Is factoring in property management into your investment spreadsheet overrated?
Cons of property management: I always care about my property more than property manager, lower ROI, and the probability you lose touch with what is going on in your properties.
I believe part of building the team is to have a great ppl you can call who will take care of tenant issues. Why have a middle man who you pay 10% of rents?? Further you have the risk of them screwing you.
I've been a landlord for over 7 years and find it easy. I am not handy, but I know how to pick up the phone and call someone to handle it. From a cost-benefit perspective, I don't think it makes sense. its really not difficult to handle tenant calls! With technology advances even in the last 10 years, being a landlord (if you utilize basic modern technology ) is even easier.
Am I completely off? With 10% of rents I'm saving, it gives me a margin for error to not have to penny pinch my plumbers and handymen.
To each his own. Some people like creating jobs for themselves, and others prefer passive income. If you want to do your own property management, go for it. But, many of us prefer to spend our time not having to deal with tenants, contractors, HOAs, etc. For us, having a property manager is an easy decision.
Btw, you can use this same argument to avoid ever hiring employees in your business. Pretty hard to scale up if you're not willing to hire people to support your business efforts... But again, perhaps you just want to create a job for yourself and don't care about scaling/passivity. In that case, you can certainly do everything yourself.
I posted this in a thread a month or two ago:
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"With my current portfolio and what I just closed on, I am on track to pay property managers just over $70k for 2017 and over $80k for all years following.
I see those numbers and smile. I think about how great it is that that is all is costs me for them to deal with 141 units worth of the unit turnovers, showings, work orders, and rent collection of over $1mil per year. All this while I'm sitting outside, sipping my morning coffee, and deciding what I want to do for the day.
I self-managed in the beginning, but there will come a point where you won't have enough time for your day job, self managing, and still be finding/making new deals. Of those I chose to let the management go first because it definitely wasn't anywhere near a full salary (at that time). Plus I had done it enough to know I did not want to be doing that for the rest of my life!"
Eventually, hopefully you have enough properties that you can live on the cash flow with someone else doing the work. If you don't make money with a PM, and you have so many properties you have to leave your day job to become a full time property manager then you just own a job. Not necessarily a bad thing because at least you'd be working for yourself. But I'd rather make money with a PM and be a passive investor... free from working for anyone.
I average 1 hour per week total, and that includes my end of year tax prep. An average month is probably 30min a week (nearly all of is just transposing the owners statements into quickbooks for my various LLC's). And if I die, my wife wouldn't have to become the full-time PM or sell everything.
Those are some reasons why you should factor it in, even if you are self managing for the time being.
This poor horse has been beaten and beaten and beaten, is now dead 10 times over and buried 20 feet deep!!
Other than that, all I have to say is @J Scott is my hero.
Careful Will, that is how rumors get started. Will Bernard worships people who beat and kill horses!
As I look to acquire rentals, I think the #1 thing keeping me from scaling quickly will be access to capital. If managing my first 10 units or so allows me to save more money to acquire more rentals then I will do so. Eventually however, the biggest obstacle I expect will be making the best use of my time. I personally like the idea of hiring someone under you to do the PM at a cheaper rate and also that will do things your way(i.e. caring about your properties as much as you do). That could change if I found a great PM company, but as everyone said, it's still obviously best to factor in PM as an expense and either pay yourself or assistant for the time and effort while you are still scaling up.
You do what makes sense to you. That's pretty much the end of the story. Everyone's situation is different.
I prefer to spend my REI time looking for deals and then handing it off to a team I pay to deal with everything after that. It's well worth what I pay because I don't have much spare time, I don't want to be bothered by tenant calls, and so on.
The answer is it depends- like so many real estate investment questions.
It depends on whether you want to be hands on or not.
It depends on whether you have the time or not.
It depends on what your time is worth.
It depends on whether you are ready to evict, have hard conversations, and receive calls in the wee hours of the morning.
It depends on so many things.
There is no rule of thumb.
Use what is best for you in the time and situation you find yourself in- whether that be self-managing or farming in out.
I couldn't agree more. Enough said.
Besides the "time is money" issue, you also have an issue of if you actually enjoy managing rentals. I personally love it, although based on an entire forum here, many hate showing properties, talking with tenants, dealing with issues, managing repairs, etc. The same goes for every other aspect of real estate - there are folks who love to manage the rehab contractors, others who really enjoy the buy-sell process, etc. If you enjoy any of these as a job, real estate investing affords you the opportunity to be your own boss in each of these sectors. Others use real estate investing like investing in the stock market, they only want the returns, and that's fine too.
For 5%-10% savings/month, its only "worth it" do do property management in my opinion if you actually enjoy doing so and are knowledgeable enough to be successful doing so.
A good property manager is better than a bad landlord. A good landlord is better than a bad property manager.
The answer is it depends- like so many real estate investment questions.
It depends on whether you want to be hands on or not.
It depends on whether you have the time or not.
It depends on what your time is worth.
It depends on whether you are ready to evict, have hard conversations, and receive calls in the wee hours of the morning.
It depends on so many things.
There is no rule of thumb.
Use what is best for you in the time and situation you find yourself in- whether that be self-managing or farming in out.
Exactly my original point. I never said, in all cases, you should manage yourself. I was making the argument that for the vast majority, PM factoring is overrated. I'll stand by that.
Some people do not want to mess with it. If I did not own a PM company, I would most certainly hire a PM. Between family life, work and what time is left over, I would not want to spent it troubleshooting problems, showing vacant homes, calling past due tenants, going to court, etc. A good PM will care whether or not the property is doing well for 2 reasons. First reason is often times, no matter the situation, the owner wants to blame to some extent the PM. Second, 8% of $0 is $0. Not very profitable for a PM. All that said, if you can manage yourself and don't mind it, then by all means, do it. Some people enjoy it, but most get burned out sooner or later.
I both completely agree, and yet disagree with @J Scott. If I had problem properties that took time to manage, I would probably hand my rentals over to property management as well. But I probably spend about as much time, maybe slightly more on my rentals as J does. I probably answer 1 email or so a month to every other month from my tenants. Washers broken, I order a new washer online. Ant problem, I email the pest guy, X is broken, I forward the email right onto my handyman. If it took more than a few minutes a month, I would hand it over to someone else to manage, but with it being pretty hands off, Im perfectly fine managing myself.
If I could self-manage in the same amount of time (or anywhere close) that I spend dealing with my manager, I most certainly would. But, I learned early on that I just didn't like doing certain tasks. For example, interviewing tenants. I spent eight months interviewing tenants for my first rental before I finally just hired a PM to take it over and find me someone (which they quickly did).
Seemed like prospective tenants always wanted to see the property on weekends -- when I had to choose between interviewing a tenant and spending a Saturday with my family, the tenant always lost. Which is why I wasn't able to find a tenant in eight months... :-)
Here is more detail on that first rental:
One side of this argument that has not been mentioned is positive return on investment of meeting the tenants yourself. I can tell that you appreciate the numbers side of an argument. I think a number of people in my camp who are good at managing tenants, feel that by them being involved with tenants, it reduces turnover in the properties. So not only are you saving 10% on rents, but you also save 4-5% on vacancy per year. I have seen this play out with the same tenant in my property for over 6 years. I am a disciple of the book "Landlording for Autopilot", which that is the authors goal, to have tenants stay forever thru various strategies. Do you believe PM are putting this level of care into the average investor's properties? I would bet no.
Further, you could argue that other money saving solutions could be discovered and implemented if you were involved versus PM. Such as having the tenant fix something and paying them the difference between what you would be screwed on someone being hired from the outside. I have implemented these techniques and the tenant becomes more engaged in the property and builds a relationship with me during the process. Plus, it keeps me in the know and on the ground level which may have positives as well.
Lastly, the reason I started this thread is that I didn't agree with a host on a recent BP podcast regarding a general statement about PM. This is not black and white, and worse, I don't think it applies to most of the members and where they will be in their RE investment careers.
Your profile says you have one rental property and it sounds like just one tenant since you purchased it. It also sounds like that tenant is handy enough to fix things. That is great, but it is likely just luck of the draw. You are making the assumption you could scale that to 10 or 40 or 100 and have the same results.
As an accountant I am sure you understand probability. I work in the tech field and hard drive failures are a great example of probability in action. Most people have seen their computer hard drives last 5 years or more and consider them very reliable. It is a single hard drive. Google has tens of thousands of hard drives. One fails every minute and they have a staff of people who spend all day replacing hard drives. There is no difference between your hard drive and Googles beyond scale. Same is true for rental properties. Scale increases your probability of problems occurring.
No problem managing one yourself, even 10-20 SFH is doable, but it is naive to think even that won't have challenges. Scale will bring you problems which is why some landlords choose to stay small.
I'm going to be completely contrarian here on a few points ... for one, I agree with the statement that one poster said that I spend about as much time directly managing my tenants as I do managing my PMs ... less time in fact than managing a bad PM vs a good tenant.
Second, 10% is simply not reality in a vast majority of cases once you factor in ALL of the fees, like maintenance mark ups, leasing fees, re-lease fees, etc. The real number in my experience is 15%, and that is best case for a good PM ... and that is 15% of GROSS rents ... if you have no mortgage and believe in the 50% rule (which you should not, but just for argument's sake) then 15% gross is really 30% of your cash flow. Why would I want to give up 30% of my profits for a job I can just as easily do myself for free?!?
Third, if you buy quality properties, in quality locations, with quality tenants, then yes you don't need to check in on PMs as frequently, but you also would need to check in with tenants equally less frequently. These are the properties that draw more rent, so a PM gets paid more for doing less, and they are easy to manage so a PM is needed less. Properties in rougher neighborhoods that rent for less are more management intensive, whether you use a PM or not. So PMs do NEED to do more work for less money to do a good job ... do you think they have a business model based on doing more work for less money? No, so what they do instead is do less work for less money, and that gets the investor into trouble long term. Or they do more work for more money, and this money is often gotten in various unscrupulous ways "under the table" from things like repair invoice markups. Or the best one yet, they do less work for more money. So the properties that really need a PM the most are the ones that end up getting it the least and the ones that need it the least, you don't really need a PM for at all as they are just as easy to self manage.
I'll take it even a step further (this is where I get REALLY contrarian) ... for me at least, quality properties in quality locations, that attract quality tenants, the kind that are easy to self manage, are far more profitable long term ... so not only are they fewer headaches, but get a few of these free and clear and you don't really NEED to scale up at all, so the argument that it is not scalable is largely irrelevant to me and my goals at least ... I intentionally avoid leveraging up and scaling up, because it is more risky and a huge PITA ... my goal is to own the FEWEST number of units, with the least volatile profits, that meet my financial needs, with the fewest number of headaches, and I have done it without the need to scale up precisely because of the quality of properties I choose to invest in. So, the only downside is I don't get to stroke my own ego by going around bragging to my buddies about owning 100+ units; I don't need to stroke my own ego, and I don't want nor do I need that many units to meet my goals. Mo units = Mo problems. Small is simple; small is beautiful; small and high quality is very profitable and headache free, even self managing. Quality over quantity. YMMV.
@David Faulkner makes some good points (and hits on some of what @Scott Trench mentioned). If you have "high quality properties, in quality locations, with quality tenants" then a PM might not make sense... ESPECIAllY if they are net about 15% as David's would be. That's crazy if you're talking say a $3k a month rental. 15% of $3k is $450 per month, per unit!!! It would be really tough to justify a PM in that case.
I'm on the other side of the REI coin.... First of all, I completely disagree about managing a PM taking as much time as managing a tenant. Maybe that's the case if you only have a couple tenants, but when you hit scale that is absolutely and unequivocally false, unless your PM is completely worthless. And if you live/invest in many geographical areas in the country, scale is what you need to do which leads to...
Secondly, I live and invest in an area where David's investment strategy isn't a reality (as do a ton of other people). I only average ~$750 per month in rent, but jut because that's not $3k per unit doesn't mean they're crap properties and that I'm getting crappy PM service. In fact I am VERY happy with the service I have received. AND that's at just under a net 8% property management fee, or $60 per month when it's occupied. In no way is it worth $60 per month to me to deal with all that has to be dealt with given that rent range. AND they get maintenance as cheap/cheaper than I can unless I'm doing it myself or hired my own employees. So the 8% also saves me money in other areas, not increases it. Therefore my effective PM fee may be in the 6-7% range. Yes, it takes 4 of my units to meet a single $3k per month unit. But I'm only paying $240 instead of $450 on that $3k, for 4X the tenants. Sure, if I had 1/4 of the units, but 4X the rent per unit, and a stupid high PM fee, I would consider managing my own 35 units in that scenario instead of hiring a PM.
HOWEVER, even if I were in that boat; I would always want to factor my properties with a PM fee in place. Why? Because if for no other reason, I wouldn't want to put the burden of the success of the properties and rental portfolio I built being dependent on my spouse (or other family member) being the property manager in the event of my death. You could get life insurance for that, but I'd rather my life insurance be used to increase their cashflow and livelihood as opposed to being used to make up the difference of having a property manager or not.
@David Faulkner makes some good points (and hits on some of what @Scott Trench mentioned). If you have "high quality properties, in quality locations, with quality tenants" then a PM might not make sense... ESPECIAllY if they are net about 15% as David's would be. That's crazy if you're talking say a $3k a month rental. 15% of $3k is $450 per month, per unit!!! It would be really tough to justify a PM in that case.
I'm on the other side of the REI coin.... First of all, I completely disagree about managing a PM taking as much time as managing a tenant. Maybe that's the case if you only have a couple tenants, but when you hit scale that is absolutely and unequivocally false, unless your PM is completely worthless. And if you live/invest in many geographical areas in the country, scale is what you need to do which leads to...
Secondly, I live and invest in an area where David's investment strategy isn't a reality (as do a ton of other people). I only average ~$750 per month in rent, but jut because that's not $3k per unit doesn't mean they're crap properties and that I'm getting crappy PM service. In fact I am VERY happy with the service I have received. AND that's at just under a net 8% property management fee, or $60 per month when it's occupied. In no way is it worth $60 per month to me to deal with all that has to be dealt with given that rent range. AND they get maintenance as cheap/cheaper than I can unless I'm doing it myself or hired my own employees. So the 8% also saves me money in other areas, not increases it. Therefore my effective PM fee may be in the 6-7% range. Yes, it takes 4 of my units to meet a single $3k per month unit. But I'm only paying $240 instead of $450 on that $3k, for 4X the tenants. Sure, if I had 1/4 of the units, but 4X the rent per unit, and a stupid high PM fee, I would consider managing my own 35 units in that scenario instead of hiring a PM.
HOWEVER, even if I were in that boat; I would always want to factor my properties with a PM fee in place. Why? Because if for no other reason, I wouldn't want to put the burden of the success of the properties and rental portfolio I built being dependent on my spouse (or other family member) being the property manager in the event of my death. You could get life insurance for that, but I'd rather my life insurance be used to increase their cashflow and livelihood as opposed to being used to make up the difference of having a property manager or not.
Thanks Austin for spelling out when this way may or may not work and why ... I don't necessarily disagree with you ... I did caveat my comments by saying I'm being really contrarian ... at the end of the day, my strategy may not work for most people in most markets, but it only has to work for one person in one market, the one it was designed for: that's me in my market ... and it does. So, my contrarianism is not so much to expect that folks would run out and copy my exact strategy, but rather to actually give some thought and not necessarily blindly follow the standard approach with the standard assumptions.
Custom build the strategy that makes sense for you, in your market, with your goals ... if that leads you down the conventional route, cool ... if not, as it has with me, then that's cool too and doesn't necessarily mean it is bad or will fail ... but whatever you do, make sure you have a good reason why you do the things that you do the way you do it ... and no, because XYZ BP person does it this way and he/she is my hero is NOT a good answer. Austin and I have almost bipolar opposite styles so far as I can tell, and they both make perfect sense and work for each of us in our markets for our goals and have been consciously designed as such IMO.
So, I'm just offering an alternate POV + explanation here ... that and occasionally stirring up trouble with all the "cash flow is king" investors out there for fun & educational purposes ;-p In that spirit, I only paid $240 also, but they were only renting for $2k at the time ... but what do you know, today they are worth $450 and rent for $3k ... look at all that "dead equity" the market has created for me, I must be one heck of a lucky guy, LOL.
Going back to your original question, I would say that whether you need to factor property management into your investment spreadsheet really depends on what you're using your spreadsheet for and is independent of whether or not you choose to self-manage. If you are using your spreadsheet to value a property then absolutely you need to include it. Any underwriter or appraiser will enter it in theirs, so you should also, regardless of whether you prefer to manage your own properties or not. I think investors need to be careful about using a decision not to self-manage to justify paying a higher price. And there is always a cost for property management, even if you do it yourself. Your time is worth something so it really should be valued and included in most analyses that you're doing, including an internal ROI. One exception might be if you're using your spreadsheet internally to look at cash flow, in which case you can justifiably leave it out.
I think it should be fairly obvious to anyone reading this thread that how you structure your business and investments is going to be highly dependent on your skillset and your goals. What works for one person won't necessarily work for another. Some people want to maximize cash flow; some people want to maximize passivity. Some are in between.
But, going back to the original question, I think it's essential that all reasonably possible potential costs be rolled into the pro-forma before buying a cash flowing asset. Perhaps you don't expect to ever hire a PM, but things change. What happens if you move and can't manage a property yourself? What happens if you die and whomever inherits your property wants to hire a manager? What happens if you find yourself laid up in a hospital for a few months or years and need someone to handle your tenants?
If you didn't factor in the expense of a PM, you could find yourself in a situation where you have suddenly gone from cash flow positive to cash flow negative, and you'll be unpleasantly surprised at having to come out of pocket every month until you are able to get rid of the property. So, factor it in and ensure that the property meets your financial goals even under worst-case scenarios.
Given that you're always paying for property management -- whether it's with part of your cash flow or part of your time -- ignoring the cost is just lack of due diligence.
Not sure if anyone else considered this. But shouldn't taxes come into consideration here? For example, my 6 unit building cash-flows very
well. At some point this year, once I meet my reserve, I'll be cash-flowing ~$4300 month. If PM fees are tax deductible, wouldn't that help a little via deduction at tax time, and result in lowering the cost of PM. Thus slightly tilting the time/money equation in favor of using a PM?
You should also include it because if you sell, the buyer will include it in his/her math and place a value on the property based on that.
The answer is it depends- like so many real estate investment questions.
It depends on whether you want to be hands on or not.
It depends on whether you have the time or not.
It depends on what your time is worth.
It depends on whether you are ready to evict, have hard conversations, and receive calls in the wee hours of the morning.
It depends on so many things.
There is no rule of thumb.
Use what is best for you in the time and situation you find yourself in- whether that be self-managing or farming in out.
Exactly my original point. I never said, in all cases, you should manage yourself. I was making the argument that for the vast majority, PM factoring is overrated. I'll stand by that.
If this is your final takeaway from all the comments in this thread, then you are either misinterpreting and misunderstanding everything or you are being stubborn and regardless of what anyone states, plan on sticking to your opinion. There is a huge difference between "PM factoring being overrated" and "property managers being overrated". You originally stated that factoring in the costs of a PM is overrated and the fact is, that is 100% inaccurate. While the balance is all opinions and there is no right or wrong answer as far as self managing vs hiring a property manager, it is a fact, not an opinion, that including "factoring" the costs of property management into your proforma and analysis of each deal is necessary. You may not keep that property for ever and thus, when you sell, the new landlord will be factoring said costs in regardless if they choose to self manage or not.
All the rest of he answers as to why one should Nestor chooses to self manage has nothing to do with factoring in costs of management. I don't work for free, other landlords don't work for free, and regardless of what per hour rate yourvtime is worth, you are taking on a job by self managing (regardless of how easy that job is for you) and you should get paid for it.
A good property manager is better than a bad landlord. A good landlord is better than a bad property manager.
... and most property managers are bad ... then again, most landlords are bad too ... which is better, a bad property manager or a bad landlord? :)
Lots of interesting viewpoints here. But the undeniable fact is that if you have a property where the value is determined by the income/cap-rate method, you need to factor in property management. That's not a debatable point. When I meet brokers or owners that hand me their pro-forma numbers and they don't include property management, I immediately think that they are either: (1) dishonest; (2) careless; or (3) plain stupid.
For SFRs, you don't need to. In many cases, you will likely sell it to average home buyers. They are not thinking about property managements.
For smaller multi-units (2 to 4), it's debatable. The appraisers will generally not use the income/cap-rate method. In some areas, the selling price is close to what you would get using that method. In desirable city areas (think of a nice, brick duplexes you see in places like Philadelphia or New), they will probably sell closer to SFR prices. In practice, I just have a ballpark figure in mind about what certain properties go for in my area. I know, for example, that a nicer duplex in my area that generates around $700 to $750 rent in each side will probably appraise for around $80 to $90k in mint condition.
For your investment spreadsheets, I suppose anyone can do what they want. For example, I find it crazy when people just rely on something like the 2% rule. But if it works for you, then that's great.
In terms of whether property management itself is worth it, I would say it depends on your situation and the quality of the manager. I think everyone already said what needs to be said on the topic. I do think that even if you hire a property manager, at some point you need to learn the basics of property management so that you can better work with your managers. Most common problems I see people have with their property managers seem to stem from the fact that the incentives are not properly aligned between the manager and the owner.
Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it as legal advice. Always consult with your attorney before you rely on the above information.
Any underwriter or appraiser will enter it in theirs, so you should also, regardless of whether you prefer to manage your own properties or not.
This may be true for commercial properties, but not for residential properties. No where in the appraisal for a SFR is there a line item for property management, nor should there be ... I would fire any appraiser that tried to sneak one in. Sold comps determine residential property values, not NOI/CAP.
To clarify, I'm investing in SFRs and only have 3 units (1 under contract which would give me 4). I should have been clear about that upfront. When I said "overrated", that doesn't mean I think there is no merit to having it in your calculation.
I have been looking at it from a cost/benefit standpoint. With a background as a CPA, being organized is second nature to me as well as dealing with clients and challenging/stressful situations. Plus, just like being an accountant, the use of technology in managing tenants in 2017 cannot be understated. I can do the work of 4 accountants who are not organized and who do not have applicable computer skills in my field. It takes very little effort for me to manage units for the benefit of saving 10% of rents and the uncertainty of the performance of the PM. That is where I'm coming from.
That being said, this thread has changed my approach. Last night, I updated my spreadsheet so that both a ROI with and without PM is displayed. Already, there is a piece of mind knowing that I have the option for either way.