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.
@David Faulkner Great point - you are correct and I should have clarified that I was referring to income-based valuations, which are generally the standard for larger rental properties.
I believe the largest variables are how much do you think your time is worth and what are you spending the most time on (Finding tenants, maintenance, etc).
For me, maintenance became a huge struggle when I had to help my grandfather manage his company as he became too old to keep managing his company, and with my background working logistics at Amazon I realized what a logistical nightmare maintenance was becoming and how much of my time it was eating and hiring additional help is always difficult since I don't know many people with a burning passion for maintenance scheduling, so as good as the work was I always knew it was a temporary hire that could leave at any moment.
While reading through here I have to agree that at a certain point having a property manager handle everything from top to bottom is incredibly valuable especially if your intention is passive income. On the flip side, PM's do also eat into your passive income, so the quality of work is incredibly important especially at 10-8% of that monthly income.
Yet, if you only manage a small portfolio and have decent tenants in combination with a couple quality handymen you should be just fine. Our company usually had tenants stay for about a minimum of 2 years so if any numbers at our old PM company hold true I would easily be able to handle 15-20 units on my own if maintenance coordination wasn't part of the equation.
I actually started a company recently with the intention of helping those who don't want to deal with the back and forth of maintenance requests. Currently, we help property management companies but, I'm actually thinking about moving into the landlord/investors market and am interested in hearing what people would even pay for a service like that?
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.
If anyone is interested, I have a spreadsheet that I put in the Fileplace many years ago... It does just this -- provides CoC and Total ROI under both scenarios (PM or self-managed):
I believe when starting out in REI you should self manage as typically your resources are not as significant and self managing provides a learning opportunity.
However, as many have indicated as you scale the self managing of the units will become a job as it will take significant time. How many units do you think you can self manage and work a traditional W2 job? Do you like managing properties? I slightly do but time is also very precious. Do I like managing properties more than fishing with my kid(s)? I say the answer is no but my actions state otherwise.
We still self manage all of our LTRs (14 units) and we use a property manager on our 2 STR units. However, my wife and I both realize that at some point we will convert some of the self managed properties to managed properties. My view is that somewhere around 20 units, even with a good team (mine is currently just an OK team), the managing of the units is a job.
Also as others stated, is dealing with tenants or doing handyman tasks the best use of your precious time. I think the answer may be yes when you are starting out and not able to generate large amounts of cash. However, for me to self manage in many ways is stupid. I self manage because I slightly like it but also because I am teaching my 14 yo son what REI entails (all facets) similar to what my Mom taught me. I recognize that it is not financially the best use of my time and may be financially the worse use of my time.
So it is important to include management fees because there will likely be a time that you no longer want to self-manage.
In general, I agree with @J Scott that my time is worth far more than the expense of a Property Manager and if you do not learn from managing your units or enjoy it then at some point if does not make sense to manage your units.
Good luck
I think what needs to change is the PM cost structure. % of monthly rents is an antiquated method of charging for PM services. Technology has significantly brought down the amount of work required to effectively manage a property. Add that to the fact that rents have been rising faster than inflation these past few years and the result is investors getting over charged for PM services.
I have seen some PM companies already adopt new pricing structures which actually reflect the amount of work done. If all they do is collect rent and deposit the check, why should they get paid 10% of gross rents ? On the flip side, C class properties that rent for $500, PM services should definitely cost more than 10% of gross rents.
With a "pay per use" model, I think the argument this thread discusses is no longer valid. Pay a fee to get your unit rented and then pay a fee for each call that the PM handles. Ticketing systems are a dime a dozen and tracking this info and sending monthly invoices can easily be automated. This model really resonates well with Millennials and hopefully more PM companies will change their pricing structure in the near future.
I think what needs to change is the PM cost structure. % of monthly rents is an antiquated method of charging for PM services. Technology has significantly brought down the amount of work required to effectively manage a property. Add that to the fact that rents have been rising faster than inflation these past few years and the result is investors getting over charged for PM services.
I have seen some PM companies already adopt new pricing structures which actually reflect the amount of work done. If all they do is collect rent and deposit the check, why should they get paid 10% of gross rents ? On the flip side, C class properties that rent for $500, PM services should definitely cost more than 10% of gross rents.
With a "pay per use" model, I think the argument this thread discusses is no longer valid. Pay a fee to get your unit rented and then pay a fee for each call that the PM handles. Ticketing systems are a dime a dozen and tracking this info and sending monthly invoices can easily be automated. This model really resonates well with Millennials and hopefully more PM companies will change their pricing structure in the near future.
Great point. I buy B properties and look for A tenants which reduces the headaches of property management. With 2017 technologies , I agree that 10% is outdated, especially for the properties I am targeting.
I self-manage most of my SFRs except for one and that is because I absolutely like my PM. Self management is at my comfort level. All my rentals are leveraged; yet, cash-flowing very well and yes, I have plenty of time for cruises and traveling abroad with a trip to Costa Rica this week. My rentals are in highly desirable areas commanding excellent rents. So, the PM fees alone would make a big dent in my cash flow not to mention the tenant placement fees, renewal fees, and ridiculously priced band-aid fixes. As long as you have reliable vendors in place, all it takes is an email or a phone call. I have automated all aspects of the rental business and the only time I plan to stay in town is if a tenant has decided not to renew a lease. This way, I can personally screen and interview prospective tenants and rent the place quickly. No, I don't have 200+ units. That is not my preference. I prefer quality over quantity. I still fall in the highest tax bracket even with all the RE deductions. (Ouch!). BTW, I am a long distance landlady and have tried the PM route to which I say, "No, thank you."
@ Steve Vaughn - I love your down-to-earth posts. You are so right about people skills and great customer service. Couple that with great management skills and landlording can actually become enjoyable rather than a job.
A Property Manager should provide 3 important services:
1) Passive Income - That's most of everyone's point here. Passive income means money continues to flow to you, even when you take steps away. A property manager needs to take over time consuming tasks, that should be spent elsewhere (workplace, acquisitions, studying BP podcasts, the beach, heart transplants).
2) Reduce Costs - As a property manager, most of my day is managing people. I future pace tenants contractors and property owners. Several times a day I refer contractors on social media and here on Bigger Pockets. Why? My contractors work for my referrals! I bust my butt to get them referrals. I do it so I have accountability when i call them for repairs in my client's home. The trades people I send to my clients are working to not lose my referrals. Simply put, a property manager should be able to get work done in your properties for far less than you can get it done, and far better and far faster. Also, preventive maintenance and solving $3 problems before they become $3,000 problems.
3) Increase Income - I market for tenants non-stop. When you have a vacancy, its better to choose the best potential out of 5, then it is to chose the best out of 3. A property manager has made it his career finding better tenants, that are willing to pay far more, stay longer and are willing to take a property sooner just to reserve it when they need it.
I agree that paying 8% to a property manager would be a waste. But many property managers will increase your ROI - not decrease it.
@J Scott has processes and procedures in place to allow him to manage his properties effectively in short period of time. I spend less than 30 minutes a month on 3 rental properties. I do this through automation of processes, picking good tenants, and keeping my properties in excellent condition. Initially, I spent more time managing and maintaining my properties. If you are spending too much of your time reviewing and managing your properties, your tenants will see that and it will send a message to them. They typically like a "automated" landlord and not a "do it yourself landlord". I've been both and there's benefits to both, but to grow a successful business your need to be the "automated" and scale your investments.