Is your property manager really protecting your investment?
Truthfully, do you really know what that 10% to 12% of your GROSS RENT is going to when it lands in your property managers hands? Sure you have a contract (hopefully) but has your manager defined exactly what they will do to protect your investment from environmental and tenant damage? Are they being completely truthful in the repairs and vacancies?
Nightmare story of the day - Property Manager in Tulsa, OK claimed a property was vacant for months... investor was 700 miles away... investor assumed it was vacant and let it roll until a third-party (me) did an audit of the portfolio and found the fraud.
Too often investors trust their property managers to handle things and assume the managers are doing so. But as a prudent investor, you should never risk making assumptions on an incredibly expensive investment.
I'm not attacking property managers in general, 99% are legit and incredible at what they do.
So how do you protect yourself?
Investors New To A Market Searching For Good Property Manager Start Here - Others Skip down...
If you are out of town and are just getting into a relationship with a new property manager, ask for references from their clients. Also find out how many properties they has vs. staff/resources to handle the load. A great manager may have 100's of properties and 24/7 resources, management software, and a staff to handle it - (Shameless Plug to Danny Haas @ KCMS in Kansas City). I tend to lean towards managers that have a large number of doors because they tend to have that many for a reason... they're good. But sometimes a manager will windfall a huge client and not have the resources, tools, etc. to handle it. Getting references and verifying his bandwidth and resources can be the difference in a cash flow delight or hell.
In general, a few items that I always recommend requiring the manager to have on hand are:
1. Pictures inside/out every 90 days
Knowing the condition of your property is equivalent to watching quarterly reports from company on their earnings. It also reduces the ability for the "vacancy fraud" issue I discussed earlier. Property Managers will groan but they should be changing out air filters and checking smoke alarms every 90 days anyways... it won't kill them to shoot some photographs and slap them on flickr or their property management systems.
2. A repair report monthly
Most property managers have a maximum limit they will spend before contacting you,some contact you for everything. Either way, sporadic phone calls can't provide you the knowledge you need to understand the properties true condition. A monthly spreadsheet, word document, etc. itemizing repairs/complaints can give you a 1000 foot view of the property.
3. A list of rented/vacant properties monthly
This provides you with an overall understanding of your properties occupancy straight from the property manager. When I managed properties, just seeing a list of vacancies made me sick and motivated me to work harder to get them off an otherwise flawless sheet. I was dealing with one of the largest financial institutions in the world and the word "Vacant" at our monthly meetings was not a fun line item to discuss. Trust me, make them list them and see if things change a little.
4. A property write up every 90 days of condition of property inside/out with comments of changes from previous 90 days
This goes along with pictures and vacancy lists. Your property manager should provide a property condition template filled out for each property every 90 days. As the condition of the property changes, these forms are fantastic at noticing trends in certain areas like plumbing or electrical. Especially on properties that were freshly renovated and under warranty.... you can look back at your records and audit for maintenance fees you may have paid over the quarter that were under warranty.
5. Contact information for the tenants
Have names and numbers of your tenants. Certainly don't call them from your cell or home number... trust me... bad idea... But a free skype account or other phone number works. Call and ask if they are happy, if the property manager is treating them right, etc. Expect a little exaggeration from them but get an overall understanding of how they are being treated. An unhappy tenant is worse then a leaking roof.
Nightmare story of the day - Property Manager in Tulsa, OK claimed a property was vacant for months... investor was 700 miles away... investor assumed it was vacant and let it roll until a third-party (me) did an audit of the portfolio and found the fraud.
Too often investors trust their property managers to handle things and assume the managers are doing so. But as a prudent investor, you should never risk making assumptions on an incredibly expensive investment.
I'm not attacking property managers in general, 99% are legit and incredible at what they do.
So how do you protect yourself?
Investors New To A Market Searching For Good Property Manager Start Here - Others Skip down...
If you are out of town and are just getting into a relationship with a new property manager, ask for references from their clients. Also find out how many properties they has vs. staff/resources to handle the load. A great manager may have 100's of properties and 24/7 resources, management software, and a staff to handle it - (Shameless Plug to Danny Haas @ KCMS in Kansas City). I tend to lean towards managers that have a large number of doors because they tend to have that many for a reason... they're good. But sometimes a manager will windfall a huge client and not have the resources, tools, etc. to handle it. Getting references and verifying his bandwidth and resources can be the difference in a cash flow delight or hell.
In general, a few items that I always recommend requiring the manager to have on hand are:
1. Pictures inside/out every 90 days
Knowing the condition of your property is equivalent to watching quarterly reports from company on their earnings. It also reduces the ability for the "vacancy fraud" issue I discussed earlier. Property Managers will groan but they should be changing out air filters and checking smoke alarms every 90 days anyways... it won't kill them to shoot some photographs and slap them on flickr or their property management systems.
2. A repair report monthly
Most property managers have a maximum limit they will spend before contacting you,some contact you for everything. Either way, sporadic phone calls can't provide you the knowledge you need to understand the properties true condition. A monthly spreadsheet, word document, etc. itemizing repairs/complaints can give you a 1000 foot view of the property.
3. A list of rented/vacant properties monthly
This provides you with an overall understanding of your properties occupancy straight from the property manager. When I managed properties, just seeing a list of vacancies made me sick and motivated me to work harder to get them off an otherwise flawless sheet. I was dealing with one of the largest financial institutions in the world and the word "Vacant" at our monthly meetings was not a fun line item to discuss. Trust me, make them list them and see if things change a little.
4. A property write up every 90 days of condition of property inside/out with comments of changes from previous 90 days
This goes along with pictures and vacancy lists. Your property manager should provide a property condition template filled out for each property every 90 days. As the condition of the property changes, these forms are fantastic at noticing trends in certain areas like plumbing or electrical. Especially on properties that were freshly renovated and under warranty.... you can look back at your records and audit for maintenance fees you may have paid over the quarter that were under warranty.
5. Contact information for the tenants
Have names and numbers of your tenants. Certainly don't call them from your cell or home number... trust me... bad idea... But a free skype account or other phone number works. Call and ask if they are happy, if the property manager is treating them right, etc. Expect a little exaggeration from them but get an overall understanding of how they are being treated. An unhappy tenant is worse then a leaking roof.
Comments (15)
@ Kelly, I will actually have a blog post on that tomorrow... They usually lag about a day beyond my blogger posts. I'm a huge believer in treating a tenant with respect. It kills me to see how some landlords/property managers treat Section 8 tenants. It never ceases to amaze me at the abysmal conditions that they will endear out of some unfounded fear that they will get evicted and never find another home. I've seen them literally cry looking at a newly renovated property and us calling it their "home". Of course there are exceptions... but when isn't there? I'd say for an out of state investor - A property manager that works specifically in inner city/impoverished areas that has a high percentage of Section 8 tenants. You can also call up Section 8 and ask of complaints, I've gotten responses before of indirect warnings about a particular manager. A 90 day inspection where air filter and smoke alarm batteries are changed out. At this time, a walk through with a checklist (pm me if you need one) of condition of the property. Perhaps as you said by a third-party inspector.. but since I'm paying the manager, why not just require photographs (check the timestamps..) Require that the property manager provide you with a monthly log of calls for maintenance, complaints, etc. Most managers will be more than willing to show you their daily headaches. Reach out to the tenant occasionally and ask how they are doing. When a tenant knows that they aren't just being "audited" but that someone actually cares... they take notice. Be it a letter, phone call (use skype NOT your cell phone) or other means. Heck, I've had clients send Christmas Hams just to say thank you to their tenants. A simple gesture goes a long way. Last, make sure that any repairs are made quickly. I've noticed that the longer repairs take, the longer next time before the tenant calls in that leaky pipe... I don't understand this dynamic but I've seen it too many times. I look at property manager administered properties as a partnership. It's not financially prudent to just "hand" off your property to a property manager and take in the checks.... if you do you may end up without them. So much more.... but so little time. :) P.S.... Give up and let the the sheets in the windows remain... even though you had brand new blinds put in... just the way it is.
Curtis Williams, over 14 years ago
Good post Curtis...I appreciate the feedback (and the shameless plug in KC where all of my investments are). I have many horror stories over the past 5 years in KC as an out of state investor. I have gone through 5 PMs in that time. They are your eyes and ears and need to be a most trusted member of your power team. I recommend partnering also with a good Property inspector to balance them out and keep eyes on properties for you to keep them honest (or a contractor or other team member). I have my PM go through the property every 90 days with walk throughs especially because of my client's exposure to Section 8. The worse thing you can do is find out the property condition when they are ready to jump ship at the end of the lease. I'd love to see your feedback on how to effectively deal with Section 8 tenants to ensure that properties are well maintained and retention is high.
Kelly Klein, over 14 years ago
@Paul: Some contracts I have seen have the property managers demanding compensation when the property IS NOT rented. Crazy! Whatever arrangement is arrived at should have the interests of the property manager aligned with those of the investor. Many of the property managers I have seen act like they are doing YOU a favor by managing your property. Let's be clear...the property manager works for the owner...not the other way around! Fees generally go down as the size of asset increases, but this isn't always the case. SFRs generally command 7-10% in Texas. A percentage of gross rents arrangement, by nature, is poor IMO. In a perfect world the manager's compensation would be tied to NOI or some return numbers...one can dream!
Bryan Hancock, over 14 years ago
One other comment... you truly, no questions asked, get what you pay for in this instance. Someone accepting 5% is making very little in the transaction for the work they are doing, I normally recommend (I know it sounds crazy) figuring out what they normally go for and incentive them 1% or so after 6 months of a property being maintained, low maintenance overhead, no vacancy. Make them want to please you.
Curtis Williams, over 14 years ago
It's amazing the horror stories with property managers.... You would assume that an aligned interest is mutually beneficial. But clearly this isn't the case with some managers. I think they get overwhelmed and burned out dealing with tenants. I have found very few that I could truly trust...and I make sure that I keep them handy!
Curtis Williams, over 14 years ago
As someone who is contemplating a move into property management, this is a great article. It makes sense, though, that the manager's interest should be squarely aligned with the owner's. As a manager, I won't make any money unless the property is rented, and it's far cheaper and easier for me to keep a client than find a new one. Ultimately, what's best for the owner is best for me! (And as a property owner myself, I completely understand the need to manage the top AND bottom lines.)
Paul B., over 14 years ago
And you are only going to get down to 5% with a LOT of units and just basic property management services.
Jon Klaus, over 14 years ago
Anthony - I've seen management fees range from up to 15%...
Joshua Dorkin, over 14 years ago
10-12% I thought property managers get 5-7%
Anthony Larson, over 14 years ago
I'm trying to find a good property manager in buffalo NY. I like your ideas. does anyone know who I can contact?
Beth Denton, almost 15 years ago
I have property managers for all of my properties except for one in Ft Worth with very responsible tenants. I will find a manager for that one too when those tenants leave.
Bryan Hancock, almost 15 years ago
Bryan, are you managing your own right now? How about the ones out of town?
Jon Klaus, almost 15 years ago
I have had some AWFUL property managers in the past. In general I find that they are lazy and won't manage the product like I would if I had the time to do so properly.
Bryan Hancock, almost 15 years ago
I agree these sound like solid recommendations for anyone with out-of-town investments or even properties close-by that hey have chosen to be managed.
Account Closed, almost 15 years ago
Great suggestions here, Curtis. A system that enhances accountability, communication, and alignment are exactly what the Dr. ordered for great property management.
Jon Klaus, almost 15 years ago