Can Good Property Manager's Pay for Themselves?

31 Replies

I have a property management company which I am trying to grow. I started out 6 years ago as a real estate investor so I understand the philosophy of minimizing all costs to maximize your ROI. The question though is whether or not having the right property management company can actually increase your ROI (even after deducting their fees)? I believe it can.

Since we started as real estate investors, our companies focus on all the areas that rob ROI (mostly bad debt, vacancy periods, maintenance costs and monthly rents).

We lease prior to a tenant leaving to minimize vacancy periods (currently we close more than 2 weeks faster than average property management companies and that doesn't compare to investors who self manage).  

Since we already own a lot of properties, we work to partner with cheap and skilled tradespeople saving maintenance costs.

We are proactive in our maintenance so our tenants are happier and they stay on average longer than most tenant occupancy periods (which saves the owner on future leasing).

We set up leases to end during summer months where we have the most tenants looking for new houses to rent so we can maximize rental rates.

Even though we rent fast, we prioritize make ready repairs so that we can continually keep the property up to maximize rental potential and identify and get great tenants.

We are proactive in our collection of rent so we evict faster than self managing investors.

We perform inspections to identify how tenants are keeping the property to not renew leases to hoarders and people who break lease terms.

We perform move in and move out inspections by video to document condition to charge back tenants on security deposits.

For some investors, they are not as on top of all aspects of property management and they should get help (to improve ROI). There are some property management companies who are not proactive like us and they do not really add value.

What do you think, can partnering with a holistic property management company actually increase ROI (even after deducting fees)? If you knew you had a holistic property management company, would you consider buying more?

Yes, I have hold off on buying B-/C areas because I have not found the right management company yet.

On the other hand, I am not very active in those areas so I don't actively seek the right management company out. 

But I do see some interesting properties now and then, which I would consider buying  with the right property management team. 

The biggest costs can be lumped into... tenant turnover.

How about not charging a lease up fee, and instead take a renewal bonus? Better to align your incentives to your clients.

@Max T.

I think that is an interesting idea but has some flaws.  Based on fair housing laws you cannot discriminate.  However from our experience, roommate tenants (for example four friends) turn over more than families with young children.  For the same quality of property management, some tenants will turn over more.  

If you promoted that in lieu of leasing, it is possible that a property manager may screen less well if the tenant profile is more conducive to a long term tenant (aka, I'll sign a three year lease, etc).

Originally posted by @Samuel Eddinger :

@Max Tanenbaum

I think that is an interesting idea but has some flaws.  Based on fair housing laws you cannot discriminate.  However from our experience, roommate tenants (for example four friends) turn over more than families with young children.  For the same quality of property management, some tenants will turn over more.  

If you promoted that in lieu of leasing, it is possible that a property manager may screen less well if the tenant profile is more conducive to a long term tenant (aka, I'll sign a three year lease, etc).

 If there is tenant turnover but <2 days vacancy in between tenants then I bet owners would be happy to pay the "renewal bonus" or whatever you want to call it.

@Samuel Eddinger -- Great Post.  I think the reason it resonates with me is that you are managing your company in the same fashion as you would your own rental. That is what I try to tell prospective clients on why I am different.  I have run my own rentals for a decade now and I am running the management company the same way for my clients. 

When you break down your management fees over that year, you may be in for a couple grand, maybe more...maybe less for the area.  Using trusted suppliers that keep tenants happy and charge you under market pricing ($ Savings for owners); Getting it renewed or re-rented with next to no turn ($ savings for owners); Posting rental for lease 60 days out allows you to start the rent higher and move pricing downward as you get closer to renewal.  It maximizes the rental income (Making owner $) as well.

Giving the tenants online payment options, allowing them to pay with CC  -- lowers the likelihood of defaulting on rent payments.  Spending the time calling references (and knowing what to ask and where to find it), lowers the risk.  All of that saves money for the clients and lowers their liability.

If there is a study on the cost savings for a Property Management company, I would like someone to share it.  I have not found one recently that goes into the numbers.  That would be pretty cool to see.

@Jim Shonts .

That’s the problem with this exercise.  I plan to analyze my performance but things like vendor savings is impossible to quantify as I do not plan to call additional vendors to quote every job.  

I think the easier ones to quantify are things like difference in rental rates by month (we set leases to only be in best rental months), reduction in vacancy period, and increase in tenant occupancy period.

Hopefully with time I can get the data to put this into hard dollar numbers.

@Samuel Eddinger If the pm is taking 10% of the rents plus other fees I hIghly doubt they are going to offer a higher ROI than someone who self manages that IS smart . The fact is nobody will care for your investment better than you will !
I would make sure your property management company markets itself well and have a good website. Even if your company come up in Google, people need to see what you are about, you are a trusted company and not just some guy who does property management.....also make sure you respond quickly. When I was thinking about hiring one, only 1 of 3 responded from their websites.

@Dennis M.

You are exactly correct but it takes some time to know enough to be able to manage it well.  After you have more than four properties and work a full time job, it is hard for DIY landlords to be able to prioritize leasing during weekdays, etc.

As an investor increases the number of properties, the ability to juggle it all without losing days starts to occur and then you can make a decision to get help, go at managing your properties full time, or becoming less efficient.

What percentage of property owners  do you think has what it takes to really be able to manage their investment without losing days?

@Joe M.

Thanks for the advice.  I actually agree with this more than you know.  If a property manager does not prioritize reaching out to prospective clients as soon as possible, how can you trust they understand what time is of the essence means for leasing?

I think where a pm really shines is long distance investing .I also think a pm usually offers a great service , however my issue is the financial aspect atleast from a perspective  with less than twenty or so units . 

Going back to having difficulty putting a number of savings to discount using vendors....

Maybe reach out to vendors you already use a lot, tell them what you are doing and see if you can get an approximate number.  If you use them a lot, they will see the value in this

I think my pm has more than paid for himself by his aggressiveness in ensuring my property stays maintained and rented. I feel it is a small price to pay for the peace of mind he provides for me. As I continue to build my portfolio I would not consider anyone else to fill the pm role.

I would agree with your initial thought that a good property manager can more than pay for their fee. It does though depend on how good the customer was initially at property management. Two potential benefits of property management are time savings and let's just call it broadly profit optimization or getting the most bang for your buck.

For a lot of people they will be taking a hit on profit when they hire a property manager to gain back time and scale-ability. The other benefit, this is what @Samuel Eddinger is referring to, is if it costs, lets say $200/month to hire a property manager for one of your properties. It is very possible that the property manager could increase your profits, either by increasing top line revenue or decreasing expenses, by greater than $200/month which would give you the full pay back and then some while still getting the added benefit of more free time. The big variable that this will hinge on is how much better of a job the property manager can do at managing the property than you have been doing.

Thanks @Nicholas Paros .  I agree with you wholeheartedly.  The hard part is finding the good property managers who are more than just rent collectors.  I am trying to coin the term "Holistic Property Management" to describe looking at all the parts of property management and focusing and optimizing each portion to return value to investors.  It is not easy, as an investor first, I really enjoy helping people be even more successful.  In this regard, I am no different than a financial adviser, who is allowing you to treat your asset like a stock, and you can get great returns.  I just realize that my job is that much more difficult which can make the reward that much greater.

One thing I was pretty surprised about was lawn/snow removal.

I think as a PM, there should be services available.  (In my eyes a PM should do everything to manage that property and not put any of the stress on the owner)

Your resume is exactly what my first two PMs told me.  They were also honest and hard working people but ineffective.  My 3rd PM is better but more expensive than if I self-managed (both including and excluding management fees).  But it's worth it for me.

If you are able to scale that level of service with employees and trades who are as smart and hard working as you, you will not have a hard time growing your management business.

Originally posted by @Samuel Eddinger :

@Joe Marshall

I’m not sure I understand.  A PM company should handle everything.  What is your experience?

 So in my two experiences meeting with PMs, both put the duty of lawn/snow on the tenant.  When I asked if they didnt want to or couldnt take care of those, both said they didnt have any maintenance services in place and either I could or they could but it would be extra (on top of first month down and 10% a month)

Originally posted by @Samuel Eddinger :

@Mike Dymski.  Can you explain more what made them ineffective?  I’m new to this and want to focus on the natural pitfalls of property management so I can grow processes to help the people and thus business succeed.

Poor management of vacancy and repairs.  Most management companies handle resident management well but they struggle with the tougher aspects of management (slow turns and poor management of repairs and the cost of repairs).  Most investors think the cost of 3rd party management is in the management fee and that is a distant 3rd compared to the cost of mismanaged vacancy and repairs.