All Forum Posts by: Michael Smythe

@Calvin Thomas fully understand the difference.

How do you compare the two models?

@Geoffrey Paugam you'll want to chat with @Engelo Rumora about Toledo!

@Jonathan Feliciano you can say this about Detroit, Columbus, St Louis and many other Midwest cities.

Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.

If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.

So, when investing in areas they don’t really know, investors should research the different property Class submarkets.

Here’s our OPINION for the Metro Detroit market (use as a template for your target area!) that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases.:

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenant Pool: Majority will have FICO scores of 680+, zero evictions in last 7 years.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenant Pool: Majority will have FICO scores of 620-680, some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620, many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

@Amy Denzler

Recommend exploring as many sources as possible to get referrals AND cross-reference them to get as much accurate information as possible.

Check out NARPM.com, BP’s Property Manager Finder, etc.

Also, encourage you to learn from the mistakes of others - by reading posts here on BiggerPockets about owners not having their expectations met by their current Property Management Company.

To avoid going through the same poor experience, keep reading.

Even if someone gives you a referral here, do NOT make the mistake of assuming that the PMC will meet your expectations, just because they met the expectations of the referral source.

In our experience, the #1 mistake owners make when selecting a Property Management Company (PMC) is ASSUMING instead of CONFIRMING.

It's often a case of not doing enough research, as they don't know what they don't know!

Owners mistakenly ASSUME all PMCs offer the exact SAME SERVICES and PERFORM those services EXACTLY THE SAME WAY, so price is the only differentiator – so, they often select the first PMC they call or that calls them back!

So, the first question they usually ask a PMC is about fees - instead of asking about services and HOW those services are executed.

EXAMPLE: PMC states they will handle tenant screening – what does that specifically mean? What documents do they require, what credit scores do they allow, how do they verify previous rental history, etc.? You’d be shocked by how little actual screening many PMC’s do!

This also leads owners to ASSUME simpler is better when it comes to management contracts.

The reality is the opposite - if it's not in writing then the PMC doesn't have to provide the service or can charge extra for it!

A well written management contract should clearly spell out what is expected of both the PMC and the owner, to PROTECT both and avoid misunderstandings. Why do you think purchase contracts are so long and have such small print?

We recommend you get management contracts from several PMCs and compare the services they cover and, more importantly, what they each DO NOT cover.

EDUCATE YOURSELF - yes, it will take time, but will lead to a selection that better meets your expectations & avoids potentially costly surprises!

P.S. If you just hire the cheapest or first PMC you speak with and it turns into a bad experience, please don’t assume ALL PMC’s are bad and start trashing PMC’s in general. Take ownership of your mistake and learn to do the proper due diligence recommended above😊

@Skyler Lehman assuming you're asking about 1-4 Family (SFR) or small MF.

Fees average out to 10-12%, once you take into account all the extra/hidden fees.

Don't be fooled by 5-6% quotes! If you dig into those PMCs you'll find they charge extra for just about everything. Once you account for those fees, you're right back at the 10-12% average.

Biggest hidden fees are related to maintenance. Have seen many PMCs claim they don't charge a markup, but then find out they charge owners $70+ hour for their handymen. How much of that do you think actually goes to the handyman? So, the PMC is making a decent amount off their hidden markup!

Regarding if you should DIY manage or hire a PMC:

Many new investors read a couple of posts and then think self-managing their rental property, and avoiding PMC charges, is an easy way to boost their ROI.

The reality, is that many of these investors really haven’t taken the time to properly understand what it takes to properly manage a rental property and the corresponding tenants.

Here’s a list of some of the requirements to properly manage a rental property:

• Knowledge of all local municipality, state and federal landlord requirements
• Intimate knowledge of all Fair Housing statutes
• Understand all federal privacy laws, as they’ll be handling social security numbers and IDs
• Proper business insurance in the event their computer is hacked and or they improperly dispose of tenant data.
• Where to advertise their rental, other than Zillow
• Writing ads compliant with Fair Housing statutes
• Creating a process to accept calls/texts and schedule prospects to show their rental
• A rental application and application fees that meet all local and state requirements
• Knowing how to screen applicants to avoid professional tenants and the growing amount of fraudulent data
• A lease compliant with all local, state & federal laws
• Understanding local and state requirements regarding security deposit collection and holding
• Rent acceptance options for tenants and accounting system to track, including late fees, etc.
• Plans to handle nonpayment of rent issues
• Knowledge of their local eviction laws or access to an attorney familiar with evictions
• How to accept, track and respond to tenant maintenance issues
• Building a list of handymen and contractors for maintenance and turns between tenants
• Expertise at evaluating tenant damages to charge against security deposit when tenants move out
• Researching local utility requirements to avoid suspension of services that could lead to frozen pipes or flooded basements, etc. Also, how to force tenants to put in their name, so they are charged, not the owner
• How will rekeys be done between tenants?
• And there’s a bunch more…

If an investor doesn’t have the time to invest in learning all these, then they should probably hire a PMC.

Otherwise, they’re playing Russian Roulette with costly mistakes, potential fines and lawsuits.

@Ketul Sheth

Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.

If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.

So, when investing in areas they don’t really know, investors should research the different property Class submarkets.

Here’s our OPINION for the Metro Detroit market (use as a template for your target area!) that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases.:

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenant Pool: Majority will have FICO scores of 680+, zero evictions in last 7 years.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenant Pool: Majority will have FICO scores of 620-680, some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620, many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

If all this leads you to our Detroit market, PM us to chat more!

@Allen Parker real estate is not as liquid as the stock market, so not a good analogy.

Also, you're forgetting that the US has a serious housing shortage.

The question is, finding areas with shortages that have affordable entry points compared to rents.

@Nathan Gesner while understand your concern, don't think price is the correct measurement. Something more like Rent-Price Ratio and local income growth would be better. Not sure where to get that info easily though.

@Ricardo Serrano this copy & paste info may help...

Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.

If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.

So, when investing in areas they don’t really know, investors should research the different property Class submarkets.

Here’s our OPINION for the Metro Detroit market (use as a template for your target area!) that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases.:

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenant Pool: Majority will have FICO scores of 680+, zero evictions in last 7 years.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenant Pool: Majority will have FICO scores of 620-680, some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620, many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

What else can we assist you with?

@Marty Rogachefsky this does NOT sound like a Class B area, more like Class C at best.

Also, from your description, sounds like a Class D property.

Your PMC should be able to send you the S8 Property Standards for your review.

You could also "accept" a S8 applicant and schedule the S8 inspection, just to get the list of repairs.

In our opinion, if an owner won't keep their property up to S8 standards, which are not that demanding, then they are a slumlord.

Average Days On Market (DOM) are up 36% from 2022.