Ten Reasons Why I Don’t Need Property Managers

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So you have a property in a distant city, you want to rent it out, but you don’t want to pay a property manager an arm and a leg. Are you at the mercy of a stranger who may over charge you on their monthly fee, on costly repairs that are all too frequent, and on other “fees” that mysteriously appear on your monthly statement (see my previous post for some of those fees)?

You can do it yourself . . . I do.

I rent out seven out-of-state single family houses; I fill them when vacant and the rents get deposited directly into my account. They are as hassle-free as I can get them. Here’s how…

How I Manage My Out-of-State Rentals: A Case Study

Let me walk you through the last lease-up that I just did in Phoenix. This house became vacant last spring while I was on a road trip through the Midwest. Some repairs had to be done — the tenant had been mostly good — but how was I going to get it inspected, cleaned up, advertised, and leased out to a satisfactory new tenant, especially while I was traveling? I HATE negative income days, and every day empty is a negative income day.

The night it became vacant, I got on the internet at the hotel that had free WiFi. I Googled “Phoenix property managers” and went for the map option. That’s right, you can Google property managers, realtors, plumbers, carpenters, or maids that live close to your house in any zip code.

I needed somebody close to my property so they can run over to show the house to those that call. A lot of the managers that show up on Google maps are apartment managers, handle commercial buildings or are big property management companies. You don’t want those guys; you want a small mom and pop firm or a single broker who has the flexibility to work with you.

The next day while on the road in Colorado I called the numbers. After about ten calls, I found the perfect guy; he was what I call a “grizzled, old war veteran” who owned several rentals on the area, and won’t take crap from anybody. Al owned his own small brokerage so had the ability to accept my unique offer. I offered him half of the first month’s rent if he would rent it up for me then hand the reigns back over to me. His job is to handle the calls, screen out the wanna-bes and show it. I pay for the newspaper ads, place it on Craigslist and he puts up “For Rent” signs around the neighborhood (those got the most calls). All ads have his number on them.

After we took in the gorgeous mountain scenery and hiked around Pike’s Peak, we received Al’s contract and faxed it back the next morning after breakfast. Al agreed to a “lease up only” contract where as soon as he finds the renter and gets the lease signed, his job is done.

Al went to the house and found the key that the exiting tenant left in the backyard. After inspecting the premises and taking pictures, he gave me a breakdown on the house’s condition. We used his handyman to do the repairs and his maid service to get the place cleaned up. By the time we left Colorado, it was rent ready and the old tenant had part of their deposit back.

The next week while we were driving through the many small towns that dot New Mexico and Texas, Al got a lot of phone calls but had few showings. Since he had rentals in the area, he thought that it was priced a little high; we lowered the rent by a hundred dollars and got showings and applications as a result.

Important note: We use my paperwork; my application and my lease agreement. these are very detailed and ask the applicant things that generic agreements do not. If you control the paperwork, you control the transaction.

Finally, after about two weeks we settled on a well qualified prospect. Al took my 17 page lease agreement that I had emailed to him and signed them up; he liked my rental agreement so much that he said he would use it on his tenants.

By the time I got to Arkansas, he mailed the signed lease to me with the rent money. He subtracted his fee and I took over. I called my new tenant and introduced myself. We spent about thirty minutes over the phone going over what I expected as a landlord and how happy I was they were renting from me. She was pleased with how the whole process went and knew that a lot of the minor repairs will fall to her husband

Her husband happens to like working on stuff and she was into gardening — just the kind of tenant I told Al to look for.

Here’s what just happened:

  1. I got a paying tenant in three weeks
  2. I saved at least a thousand dollars a year based on a ten percent management fee
  3. I found a property manager that gave me essential fix-it people and who can provide valuable referrals in the future
  4. The property was inspected, tenant damages were inventoried and pictures were taken of the inside
  5. I signed no long-term management contracts, locking me in
  6. I trained a new tenant who signed my paperwork
  7. I found out the appropriate rent
  8. We found a handy tenant
  9. I coached a landlord veteran on better ways to rent a house
  10. We had an uninterrupted car trip through the beautiful Midwest

The positive cash flow zooms up because I pay no management fees and the new tenant knows I am no easy touch. Since I am calling the shots, my lifestyle is not compromised.

Since I can do this from anywhere why would I hire a manager?

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.

12 Comments

  1. Steve – How often do you check on your properties? Who does this for you? Also, I’ve never seen a lease close to 17 pages long . . . I’d love to see what you’ve got in there. Finally, how do you handle the liability that you incur by allowing a tenant to do repairs?

  2. I hvae the local guy go by every so often to make sure the lawn is cut and evrything is neat.
    Fixit people i send over help w the interior look sees.of course the neighbors let us know if anything is awry
    Minor repair are made by the tenant; we love to rent tohandy people. We have the you break it, you fix it mentality. AC/heating plumbing electrical beyond the tenants expertise-we take care of those.

    Yes we have a 17 page lease agreement that covers anything and everything you can think of-it is a training device for the house rules we want the tenant to live under.

    • Hi,
      We have a 13 page lease and 22 page handbook that is an addendum to the the lease that tells tenant what items they are responsible for and how to fix certain things. We have our own crew to do any property repairs.

      We recently formed our own company to do our own Property Management because the PM was slow to rent properties, never ran background or credit checks and would not get tenants to sign the handbook addendum even though the PM company had it’s own handbook and we also would never got any insurance policies from renters even when it was required in the lease. Getting lease addendum was also a problem. We do it all now on new properties we purchase.

      I have a question, those that are using property mangers, how much of the late fee does the property manage keep. I recently discussed this with two large real estate firms and they said the PM should only keep 10%. Also, how would you go about taking rentals away form a property manage as we don’t have any separate agreement other than what is in the lease and we don’t pay a listing fee. I guess we could on raising the rent the next time which then requires a new lease take over the properties.

      • Harris, I’m a property manager and can tell you how it works from my perspective.

        1. The late fees are split a variety of ways for a variety of reasons. You just have to figure out what works for you and the owners. I’ve seen many managers retain 100% of the late fees. Some split it 50/50 with the owner. Some take the same percentage as they would for rent income. I don’t know that it really matters as long as you disclose your plan up front and can justify it. For example, if the manager retains 100% of the late fees you would want to make sure they aren’t allowing tenants to rack up late fees just as another source of income. If the manager can show that he goes after late tenants aggressively, I would be more willing to allow him to keep 100% of those fees for his trouble.

        2. Terminating a management agreement should be simple. If you don’t have a written agreement between the two parties, you are wrong. Period. It’s no worse than renting to a tenant without a written lease agreement! If you don’t have an agreement, you should be able to terminate by giving the other party a 30-Day written notice of your intent to terminate. I highly recommend you build a management contract and get every owner under one as soon as possible because it will save you some headache down the road as your company grows. It also demonstrates professionalism to the owner who is entrusting their property to your care.

        If you are interested in sharing your tenant handbook, I would love to see it. I have a draft version that I intend to refine this winter and publish to all tenants in January and am always looking for more information/ideas.

        Nathan

  3. I’m only responding because you seem to be mocking owners that hire professional Property Managers, as if they were stupid for requiring assistance. So I read your article and have to say I disagree with your entire premise. Here are a couple reasons why:

    1. Your article is titled, “Ten Reasons Why I Don’t Need Property Managers”. Can you please tell me what those ten reasons are? You list ten things that happened during the process, but I only see a couple statements that could be categorized as “reasons” that you don’t need to hire a PM. For example, items 1, 3, 4, 7, 8, and 10 would have happened had you hired the manager long-term. And as for item 5, I have yet to find a manager that requires long-term contracts; every one I’ve seen has a clause stating they can be canceled at any time, for any reason, with 30 days notice. Items 3 and 8 are essentially the same thing. So what are your ten reasons for not needing a PM?

    2. In a direct contradiction to the article’s title and purpose, the first thing you did was hire a professional property manager. On top of that, you hired him for two of the most important aspects of management: pricing to the local market and tenant selection. I’ve talked to many managers, and am a good one myself, and can tell you that tenant selection is the #1 most important aspect of managing a property. Also high on the list is properly pricing the rental to the local market and economical situation. You’ve hired a property manager to do your heavy hitting!

    Your articles, and your comments to other long-distance owners, are completely misleading. You hire a property manager to find a good tenant which is, without a doubt, one of the most important aspects of management. Then you dump the manager, collect rent and respond to the occasional repair call and collect rent while claiming to have done it on your own. And how do you know your unit is maintained? You don’t unless a neighbor can spy for you or you hire someone to look in on it (handy-man or otherwise). Again, you’re hiring someone to do the work for you.

    I’ve seen many long-distance owners get burned by “good” tenants that pay rent on time and never complain. Two years later they move out and the owners find out they’ve been smoking in the house, tore out good carpet and replaced it with adhesive linoleum squares from WalMart, or caused thousands of dollars in damage. This all happened despite strong screening, tough rules, and neighbors keeping an eye on the unit. Just because it hasn’t happened to you doesn’t mean you have a great system because I’ve seen your same system fail many owners over the years.

  4. FAIR ENOUGH I knew you were a property manager bf I started reading the post. Maybe you are one of the good ones but the odds are not in your favor if you read all the tales of woe from all the painful posts on this site. Your profession has a real image problem.
    In my 15 years of dealing w PMs, Ive been literally stolen from , hung up on, cussed at, ignored, dinged to death for every fee under the sun, not had statements mailed, doubled charged management fees and been lied to.
    Ive been to the NAPM meetings and see what regard many PMs hold their investor/clients in as weill as brag about all the fees they get away with
    Im here to enpower investor taht w little help fr PMs for specific project, their cash flow can zoom up and make a ton of money if they do it right. Mpst of my units end up with” no days vacant. and no lost rent”…which happens to be the title of my next book

    • Steve – I’ve been screwed every way imaginable from PMs as well . . . there are definitely some good ones out there – I just have never worked with any of them. There are a few great members on BiggerPockets who I believe would be incredible property managers, and would gladly try them out if I were to buy in their area, but I do have to say that I’m 0 for 4 so far with companies I’ve contracted for my own properties.

  5. Hi Steve,

    Great post!! I am in a similar situation that you described above – have multiple rental properties distant from home state, being screwed up by the PM firm (35% of my gross rental income!!!), wanting to get rid of them and start myself but not sure exactly where to begin – do I just call them up and ask to terminate my contract, and take over the renters from here? please advise. BTW, if you happen to know any good managers in Oklahoma city area, I would appreciate your recommendations!

    • Thomas, if you don’t know your own contract with the PM, how can you possibly be prepared to manage properties from a distance? If the PM is really worthy of firing, your agreement with them should stipulate the steps to terminate their services. In my case, we operate on a month-to-month basis and either party can terminate the agreement by providing notice in writing 30 days in advance.

      Everyone pats their back for managing from a distance, but my experience is that most long-distance Landlords eventually fail and those that don’t are just lucky. Good management requires keeping an eye on the property regularly, being responsive to tenant’s needs, knowing the local rental market, and building a relationship with local contractors.

      I picked up four rentals from Landlords living out-of-state that were “managing” on their own. The truth is, their houses have been trashed, they’ve had headaches from all the tenant problems, and they’ve lost a lot of money. According to my estimates, they spent 3-4 times as much to fix problems as they would have spent on a PM! I have another owner locally that owns 35 commercial properties and 5 homes and he manages them all on his own. He admitted last week that he’s losing thousands every month! Hiring me to manage them would cost less and protect his property more, but he thinks he’s too smart to need help.

      My bottom line is that there ARE certain people that can manage from a distance but it’s not as easy as telling the tenants where to mail their checks. If you plan to make the leap, educate yourself well and go into it expecting some difficulties or that it might cost you a little more in the end.

  6. From my years in investing, management, consulting and now in tenant screening it all comes down to one thing: working with someone/people who have or feel as if they have a VESTED INTEREST IN YOUR INVESTMENT. Sometimes you can find this in a management company and sometimes you need to do it yourself or higher a part time or full time manager on your dime to get the job right.

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