What’s the Maximum Number of Self-Manageable Rentals?

by | BiggerPockets.com

There comes a point for many landlords when they “just can’t take it anymore.”

For some landlords, that happens at six units. Other landlords are still happily managing their properties with 30 rental units. So how do you know when the time is right to step back and outsource the work to a property manager?

Since no one likes soggy, wishy-washy advice, let’s start with some concrete counsel: Manage your first five rental units yourself. You’ll gain extremely valuable insights, skills and knowledge into not just managing rentals, but investing in new properties.

But at a certain point, you’ll learn most of what hands-on management can teach you. You’ll reach a point of diminishing returns on the education, even as the headaches and work remain constant.

Before we get to an actionable checklist you can use to make your decision, though, let’s talk a bit about cash flow. It’s a cornerstone for the very conversation about property management.

Download Your FREE copy of ‘How to Rent Your House!

Renting your house is a great way to enter the world of real estate investing, but most first-timers (understandably) have a lot of questions. Fortunately, the experts at BiggerPockets have put together a complimentary guide on ‘How to Rent Your House’. All the skills, tools, and confidence you need to successfully rent your house are just a mouse-click away.

Click Here For Your Free Guide to Renting Your House

Budget for Property Management, No Matter What

One of the most common mistakes made by new landlords is failing to budget for property management in their cash-flow projections.

They all say the exact same thing: “But I’m going to manage the property myself!”

To which I always reply: “It doesn’t matter. It’s a labor cost, whether you or someone else is doing the labor. Budget 10 percent for property management — and preferably more to cover vacancy leasing fees.”

If you manage the property yourself, pay yourself those fees. Landlords always roll their eyes when they hear that, but this is part of what it means to run your rental business like a business. If you don’t budget and account for all the labor costs, then you’re not calculating your returns properly. How could you compare your returns on a rental property to your returns on, say, an index fund? Rental properties come with labor and headaches. Mutual funds don’t.

Enough proselytizing, but make sure you factor the property management costs into your cashflow calculations before buying any rental property. That way, the decision to outsource is never one based on “can I afford it?” but rather on “is the money I’m paying myself worth the headaches?”

Related: The Landlord’s Ultimate 34-Step Property Management Checklist

The Gap

Some investors dream of quitting their job to invest full-time in real estate. Rental properties can provide a (somewhat) stable income foundation, even for those who want to flip, wholesale, or enter some other niche.

But there’s a gap for some investors between when they can no longer manage their rentals themselves and when they can afford to quit their day job.

Say you have a demanding job without much flexibility. It’s hard to do a good job of managing 15 rental properties while also working a high-octane job. And raising kids. And maintaining a strong marriage. And having a social life. Never mind having any hobbies or interests.

So how can investors close that gap to keep cash flow high but time demands low?

BRRRR-strategy-deal

The Quality vs. Quantity Debate

Imagine owning five rental units that cash flow $1,000/month each. Manageable, right? Next, imagine owning 20 rental units that cash flow $250/month each.

Both portfolios produce $5,000/month in income. But only one of those portfolios can easily be managed by someone working a full-time job.

As a further wrinkle, the property management costs for the 20-unit portfolio will be much higher since the gross rents are presumably much higher.

Some investors achieve that better cash flow by buying properties in cash or quickly paying off mortgages. Others invest in higher-end rental properties with lower vacancy, default and turnover rates, and higher rents.

Don’t get me wrong, there is a case to be made by “team quantity” too. More properties mean more opportunities for diversification. If you can keep low-end units occupied and rents inbound, the margins tend to be much higher. But it adds extra labor to manage more properties with less cash flow.

Checklist: 8 Questions to Ask Before Outsourcing

If you manage six or more rental units and the labor is starting to wear on you, here are some questions to help make your decision easier:

1. How responsive and detail-oriented am I?

Not everyone is suited to property management. It requires responsiveness, speed, flexibility. It also requires a certain amount of organization and attention to detail. If you are not interested in detailed bookkeeping, making semi-annual inspections, screening every single applicant thoroughly, and generally operating like a business, outsource it.

2. How quickly am I filling vacant rental units?

If you aren’t able to turn over your vacant units within a month or so, you’re losing money anyway. Why not pay a property manager to do it better and faster than you’re able to do it?

3. How far away are the properties?

If your rental properties are more than a half hour from your home or work, then managing them yourself starts looking inefficient. If they’re more than an hour from your home or work, forget it. Outsource to a professional, local property manager.

4. How much do you hate — or enjoy — managing the properties?

I have a dark confession to make. I hated, hated managing certain properties, in certain rougher neighborhoods. It made me bitter and cynical, watching firsthand as people gamed the system and stacked up as many social welfare incomes as they could. And I can’t tell you how many times I walked into a $40,000 rental with a $50,000 SUV parked out front and a 70-inch LED TV hanging on the wall, only to listen to the tenant whine about how they couldn’t afford their rent that month. At a certain point, I realized that managing these properties was actually hardening me into someone I didn’t want to be.

Besides, when you hate doing something, you just won’t do a very good job of it. Outsource it.

5. Are you satisfied with your pay for the property management work?

You’re paying yourself the property management fees like we talked about above, right? Is it worth it to you? Or would you rather forego that money and spend more time with your family, friends, and hobbies?

Related: 8 Reasons Why Using Property Management Is a Waste of Time

6. How often do you encounter rent defaults, evictions, turnovers, and vacancies?

If the answer isn’t “very rarely,” you probably aren’t doing a thorough enough job at tenant screening and property management. Outsource to a professional.

7. How well do you know your local landlord-tenant policies?

Some cities and states impose complex, tenant-friendly laws. Likewise, if you accept Section 8 or other program tenants, expect bureaucratic hoops and labyrinthine requirements. If you can’t say, “I’m an expert on the local requirements,” hire a property manager. Believe me, in certain communities, the renters are experts, and they will eat you alive with technicalities and loopholes.

8. How much time do you spend on property management, bookkeeping, and accounting?

Even if you don’t mind the work, you may decide the time commitment is simply greater than you’re willing to accept. A few hours each month is one thing, but when your evenings and weekends start being dominated by your rental portfolio, expect the rest of your life to suffer.

use-debt

A Few Questions Everyone Says You Should Ask (But You Shouldn’t)

Experts are quick to pose these questions. Here’s why I think you should ignore them.

Can I afford a property manager?

If the property’s cash flow can’t cover the property management costs, you made a bad investment. We’ve already discussed why you should pay yourself for property management and why you must include the costs in your cash flow calculations. Sell the property if it fails to cashflow well, and move on to a better deal.

Do I have the knowledge and skills needed to manage my rentals?

Guess what? No one is an expert property manager when they buy their first rental property. Or their second. Or their third. How do you think you develop these skills? By managing your properties, you’ll learn on the job, and you’ll get better with each passing month.

If and when to hire a property manager is a personal decision. Ask yourself some hard questions, make a judgment call, and stick with it for at least six months.

If after six months, you second guess whether your decision was the right one, that in itself is a telltale sign. The good news is that it’s a reversible decision, and it’s never too late to make a change.

When did you decide to outsource your property management? Or are you struggling with the decision currently?

Tell us about how you made (or are making) the decision, to help other investors make their own!

About Author

Brian Davis

Brian is a rental investor with 15 income properties, who provides free video training to help everyday people start earning passive income at SnapLandlord.com. He's also the co-founder of SparkRental.com, which provides free services & education for landlords. His rental management is almost completely automated by now, allowing him to travel the world (his current home base: Abu Dhabi).

28 Comments

  1. When just starting out.
    Hiring a management company at first. If you study how they handle your property. You could think of this as a practical lesson on how to Handel your property. After everything is set up they have given you a template on your property. That you change/adapt later if need.
    Later review this template when you ready to purchase your next property. It’s just a real time learning tool.
    Thanks Mr. Davis.

  2. Curt Smith

    HI Randy, My recomendation would be the opposite, self manage at first. Else you won’t have any appreciation for how much or how little the PM will do for you. Especially in the area of real vs fake repairs one of the big problems for landlords delgating to PMs, that and low quality tenents that get placed that cause damage and high turn over. No… self managing at first is very important. My view as a self manager of 36 properties most of which are over 1 hr away and I spend 2 hrs a month on managment. My wife spends 5 hrs a month on rent rolls though. 🙂

    The Quality vs Quantity paragraph totally missed the most important point. Self managing 10 rentals that are in war zones with tenants from hell is way way too many to self manage. Or 35 rentals with very good tenants is way way too few to have problems with.

    Your problems and effort self managing starts BEFORE you buy. IE where you buy, type of house, how good are schools (over #6 in great schools for us) etc will directly drive your hassel factor and how well you sleep.

    Set business rules for where to buy:

    – In good school districts. Go off the high school. 6 or better is great, 5 or better is ok.

    – 10 min to major freeway, 30 min to major jobs centers. Jobs is what really drives the success of a rental. Few jobs and guess what your tenants will often be missing a month sijnce most renters seem to churn through jobs and if they loose one, and non available right now, you will not get your rent.

    – Cute house in nice area or neighborhood. No houses on busy roads or out by themselves.

    – Do nice job of fix up. Good renters like nice houses.

    – My latest rule is: buy in the path of GROWING jobs. Use indeed.com put in a city name and radius of 5 mi, meaning narrow to jobs just in that city. Jump around with many same sized cities and find where there’s MORE jobs. Buy in that area. Look for state / Governor PR sites that announce major employers. Google “amazon distribution center” (do this!!). Buy near by.

    The more of the above rules you check off with a new rental the lower your effort factor will be to self manage. 36 for me is no problem. Its all via text these days so I can live anywhere actually.

    • Brian Davis

      I agree, it’s critical for investors to set operating rules. Better to have a false negative (missing out on what might have been a good deal) than a false positive (buying a bad deal). Rules help keep strict standards for success!

  3. Douglas Larson

    Excellent article Brian!
    You outlined the factors so well and your questions are right on. Individual personality, organizational skills and effective delegation are the biggest issues for me and other investors I know. The only item I would add to your question list is “How old is the property? Old properties 1950s and before) generally require more time, money and cause more stress!

    I have had as many as 12 rentals and that was too many for me, along with the flipping and wholesaling I do. I have scaled back to 8 rentals but only two of them have mortgages so the cashflow is great. A management company rents/maintains 2 of my properties because they are 3 hours away. I manage 6. That’s a good number for me. My wife agrees! With 3 kids, I need plenty of family time. I know an investor with 50 doors that self-manages, but he has an 80-hour work week! I also know another investor that has 200 doors, all professionally-managed multi-family. I would like to head in that direction.

    Again, Great Article!

    • Brian Davis

      Thanks Douglas, and congratulations on having so many free & clear properties! That’s an accomplishment. I love your point about older homes requiring more work – that’s simply a reality of “real” property. Especially in areas with strict lead paint regulations.

  4. thinking about this……a lot of this depends on you…if your a dentist or doctor with way more money than time…….its management company all the way……if your a carpenter/handyman, then you multiply your income x3 by doing the repairs yourself… I was a veteran, young and tough when I started and 24 years later I still do some stuff….changing hot water heater elements/ thermostat, circuit breakers, minor plumbing leaks etc……one thing about doing some stuff yourself, you get to know your people, whos taking care for your places, you learn that doing minor repairs are easy- whats an electrician charge for swapping out a 30 amp breaker??? 50 bucks? the breaker is 10 bucks, and 3 minutes work……so I think rather than a one or the other…..a mix of participation is the best way in my humble opinion…..

    • Brian Davis

      Thanks Dave, and I agree, a lot of the decision comes down to whether the extra money is worth the time cost. I’m jealous that you’re so handy and can do so many of the repairs yourself – I always wished I were handier guy!

  5. Christopher Smith

    Excellent Article

    I have newer B properties in B+ neighborhoods broken down in two location sets, one set in California and one set in Ohio. I have always used a property manager even though my properties are relatively speaking low maintenance with above average tenants. I work a full time professional job so I could never swing full time management given everything it takes to properly tend to rental properties (nor would I really care to). I am satisfied managing the managers.

    I’ve been at this now for about 6 years and have had overall great results both income and appreciation. My managers go with a flat 8% rate which has worked out to be a pretty fair deal. They have always selected really good tenants (only 1 person so far has had to be told to pack up and leave, and that went without any major incident). They also do a really good job of responding to the various tenant issues (routine and emergency) so I think they earn their keep. The one item I have noted (and as is also noted above) repair work can sometimes be insufficiently supervised with contractors likely billing more than is fully justified. But we are working on that issue, and its at least improving.

    Bottom Line – Its been well worth the management expense I have incurred to permit me to be free to focus on the more strategic aspects of ongoing property acquisition and business profitability and development.

    • Brian Davis

      Glad to hear you’ve had such a positive experience Christopher! I suspect that part of the reason for that is that you’ve chosen your investments wisely, and in pretty good neighborhoods. It makes a huge difference, positioning yourself for better tenants, fewer vacancies and easier management!

  6. Jerry W.

    Brian,
    Thank you for the thought provoking article. I currently own between 30 and 35 units. About 4 units are joint ventures where the other party is managing the units. I have one unit professionally managed in Ohio in a C or C- neighborhood. I have 12 units that are managed by a local management company, and 4 units with a live in manager who gets reduced rent in a town 32 miles away. The rest of the units I self manage. I pay about $1,500 per month to a handyman company who handles things like leaking pipes, rodding out sewer lines, laying carpet, patching drywall, and light renovation in-between renters.
    Many of the properties were not bought right as it was a company that one of the partners did a lot of the managing then moved away and I took over for him. The first in house manager did OK was but not professional in his approach, he simply bulled his way into making things work with common sense and elbow grease. I was pretty bad at being a property manager but have improved over time with a lot of self education. Since I usually use 15 year loans, the profit margins are pretty slim, and if I paid a 10% management fee many of the units would barely break even. On the other hand, I have gradually moved into higher end nicer properties where I have less property damage and less turnover. The newer properties do not cash flow much better than the older properties, but are a lot less work. I have had several tenants for longer than 10 years. I have a professional job that is demanding, but flexible as I am the boss. I could make a lot more money working as a professional than I would have to pay for a manager, but I find I kind of like it. It is a lot less stress than the day job. I can also change a water heater out in about the same time as a plumber, but do it for $500 less. I usually put from 1 to 3 new roofs on properties a year, saving $3K to $5K per roof. my wife has a business degree and does the books to the tune of about 10 or 12 hours per month, and collects the rents at my office location. We took on a load of debt by buying out the rest of the partners 3 years ago. We have paid off 2 of the houses, and will pay the next one off in 3 years or less using snowballing. After that it is a property paid off about every year or two. By the time we hit 12 units paid off we can retire and live off the rental income alone. We will have retirement from the day job and a few investments as well. I plan to self manage at least the nicest 4 or 5 units even in retirement.
    The hardest part in giving up managing is that I feel I am better at it than any of the property managers I currently use. I check the property more often, i do regular maintenance, like changing furnace filters, and painting, and keep a mental schedule of big items like roofs or siding/window upgrades. All the managers I have used take a wait until it is broken to fix attitude. I have never had one say it looks like we will need a new roof in the next 2 or 3 years. We also have very landlord friendly laws here that make evictions very easy.
    Thanks again for your article.

    • Brian Davis

      Wow congratulations on the aggressive payoff schedule! As you said, it might mean slim margins now, but as you snowball and pay more of these loans off, your cashflow will skyrocket. That’s also huge that you can do so much of the work yourself, huge money saver and you also know that it’s being done right.
      From the sounds of it, you’re not far off from financial independence!

  7. Jerome Kaidor

    How about 74 units? That’s how many I self-manage.
    1. It’s my full time job. I haven’t seen a W2 check in 13 years.
    2. 52 of them are a single complex, where I have staff.
    3. I wrote custom software to help me with bookkeeping, tracking maintenance, checking prospective tenants, payroll etc.
    4. I leverage online resources for checking out prospective tenants.
    5. I also leverage my bank’s Bill Pay. I was shocked how much time that saves.

    ….Did I say “full time job”? Actually it costs me about 10 hours a week, very manageable. With my software, I believe i could do up to 100.

    • Kevin Ross

      I’ve been managing 5 units, starting in 2008, with the last two purchased in 2015. I’m positioning myself to be ready for when I find the next deal. I’m always looking at ways to improve my accounting and expense tracking. I’d be really curious to what kind of program you’ve written. Any chance of getting a look?

  8. Christine Swaidan

    Seriously contemplating hiring PM for 13 SFR and condos–as in I’m supposed to sign in three days. So this was a timely article. My biggest headache is tenant screening. The fact that I only had to put two tenants in for 2016 and just signed a new tenant last week should make it easier but the whole process is just a PITA. PM will charge me a flat fee of 6% of gross rents. They are allowing me to continue to use the vendors that I have established a relationship with. Part of me says I just need to suck it up and do the job. The other part says I have a lot on my plate and could use less stress in my life! I don’t think I will be comfortable just letting go after putting so much energy in management so it occurs to me that the main job of PM will be collecting rents which is already in good working order.
    My question for you, Brian Davis, is re paying yourself for self management. In the almost two years that I took over managing where my husband left off I have put every dime back into the properties. Been rehabbing like crazy when a property becomes vacant not only at the SFR but also apartment complex that I will keep control over because the onsite managers have my back. Everything else goes towards paying off mortgages (five left!). Is this what you have in mind when you say pay yourself?

    • Brian Davis

      Hi Christine, paying down the mortgages faster is certainly a productive use of your extra cashflow, and I would never discourage you from doing so. If I were you I’d go through the checklist above and see if anything jumps out at you as a cause to outsource management. I will say this – 6% is low as property management rates go. If you don’t think you do a very good job with placing and screening new tenants, one option is handing over the properties one at a time to a manager, as they become vacant. That will also give you a chance to evaluate the property manager and see how well they do with just one or two of your rentals before you hand them all over.

  9. Deanna Opgenort

    Is it feasible to put several of the properties under management for a specific amount of time (ie 6 mos or a year) as a trial, then re-evaluate how the PM does? The prospective PM may not be thrilled, but if they tell you they need to manage all of your properties or they won’t take any of them, run away (same with a financial advisor who tries the same tactic — except run away faster!).

    • Brian Davis

      Hi Deanna, I’ve done that exact thing myself, giving a few properties to a property manager to see how they did with them. After evaluating their performance, I gave them more. If a property manager demands all of your properties, don’t give them ANY – very bad sign.

  10. Chris Field

    I’m at 24 and it’s not really much work, I feel I could double that before needing a manager.

    I also run a construction company so I have access to lots of subs, very quickly. The two business’s do dovetail in nicely together. I don’t wait on any repair, I just have the guys run over and take care of it.

    I dislike what I see with management companies. I think when I get to about 50 units I’ll start my own. Hire a handyman, maybe a leasing agent, and part time book keeper. I’m all about control I don’t think I could give up hands on control of my rentals.

  11. lisa hoover

    When i got up to 75 very nice, 1990 & newer homes i started a company, hired property mgrs and later sales agents.
    Word of caution– you can’t be good at everything– don’t be afraid to spend money and hire the BEST Company (not a single person or your cousin–a company with procedures and insurance)to do your books and regularly have an outside independent AUDITOR come in and audit!
    In RE it’s not like retail where a $5 item error is no big deal… most transactions are $1000 $2000 each — and if you have an unethical aka thief on your team it be a huge problem to correct.
    So absolutely manage your properties yourself FIRST and when you hire others AUDIT them.
    IF your property mgmt firm ever bounces a check to you the owner (i’ve seen that in Charlotte with some of the biggest oldest firms!)
    RUN
    That co is out of control.

    • Brian Davis

      Ounce of prevention beats a pound of cure every time. You’ll also find that it will force you to reject borderline deals, that you might otherwise have been tempted to buy, but that in the long run would have caused you grief and headaches.
      A lesson I wish I’d known before making my first investments.

  12. Lisa Arkowski

    Great article! We brought in a property manager after just 4 units. I was pregnant with baby #1 so I had a big shift in priorities. My husband does remodeling for a living so he still does all the maintenance on the units. Since then we’ve grown the rental business, I went the self-employed route (in my “real” job) and now have baby # 2 on the way. I can’t imagine at this point still dealing with day to day tenant issues, turnovers, etc. We made the switch a lot sooner than most but so far it’s been worth every penny we pay the property manager.

    • Brian Davis

      Thanks Lisa, and congratulations on your second baby on the way! Honestly if your priorities shift and your rental properties drop far down the list, then hiring a professional property manager is the only responsible thing to do, short of selling them. That’s great that your recognized you weren’t going to be able to give them the attention they need, and planned accordingly.

  13. Cory Binsfield

    I agree that property management is not for everyone. Yet, if you are detail and customer service oriented and have the time, it can save you lots of money over the long run while ensuring your properties are maintained properly.

    I was fortunate in that I was self employed when I started out and had a flexible schedule. I also purchased property management software in the beginning to leverage time with technology. I basically created my own property management company.

    Due to time constraints, I focused all my efforts into acquiring nice properties in a nice areas to avoid excessive driving. I called this my strike zone. It was tempting to consider properties outside of my zone, but I’m glad I stuck to the plan. Leasing and maintenance calls are a breeze since all the properties are nearby.

    I continue to self manage my portfolio today. If I were to pay a property manager, it would run over $100,000 per year. I take the savings and reinvest in my portfolio as well as outsourcing key tasks like maintenance and renovations. Software makes leasing, maintenance requests and background checks a breeze.

    The other benefit to self management is the real estate professional classification. This allows me to take advantage of all the tax deductions to offset my other earnings in my day job. This saves me thousands in addition to the property manager savings.

    Great job on outlining the key questions to ask yourself before taking on property management. Too many people forget that good property management drives good returns.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here