too much Property Management Fees?

Question

Hello Folks,

I'm Looking to purchase my first Rental Property in Kankakee area. I had a Conversation with one Local property Management Company looks like i don't have much options.

1.asking me to have General Liability Coverage for them above 1million.(purchase price of $120K) is it normal? do the landlords supposed to pay for it or PM Companies should have their own?

2. Biggest deal breaker for me is Tenant replacement. which is 1 Months Rent. if I  do that I will  cash flowing negative.

and my last question is that Possible to manage a 5 Unit property by myself if I Live Out of state? any online software I can use to leverage for my benefit?

Bjorn Ahlblad · Answer

@Mallikarjun Reddy Pateel in an OOS situation a good PM will save you money as opposed to you doing it yourself remotely.

Go to the NARPM website (National Association of Residential Property Managers. Enter the required info and go from there. See what you come up with.

People do try to manage their own even 2 time zones away; do they save any money-I doubt it. I am not a PM just an investor like you. All the best!

Nathan Gesner · Answer

Your insurance won't cost more. The PM is asking you to add them to your existing insurance policy as "additional insured" at no additional cost. If a tenant sues you, they will likely sue the PM at the same time. Your insurance company would fight for you and the PM.

Managing from a distance is only recommended for experts that really know what they're doing. It's not for an amateur just getting started. This claim that someone is managing 100 units from another state is false. They have an employee or something with boots on the ground to watch the property, inspect, market, handle showings, sign contracts, coordinate/supervise maintenance, etc. Can you image how quickly things would fall apart with just ten rentals and nobody watching them?

If the property management fees result in negative cash flow, then I would argue you haven't purchased properly. You have to take your gross income, subtract your mortgage, taxes, and insurance, then subtract another 30 - 40% for capital expenditures, property management, maintenance, vacancy, etc. What you have left over is cash flow. If the mortgage and property management already put you in a negative, then you're asking for trouble.

Drew Sygit · Answer

@John Underwood don't usually mind your position of everything DIY, but please stay in your lane with what you know:)

A PMC CANNOT get liability insurance to cover "slip & fall" accidents on a property they do not have an ownership interest in!

Either the PMC has to be added to the owner's insurance policy, as "additionally insured" - just like a mortgage lender, or the PMC may have a blanket policy they control that they add the property to, but charge the owner for the insurance (and where allowed a processing fee).

@Mallikarjun Reddy Pateel why did you buy this property if a month of rent will make your cashflow negative? Why didn't you research PMC fees BEFORE you bought it?

Now you want to find a solution that covers the mistakes you've made.QUESTION: if you manage remotely, how do you plan to find tenants for vacant units? Real estate agents will charge the same one month of rent you're complaining about. If you want to have remote showings, who's going to place a lockbox, monitor missing keys, make sure no one has used the toilet and left a smelly "surprise",  etc?If your property is Class A, with corresponding Class A tenants, most investors can successfully manage it remotely.

Class B is a bit more difficult, but an experienced OOS investor can still pull it off.

Class C can only be successfully managed remotely if you are VERY experienced, have local boots on the ground and probably 10+ units.

Class D - you're throwing your money away if you try to manage remotely.

Kim Meredith Hampton · Answer

@Mallikarjun Reddy Pateel

The insurance is more for you and your property in the event something we’re to happen. The PM has their own policies for their business, but they don’t own Your property, i think you are misunderstanding the context of the need for insurance on your own asset.

Secondly, a professional PM is worth their weight in gold given the large asset you are purchasing. Marketing costs, running credit, criminal, eviction search, verifying employment, rental history, lockboxes, showing the property over and over again, gas, time, lease preparation, move in inspection/video, posting funds, software, staffing, I could go on and on……. One months rent is nothing compared to the expenses incurred by a professional company.

Sounds like this is your first rental property, do you have all of the above, plus good quality licensed vendors to take care of your five unit property from thousands of miles away? Sure go ahead and do it yourself 😳

Scott M. · Answer

@Mallikarjun Reddy Pateel Given the nature of your questions, you are out of state, this is your first purchase I think your best best it to have a manager assist you. As to your three questions:

1. They are not asking you to pay for their insurance, they need you to get liability (and more than likely insurance on the structure as well) and name then as additional insured or something similar.  This is something all professional managers should ask for and if they don't would make me question if that manager actually knows what they are doing.  While the amount (1M) in this case will vary from manager to manager this is insanely cheap.  Liability insurance is nothing in the grand scheme of things.  The cost difference between 300K 500K and 1M is generally far below 100 a year.  And by the way, this covers you too and something you need in my opinion.  Nothing out of line here at all.

2. 1 Months rent for leasing is a super common number in the management business, nothing out of line here at all.  The fact that 1 month rent puts you negative means your numbers are way too tight and clearly this is something you should walk away from if you can.

3.  Can you do this yourself.  I do not mean any disrespect here but given the first two questions and this is out of state I would say you probably shouldn't.  Look, there is an off chance that everything goes swimmingly for you and you can handle it no doubt when everything is going swimmingly.  Tenants pay you, no work orders, no turn overs.  but what happens when the problems come and chances are they will.  Tenants don't pay, work orders are flowing in, several people leave at once.

Many red flags here for you.

Ian Walsh · Answer

Both requests are fairly normal.  1 months rent is common.  The management company should carry general liability and so should you.  Remember that you are paying them less than a cell phone bill per month to manage your property so the customization you are looking for is limited.  A good management company will have their processes in place already and tell you yes or no and keep it moving.

Nathan Gesner · Answer

Right. So after years of experience, they're able to find and hire employees. And what are they paying those employees? 5% of the rental income? I bet dollars to donuts they're saving some money, but they're also spending time finding, training, and supervising those employees. And in many cases, those employees will be less qualified than a professional property manager that will take on 100 units for a discount of 8%, maybe less. Oh, and let's not forget that the owner is spending time every single month supervising his employees and doing a lot of the work that a PM would normally do.

My point is, they are not saving 10% through self-management of 100 units. I bet they don't even save 5% when accounting for their own time and expenses. Also, it is dangerously misleading to tell a new investor that he can manage from a distance when he doesn't even know how to manage from across the street yet.

Max T. · Answer

@Mallikarjun Reddy Pateel

Renewal fee?

In PA our leases have a little checkbox for “this lease will automatically renew….”

Mallikarjun Reddy Pateel · Answer

@Simon W.

no i'm just considering the worst case scenarios. i'm not going to replace 5 tenants every year. maybe 2 a year even though there is still cost associated with it. PMC pretty much charge the same thing for Renewal fee as well

Jeffrey Donis · Answer

@Mallikarjun Reddy Pateel I would try to find another property management company, but I wouldn't consider you should manage the 5 unit yourself. Especially if you're out of state. This would make it hard for you to go to the property if you need to. Also, you want someone there to be your "boots on the ground." You can hold a property management company accountable in case something doesn't go as planned.

too much Property Management Fees?

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