Choosing a Property Manager: Nobody Watches Your Money Like You Do

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Before you put your money down on that can’t-miss out of area real estate deal, watch your wallet.

Lots of rich California real estate investors lost their money big time during this last down turn because of inept property management. You are at a disadvantage owning a building you can’t see, having tenants you can’t screen and managed by people you don’t know well.

I know because I’ve done it.  I have houses in Las Vegas and Phoenix that were supposed to cash flow. At least that was what I was promised. After deducting their fees and frequent overpriced repairs, profits were hard to find. I’ve had property managers not call me back, steal from me, over charge for repairs and not chase delinquent tenants that owed me money. The tenants that many of these “professionals” put in my properties never seemed to stay long and trashed the place every time.

Now these properties cash flow very well because I rent them myself.

Don’t get me wrong; I’ve had some good managers. Not all property mangers are incompetent or lazy. In my opinion, most are adequate, a smaller percentage is excellent and the others are just plain bad. However, do you really want to trust your multi-hundred thousand dollar investment to the barely adequate?

If you insist on taking that risk, I present to you my top ten questions (there are actually about 50 of them, but we are limited on space) to ask a prospective property manager BEFORE you put your money down. They should be happy to answer them.

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Ten Property Manager Interview Questions

  1. Do you have any investments of your own? If they are successful, they should have their own investments.  Actually, I’ve known some property over seers that have done very well in the property investment game. A long term history of holding their own property in your area is preferable
  2. How long have you been in the business? Besides having their own money in the area, they need to have a long and successful history of dealing with investors like you.
  3. How do you work with investors? Walk me through the process. They should have an action plan on how they market each property, how long it will take to get your property rented, when you receive your statements and who in their office is directly in charge of your account.
  4. What types of properties/areas of town do you specialize in? If you have a house for rent, you don’t want an office that manages primarily apartments. And you want somebody close by; some property managers won’t turn down any business even if your property is not close to their office. You want a manager who is local, can drop by for a quick showing and can drive by and keep an eye on things.
  5. What kind of market are you experiencing? What kind of market have you experienced over the last five years? (Describe rent changes, rent list price to actual rent ratios, house for rent inventory changes, etc.). Every manager should be up on his town’s economic trends. The local real estate board, business groups and trade associations are continually posting numbers and trying to predict trends. Your agent should be on top of these numbers and know the economic vitality in his town.
  6. What is the average vacancy rate for the area? What is your vacancy rate? Needless to say, you want your manager to beat the averages. Your prospective manager should know the baseline vacancy rate put out by the local apartment association, know his vacancy rate AND take pride in his performance. Sadly, some managers don’t even know how they are doing compared to their competition.
  7. How long do your tenants stay? Very important because, like the vacancy rate, this directly impacts your bottom line. Ideally, the manager can give you a specific average on the average length of tenancy, say two years, three and half years etc. My tenants stay an average of about six and half years. The answer should be at least a couple of years, but some managers can’t do that. Your positive cash flow goes out the window with short term tenants
  8. What are best areas for rentals? Every town has its areas of high renter demand where the rents are higher and vacancies are few.  You should endeavor to have rentals in these regions of high performance, but these areas of town tend to be more expensive. Still your property manager should know where they are. Maybe he can help you procure property somewhat close to these safer areas
  9. What types of amenities will tenants pay extra for? Garage door openers? Enclosed yard? Pets? If it’s customary for tenants to furnish their own refrigerator, stove or washer/dryer, you can make extra money if you lease it to them. I’ve leased refrigerators or washer/dryers for an extra 10 to 40 dollars a month. A good manger should be looking for ways to increase your income.
  10. What kind of maintenance and other costs should I expect? Here there is a profit center for most property management companies. Costs that investors don’t see that adds to a management firm’s bottom line?
    1. For every repair call there may be a 10% override. Sometimes all repairs are done by their in-house contractors (possibly overpriced )
    2. Inspection fees to see if the repairs are done
    3. They will keep the late fees when the tenant pays late
    4. Gas surcharges when the price of gas goes up
    5. Stiff re-lease fees when the tenant re-ups
    6. Rent raises are un-common; they just want to keep the tenant s so they y keep the rents woefully below market
    7. Evictions can be very expensive. You may have to pay your manager just to show up in court

I’ve been charged all of these fees. So if you really want to add to your monthly cash flow, I have a suggestion for you. Do it yourself. I can show you how to manage all your rentals from afar. If I could show you how to do this without much hassle or effort, would you want me to write about that?

I look forward to your comments.

About Author

Steve is the author of three books, is an invited expert commentator for CNN/Money, CBS Radio, Fox TV and numerous other newspapers and media outlets, has been a distinguished speaker at the Harvard Business School, Harvard Law School and their Graduate School of Design, and teaches courses in investing and real estate finance at colleges across Southern California. He is also an active real estate investor and owns 27 investment houses in Southern California and around the country.

22 Comments

  1. The first things I would do would be to
    1 – ask for references
    2 – google their name. Go to craigslist etc.
    3 – ask them about there fees

    The main issues with the property management business is there is a low barrier to entry (like realtors) and anyone who has ever rented a place thinks they can be the next equity residential. Combine that with the fact that the fees are so compressed because of competition that management is usually a money losing business and break even at best unless you are top notch with your systems, procedures & automation.

    I would say the number one reason of problems is people grind the managers so much that they can’t spend the time necessary on your property to do a good job. I think if you add the hours you spend per month by $25 per hour it costs you more than a property manager.

    I do absolutely 100% agree that no one manages your property like you do. That is where the art of ASSET management comes in. Being able to manage the manager.

    Here is a little article about reducing the risk of owning apartments. I think much of this can be applied whether you are managing it yourself or someone else is.
    http://gabhartinvestments.com/articles/so-what-steps-can-i-take-to-minimize-the-risks-right-now-of-owning-apartment-buildings-in-san-diego/

    BTW you don’t have to be in san diego for it to be useful. Good post – thanks

    Curtis Gabhart

  2. Thanks Steve but I don’t manage properties (except our own) if that is what you meant by “one of the good ones”. I have been in the same situations as you have and that is also why I try to stay local. So when I have to fire a property manager it’s not to much of a hassle.

    Now vegas isn’t a bad place to go to manage your properties but I would lose all my profits at the slots.

  3. I think the biggest problem investors make is they don’t do their homework before they hire a property manager. They spend so much time finding the right deal but spend no time finding the right property manager. Once they make the decision to fire their current property manager is usually when they do their research to find a qualified property manager.

    • This is so true. We certainly made this mistake by hiring a property manager that had seemed pretty good. He had 1000+ properties and some of his own. Later, came to find out that most of his properties were apartment complexes and very few single family homes. We have a large home nestled on a lake that had been unable to sell. It was however rented out quickly. The manager conducted business as it was an apartment complex. A newer home with very few problems, yet we had maintenance charges every month. We learned our lesson and have hired a manager that specializes in homes like ours. We pay more for management fees but in the long run it all balances out. I would manage it myself but as a busy mother and 550 miles away it is nearly impossible.

      • Kristan- Read my post Ten Reasons I Dont Need Prooperty Managers to discover how to manage properties from afar. You can do it even of you are very busy and you will give your family a 1000+ dollar a year raise. Read and let me know what you think!

  4. used to manage all my properties until we got too many then had to get help.. all the properties are local .. but what I did.. and still a work in progress is put two people in a office and split the percentage between them both. That way I have one watching over the other making sure they are doing the job. I have personally found someone that worked for the credit bureau in the collections department has had the best personality to be the best property manager I have found… and all I had to do is train her.. anyways am new here.. found your post very good. Good job!

  5. Jeff Brown

    Curtis — You keep hitting each nail on the head.

    > I would say the number one reason of problems is people grind the managers so much that they can’t spend the time necessary on your property to do a good job. I think if you add the hours you spend per month by $25 per hour it costs you more than a property manager.

    This is why I spend so much time with my own boots on the ground in areas to which I bring my investor clients. We look managers in the eye, and they immediately realize the rubber better hit the road, or else. There’s nothing more important, starting the day after closing, than property management. Nothing.

    Don’t know about you, but I’ve sure been enjoying the 80 degree weather this week. 🙂

    • Thx jeff
      I hope you are right and people listen to this hard won advice. I dedicate my writing to forewarn newbie investors not to be preyed upon by the inept, incompetent or the deceptive.
      Armed with the right information, you can do it all!!

  6. As I have properties located in six states and thousands of miles apart, I have no choice but to hire property managers. One thing you need to add is to watch out if your current property manager sells their business. We had a decent property manager in the Fresno area, give them a B-, but then they sold the business as the owners wanted to retire. I would give the new owners an “F”, but they weren’t even in class, talk about being inept. After one property was vacant for an entire year, I fired them and moved on. So even after you hire a property manager, you need to be vigilant and watch them continuously.

    Also, remember, fees are always negotiable. Most of my properties are managed for 6% or 7%.

    Let me add one more thing. Let’s say you have a manager doing 80% of the right things. Sometimes, you don’t need to fire them, just send them a registered letter about what needs to be fixed. Don’t email or make a call, the Registered Letter seems to carry a degree of seriousness, and be straight to the point. My last one simply said to correct this issue or I will find a new company. It worked.

  7. The top ten questions were good. I’d be interested in seeing the other questions that you ask. We manage two properties of our own, have another one under management by another firm, and are contemplating getting into the property management field. It would be interesting to see what other criteria you ask for when screening potential managers. And, “yes” to your last question. An article on managing your properties from afar would be an interesting topic for another post.

    • Thank you for the replies, guys. Next post, I will walk you thru how I rented a Phoenix house while I was in the road in the Midwest. I manage it myself, get to keep all the cashflow and the tenants who pay the rent on time…they like me and respect me.

  8. As a property manager myself, I agree with most of your list. I have experience as an investor and have used managers in the past, so I completely understand it from both sides. I make sure to let owners know that I have that experience, what problems I ran into, and how I eliminate those problems as a manager today.

    The biggest comment I hear about property management is, “nobody will care for a property better than the owner.” I see that as my goal and strive daily to prove that I actually care for the tenants and property MORE than the owners. I’m fairly new at this, but am already hearing from the owners that they are very happy with my work. If they’re happy with me now, they’ll be blown away once I have everything in place, which means more referrals, more properties, and more income. I see it as a win-win!

    Most the articles on Bigger Pockets are from the investor/owner perspective. One of these days I’ll put pen to paper from the PM perspective.

      • This is a timely discussion for me. I have had a PM manage a house long distance that has not gone well. I just gave them notice that they are “fired”. I intend on managing the house myself for a time to see how it goes. I haven’t a clue how to do this. For starters I have talked to the tenant and a neighbor addressing some of the problems. I also have a back up manager in another city 60 miles away who could take care of issues once in a while for a fee. At least I trust him. I would love to hear ways to self manage a property long distance.

        • Nathan- I hope you maintain your exurberance for a long time. The life cycles for most managers after dealing w investors and tenants is too short. Its hard to make money and still have grateful investors and long lasting tenants. Keep you enthusiasm!
          Beth-stay tuned for long distance managment. It is not for everybody, but to my mind it is the only way to go

  9. This is some great information here.

    I as well, am a property manager. I advise my clients to ask other property managers the same kinds of questions. In our (my company’s) experiences, we have found that many “Property Managers” are simply Real Estate Agents in Property Manager clothing. That being said, they do not have the investor’s best interest in mind. Many of our clients and current prospects have had bad experiences with their managers trying to push their sales agenda on them, and offer poor service in a major effort to push the owners into using them for the sale. Every time I hear this sad tale, it kind of breaks my heart.

    While I agree that it is rare, there are Property Managers who have it in their DNA to manage property. We are committed to offering our clients convenience, peace of mind and managed expectations.

    Oops, I guess I’ll get off my soap box now. Ultimately, it might take some digging, but you will find us, we do exist, we are out there!

    Thanks again for the great article.

  10. I am interested in long distance management as well. One of my properties is in the same area, but over an hour away with traffic.

    From personal experience, I recommend documenting everything you can. Not just finances. If you do need to fire a property manager and hire a new one, the transition will be much much easier with records. Its also allows you to manage your managers. Also watch for little problems, they could be the tip of the iceberg.

    A bad PM can cost you far more than a bad tenant. They are the gate keeper of your little village.

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