Northern Carpet Baggers."  I don't want to sound 'arrogant' but I have probably seen more doing PM that most on BP will ever see.  Murder, suicide, a 2 year old drowning, house burning down, sitting in a driveway with a shotgun in my hand holding off gang bangers, being assaulted by potential renters, drug dealing, drug growing, more lock outs than I can count, and you have the GALL to say I am afraid of a hanging rain gutter!  PLEASE!  PMs holding my money?  In Fresno, they collect my rent on the first and deposit it in my account on the fifth.  In TX, OK and AZ, they do an ACH on the tenth.  In CO, the 12th.  I have no problem with a PM making sure the tenants check clears first.  And my average PM fee is 7%.  It works for me and I make a good return.  And if you have a STAFF, you have a property manager.  As Shakespeare said, "A Rose by any other name is still a Rose!"

Originally posted by @Mike McKinzie :

Faisal

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. 

You seem to suggest that anyone who hires a handyman to fix a toilet, or hires someone to paint walls, trim trees, etc. is not managing their properties.

Bit of a stretch don't you think?

There is a difference between managing and doing. Plenty of people here manage their own properties, but that doesn't mean they fix all the toilets.

It depends on the quality of property management and on the skills and interests of the property owner. I used to manage my own properties (local properties), but that ended after I got a succession of bad tenants. Unfortunately, the property manager (management company) we went with is terrible, and we spend nearly as much time, and a lot more money, managing the manager. I absolutely know I don't want to manage my own properties, but I need decent property management.

It truly depends on the free time you have to manage your properties and whether you can be doing other things with the time you spend dealing with tenants that could be bringing in more money for you to buy more properties.  Also, all Property Managers are not created equal and the fees that each firm charges are completely different.  I know that All County Property Management does not make any money or charge any fees to handle maintenance issues so there is no incentive for us to have more than the real ones that come in from tenants.   You have to do your research if you decide to go with a Property Management company.  You want to look for one that has been in the business for at least ten years!!!

Sself managing is SELF MANAGING!  You collect the rent, you do the repairs, you screen the tenants, etc....  If you use a HY BRID system, where some of the work is farmed out, and you have to PAY someone else, then you are not a Self Manager.  If I call Roto Rooter to unclog a drain and am charged $100 or my PM has a staff plumber who does it for $50, both ways use a third party per SE, to facilitate the repair.  But I benefit from economies of scale due to my PM having the right staff and connections.  My average monthly management fee is $70 and that is well worth it to not have to chase down the rent or listen to a tenant complain about his neighbor.

One thing that is not clear to me when I read this thread is where people are drawing the line on Property Management. Does it in fact include DOING actual repairs like unclogging the toilet?   or just arranging repairs like calling a plumber?

PMs I have worked with don't unclog toilets and would not consider that a PM job. They arrange for service and call that property maintenance, not management.  Yes of course if you do those small things yourself you save money but you would need to be local to save money because when you figure in driving or flying to maintain property  it does cost you more to DIY.

I would say the OP 's   doesn't  talk about the scale of the ownership, it makes a difference. If you set up your own team and oversee them  because you have the scale to do it and do it well of course you will do better. However that is in house PM and property maintenance. In the end inhouse or contracted out it is the oversight that matters. They have to know you will notice overcharging.  You don 't have to do it everyday but just like rebalancing a stock portfolio, you will do better if you periodically look into it.

That said some properties won't cashflow no matter who manages them. 

I don't agree with that sentiment @Mike McKinzie. Self management does not mean you do every single thing that has to do with the enterprise yourself, any more than being a manager at any firm means that you personally perform all of the tasks at that firm. Anyone who believes that being a manager means you do everything yourself could not have possibly been a manager. I've been in executive management all of my post-college career (I was a late student (30), having served in the military and had "real jobs" in between and during college, ) and I have never considered it my job to do everything at the firm. It is my job to manage the tasks that have to be done, address the crises and look for opportunities. Sometimes that means doing things myself, and a lot of the times it means coordinating all of the resources that need to come together to make things happen (people, money, materials, etc). 

Back to the original question. Over time, purely considering dollars spent, you are going to spend more on a property manager than if you did it yourself, unless your PM works for free. But that ignores the opportunity costs that are lost by doing everything yourself. If you were going to spend all of your free time playing Donkey Kong or watching the Housewives of Atlanta, then you would probably be better off learning how to manage your properties yourself, as neither of those enterprises are profitable. If, however, you are able to put your time to better use, then it may in fact be far more profitable to hire a PM to take care of the rote tasks of finding tenants, checking references, arranging repairs, than it would be to do it yourself. It all depends on your own personal level of productiveness, and what you could be doing (alternatively) with that time. 

Example: I have a guy that does some different work for me. He is getting $350 to put up fencing (not including materials) on one side of the property at one of my units to screen off an undesirable view. From a pure dollars and cents perspective, I can put that fence up for free, so does that mean I should? Well, if the money part was important, and I was going to spend the 1.5 days of fence-building sleeping in my recliner, then yes I should probably do it. If, however, I was going to spend a day of that time looking at prospective units, then it is probably a poor use of my time, as I can't expect the fence guy to find me another house that will clear me $3-5k this year for $350, while I put up the fence myself. And if I'm putting up the fence, and have no one looking at units, I might potentially lose out on several thousand dollars of return because I was paying myself $20/hr to put up a fence. 

And of course all of this depends on a lot of other factors besides - your own personal skill levels at doing repairs or maintenance; your access to tools and specialized equipment; your availability of free time; your proximity to the units; the number of units that need to be managed; ETC. Someone else here already said it, but having a property manager will be less profitable for you if you have 10 units than if you have 100 units, because you personally only have so much available time. If you spend it all dealing with items that you could have someone else do for dimes on the dollar, you will not be creating additional long-term wealth for your enterprise. 

Jd, owning one rental property and being a middle manager at Microsoft can hardly be comparable!  When you were in "Executive Management", you NEVER said "I am a self manager," you said you were in Executive (Upper, Middle, Lower??) Management.  I am currently managing an accounting staff and the term "self management" is NEVER used.  But when people say, "I do NOT use a Property Manager, I SELF MANAGE," that term means they do it ALL BY THEMSELVES.

But we can agree to disagree, that's fine!

I think it would get confusing if you used the term "Property manager" to mean anything but doing every single thing involving a unit yourself. I believe the common understanding of "property manager/property management" is a single individual and/or a professional firm who is retained and paid for the explicit purpose of "running" the rental, not specifically fixing a toilet or other individual task. Otherwise, wouldn't you then have a situation where the "Property manager" utilized a "property manager" to fix the toilet, who in turn might also be a "property manager" because he sends a helper to fix the toilet while he's on another job? 

We work almost exclusively with out of town investors. For our class C tenants there is no way you could provide the level of service necessary to keep the property performing, for the 10% of your rents we charge, unless you had around 100 units and even then you miss out on a ton of benefits that come from working with a professional team.

That being said if you are going to be working with an out of town PM you NEED to have a working relationship with them. You need to to fly out and see your properties, sit with their maintenance team and find out how and why they fix things the way they do.

Also you need to trust but VERIFY. There are plenty of bad PM's out there. Call them out on a few things every once in a while make them prove to you they are on the ball.