Are Property Managers Worth The Money?

Question

I want to create passive income for myself and not have to deal that much with tenants, so I heard that property managers would be a good idea. But I've also heard that they can be quite costly.

Linnea Minnema · Answer

These are two separate questions.  First, related to cash flow.  When you are scouting deals, make sure you include 10% for prop management into your calculations.  If it doesn't cash flow because of the property management fees, it probably isn't a great deal and you should keep looking.

Prop management is worth it to me because I don't have time to deal with tenants nor do I live in the same city.  My oversimplified way of looking at this - if you actively manage your rentals, that's a job.  If you hand off your properties to a management company, that's an investment.  It just depends on what you want.

Michael Marston · Answer

Property Management company takes 10% of my rents collected. They tack on 5% to cost of services. They take my first month's rent for a new tenant. And I GLADLY pay it.

It is well worth the cost to me. I don't deal with the tenants. I don't have to find contractors and meet them at the property. I don't have to advertise vacancies. I don't have to deal with showing the vacancies. They conduct regular inspections and provide suggestions to me. I am a real estate accountant by day, so I am familiar with how valuable some line-items can be. And the PROPERTY MANAGEMENT line-item is one of the most valuable ones on my rental P&L.

My investments are all rural rentals and the cap rates are anywhere between 15%-34%, so I have room to include the PM costs and still do ok.

Account Closed · Answer

Here are my two cents on PMs

A lot of new landlords immediately hire a property manager thinking it will be better, easier, safer, _________ fill in the blank. The problem is, a property manager will never have an “owner’s mentality.” I am not saying they won’t try their darndest and hold up their end of the contract. But, as an owner, you will develop a relationship with your tenants and service providers. A relationship that is based on a mutual understanding, respected and nurtured. When it is, tenants renew, they take care of your home, like it’s their own, they fulfill their obligations and leave on good terms.If you make the people, process and product, the sole focus of your new rental business, you’ll be amazed how little time it takes to manage your home(s). Once you have the tools you need and put a process in place, the day to day management is minimal.I spend less than 10 hours per year managing my rentals, less than that if the tenants renew and I am not marketing. Having a PM doesn't mean hands off. You still have to answer their call when there is an issue, review their accounting and if shit hits the fan, it costs you not them to evict the tenant they placed. Finally, you can't manage what you don't know. If you are going to be a real estate investor and own rental properties, it is a good idea to know how to manage them, have qualified vendors and understand the rules / regulations. Otherwise, how are you going to hire / oversee a PM?

A lot of new landlords immediately hire a property manager thinking it will be better, easier, safer, _________ fill in the blank. The problem is, a property manager will never have an “owner’s mentality.” I am not saying they won’t try their darndest and hold up their end of the contract. But, as an owner, you will develop a relationship with your tenants and service providers. A relationship that is based on a mutual understanding, respected and nurtured. When it is, tenants renew, they take care of your home, like it’s their own, they fulfill their obligations and leave on good terms.

If you make the people, process and product, the sole focus of your new rental business, you’ll be amazed how little time it takes to manage your home(s). Once you have the tools you need and put a process in place, the day to day management is minimal.

I spend less than 10 hours per year managing my rentals, less than that if the tenants renew and I am not marketing.

Having a PM doesn't mean hands off. You still have to answer their call when there is an issue, review their accounting and if shit hits the fan, it costs you not them to evict the tenant they placed.

Finally, you can't manage what you don't know. If you are going to be a real estate investor and own rental properties, it is a good idea to know how to manage them, have qualified vendors and understand the rules / regulations. Otherwise, how are you going to hire / oversee a PM?

Dana Dunford · Answer

Tahj G. -- when you are determining whether or not a property will cash flow, you will want to make sure a line item for management is included in your numbers.

Justin Fox · Answer

It's usually a move from actively managing a property(ies) to sacrificing some of your earnings for time away from LL'ing, which probably makes the newly reduced income even sweeter.

However, I self manage my properties right now and I'm not sure a job would be the correct definition.  I schedule 30 min viewings on Saturdays every 2-3 years, I pick up checks and call other people to fix problems at the tenant's expense.  I'm sure one day I'll get tired of turnovers overlapping, picking up checks and not fixing things.  But for now, I feel it's just too easy.  Saying this though, I do realize people have different classes of property, live further away and have different personalities/goals.

I agree with the factoring in a deduction of 10% of the gross rents in your positive cashflow.  Not only for future use of a management company, but also for possible decrease in rents.

Good luck on your decision.

Ali Boone · Answer

Usually only about 10% of the monthly rental income. It depends on your goals, but if you actually calculate out what your time is worth--the time you'd have to spend on the properties without a manager and the stress that may come with it--I bet you find it's worth the payment.

I wrote this article a while ago that starts to talk about benefits of using a property manager-

https://www.biggerpockets.com/renewsblog/2014/06/0...

In the first section about paying a manager, there's a link to another article that goes in more depth about valuing your time and deciding if it's worth it to pay a manager or not.

Joseph Austin · Answer

One of the many reasons why I love single tenant triple net lease investments is they DON'T NEED a property management company to be involved.  They don't even need to be in the state where you live.  For several reasons (among which are tax purposes), you may even purposely want to purchase in a state outside of where you live.  Single tenant triple net leases are the best real estate investment vehicle I'm aware of for gaining true passive income.

That being said, if you don't feel you are in a position to purchase this type of real estate asset then I agree you absolutely need to build the cost of a property management company into your analysis.  You want passive income and most real estate investments without a property management company being involved are anything but passive.

It depends on the type of real estate you are purchasing, something around 8-10% would be my expectation for a residential property management company, but if it's a large commercial property, it will probably be something closer to 4%.

Lastly, if you end up investing in a real estate type that requires a property management company then take your time vetting property managers.  A good property manager can be worth their weight in gold, but a bad manager...

Best of luck and again, because your goal is passive income, if you're able, I'd seriously consider single tenant net lease investments.

Chuy Gonzalez · Answer

I thought it would be a good idea to keep the PM company when I bought my place. But that was a huge mistake. I had a decent guy, but he left. The PM company was horrible and lazy...they would put in anyone with a pulse. I got rid of them and got a night and day better PM company that makes the same decisions i would make with a eye towards protecting my investment long term. The old company was 6.5 percent, the new one 6 percent. The old company charged me everytime they went to my property the new one doesnt. The old company gave me late fees...the new company keeps the late fees..there are lots of differences betweeen companies. Yelp and word of mouth referals are good ways to find a company.

Ashley Ben · Answer

I think it depends on how many properties you have. I use rentigo to manage my properties and it's really easy and I think hiring someone external would be a waste of money. This way I get to see and control everything. I think it would be worthwhile to use a paid service if you live in another state maybe and want someone to come deal with issues, or if you have hundreds of properties and managing them isn't your full time job. Worth checking out rentigo here: www.rentigo.com

Are Property Managers Worth The Money?

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