To invest out-of-state or to not invest out-of-state? That is the question. You mean I might have to trust someone else to take care of my property?
Have you lost your mind?
Yes, I have lost my mind. Welcome to the idea of professional property management.
Property managers don’t have good reputations (and rightfully so in most cases). I get it. I actually don’t argue the reputation because the majority of property managers I’ve dealt with have been horrible. However, you need to realize there are good managers out there who can completely change your investing experience. With good ones in place, you can invest anywhere! Talk about broadening your experiences and your portfolio.
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Long Distance Investing
I love investing outside of my local area (I have to since I live in Los Angeles). Not only do I get the highest returns but I have so many options for diversifying and having a really cool portfolio of properties that investing really can be a blast. I am completely comfortable not being able to check on my property and quite frankly I prefer it for several reasons I won’t go into here. However, I know not everyone is like me and in fact most probably aren’t. However, if you are like me and are okay relinquishing control to a manager, here is my rundown of property management and managers for you based on my experience with them.
Favorite Quote about Property Management:
“I’d Rather Have an Average Property with an Excellent Property Manager than an Excellent Property with an Average Property Manager.”
I heard this from a seller I work with and he was absolutely dead-on when he said this. In my experience with rental properties, every major problem I have had I can attribute in some way to my property manager.
This house is one of my properties in Atlanta. The house is amazing, great layout, great rent, cheap purchase price, but just in the first six months I owned it, it went through two evictions with the second resulting in $2400 worth of repairs. Two evictions back-to-back? How does that even happen? It happens when my managers move in any fool who applies to rent the property, that’s how. Their income requirements were way too low for starters. Oh and the second guy was a felon under investigation by local police. Man, I love when that happens. The $2400 was asinine in itself because I know most of those “repairs” weren’t even necessary.
I was in California when all of this happened. I wasn’t local to the property to be able to run in and stop the insanity, so what could I do in this situation? Easy. Fire the property manager and get a new one. Problem solved. Yes, I lost a nice chunk of money in that pile of chaos, and maybe even a little sanity, but the property is great now and I haven’t had a single late payment from the new tenant. Plus, the property cash flows so well that it won’t take long to recoup the lost cash and move on. One of the perks to investing out of your local area is the potential for significantly higher returns which can help offset any “oops” that may happen. Also worth noting is that the problems I just mentioned with that house could have just as easily happened if the property was local to me in Los Angeles. The only difference is whether I was able to drive by the house to see the mess in person or not. Did I need to go by the property during any of that? Nope. What would that have done other than just stress me out more than I already was? Nothing.
I tell this story not to convince anyone that investing out of your local area is what you should do, or to scare you away from having a rental property at all, but rather to emphasize the property management side of your investment should you choose to go the route of long distance investing.
Let’s get to it. What do you need to understand about property managers and their role? You need to understand how important they are in the success of your investment and you need to know what qualities to look for in a manager. Once you know these, you need to know what questions to ask while you are shopping for a manager. I’ll address these in order.
Potential Consequences of a Bad Property Manager
The property manager is in control of your property on a day-to-day basis. He places the tenants and keeps an eye on them while they live there, he makes sure repairs are taken care of and the house stays in working order, and most importantly he stays in communication with you about the property. If your manager doesn’t know what he is doing, or isn’t overly concerned with how he is doing it, here are some negatives that can result.
- Higher Vacancy Rates: The property manager is the ones who select tenants. While no tenant is a sure thing, there are easy precautions to take in screening a potential tenant, such as their income-to-rent ratio, employment history, and their reason for renting. Credit scores these days have become horrible indicators of tenant quality, rental history can be easily forged when the tenant gives you their friend’s number who pretends to be their landlord, and criminal background checks often don’t show everything. All three of those are still worth checking, but they aren’t the big indicators anymore.
- Higher Repairs Cost: If your manager only calls a contractor for any maintenance request, you are going to continuously pay an arm and a leg for repairs. If he hires a handy guy who is cheap but doesn’t do the job right, guess who has to keep paying for the redo? If the management company wants to squeeze extra money out of you they can charge a ridiculous hourly rate for their handymen or create repairs that weren’t really necessary in the first place, as with my property above.
- Constant Stress: “Managing the manager” is horrible. I’ve done it, I don’t like it, and I can’t help but wonder what I’m paying a monthly fee for if I’m having to always be on top of my manager. There are plenty of managers that leave me stress-free and I definitely prefer that route. You may wonder how you will know if you need to be managing your manager or not. Trust me, you’ll know.
- Confusing Invoices and Pay: I think the property management software out now is worthless. It’s confusing, I can barely read the things, and if there is any anomaly such as the manager charged me maintenance incorrectly, the statement rarely reflects the change because it was created by the same computer that received the maintenance request, versus being created by the person I talked to about the request. If that makes any sense. I prefer mom-and-pop style invoices in Word or Excel, personally.
The first two bullets are the most important because they directly, and quickly, affect your ROI. The last two don’t affect the money but they can affect your sanity which to me is in a close second place to the money.
What Makes a Good Property Manager (and Don’t be Fooled into Thinking These Managers Don’t Exist!)
Feel free to add to this list as you go about your experience with property managers, but these are the key things that will make or break my relationship with a manager.
- Feeling of Trust: I want to feel confident that my manager will contact me if there are any issues. I also want to feel confident that if I fall off the face of the earth for any period of time and my manager can’t get a hold of me that he will handle my property not only smartly but he won’t rack up ridiculous expenses while doing it either. This feeling of trust isn’t hard and isn’t something that needs analysis. You either have it or you don’t. Go with your gut.
- Good and Quick Communication: Nothing gets under my skin more than if I can’t get in touch with my property manager or if I can’t get a question answered promptly. I’ve had managers I had to call daily for a week or more before I could get an answer to a simple question. My good managers however email me back the same day or by the next morning with a simple answer. What a concept!
- Proper Maintenance Doesn’t Break the Bank: This is a big one for me. Calling a contractor out for every maintenance request is unacceptable. Surprisingly, this is what most property managers do. I can call a contractor from 3,000 miles away. Why pay someone to do that for me? I want to know that if my tenant calls and says the toilet is messing up that the manager will go adjust the floaty ball himself and not charge me for such a minor issue. What about compensating his time to do that, you ask. That’s what I pay a monthly fee for!
- Knows the Importance of Tenant Quality: Any period of vacancy is stressful for an owner but being patient in finding the right tenant is key. My good managers may not place a tenant as quickly, but when they do finally place a tenant, the tenant is well-qualified and shows all the signs of holding up their end of the lease. In the long-run, having less turnover with good tenants will cost much less than saving vacancy time in the short-term and placing just anyone.
Questions I Ask When Interviewing Potential Managers
As you get more experienced with property managers, you will learn what things are most important to you in a manager and consequently you will have a better feel for what questions to ask. Don’t be afraid to learn from your mistakes (or your manager’s mistakes) in order to know better what you are looking for. Here are the big questions I always ask when talking to a potential manager.
- How much do you charge for the following: monthly fee, tenant placement fee, re-leasing fee, maintenance labor?
- How do you handle maintenance calls: send a handyman, call a contractor, do it yourself?
- What are typical maintenance charges in terms of labor?
- What kind of statements will I receive each month?
- How accessible are you on email and/or phone? (not kidding, sad I even have to ask)
- Are there any times you won’t ask for my approval for maintenance repairs?
- How many properties do you currently manage? Do you have references?
- What are qualifications do you look for in tenants?
At the end of the day, it comes down to you realizing that you are in control of the situation. If a manager does anything that seems out of the ordinary, or too expensive, or whatever else that can happen, understand that you have every right to fire that manager and hire a new one. Not all managers are bad. Yes, property managers tend to be at the lower end of the totem pole when it comes to trustworthy real estate connections, but good ones do exist. If you are willing to find them, they will change your investing life forever. Don’t forget, they work for you. You run the show. Bow up and do your thing and don’t be scared to fire someone.
If you use property managers, what is the worst thing you’ve seen happen? If you don’t use property managers, why not? Other than “no one will take care of a property as good as I do.”