“At what point should I hire a property manager?”
Sooner or later, most real estate investors question whether to hire property management to make their rental income truly passive. I did, and I decided that for me professional management was almost as important as the investment property I purchased.
Over the years, I’ve owned rental real estate in my home state of Texas as well as Colorado, Nevada, and California. Excluding my first property in Texas, my first act after buying a rental property was hiring a property manager. In each case, my results — cash on cash return, tax benefits, and capital gains — all fit the numbers I forecast with a rental property calculator before buying.
Sure, buying the right properties helped. But just as important was the due diligence to hire the right property manager. In each case, I selected a property manager with at least a decade of experience with similar properties in the local market, a cadre of satisfied clients, great business and credit references, and verifiable accounting and administrative systems.
Because for long-distance real estate investing, I need regular, timely, and complete financial information, which means hiring only the best property managers.
- Property managers handle the day-to-day operations of managing rental units.
- Common duties include filling vacant units, collecting rents, and overseeing property repairs and maintenance.
- Outsourcing property management comes with pros and cons beyond the obvious cost and alleviated landlord headaches.
What Is a Property Manager?
As any seasoned landlord will tell you, rental properties aren’t nearly the passive investments that many a fast-talking guru would have you believe. They come with considerable labor — labor you can either perform yourself or outsource.
Property managers take over the day-to-day work of overseeing rental properties. They could operate as a business with many employees, or a single individual.
Broadly speaking, property management includes services relating to:
- Tenancy. A property manager makes recommendations on rental rates and policies (pets, smoking, guests), identifies ideal tenant characteristics compatible with laws and regulations, and markets the property through the optimum media. They also advertise units and collect rental applications, screen tenants, sign lease agreements on behalf of the owner, collect rent, and handle evictions.
- Physical Property. A property manager maintains the property to the owner’s specifications, handles repairs and remodeling as necessary, contracts with essential service providers (utilities, trash pickup, and television and internet providers), and performs regular physical inspections. They may provide security services as well, in the case of larger multifamily properties.
- Administration. Receipt and disbursements of cash, recurring accounting, financial reporting, retention of critical legal papers (lease agreements, contracts, eviction notices and other documents for the eviction process), property tax filings, and relations with local and state government authorities.
What Does a Property Manager Do? Common Responsibilities
Property management responsibilities can vary, but in general, property managers serve landlords in the following ways.
1. Comply with Landlord-Tenant Laws
Landlords must follow federal, state, and local landlord-tenant laws. Which means property managers must understand those laws and help their clients adhere to them.
For example, federal Fair Housing laws prohibit landlords and property managers from discriminating on the basis of familial status. Sounds simple, right? And yet, landlords have been sued for advertising a tiny studio apartment as “Ideal for a single professional.” It doesn’t matter that a studio apartment isn’t appropriate for a family of six — you still can’t say that when you advertise vacant units.
State and local landlord-tenant laws often restrict the amount of security deposit a landlord can collect, or when they can charge a late fee, or how much they can charge for that late fee. They may require landlords to open a separate interest-bearing bank account for each security deposit, and potentially pay tenants their interest on it.
You probably work a full-time job in an unrelated field, and aren’t an expert on landlord-tenant laws. Your property manager should be.
2. Advertise Vacant Rental Units
Property managers market vacant units for rent. In today’s world, that usually starts with online rental listing websites. But it could still include lower-tech advertising tactics like running ads in a local newspaper or posting flyers in local supermarkets, gyms, and community centers.
A savvy property manager understands the local renter population and where they go to search for a home. For example, in a heavily Hispanic neighborhood, it makes sense to advertise vacant rental units in Spanish in the local Spanish community newsletter or circular.
Again, you may not know how best to reach local residents — but your property manager should.
3. Show Vacant Units
Property managers meet prospective residents at the property to walk them through the unit.
They should approach showings as a sales opportunity, not a chore or to-do to scratch off their list. Each prospective renter is exactly that: a sales prospect. It requires professionalism, politeness, and punctuality, without any pushiness or obvious selling.
4. Collect & Screen Rental Applications
As prospects submit rental applications, property managers must review them to find the best qualified renter.
That includes running tenant screening reports such as credit reports and criminal background checks of course (and eviction history reports), but it goes far beyond that. Screening tenants also involves contacting supervisors and verifying not just income and employment, but also the prospect’s character and likelihood of continued employment. It involves contacting current and former landlords, to ask what kind of renter they’ve been.
If possible, it also includes viewing the prospect’s current home to see how they treat it. But admittedly, few property managers go that far on their clients’ behalf.
All the while, property managers must adhere to the law, such as keeping a fixed set of screening criteria and being able to justify in court why they selected one renter over another.
5. Prepare & Sign Lease Agreements
Property managers also handle the legal paperwork, such as preparing and executing lease agreements.
Yes, that includes the lease contract itself, but it doesn’t end there. They must also include all relevant (and sometimes required) disclosures and addenda. Again, that means following federal, state, and local laws. Many states and larger cities require landlords to include specific documents with their leases. Your property manager should know these documents well.
6. Collect Rents & Deposits
Property managers collect the first month’s rent, security deposit, and every other cent of income from the renter on your behalf.
For some tenants, the rent simply shows up in the bank account on time each month through direct deposit. For others, the property manager must call, text, mail late rent notices, and otherwise chase down delinquent tenants for every dime.
But if they did their job well screening renters, that shouldn’t be necessary.
7. Pay & Collect for Utilities
Property management companies can pay utility bills on your behalf, if the renter doesn’t pay them directly.
In some cases, property managers pay the utilities and then bill renters for reimbursement. Again, collection features among their job responsibilities.
8. Keep Accurate Books & Accounting
Aspiring landlords don’t realize how much of a pain rental property accounting is.
You have to track and label every single expense, every single income payment. At the end of each year, you need to complete your Schedule E tax forms accurately.
Mess any of that up, and the IRS comes a-knocking.
Property managers handle nearly all of this for you, keeping your books and providing simplified tax reporting at the end of the year.
9. Enforce Lease Contracts
Tenants often push your boundaries to see what they can get away with. It’s human nature.
If they can get away with paying the rent late each month with no late fee, they’ll do it. If they can get away with not paying their utility bills, they’ll do it. And that goes for other lease rules too — if they can get away with moving in an unauthorized rottweiler, or their deadbeat drug-slinging boyfriend, or an entire family of demented clowns, they’ll do it.
The property manager must defend the lines drawn in the lease agreement. When tenants break the rules, the property manager enforces them. That typically means serving an eviction warning notice immediately, and if the renter doesn’t remedy the situation, then filing in court for eviction.
And showing up in rent court, presenting evidence, scheduling the eviction date, showing up for it with a locksmith and movers… you get the idea.
10. Inspect Rental Properties
One of the ways that property managers enforce lease agreements is visiting the property in person, to make sure the tenant is complying with the rules. But that’s not the only reason for rental inspections.
Inspections also help property managers (or landlords) find problems at the property before they grow into huge expenses. If you find a roof leak early enough, it might cost a few hundred dollars for a patched roof and painted ceiling, rather than thousands of dollars in replacing a section of roof, drywall, flooring, and the requisite mold remediation.
I like to see property managers inspect all properties every six months.
11. Oversee Maintenance & Repairs
Property managers coordinate with contractors for both emergency repairs and regular maintenance.
For instance, they might send an HVAC technician each fall to service the furnace. When renters call about an issue at the property, the manager sends a contractor to repair it.
Ideally, the property manager also negotiates the best possible pricing on your behalf, but don’t count on them actually doing that.
12. Coordinate Move-Out
Renters eventually move out, and that comes with its own labor on the part of property management.
The property manager must confirm the move-out date, coordinate with the tenant on cleaning out the property, and do a final walkthrough inspection to determine how much (if any) of the security deposit they’ll get back. If the unit needs some maintenance before re-renting, such as painting the walls or recarpeting the floors, the property manager sees to it.
Property managers should also start advertising and showing the property before the unit becomes vacant, to ensure the minimum possible vacancy period.
13. Analyst the Market & Propose Pricing
Coming full circle to vacant units, the property manager should do market research to determine the fair market rent of the unit. What’s the most you can charge for rent while still attracting quality applicants and filling the unit quickly?
You may not know that as the landlord, but the property manager should.
Property Management Fees
Property managers don’t volunteer their time out of the goodness of their hearts. They charge a fee for their services.
In most cases, property management companies charge a percentage of the rent collected, usually 8-12%. Some charge a flat monthly fee per unit however.
Beyond the monthly management fee, property managers charge a fee to turn over vacant units. Most property managers charge one month’s rent, but you may be able to negotiate this down.
Less scrupulous property managers also charge a slew of other per-action fees, often buried in the fine print of the property management agreement. Read up on property management fees for more information.
Factors that Affect Property Management Fees
Based on the services offered, most property management companies provide either services on a la carte basis or a flat fee, depending on their client’s preference. Their prices are also affected by the property’s:
- Rent: The most common basis for property management fees is the rent of the property in question.
- Size: Typically, fees reflect the square footage and lot size of the property. For example, the cost for a 3-bedroom home in a middle-class neighborhood will be less than a landscaped mansion in an elite community.
- Condition: The fees for a newly-built or recently renovated property is typically lower than an older house likely to need costly repairs and replacement.
- Location: A property management company will consider the levels of rents in a neighborhood, its proximity to other properties managed by the firm, and the stability of residents moving in or out of an area.
Pros: Why Hire a Property Manager?Owning rental real estate long-term – letting appreciation raise the value of the property, taking advantage of landlord tax deductions, earning rental cash flow and letting tenants pay down the mortgage – can generate significant wealth and passive income. But it can start to feel like a full-time job after a certain number of properties. Consider the following reasons to hire a property management company.
Delegate WorkOn the most basic level, property managers take on most of the day-to-day headaches of owning and managing rental properties. They handle property inspections, background checks, move-in checklists, chasing down wayward tenants for rent payments, and every other hassle associated with owning rental properties. That makes your rental properties close to passive investments. You can enjoy the rental income without the hassles of fielding phone calls or screening tenants or overseeing maintenance issues. Full-service managers also handle your bookkeeping. Regular accounting and financial reports keep owners fully apprised of their investments, thereby freeing them from the tedium and responsibility of the administration.
Local Market ExpertiseBeyond doing the basic labor for you, property managers know the local market. They understand the market forces at work including new real estate developments, zoning changes, transportation issues, legal or regulatory changes, and everything else that affects local pricing. A good property manager knows how to minimize vacancy rates and fill vacant units quickly with top notch tenants. They help you maximize cash flow by charging the highest rent possible without increasing vacancy rates.
Network of Contractors & Support PersonnelProperty managers maintain relationships with a wide range of tested, trustworthy vendors and contractors. That includes everything from low-cost handymen to specialists like electricians, roofers, plumbers, HVAC servicers, and beyond. In many cases, they negotiate with contractors for discounts or service preferences that they pass through to the properties they manage.
Privacy & Not Being On CallBrian once had a tenant show up at his home at 9:00 at night. You don’t want that. Landlords who personally manage their property often become close to their tenants and lose their objectivity when confronted with a tenant issue, such as late or delinquent rents. A property manager keeps renter relations on a professional level.
Cons: Why Not Hire a Property Management CompanyLike other professionals, not all property managers are created equal. The quality and types of services they offer vary widely, even in the same real estate markets. As a consequence, a real estate investor should enter into a property management relationship with his eyes wide open. Before deciding to hire property management, consider the following drawbacks and risks carefully.
CostProperty management fees are not trivial. In my case, I only purchased houses in desirable locations that required little remodeling and likely to rise in market value. My due diligence included the likelihood of reaching rental rates equal to 200% of a 30-year fixed-rate mortgage payment within six months of purchase. For example, I required a minimum monthly rent of $3,000 on a property purchased for $300,000, knowing that I could arrange a 30-year mortgage with a monthly payment of $1,200. Rent of $3,000-$3,200 monthly (about 1.0% of market value) was sufficient to cover expenses like vacancy rate, property taxes, repairs and maintenance, property insurance, property management fees, and rent default insurance.
Loss of ControlThe advantage of hiring property management is outsourcing the responsibility, decisions, and work. However, hiring a manager means a loss of control and the need to trust a third party to act in the owner’s interests. Ceding that authority is difficult for most people, especially when you’re talking about assets worth hundreds of thousands of dollars.
Risk of Legal LiabilityProperty managers are human and far from error-proof. They can make mistakes that cost you dearly, such as failing to adhere to Fair Housing laws. The “hold harmless” clause in most property management contracts, limiting the owner’s ability to seek redress, means you have few options when property managers mess up and cost you money.
Termination TroublesIf relations between the property owner and the property manager deteriorate, things can get messy, even winding up in a court. In addition to any costs of termination, the reputation of the property and relationship with tenants might suffer adverse effects.
Types of Property ManagerMost of us think of long-term rental properties when we think of property management. But not all property managers specialize in long-term rentals. Some specialize in short-term vacation rental properties, such as Airbnb rentals. These short-term rental managers charge more for their services, because it requires more work. They constantly turn the unit over, and communicate with upcoming, current, and former guests. With each turnover they must clean the property, change the linens, and otherwise prepare it for new guests. These specialists operate in the hospitality industry, not just the property management industry. Other property managers specialize in extended stays or medium-term rentals, such as three-to-six months. These often serve travel nurses and business executives required to spend months at a time in a location. And, of course, commercial property managers oversee commercial properties. Commercial property management involves its own skill set, from negotiating triple-net lease contracts to ensuring that commercial tenants don’t make irreversible changes to the rented units. For that matter, commercial property managers often specialize in one industry. That might mean self-storage facilities, or restaurants and bars, or industrial properties, or retail. Each type of property comes with its own unique quirks, and property managers must know their specialty well.
How to Hire a Property ManagerThe decision to hire a property manager is just the first step in a process that can make or break your investment. The right manager should make your life easier, not harder. Take the following steps to find the best manager for you and your property.
1. Identify Potential CandidatesSeek recommendations and references of property managers from real estate owners in the area where the property is situated. Companies like Roofstock vet and certify local property managers – start there.
2. Research Each Candidate’s CredentialsIn addition to the local Better Business Bureau and Chamber of Commerce, some states require a Realtor or Real Estate Broker license or a Property Management License to offer property management services. Many are members of the National Association of Residential Property Managers or the Institute of Real Estate Managers, both of which operate with a Code of Ethics and Standards of Professionalism.
3. Interview Prospective Property ManagersKnowing who will work with your property and having good relations is critical to communications and trust. During the meeting, you should detail your expectations for the property and your relationship. The interview is your opportunity to ask questions about their service, such as:
- “How will you screen applicants?”
- “How quickly do you respond to a tenant complaint?”
- “How, how often, and what information will you provide me?”