The Biggest Landlording Mistake I Ever Made

by | BiggerPockets.com

My biggest landlording mistake isn’t an uncommon one. It is one that at least 50% of investors continue to make—and not just first timers, either. Some experienced and relatively successful income property investors still fall prey to this pitfall, too.

No, it wasn’t skipping due diligence, property inspections, or foregoing title or property insurance. It wasn’t even getting the numbers on the deal wrong. It was self-managing my rental properties.

Related: The 3 Dumbest Mistakes Buy & Hold Real Estate Investors Make

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Why Self-Managing is the Wrong Move for Landlords

It’s not that I couldn’t manage my rental properties. It wasn’t even that I couldn’t do a good job at it. Here are some of the reasons I decided it wasn’t right for me and don’t believe it is the smartest or most profitable route for most real estate investors.

Managing Contractors

Without question, finding and managing contractors is one of the most trying jobs in real estate. Even highly successful investors can struggle to find solid contractors and manage them effectively. It’s not a “set it and forget it” item, either. They are constantly changing and need different types of supervision and engagement at different stages of any given project.

hire-a-contractor

Maintenance Requests & Tenant Correspondence

You might get really lucky on your first property or maybe even your second. But sooner or later you are going to get tenants that are a lot of work. Either the renter is just really needy, the property requires a lot of upkeep, or both. Expect at least one in three of your units to require really intensive and responsive management. That’s true even if you are buying brand new construction, vet prospective tenants very well, and your renters all have 700 credit scores.

No matter the cause, you can’t afford to slack off here. It is an area of huge financial and legal risk and responsibility. If you aren’t providing hyper-responsive and friendly customer service, you aren’t going to last long. Word gets around fast in the online world we live in today, and it always stays up on the web.

Related: 10 Lethal Mistakes to Avoid on Your First Real Estate Investment

Being Too Busy

Between having to be constantly available to tenants—24 hours a day, 7 days a week, 365 days a year—and having to stay on top of your contractors just as much, there isn’t much time to breathe or take a day off. If you are already retired and have no plans to travel, have the family over on the holidays, and never get sick, that may not be a problem for you. Still, this is time spent simply managing a few units. It doesn’t count time you need to spend to go find new deals and new tenants or to stay on top of the right times to sell and augment your investment portfolio. It’s not healthy, and certainly doesn’t allow you to reach your full potential in life.

Being Too Personally Involved

For some, the idea of personally having a hand in rehabbing properties, underwriting tenant applications, keeping the landscaping manicured, and helping others when they can’t pay the rent is really appealing. However, there is a big gap between this ideal and the reality.

Being too personally involved almost always means a lack of privacy, taking on extra risk, and failing to be objective in investing. You won’t make the best calls on property acquisitions, tenants, and exits. You’ll make big blunders on renovations, repairs, and dealing with other people. It’s inevitable. We are all human.

property-management-contract

Summary

Like me, most new investors completely blow the math on outsourcing to professional property management. You see an expense. That may be one month of rent, 10% of the gross monthly rent, both—or more. But not having professional management is far more costly. Good property management is a part of the investment. It should always be budgeted for, even if you want to try the DIY route first.

Do the real and full math on the liability and the cost of juggling multiple full-time roles, the stress, and the lost time you could’ve spend on higher value business activities and quality time with family. It can suck the joy out of the business. Give it a try yourself and you’ll quickly figure that out.

For those who are getting into real estate investing for truly passive income, wealth protection, profit, and having a life, delegating out property management is highly recommended.

Do you think self-managing is a good idea when starting out (or anytime, really)? Why or why not?

Comment below!

About Author

Sterling White

Sterling White is an investor and business owner on a mission to make the world a better place through principled and efficient real estate investment.

Even before co-founding Holdfolio, Sterling and his partner Jacob Blackett had been involved with the purchasing and selling of over 100 SFRs. Today, Holdfolio is a prominent platform for investing in income producing multifamily apartments. The firm has been featured in national publications such as US News and was ranked as one of the best real estate crowdfunding sites in 2018 by Fit Small Business.

The success of Holdfolio’s technology gave birth to SyndicationPro, a fast growing all in one software solution empowering investors to efficiently and easily raise capital online.

28 Comments

  1. Christopher Smith

    Agreed, and as you note often not followed.

    I’ve had a manger from day one (late 1999 for my first property). Besides the truly compelling economic logic of not doing property management myself, its simply a job I have absolutely no desire to do.

    Amazingly enough there are many who insist they derive huge financial benefits from self management. I had one guy insist that he had saved oodles and oodles of money by collecting and processing the rent checks himself and performing all the low level repair work himself as well.

    I asked him

    1) How much does an accounts receivable clerk make?

    2) How much does a Joe handyman make?

    That is what you are really saving (probably less than nothing when you factor in the opportunity cost)

      • Christopher Smith

        Seems you must of had experience with some real sub par managers. Mine (I have two, in two different states) have done a job immensely better than I could have ever done it, and they have done it at an all inclusive 8% of gross rent collected – no more. I dare say there is nothing that they couldn’t do far better than I could when it comes to rental property management activities.

        It also helps greatly that they are true certified professionals at what they do (as I clearly am not), and that’s not just a basic operational competency issue its also a very significant legal liability issue. They are well very schooled in landlord-tenant laws and understand exactly what can and cannot be done in terms of tenant selection, administration and management.

        This is exceptionally important to me as most of my properties are in a jurisdiction where the laws greatly favor the tenant. Because of this, I don’t need layer upon layer of high maintenance and administratively stultifying LLC structures (e.g., in my state a minimum of $1,000 in filing costs for each LLC each year). In this regard, I’ve never evicted a tenant, nor have I ever been threatened with tenant initiated litigation in 20 years of owning multiple rental properties. Knock on Wood.

        I think perhaps all you need to do is fine a good property manager.

  2. Dave Rav

    Funny, just a few weeks ago there was a post arguing for the other side – self managing.

    For me, one major concern is this: NO ONE MANAGES YOUR ASSETS LIKE YOU*

    That means others likely won’t see what you see, look to make processes more efficient, look to save money wherever possible (at least the way YOU would), and come at things with your level of industry-experience.

    That said, if you can find someone who at least closely meets your attributes and/or way or thinking, they are probably the next closest thing to you doing the management yourself. Problem is, these folks are very few and far between (most try to scale their operations and manage dozens-hundreds of units; can’t blame them).

    I’ve been on both sides of the fence here. My experience with property managers, in summary, was they costed me money. Im not talking about the 10% either. They didn’t collect my rent on time, and never enforced late fees. I have made hundreds of dollars on late fees in the first 4 months of this year alone! Once we had to evict someone and come to find out, they weren’t just one month behind on paying, but 2 months! By the time eviction complete I was out 3 months rent plus turnover costs (total $2800).

  3. karen rittenhouse

    I don’t know that this is the biggest landlording mistake and, for some, self managing is the right choice.

    I’ve done it all. I managed 56 of my own rental properties before I opened a property management company and hired people to run it for me.

    I now hire out to 2 property management companies that manage over 100 of my rentals.

    But here’s the thing, (1) if you only have a handful of rentals, say 10 or less, managing yourself is not that difficult or time consuming – if you know what you’re doing. And you can’t get the knowledge by simply swallowing a pill.

    (2) You’d better do your research and hire a good property management company. A bad one can cost you big (you need look no further than @Dav Rav’s example above).

    We have kissed a lot of frogs to find good management and fired property management companies more than once. How do you know a good property management company? Do it yourself; learn the right way; know what to expect and what to demand from a company you do hire – if you do hire one.

    Thanks, Sterling, for your post!

  4. Wow, I strongly disagree with this post. Being personally involved means you won’t make the best calls on property acquisitions? That’s just crazy. Also, I don’t trust any property manager to look after my best interests. A property manager has NO incentive to find the best contractor or price to make a repair NOR will he/she be able to make the best decisions as they relate to my personal situation. At any point I can choose for myself whether it’s worth it to me to run over and make a repair myself or make a phone call to a contractor just like a property manager would do. I just don’t see any value added to hire a property manager. Their take of the profit is huge and they absorb none of the costs of mismanaging the property. Do you know how many property managers hire out jobs to their family members or friends? Conflicts on interest are all over the place. In my opinion, if you aren’t willing to manage your rental, you should invest your money elsewhere with higher returns.

    • Christopher Smith

      Wow – Who do you have doing your work?

      My property managers get roughly 12% to 14% of my net cash flow per year, and they do at least 95% of my total rental property related work (I do the tax research/prep, and comp work to determine rental rate increases – which btw I don’t really even need to do, I do it for kicks).

      This sounds like an absolute steal, and total no brainer for me.

      • Christopher Smith

        Just out of curiosity I calculated for 2017 my property manager fee it was 11.9% of net cash flow, and that doesn’t even factor in underlying property appreciation which the property manager gets nothing from and has been running at approximately 150% of annual cash flow.

        95% of the work for 12% of the bottom line, I’ll take that any day.

  5. Christopher,

    In your first post, you say your two managers collect 8%. Then in your second post you say they get 12% and 14%. Which is it?

    Christopher & Sterling,

    I’m curious what your net return on your cash investment is paying those kinds of fees. I net in the mid to high teens (%) managing my properties myself after buying them all in 2013 as foreclosures at the very bottom of the market. I’d say most investors are lucky to make 10% return on their cash invested normally. Hiring a property manager at 10% of rents would likely reduce their profits by 25%-50%. At those returns, it makes better sense to invest elsewhere unless you’re in a rapidly appreciating market.

    • Christopher Smith

      You need to compare apples with apples, 8 is on gross rent, 11.9 (my 2017 final amount) is on net cash flow.

      I invested just a hair over 1M, now at 3M, plus another 600K net rent over about a 5 to 6 yr time frame (on average). I bought mine mostly starting in the 2011 (crater bottom of the market in my neck of the woods) to 2013 (prices still low, but climbing very rapidly) time frame, bought one out of state in 2016.

      My big issue is that my properties have appreciated so rapidly the underlying rental yeild is getting a little low (not the worst problem in the world to have, but it does make me consider rolling my gains into higher yeilding, but very likely lower appreciating properties).

      I’m way to lazy to manage properties, just the thought of it makes me nauceous. But thats just me.

  6. John C.

    I agree with many people here that if you only own a few units, self managing is probably the way to go, especially in the beginning. I’ve learned a great deal in a short amount of time. I now know if I’m being ripped off on any number of things related to management and maintenance.

    Hiring a management company at 10% would’ve eaten up 1/3 of my net. That’s tens of thousands of dollars that I saved by doing some billing, tenant screening, cleaning, and repair work. It ultimately amounted to a few hours a week. By the hour, I figured that I was saving a couple hundred dollars per hour by doing that stuff myself. That’s way more than I earn in my regular job, so it was definitely the right way to go for me.

    In addition, every single tenant I’ve ever had has left me by thanking me and telling me that I was the best landlord they’ve ever dealt with. And, yes, I did raise their rent every year. That’s not something that a manager could ever replace.

    However, moving forward, I no longer want to do all of that, especially as I plan to scale up. That’s when the cost benefits will decrease and I will be forced to hire out.

    Everybody’s situation is different. But, I think self managing is the way to go if you’re just starting out. You have to learn from the ground up.

  7. Christopher,

    If 8% gross rents = 12% net cash, then you are saying your properties are cashflowing 67% of gross rents. The only way you can achieve that is if you own your properties outright. And, if you own them outright AND pay a property manager, you’re probably not doing better than about a 5% return on your cash. That’s horrible. Enjoy your 5% so you can sit on the couch while you assume a huge risk letting someone manage your real estate! I’d rather invest in preferred stocks than make less that double digit returns on my real estate!

      • MBA from William & Mary. Your last post doesn’t even address anything. Btw, I’m also a millionaire through real estate if that’s where you were going with that. The fact remains your return is horrendous. I’m making 13%-23% return on my cash with an average of around 17% on most of them. No way you are even close to that unless you are in some really special type of market. In Baltimore I managed to get 30%-55% returns doing Section 8 rentals in the hood. That’s the only way you could be hitting the returns you claim to be making. Not too many property managers willing to work that kind of territory.

        • Christopher Smith

          No that’s not where I was going, that’s can only be something you have fabricated or conjured up somehow in your rather defensive and paranoid state of mind.

          Yes those are my real returns, and btw they are not even that unusual for my area. I know of some folks who like me were willing to take significant risks in very adverse market conditions that did even better in several locales in my general vicinity over the same time period.

          So once again you are wrong on all points, better not let you classmates and W&M find out about this, especially given your paranoid tendencies.

        • Calm down. Every market is different. Some statements being made here are simply people bragging about how well they are doing,’using formulas or numbers that may or may not be accurate or be reasonable in some markets.
          This blog is supposed to be a board that shares tips and information to all who read it. I mostly enjoy it.
          I have only 17 units, own them outright, and so far have managed them myself since I want to get a feel for the properties, the tenants, and the business itself. Also I manage the improvements or renovations that I do with the goal of both raising rents, net profits, and property value which is based loosely on the CAP RATE.

        • what points am I wrong on Christopher? you write a vague post with numbers that don’t support your thesis. I presented an argument supported by real numbers showing how you cannot be making a decent return, certainly not enough to warrant telling people that you can make MORE money by hiring a property manager. I just can’t stand peoople who get on these posts who blow smoke for whatever narcisistic reasons they have. It’s not fair to people who are are on here to get REAL beneficial information. It’s irresponsible posting.

  8. Laurel Devine

    I don’t know about this…I am a third generation landlord. My grandparents, parents and now my husband and I have been self managing our real estate since 1942, and love it. We have a team of experts (plumber, HVAC, painter, landscaper, electrician, etc…) who know us and our tenants and we can call at a moments notice. We do some of the work ourselves, when we want (I spent last weekend painting one of our 3 bdr 1/2 duplexes because of a move-out), but when I will be on vacation, or if I just don’t feel like getting my hands dirty I will call one of my “guys.” Our family has enjoyed our hands-on approach and have made lots of money (enough to do what we want, when we want, with whom we want), as did my parents and grandparents.

    I personally, am way to OCD to turn over my properties to a stranger. I like knowing what’s going on, how the tenants are treating my investment and who is in my properties fixing things and my husband enjoys rebuilding decks and replacing doors and stuff like that – and if he doesn’t feel like doing it or we are busy with other things or will be away, he just calls the right person on our team and sends them over to do it.

    I wouldn’t want it any other way!

  9. A coworker just walked into my office this morning complaining that her property manager in another state rented her old house out to a terrible tenant who “destroyed” the inside of her house over several years. The property manager never did an inspection. Just took the fee and left the owner hold a bag of losses.

  10. Naj from Miami,

    I did become an accidental investor after getting furloughed as a Captain of Brand X Airlines and cashed my 401-k and started buying SFR houses. First three houses were excruciating uphill battles because I was a White Collar coming in a segment to do a blue-color work i.e., painting, lawn manicuring, bit of plumbing like changing toilet’s leaking valves etc. etc.
    But the hardest part of Land lording was, no doubt, getting the right tenants, As DAV said earlier a so-called Manager costed me as DAVE RAV mentioned above, it costed me almost 5 months of my cash flow. Therefore, I learned to check my tenants very well starting with a complete back ground checks

  11. Jerome Kaidor

    I guess it’s different strokes for different folks. I manage my own properties. It “costs” me about 10 hours a week. I have no other job. I have staff at my big complex. They get the midnight plumbing calls. I do the back office work for them. I pay the bills, check out prospective tenants, watch the money come in. I do the payroll and the bookkeeping. They keep the place clean, turn over vacant apartments, show them, meet Section 8 for inspections. They receive the rents and book them on computer.

    I wrote custom software for tenant ledgers, maintenance tracking, prospective tenant checking, rent-increase-planning, payroll, forms generation – my staff issues three-days for rent with a couple mouse clicks, rental agreement generation, and some etc that I forget off hand.

    I will say that there are facets of property management that I could do without. Top of that list is the people stuff. “Bob is parking in my space!”. “The lady next door is making noise!”. Then if I send a notice to Bob, he says that the complainer is doing X, Y, and Z, and why don’t I address that?

  12. Ryan Haley

    One thing that hasn’t been addressed is the access to remote markets that property management enables. I live in an area that doesn’t allow anywhere close to the yield/cash flow I’m targeting. So, I invest out of state. That would be impossible without a PM. Obviously, trust and competence in the PM is paramount. Given that I have that, I’m perfectly ok with giving my PM 11% monthly plus considerable tenant placement fees to open up an opportunity I wouldn’t otherwise have access to, as well as deal with the myriad headaches of low-income tenant drama. The margins/yield is good enough that I’m still way better off even with the considerable PM fees.

  13. That’s a pretty wide brush you’re painting with there. People and situations are different, not to mention location. I just started my “empire” this year. 1 months rent to find a tenant plus 10% each month? Nah. I’ll manage myself for a little while. I find the 24/7/365 isn’t so bad with just a couple doors at the moment. And for small operations I like to meet applicants. See? Different situations for different people

  14. Stephen Shelton

    I see the value in professional property management, but for me the value does not yet seem viable because I only have 3 properties and they are all within a few miles of each other.

    But I see the math on the wall.

    I decided to apply sealant to the fences on my properties in May (my unofficial optimal month because it is the last month of Florida’s dry season)

    That’s 2 houses. 2 out of 3. That’s manageable, but if I had 60 properties at that rate that would be 40 houses! I’d have to do more than one a day!

    Also with the Obama recession over, properties in my area are, sadly, rapidly rising in price. If I want to achieve tycoon status with 60 doors I’m going to have to seek out properties outside a 15 minute drive.

    I see property management as an inevitability for me, but it doesn’t make sense yet.

    Also, I enjoy doing this stuff. Am I alone on this? I take pride in my properties and like to visit them and work them. It’s weird because I don’t do thesame with the one I actually live in.

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