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.
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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
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?
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?
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.
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!