As a corollary to last week’s blog on self-managing (So, You Want to be a Property Manager?), I wanted to follow up with an article detailing what to look for in a property manager. After investing the time and money required to acquire an investment property, the last thing that you want to do is hire the wrong property manager. A rental property is a business, and the way that business is operated is largely what determines whether or not it will succeed or fail. For this reason it is absolutely essential to be sure that whoever manages your investment is qualified, ethical, and has their interests aligned with yours.
Why Hire a Property Manager?
Many new investors want to manage their own rental properties when they should be outsourcing the job to a professional. One of the most common situations that necessitates hiring a property manager is when you do not live in the same city as the property. If you live more than an hour away, you should absolutely hire a local property manager to ensure that your tenants’ needs are handled promptly. When an investor’s rentals are not local they often neglect them and fail to keep up on regular maintenance/inspections. There is a reason that one of the best sources for seasoned investors to buy real estate at a discount is by contacting out-of-state property owners! Another good reason to hire a property manager often comes about when you look at the opportunity cost. Are you a business owner or a highly-paid professional whose time is better spent in your (other) business or job? If so, it may cost you more in lost revenue from your primary income source to manage your own rentals than it does if you pay a small fee to hire a property manager.Have you taken the time to educate yourself on Fair Housing Laws, screening tenants, and managing properties? Do you have a legally sound lease? If you haven’t done these items and aren’t planning to, don’t even think about managing your own properties. Find a professional manager and it will save you substantial frustration in the future.Finally, are you the type of person that is willing and able to have the difficult conversations involved in property management? Are you ready to evict tenants who do not pay their rent or charge late fees when necessary? If this doesn’t sound like you, find a reputable company to manage your portfolio!
What does an Effective Manager Do?
A reputable property manager will handle all aspects of managing your rental units. Your property manager should find, screen, and sign new tenants immediately when your property is vacant. Additionally, they should handle all maintenance requests and tenant questions/complaints. Everything from evictions to late night maintenance calls should be taken care of by your management company. Your tenants should not even know who the owner of the property is. Your PM should also have a website where you can access all the information on your investment’s financial performance, your tenant’s leases, and all other pertinent information. The only item you should be tasked with is checking your monthly financial statements and approving repairs that exceed a pre-determined limit.
What does it Cost?
Most property managers charge between 6%-10% of the monthly rent for their services (closer to the higher end of the range if it’s only a few units, closer to the lower if it’s a large portfolio). At first glance, this seems to be relatively inexpensive for such a difficult job, which is why it’s imperative that you read the entire contract when hiring a property manager! All too often, property management becomes expensive when you consider the numerous fees that are included in the fine print of their contract. Annual fees, tenant signing fees, lease renewal fees, listing fees, inspection fees, and on it goes. This is where you have to be extremely careful when hiring a manager. If they take the entire first month’s rent when they sign a new tenant that’s 8% of your yearly revenue from that unit. When considered separately, these fees may seem arbitrary but if you do the math they can easily push the total monthly expense to 20% or more. Be sure to read the contract from beginning to end when hiring a manager so that you know exactly what you’re signing up for.
What's a Fair Price?
Does this mean that property management has to be this expensive? No, of course not. It means that you have to be competent in your due diligence when selecting a PM. There are professional managers out there that charge no fees at all beyond a standard monthly percentage but they are few and far between. If you find a manager who charges 10% of the monthly rent and has several hundred dollars in fees a year they may still be a good option. Especially if they have a positive reputation for being reliable and effective among investors who use them. What you want to avoid are companies who have unreasonable amounts of fees and especially those whose fees motivate them to cause turnover.
Are your Interests Aligned?
If your property manager keeps the entire first month’s rent every time that a new tenant signs a lease (and it’s regardless of how long the last tenant was there) are their interests really aligned with yours? Say that rent for your unit is $1000/month and your manager charges 10%. That means (if your unit stays occupied) they will gross $1,200 a year. But if that same unit turns over half way through the year and they fill it within a month they make an additional $1000 and only lose one month’s rent ($100). Additionally, when a unit is vacant there are usually repairs and maintenance that need done, does your PM mark-up the work they do on your unit? Suddenly, it would appear that your PM may not be happy to have long-term tenants. Be wary of property managers whose financial incentives are in conflict with yours, you want a manager who will act in your best interests and in order to achieve that their interests must align with yours!
What do the Reviews Say?
When looking to hire a PM, check out reviews online to see what other landlords are saying about them. If you look at reviews on Google you’re likely to see numerous complaints from angry tenants who were evicted or charged late fees. This is not necessarily a cause for concern. What you really want to find are reviews from landlords who hired the company for at least a year. Check real estate investor networking sites like BiggerPockets and Connected Investors to see if you can find any additional reviews from property owners who hired the company. Attend local real estate groups and see who other experienced investors are using. Other real estate owners are your best source for honest feedback on the performance of a property management company.
Association Membership
Reputable property managers will often be members of various groups for professionals managers. When screening prospective PMs, check to see if they’re a member of groups like the National Association of Residential Property Managers (NARPM), the Institute of Real Estate Management (IREM), and Building Owners & Managers Association (BOMA). While not essential, membership in one or more of these national groups is a telltale sign that the organization is serious about their profession. (Yardi 2018)
Expectations
When entering into any sort of business agreement there should be clear expectations on both sides. A good property manager will have standards for the properties they manage just as you should have standards for their services. Does the prospective PM take on management of just any property? Or do they require their units to meet a minimum standard condition? This is a great question to ask a potential manager as any self-respecting company will refuse to manage properties if the owner won’t invest their own funds to keep up on the maintenance. If they are willing to take on any property and have no standards for the condition of the units they place tenants in, this is cause for concern!
Additional Questions to Ask
In addition to the aforementioned items, when screening a potential PM ask questions pertaining to their processes such as “how often do you inspect the property?” and “what does your tenant screening process include?”. Be sure to get as much information as possible about their systems and processes so that you know what level of attention your property and renters will be given. You also want to be able to get in touch with them when needed so be sure to ask who your point of contact is and how to best reach them.The key to hiring the right property manager comes down to conducting thorough due diligence. You should know exactly what you’re going to be charged for their services, what their process looks like, and who you will be communicating with and on what intervals. There should be no ambiguity as to how the relationship works. Remember, not all property managers are equal! Taking extra time upfront to thoroughly screen several different potential PMs is well worth it as it will greatly reduce future headaches and unnecessary expenses!
References:
“4 Property Management Associations To Join – & Why You Should!” Yardibreeze, Yardi, 2018, www.yardibreeze.com/blog/2018/
This blog was written by Dan Haberkost - dan.haberkost@gmail.com