Humans, as individuals, are cyclical creatures. Rarely does our interest in something pique and then stay piqued — it goes up and down over time. We also experience a phenomenon called “executive exhaustion,” where making difficult decisions and putting in loads of mental effort can actually leave us unable to continue making good decisions. That’s one very common reason that real estate investors end up with crappy property managers. Let me explain.
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Investing Ain’t Easy
Investing in a piece of real estate — if you’re doing it properly — is an exhausting task. You have hundreds of variables to pay attention to, lots of math to do (most of which you don’t actually have enough information to finish, which means you have to estimate and trust that your estimations aren’t going to screw you later), and a huge part of your financial future riding on the efficacy of every decision you make as part of that process.
By the time you’ve actually invested in a rental property and gotten it ready to rent, you should be absolutely 100% done with that place. If you’re not, you probably didn’t stress enough — I’m not even joking. But unfortunately, that level of executive exhaustion and declining interest makes it very easy to just open a phone book, pick a name that says “property manager” next to it, and hire them on the spot.
Needless to say, that’s just about the worst possible idea you can have. A very common saying in the real estate investment world goes something like this: “It’s better to have an average property and a great manager than a great property and an average manager.”
Why is This?
Because an average manager is going to allow many, many more problems to reach your level than a great manager is. Furthermore, a great manager is going to save you a lot of money that an average manager isn’t.
Here’s an example:
Investor A has a home with great investment qualities. He rents it out for $1,450/month, pays only $450/month total in all costs, and spent a mere $35,000 cash to buy and $25,000 cash to renovate. So he’s looking at a rental yield of 20% — a titanic yield. But his property manager is forced to evict two tenants within six months, each one leaving the place empty for a month, and the second one left behind $2,100 worth of repairs to complete, all due to a failure to properly screen out bad tenants.
- Income for those six months: $5,800
- Costs for those six months: $4,800
- Net profit: $1,000
Investor B has a home with modest investment qualities. He rents it out for $850/month, also pays $450/month in costs, and spent $52,000 with only $8,000 in renovations. Total rental yield: 8%. Not bad! But not great. However, his property manager screened his tenants properly, found one with a solid credit history, good job, and no major issues. That tenant signed a two-year lease, and six months later:
- Income for those six months: $5,100
- Costs for those six months: $2,700
- Net profit: $2,400
So not only did the “worse” investment pay more money, but it was also significantly less stress to the investor because a great property manager is worth more in the long run than a great property.
The lesson here is simple: After you put in six months of hard work carefully discerning everything there is to know about a house, its neighborhood, your finances, and the other myriad of details you need to know in order to be confident investing, don’t screw it all up in your executive exhaustion. Even if you have to wait a week or two and take a break and recover, do it and come at the almost-as-daunting task of finding precisely the best property manager available for that property with a fresh mind. It will save you far more than two weeks’ worth of trouble — and money — if you do.
Do you have a story about a great property manager who helped you maximize profits? What about a terrible one who tanked your investment?
Leave your comments below!