How do you make money with a PM?
Financial Advisor · Baltimore, MD · Member since 2020 · 19 posts · 28 votes
How do you make money with a PM?
Most Popular Reply
@Devin Monroe Quit analyzing every single detail and buy a freaking property. I own 3 duplexes and have a property manager. She has all the contacts for construction and maintenance and gets that stuff done cheaper than I can. Property management companies are professionals and know their markets so they will get you top dollar. It's well worth the price.
96 Replies
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes5y
@Steve Vaughan I know what you mean. The final straw with my PM was when I got charges a service call because the tenant didn't know how to set the fan speed on the AC!
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes5y
A big reason I let the PM stay on, aside from attractive volume pricing, is potential deal flow. I let them know I would keep them if they happen to throw me some tired landlord referrals.
Those that say they hire PMs for the cost savings have never effectively self-managed. Glad I'm not trying to build wealth through cash-flow anymore. LOL
- Warsaw, IN · Member since 2017 · 229 posts · 270 votes5y
@Devin Monroe one thing to consider is you are looking at your cash on cash return -not the total return. The total return will include the mortgage pay down, any appreciation, and also consider this money is largely (or completely) tax free... and available NOW
If you're comparing 6% COC to the avg long term stock returns of 6%, it's not apples to apples. If Stocks/Index finds are in retirement accounts, you can't necessarily spend those returns today/tomorrow. If they're in a taxable account...you'll get a 1099 at the end of the year and that "6% return from the market" (or whatever it ends up being for your portfolio) should be recalculated including those taxes.
Another thing I think of is those maintenance/capex costs your factoring-go to your maintenance/reserve account, so you have that money until it you need to spend it.
I think you’re numbers are pretty good/accurate, and if you’re looking to start a RE portfolio it seems like an acceptable deal to start.
- Real Estate Agent · New York City · Member since 2020 · 819 posts · 641 votes5y
If your ultimate goal is to own 60 units and have a property manager anyway, find someone who you can develop into a full time role over time. Someone you trust who is ambitious, can work part time and isn't too "pricey".
Perhaps a friend's son or daughter in their senior year of high school (for example). They likely have a car (or you can buy them a cheap beater for mobility), give them some experience and some cash for small tasks. In 5 years (after college - assuming they stay local) they could be a great asset and they've been custom tailored for you!
- Specialist · Huntsville, AL · Member since 2020 · 200 posts · 105 votes5y
@Devin Monroe In my opinion the property manager should pay for itself with the expertise and knowledge, and saving you time allowing you to work on other investments.
- 5yMichael MagnoBusiness MemberReal Estate Agent · Wadsworth, OH · Member since 2017 · 234 posts · 168 votes
Invest in a market where you can achieve the desired goals.
- Investor · Kingsport, TN · Member since 2016 · 412 posts · 254 votes5y
@Devin Monroe
Without knowing your market or going through your numbers, roughly 6% return is probably fairly accurate just purchasing a turn-key property without being in a higher risk market like Memphis.
Investors hitting higher/infinite returns are purchasing value add properties (below market rents/needs updating). They then go in and raise the value of their property and refinance their money out, or just bump up inplace rents to hit those higher metrics.
- Investor · Hendersonville, NC · Member since 2013 · 757 posts · 282 votes5y
It's challenging. It's one of the reasons why if you can own 65 units, you might as well own them as an apartment complex! That way you can hire one PM for $75k a year and one maintenance tech for $50k a year and you can service all 65 tenants. If they were separate houses, you'd have to pay a maintenance person $30-$60 an hour if you could find them available, and if the rent on 65 SFD houses is, say, 65,000 a month, that's $780k gross rent per year, which would cost you probably $60k anyway. So you can see, 65 units is about the "break-even point" - the "economy of scale" works even better with, say, a 100 unit apartment building because then you can still only spend $125k - $150k per year on those two individuals and yet your income could be $1.2m per year.
To answer your question in a straightforward way: if you are paying cash, fine, lose 8-9% on a property management firm. Have fun. But if you're using 65 loans, you'll only net maybe $300 per house per month, and so spending 8-9% will take you below zero in income per month/year.
No matter how you slice it, property management is a thorn in your side. You're either doing 65 units' worth of management as a full time job, or you're paying $125k per year to two companies who will give you mediocre service and take up five hours of your time per week, anyway.
I can't tell how many times I've raised my fists to the sky, yelling: "OH MY GOD, Realtors, contractors, tenants, bankers, and property managers are KILLING ME!!!!!!"
It's a long and sometimes tough road you're on amigo. Try to get to the other side as fast as you can (that is, get beyond trying to own 65 separate houses in a 20 square mile area, and dealing with a PM and a handyman outfit). I find apartments as a "passive investor" (in other words, not the operator of the thing) is the way to go, but it's a slow build. It's long term wealth building. It's not easy exactly, but it's a hell of a lot easier than owning 2,000 houses!
- Rental Property Investor · Member since 2020 · 215 posts · 137 votes5y
@Devin Monroe
Some things to consider:
1) the price of the property might have moved up while rentals did not. That is squeezing you return. I would imagine the rentals might catch up with time, but thats not a sure thing
2) if a PM is charging 10% of the rental, they shall not charge a full month to rent a unit. That would give you some extra cash to your cash flow
3) With cash flow of 190/mo, i see a 7.8% CoC with 29 k investment. Not great, but if you find a better deal with PM ( like the rental) then you might get closer to your 10%.
- Financial Advisor · Baltimore, MD · Member since 2020 · 19 posts · 28 votes5y
@Nick Barlow
This is a good point. 6% COC but total return may be close to 10% which isn't bad. Being a stock guy it's hard to see such a low COC since there is a lot of working going into this investment.
- Financial Advisor · Baltimore, MD · Member since 2020 · 19 posts · 28 votes5y
@Heath Ryans
Ok so 6% for turnkey isn't bad? It doesn't make me feel great but that makes sense. I should look deeper for something I can add value to get 10%. All I hear is 10% COC minimum from guys like chandler David smith and whatnot.
- Financial Advisor · Baltimore, MD · Member since 2020 · 19 posts · 28 votes5y
@Alexandre Marques dos Santos
It’s 29k plus closing costs at 6%. I’m hoping I close at 3% but my lender said expect 6% especially with the hot market.
- 5yPatrick LiskaPro MemberInvestor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
Originally posted by @Devin Monroe:
@Patrick Liska
That’s a good way to look at it. But you are assuming nothing else goes wrong in the house when you need the roof. I may need to retool my numbers to be more accurate about cap ex.
The vacancy at 1800 includes the PM leasing fee (75% of first months rent) and one mortgage payment. So it’s right around 1860/year. That assumes my place rents 11 months out of the year and takes one month to fill. It doesn’t even take into consideration tenant turnover that could cost me a lot to repaint or change carpet etc. that’s why I’m a little worried about cash flow as swapping tenants every year I’d break even essentially.
You are correct, if in a perfect world there are no other repairs, Capex is usually major repairs, maintenance should cover minor expenses. 75% leasing fee from PM, on 1500 rent that's $1125, that can be negotiated, I pay $300 leasing fee. If you replace a carpet and re paint the place and the tenant only lasts a year, and you have to fix both again, that's not normal wear and tare you can take those costs from their security deposit.
- 5yMatthew Irish-JonesBusiness MemberReal Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
@Devin Monroe it’s fairly simple, a PM is going to cost somewhere around 10% of rent on a portfolio of 2-4 unit homes so run your numbers accounting for those services.
As for maintenance and CapEx, it should be about a wash if you have a solid PM company. They will get volume discounts compared to what you can get on the open market.
If you have 50 units and self manage you will need close to 40 hours a week, maybe more to manage that many units.
So if you quit your day job, say making $80,000 to work full time on managing your properties to save 10% on PM fees, are you further ahead or behind? I would say behind because you will make some mistakes due to inexperience and you will not be as enticing to lenders because you lost your W-2 income.
There is a rare bird who can manage all of
His properties himself and keep his W-2 job and be great at both. It doesn’t last forever for
Most people and you end up working 80 hours a week.
If you are house hacking or self managing 2-6 units and working full time you can do a good job. Otherwise it starts to become too much.
The people that say you can’t make money using a PM should clarify to you can’t make money using a Crappy PM.
A good PM exists to protect your asset long term, bring in cash flow but, not at the cost of maintaining the asset In good working order. Deferred maintenance can have a very steep price.
In the beginning you can trade time for money. In the end building a business that can afford to pay professionals to do what they do best is the best long term business model.
You can save money on cleaning all of
Your apartments yourself as well. How long do you want to be scrubbing toilets for? I did it for 2 years... looking back It should have been the first thing I outsourced. I don’t miss cleaning toilets and I’m quite certain I never will. At some point time becomes your most valuable resource,
And professionals that can help you get it back are worth the price.
Irish Jones Realty4.947 Reviews - Rental Property Investor · Baltimore, MD · Member since 2020 · 53 posts · 48 votes5y
@Devin Monroe let me go on another angle on this since most have dipped into your analysis with the numbers.
Here’s what I’m thinking, to turn over 1 or few doors to a PM, it would be really hard to get a rate lower than 10% to pay them. Could be even higher and yes they may/do take the first month pay if/when a turnover is to occur.
Now, 10 doors and up, might have a better chance to get a rate lower than 10% to give up to a PM. You’ll have a better leverage negotiating. No surprise to me if PMs are favoring an investor with more doors than a single or a few doors investors.
I’m set in stone to manage my first few doors myself. Got this mindset already to roll my sleeves up and manage my tenants. Im starting to build up a list of handymen and other essential players for maintaining properties.
All the best, good luck!
- Specialist · Huntsville, AL · Member since 2020 · 96 posts · 35 votes5y
@Devin Monroe
From what I see a property manager is very good even if you have one property and you keep building. My personal opinion is you manage the properties until it’s something that you can’t handle yet or it’s just getting out of hand and it’s not something you wanna do. Most property managers get 10% of what the rent is and if you can work that into the budget and you’re still receiving some cash flow I highly recommend it.
Now if you’re not wanting the added expense then you have to be very precise with your paperwork your spreadsheet has to be perfect and programmed correctly to wear at the end of the day you can see your final numbers. And if a property manager makes sense to have somebody else take care of the property so you don’t have that mental load on you then it would be great.
Always remember to add what the property manager percentage is going to be two-year debt service. If it any point you have a negative deal whether it be monthly cash flow or equity that you’re having in the property I do not recommend it.
I tell clients all the time your total expenses should be added up to a single debt service. Cash flow is profit, equity in the property is profit as long as you have somebody making every single monthly payment. When investing you have to take into consideration every single detail in every aspect of the loan or of the property itself. If either one of those get out of hand and your debt service gets a little out of whack then you’re in a situation to where you either started with a predatory loan or you’re in a predatory situation and you’re not gonna make the profit that you should as an investor. Or the profit that meets your portfolio percentages. People have their own formulas whatever fits for you fits for you.
- Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes5y
@Devin Monroe - I think you want to be asking What’s the best way for me to get started? Until you have properties, you don’t have a PM headache and PM fees don’t matter.
So, here's how I got started and recommend everyone gets started. Buy a house to house hack either a 2-4 unit or a 4-6 bedroom 2-3 bath single family. RENT the extra apartments or bedrooms to pay 60-150% of your mortgage cost. I bought a 5/3 for 255k in a job dense area near to my work, had 4 roommates paying me $2000/mo plus 4/5 utilities and I paid a $1500 mortgage. So I was paid about $6000/year to live in my own house and it appreciated about $200k so far. I bought a smoky-smelling foreclosure that needed cosmetic work. Closed around thanksgiving, started reno ASAP, and had my first tenants in by New Years. At worst occupancy is like 3/4 bedrooms and your mortgage is still 100% paid. That's why I like the too big house, rent by the room model kind of like student housing but you'll find a huge amount of recent college graduates and quiet, working professionals asking about renting space in your place because it's 50% cheaper than an apartment. Then you can deduct your utilities, house furniture, TV, appliances, repairs etc against your schedule E income as per your CPA's recommendation. Nowadays my house rents for $3000/mo+ with a 1700 mortgage. I self manage and have no problems because area is B class and I get solid mature tenants with good jobs who don't want to damage their credit. Average maintenance is pretty low but you do have lumpy expenses like a new furnace, AC or new roof. Those are the big ones and hopefully only every 20 years. So with $60k down and $1000/mo return currently (12k) that's 20% COC not including my appreciation which makes it like 40% annualized ROI. And you have to consider the rent I wasn't paying someone else, at least $600/mo (7200/year)... so honestly GET STARTED. The house hack is the best way to go.
- Financial Advisor · Baltimore, MD · Member since 2020 · 19 posts · 28 votes5y
@Natalie Schanne
Thanks for insight! Househacking is not an option for me I already have a primary residence. I’ve considered not using a PM, however, I know I’d use one eventually so I’d like my numbers to work assuming that one day I’d use them.
- Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes5y
@Devin Monroe - ok, you said in your first post you didn’t have a home yet. You can also make money in real estate doing a series of live in flips where you buy ugly, fix it up (yourself or with contractors), and sell it with free capital gains every two years. My husband and I have $100k forced appreciation equity in a deal and we got a rehab loan for all the money and only put about 15k down on 300k. Contractor did all the work before we moved in. Then it appraised for 400k. In two years, we sell and buy another one. Great way to build wealth while living essentially for free. If you definitely have to stick in your house and can’t use your owner occupied financing to help leverage your wealth, then I highly recommend partnering with someone on a flip (you help provide money and you help with Home Depot runs, etc.) and learning the ropes in a compressed time period where you see an ugly house get remodeled and sold. Then go out and buy a rental where you won’t be afraid to fix up what’s needed and then you have super low maintenance the first few years because you know what you got yourself into. I also learned a tremendous amount by pming myself because you have to realize the property manager gets paid for renting a unit, not necessarily your unit, so I’ve found I keep my units rented faster, for longer, and to high quality people. Because I benefit $50/day it doesn’t bother me to run over and shoot a great video or great pictures. I’ve seen lots of ads with terrible pics or leases ending off season, and then the landlord is out 2-4 months of rent in addition to the placement fee.
- Member since 2019 · 182 posts · 45 votes5y
@Devin Monroe I wonder too. I bought a fourplex in McAllen, Texas (one of the cheapest places) and glad to break even with a pm. This seems to be the case in general there is such a small margin and then adding a pm leaves one definitely happy with breaking even
- Realtor · Saint Charles, IL · Member since 2020 · 126 posts · 101 votes5y
@Devin Monroe
My opinion on this subject may be naive however I figure in reserves of 6-12 months of mortgage per property. If I buy a house I will go through it with my contractor, anything that is on the boarder of being a liability and fix it / replace it. Knowing full well I shouldn’t have any major repairs or capex for awhile.
That and if you provide a nice place and are a decent human being you shouldn’t have turn over every year. Average tenancy for sfr’s is about 6 years. So far that’s proving to be valid in my experience.
Don't sweat the petty stuff. Keep it simple if it rents for 30-55% more than your mortgage you'll be fine. Buy with reserves in place or open LOC equal to 12 months of mortgage. Cash for reserves is best though..
Best of luck don’t over think it.
- 5yBonnie LowPro MemberLender · Asheville, NC · Member since 2016 · 1k+ posts · 1k+ votes
Hey @Devin Monroe - maybe the way to think about it is 'Can a good PM save me money?' The key word being Good. Everybody knows there are a lot of lousy ones out there but if you get a good one, I think it's a worthwhile expense. Fortunately, we've had good property managers. We did our homework, interviewed multiple companies, looked at their procedures and systems and it's worked out well. It saved us time and money not having to advertise vacancies, screen tenants, deal with maintenance requests, handle turnovers, collect rent or deal with evictions (luckily, that's never happened so far). They also inspect the properties twice/year and that alone is worth the monthly cost because we're out of state landlords and the trip back twice/year would be costly, albeit a write off. We also get tidy paperwork monthly and at the end of the year which we just hand over to our accountant. While it does take a bite out of cashflow, I'm pretty sure if we had to do all this ourselves not only would it eat up time we could put to better use doing other things, we would be liable to make costly mistakes. Also consider that most companies offer a break after a certain number of properties, so that can help.
I support your conservative method of running the numbers. Don't be misled by the You-tube gurus who rarely show you a realistic proforma when they run their numbers. Your method will more accurately reflect what will really happen. I looked at Baltimore very closely for rentals, some issues:
1. The typical Baltimore rental is a 100 year old rowhome. Even if rehabbed there will be age related issues not addressed by the rehab. Some of these include the sewer connection to the city and iron pipe issues in the unit. Rehabs should address new roofing, plumbing, electrical, flooring, appliances, and new HVAC in addition to all the cosmetic issues. This will run from $75K to $100K and all of these will not have been performed in your base $145K unit.
2. Many Baltimore rehabs will rubber coat the roof, typical this has about 5 to 7 year life.
3. Lead paint is always an issue. You will need to remove it completely by a certified contractor or have a periodic inspection. Either of these cost money.
4. Baltimore is tenant friendly. You will also need what is essentially a landlords license.
5. Baltimore very much street to street in terms of value and street crime. You absolutely need to know the areas or work with an agent you know and trust.
6. Real Estate taxes will greatly increase due to the price you paid vs the original appraisal. I understand that Baltimore has not been very aggressive in increasing property taxes due to resell. I expect this to be stepped up since states and cities will need to increase taxation due to covid expenses.
6. You need to ask yourself why an owner or investor is currently selling his 100 year old house if it is a gold mine. Likely there is significant deferred maintenance or cap ex that needs to be corrected.
7. Closing costs are high in Baltimore roughly 5 to 6%.
I am not trying to advise you not to buy in Baltimore but rather supporting your conservative calculation of costs and returns. I believe it is realistic to expect a $100 to $200 cash on cash return or 6% Cash on Cash return if using a PM company. Make sure you get a home inspection and property appraisal before you buy. Best of luck!
- Rental Property Investor · Rohnert Park, CA · Member since 2014 · 307 posts · 160 votes5y
@Casey Crites
That's nice that you have a reliable PM with the great contacts. Very cool. What are your monthly cash flow and COC returns on your properties with the PM fee?
- Rental Property Investor · Myrtle Beach, SC · Member since 2020 · 28 posts · 14 votes5y
@Devin Monroe
Shop around with the PM group you use. Make sure you know what services you are expecting from them so everyone is on the same page and you’re getting competitive prices. You could always go the route of starting your own property management group one day if you’re planning to have that many units. Able to inspect a lot more of what you expect that way!
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