You’ve navigated the confusing world of real estate to buy a rental property, and now you are the proud owner of an income producing asset.
However, all of that time, money, and work could be jeopardized if you don’t manage the property correctly. Therefore, an important question for any investor is: Should I take on this valuable role myself or hire a professional property manager to do it for me?
The response to this question is another one of those “there is no right answer, but there may be a right answer for you” kind of questions. Every person has different skills, personalities, and time availability. The purpose of this post is to help you make the best choice for you and your family.
Sorry to interrupt, but hey you! Yeah, you… at the computer. What are you doing Thursday night, June 11th? Cancel your plans. Because now you are coming to this week’s BiggerPockets Webinar! Click here to learn more and sign up for the LIVE event! Okay, back to the blog post!
Download Your FREE Tenant Screening Guide!
Hey there! Screening tenants can be a tricky business, and this critical step can be the difference between profits and disaster. To help you with your real estate investing journey, feel free to download BiggerPockets’ complimentary Tenant Screening Guide and get the information you need to find great tenants.
Role of a Property Manager
First, let’s talk about what a property manager actually does. But even that is tough to give a straight answer about! You see, property managers do a wide variety of tasks depending on the manager and the owner they will be working with. However, most of the time a property manager will:
- Advertise vacant units
- Screen applicants
- Approve tenants and sign leases
- Handle phone calls from tenants
- Schedule maintenance issues
- Issue late notices
- File eviction if needed
- Keep a record of income and expenses
- And possibly pay your property’s bills, depending on the manager
In addition to these tasks, property managers also offer numerous other benefits:
- A property manager can clear up your day, allowing you to spend more time with family, friends, or your day job.
- A property management company will have the infrastructure in place to handle your rental, including office staff, paperwork, and signage.
- A property manager will have a reliable set of contractors to work with and benefit from volume pricing.
- A property manager will give you more time to look for other deals, helping you focus on just the tasks that bring in the most money for you.
- A property manager will have a lead system in place for attracting potential tenants. People will know their name, recognize their signs, and call without them even needing to advertise your property.
Sounds like a dream, right?
Property management can be a powerful thing, allowing you to work on your business rather than in it.
However, management does come at a price. Let’s talk about a few of the disadvantages.
Disadvantages of Property Management
Although the price for management will depend greatly on where you live, management is usually in the 8-10% range, plus a fee when a new tenant is moved in, usually between 50% and 100% of a month’s rent.
In other words, if the rent on your property is $1,200 per month, you might pay $120 per month, plus $1,200 every time a unit is turned over. Furthermore, some management companies charge a “renewal fee” each year, even if the tenant doesn’t move. Clearly, the expense of a property manager can be a huge drain on your cash flow and something that must be budgeted for.
For example, let’s look at the numbers on a sample property.
123 Main Street is a 3 bedroom home that you purchase for $100,000 (with a $20,000 down payment), and you now have a mortgage payment of $500 per month. When you ran the numbers, you found that all the expenses (taxes, insurance, maintenance, cap ex, vacancy, etc.) came to $400 per month on average, over time.
This means your total expenses on the property would be $900 per month. If the home would rent for $1,100 per month, you are looking at about $200 per month in cash flow, or $2,400 per year. On your $20,000 investment, this is a 12% cash on cash return on investment.
Not too bad, right?
Now, let’s factor in property management.
If your local management company charges 10% of the rent, that’s $110 per month. Your $200 per month in cash flow has now dropped to $80 per month, or $960 per year. On your $20,000 investment, you are looking at a cash on cash return of just 4.8% now, a huge difference than what you thought you would be getting.
However, is that difference of $1,320 per year in cash flow worth it for you?
Could you invest your time elsewhere now to make a better return?
Or are you better off self-managing and keeping that extra income?
These are questions you’ll need to ask yourself.
No One Cares Like You Care
The fact is: No one will care as much about your property as you do.
Your property manager will likely have hundreds, if not thousands, of properties to manage. Yours will not be special.
When a potential tenant walks through their door, they have no incentive to show your property over another. They won’t be able to drive over to the property and check it out as much as you might. It’s not that they don’t care; it’s just that you are one in a bunch.
Case-in-point: I used property management on just a few properties that I own, as an experiment.
Recently, the tenant called the company and said that their gutters were getting detached from the roof on one part of the house. The property manager got a bid from their main contractor to get it fixed, and the bid came in at $1,200.
Now, I’m no Handy Manny but even I knew that fixing this gutter problem would require a few screws and maybe one hour of work.
Someone was getting ripped off.
I told the manager to get a second bid from someone else. The second bid? It came in at $115, and they took care of a few other issues while at the house. Now, had I not encouraged the second bid, the property manager would have blindly accepted the $1,200 price tag because they don’t care like I care. It’s not coming out of their pocket, so they don’t have the incentive to dig into the bid to know if they are getting ripped off or not.
Therefore, if you end up hiring a property manager, understand that your job is not 100% passive. You will still need to manage the manager and stay on top of them to make sure they are doing what they are supposed to do. Don’t assume property management means you can forget about the property and just collect checks.
Property Managers Kinda Suck
Okay, maybe not all of them.
But I would venture to say most property managers are pretty terrible. Of course, if you begin managing your properties, you’ll likely be terrible also. But because it’s your property, you’ll learn and grow quickly from the “on the job training.”
Therefore, if you are going to use a property manager, just remember: Most of them suck. You need to find the one that doesn’t.
A property manager will be one of the most important members of your team, so it’s imperative you invest the time upfront to find the right one. Treat it like a job interview. Get referrals and actually talk with those referrals!
Ask hard questions to the property manager in an interview. Don’t settle for mediocre.
If you are going to trust the most significant investment in your portfolio and the key to your family’s future wealth to someone, shouldn’t you do your homework up front?
Property Manager Interview Questions
When you sit down with the property manager, I would recommend starting with the following questions:
- What are your management fees?
- How do you communicate with owners? How frequently? What about?
- How many properties do you manage?
- How long have you been a property manager?
- Am I locked into a management contract with you? If so, how does that work?
- How many evictions do you have each month?
- What kind of reserve does your company require?
- How long does a typical tenant stay in a property?
- How long do properties usually stay vacant before being rented?
- How do you screen tenants?
- Do you accept people who have had an eviction on their record?
- How do you handle maintenance requests?
- Is there a minimum charge for a maintenance visit?
- What do you do if a tenant doesn’t pay rent?
- How do you market vacant properties?
These questions should serve as a starting point for conversation, but don’t let it end there. Dig in on each point until you truly understand the kind of manager they are. Write down each answer so you can review them later, and compare your notes with other property managers (because, of course, you should be interviewing more than one).
So… Should You Hire a Property Manager?
I wish I could tell you a simple answer as to whether or not you should hire a property manager or do it yourself.
But I don’t know you.
You might be a terrible manager.
You might be really busy.
Or maybe you’ll be great.
However, I can say this: Managing tenants is not as difficult as it might sound IF you treat it like a business. This means continually learning, growing, networking, etc. It means having systems in place to handle problems. It means always trying to improve.
So what do YOU think? Should investors use property managers? Have you?
Please share your comments below!
(And… of course… don’t forget to share this article on your Facebook and Twitter if you think others might enjoy it!)