Renting my first property. Property Management or No?

14 Replies

I am buying a new property and plan to rent the first one. Wondering if I should utilize a property management company or rent myself. Pros and cons of each one. Thanks in advance for any feedback.

@Elon Matias   I think a lot of this decision depends on you really.  How much time and energy do you want to devote to it to save the 8-10% of your rental income.  I would say if you are planning building a larger portfolio down the road, it would be a valuable experience to self-manage this one (especially since you know it so well already) at least for a little while to really understand the nuances of property management and appreciate the value of it when you eventually pay for it.  This will also help you make better decisions with choosing a property manager when you need it with a larger portfolio of homes and ask the right questions when interviewing them. 

Best of luck to you and congrats on your new place!

Cheers!

Originally posted by @Elon Matias :

I am buying a new property and plan to rent the first one. Wondering if I should utilize a property management company or rent myself. Pros and cons of each one. Thanks in advance for any feedback.

Managing yourself will be an education that will help you become a better Landlord in the future. It's educational, it's fun, and you can save 10% by handling it yourself.

On the other hand, self managing can cost you a lot more than 10%. I have personal experience and I see it on these boards every day where someone is trying to save 10% to make their property cash flow but they end up losing far more than 10% because they don't know what they're doing. A good property manager will know the market better than you. They can advertise and screen better. They know the law and keep you in compliance. They have solid policies and procedures, built with decades of experience, that will enable them to prevent problems before they start or nip them in the bud quickly, reducing your exposure and losses. They have a network of trusted vendors that can respond to maintenance quickly and effectively. And more.

I'm a property manager with 350+ rentals under management. I own 22 units myself. When I'm ready, I will hand all my rentals over to a professional because my time is worth more than just 10% and I understand the value a professional brings to the table. I would rather spend the time finding a quality property manager so I can free up my time focusing on bigger things.

 

@Nathan G. Yes, that’s what I was thinking. I’d rather pay the 10% and have majority of the work done for me than to have to worry about possible issues. BUT, I do also want the overall learning experience of doing it on my own. If I do it on my own, what tips do you recommend?

@Nathan G. really hit the nail on the head. I found out after a couple of years self-managing two different properties that I have very little patience for people's (perceived) problems, don't like having to leave my job to go to said property for minor issues, and having to sit there with some professional fixing a problem and on their schedule.

I learned a lot of about the things that could go wrong -- and how to prevent them -- and also a ton about myself. Put me in front of a broken enterprise application at 3 AM with a team of technical people, and I'll shine like a new penny. Put me in front of a tenant at 8:30 AM with a broken heater and a bunch of complaints, and I'm angry, withdrawn, and frankly don't feel like dealing with it.

I'm an investor in every sense of the word. I want to find the properties that can make me short term (cash flow) and long term (appreciation) gains. But I have very little desire to manage each individual property and tenant.

So I got a property manager, and I manage them. I do better with a business to business discussion (because that's what it is) and emotion stays out of it. We discuss numbers, issues, but she filters out the personal complaints. It's "hey Joe, the heater at Unit A seems to be on the fritz. I'm getting my heating guy out there today, his diagnostic charge is $150 which includes any spot repairs. I'll make sure he gets in the property and I'll lock it up when I'm done." as opposed to a frantic phone call from a tenant "Joe, the heater isn't working! This is unacceptable! My baby and I are freezing! I'm calling DOH because you are a crappy landlord!"

You might laugh at the above, but tenants are irrational sometimes. I don't do well with irrational people or situations -- I'd like to think I'm a logical person and I deal with logic.

So, long story short, figure out what you like and what you don't like, what you're good at and what you're not good at, and be honest with yourself. Don't be a handyman if you aren't a handyman. If you aren't good with accounting and income evaluation, don't pretend to be good at it. Find your weaknesses and start plugging those holes. Self manage to start -- and then see how much you like it, or don't, and decide from there. In the interim, start researching local PMs, go to meetups and ask people for PM recommendations and start talking to them. As you manage, you'll know what to ask and what's important, and who will be a good fit should you decide to change to a PM.

@Elon Matias It takes about 20-22 hours per year to manage a B class property.  If you have that time that is great otherwise you pay a management fee for some of the following items.  When you look at this the $1200-$2000 you pay in a management fee there is value that exceeds that.  

  1. Hidden Identity - A manager should have their name on the lease as agent for owner
  2. Wall for Liability - You have PMs liability, workers comp, and E&O as additional layers of protection for things going wrong. Make sure who you hire has these.
  3. Avoid Fair Housing Issues - Let the people that know the laws make sure you don't get into and grey or red areas.  
  4. Resources - Your PM should be able to get you better pricing on anything from a process server, to having guys to pick up old appliances for free, to trash outs, routine maintenance, and in bad areas house sitters or security.  
  5. Turn Units Faster - This one should make up some ground for fees charged in speed.  A manager should be able to turn over an average unit in under a week and maybe have it on the market sooner.  

That is just off the top of my head but that is alot of hidden value you pay for when working with a professional PM.  

Originally posted by @Elon Matias :

@Nathan G. Yes, that’s what I was thinking. I’d rather pay the 10% and have majority of the work done for me than to have to worry about possible issues. BUT, I do also want the overall learning experience of doing it on my own. If I do it on my own, what tips do you recommend?

Education and work.

Start by reading some books on managing properties. The BP bookstore has one that is highly recommended. I also recommend "Every Landlord's Legal Guide" by NOLO because it includes state-specific laws and points you to resources. It's also full of practical information about marketing, screening, dealing with late rent or lease violations, etc.

After getting a basic education, I recommend putting your nose to the grindstone and building policies, procedures, forms, and letters before you have problems. Make a list of everything a property manager does, start to finish. Start with the most common stuff and then get to the less-common stuff later.

  • market property
  • pre-screen applicants
  • show property
  • screen applications
  • accept deposits and rent
  • sign lease
  • regular inspections
  • spot inspections
  • lease violations
  • late rent
  • unpaid rent
  • add or remove a tenant
  • add or remove a pet
  • tenant abandons
  • tenant wants to terminate early

 Once you have a list of 50 or so tasks, start knocking them out one at a time. If you do one a week, you'll have 50 in a year and be light years ahead of 90% of all private Landlords.

Marketing: will you use pictures? Video? How can you get better at taking pictures and video so your property stands out from the competition? Where will you advertise? How will you study the market to understand what your rental is worth? etc.

Screening: what should my criteria be? Will they apply online or on paper? Who will you use to screen? What's a good credit score? What are the common red flags to watch for? Do you have every adult apply or just the one paying the rent? How do you verify their identity? What questions should you ask their former landlord?

You can accelerate it by reading blogs or watching webinars on BP, build your basic policy, and then fill in the gaps by asking questions. If you want to do it right, it's a very time-consuming process.

@Elon Matias One more thing from above:

6. Experience - At this point, 16 years into managing and thousands of units managed in that time we have seen just about everything and know how to react.  If we haven't experienced it, we know who to call hour one of a new issue.  This is Chicago so "We got a guy".

When you hear about costly mistakes landlords make it isn't typically the initial problem that was the bulk of the cost.  It is how swiftly or not swiftly the landlord reacts.  

Example...if you are a landlord long enough you will come across a bad tenant no matter how great your screening is (you cant always screen "crazy").  It is how fast you are to file or offer cash for keys so you can control the exit of the tenant saving thousands in time and lost opportunity.  Letting days or even weeks pass without trying to negotiate the tenant out will result in further loss in the end.  

So my point here is how fast property managers can react because of their experience is often more dollars to the bottom line for an owner.

Always self-manage your first rental. You need the experience to be a successful REI investor. You also need to know what to expect from your PM once you do decide to outsource.

Totally depends on your personality, time available,  skill sets and your level of education on management and your state laws.

I'm not against hiring a good PM for the brand new,  just don't expect 10%. Or faster turnovers.  

Budget 16% the first year including the tenant  placement fee and them calling the maytag man for every little thing. Expect an average turnover of a week or two AFTER they get to you.  

I often read on here a month turnover, a month to show and select, then a month's rent to place.  Sounds suspicially like 25% vs my average of 2 weeks all-in.  But I work in my business.  Work or stroke large checks.  I've paid off many mortgages doing it myself but it's not for everybody. 

@Elon Matias , this comes down to your own risk tolerance and goal.

Self-managing a few units is not hard.  Plenty of systems out there to help you optimize a lot of the work.  It is also a great learning experience.  Plus, property management is closer to 16-18% gross income because of the leasing fee.

Hiring a PM is ideal if you have no desire to spend more time on the rental.  Often these individuals look at real estate as a way to earn a preferred return (i.e. 10%) and their objective isn't maximizing profits.  Or they might live out-of-state and cannot physically be there to self-manage.

Whatever choice you decide, it's important to put in your proforma the expense of management.  Even if you decide to self-manage today, make sure the deal still pencils well in case you do want to hire out management.  Never investment in a property that only works if you self-manage!

You might consider a baby step that's kind of in between. I am a property manager/agent. While I manage most of the properties for my investors, I have a few clients who like to self manage. However, they hire me to list the property for rent and find a tenant for them. I do the photos and listing and use the system I already have in place to screen tenants. I also provide a standard lease and help the investor (if they need it) set up an account through Cozy to take rent payments. Then I pass the baton to them and they self-manage.

The benefit here to newbies is that they don't have to learn ALL of the skills at once, and that they can ask questions along the way and learn. It also saves you from the most time-intensive part of management...answering calls and doing showings and screenings. But your monthly cashflow will be much nicer. :)

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