“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.
Key Takeaways:
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- 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:
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- 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.
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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:
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- Rent: The most common basis for property management fees is the rent of the property in question.
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- 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.
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- 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 Work
On 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 Expertise
Beyond 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 Personnel
Property 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 Call
Brian 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 Company
Like 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.Cost
Property 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 Control
The 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 Liability
Property 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 Troubles
If 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 Manager
Most 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 Manager
The 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 Candidates
Seek 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 Credentials
In 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 Managers
Knowing 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?”
4. Review Property Management & Lease Contracts
Remember, a property manager represents you to the public and tenants for better or worse. Be sure you are comfortable with any materials that will be available to the public. Before you sign an agreement to hire a property, invest in a lawyer’s time to be sure you understand the details, even the small print. If you follow this process, you should avoid a disaster and wind up with a competent manager who will meet your needs.Final Word
Outsourcing property management is not for everyone, especially those who own nearby properties and the time and experience to oversee their investment personally. At the same time, investigating external management might give you ideas to improve your own practices and cash flow. Be sure to account for property management costs in your real estate cash flow forecasts, before buying an investment property. Regardless of whether you hire property management, it still involves a labor cost, even if you’re the one picking up that labor. Remember, your time has an inherent value, so weigh the cost against the amount of time you think managing your rentals will cost you. When in doubt as a new real estate investor, consider managing your properties yourself – it will make you a better rental investor in the future!Do you own out-of-town rental real estate? Do you manage it yourself or use a property manager? Have you considered hiring a property manager?
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I am looking for a PM at this point since the amount of rental properties I am trying to manage myself is becoming too time consuming for me. I have been weighing my options lately. My struggle here is, how do I hire the right property manager? I don’t want to end up like the horror stories you hear about when making the wrong choice hiring a bad property manager.
Hi Keisha, I hear you. I’d check out Roofstock’s certified property managers as a good starting point, although they don’t operate in every market.
Definitely check references, and ask for referrals in our landlords Facebook group: https://www.facebook.com/groups/propertymanagerslandlords/.
Keep us posted on how it goes!
Most landlords hire property managers because they have little or no experience managing a rental property. This is a poor excuse – how is one to learn without doing? Unless you live in a different city than your rental property, hiring a property manager is a waste of money.
I hear you Jimmy! And while I agree that managing your own rentals helps you become a better rental investor, there does come a point when you have too many units to self manage. And some landlords simply don’t have the right temperament to manage rentals, such as those who fall for tenant sob stories and don’t enforce their lease agreements until months of unpaid rents have gone by.
But as a general rule, I think new landlords are best off self managing to get a sense for how landlording works.
Those landlords not wanting the hassle of dealing with tenants would be very wise to hire a good property manager.
Agreed Gabe! Makes rental properties completely passive income, not just semi-passive.
A good property management company can really do wonders to your real estate business. If you dont like hands on management and has a big portfolio of rental properties. It is always a good idea to hire a good management company. The only thing is that your margins should allow hiring one and you find an efficient property management company.
If the margins don’t take property management into account, the property doesn’t cash flow well enough. It’s a labor cost whether you do it yourself or outsource it!
Great overview of the decision to hire a property manager or not. Thanks for sharing!
Thanks Brandon, much appreciated!
These are the things we must consider when hiring a property manager. Thanks for the info!
Glad it was useful Sally!
The most important aspect of our service for an owner to consider, is that we treat each real estate asset as an investment and do everything possible to increase the value.
Right on the spot! Property management is not for everyone. There is a lot to consider: time, labor cost, picking the right people, etchetera etchetera.
Hire a professional property manager when your hands are full. Don’t hire your relative or friends; they will mess up your business! I learn my lesson.
Good explanation about the pros, cons, and costs. Important to focus on any hidden fees, and you must discuss all the points in advance before hiring a property manager.
Property managers have the time and resources to fill vacancies quickly with qualified tenants, saving you the stress of difficult tenants.
Absolutely Ehrin!
One of the property management companies that is on Roofstock’s list happens to be the one we use for an out of state property. PMI in Indiana. We started with them last year and have had nothing but problems. When they don’t do what they say they are going to do, like get your property ready (initially sat for months while they came up with excuse after excuse after we had paid them and signed up with them) price gauge you on literally every single repair (ie, over $500 to change out three smoke detectors, $250 to replace a $5 toilet flap) and then when the property became vacant again, they wanted to charge way more than the deposit they took to fix it so when we denied their prices on some of the items they had emailed us, instead of talking to us, they refunded the tenants much of their deposit! We wound up paying! They don’t call you back. It takes weeks to get to someone and if and when you ever do, they just make excuses. Every time someone is sick, the whole business uses it as an excuse to stop functioning. When the house became vacant after a year, it took them three weeks to get someone out there to do the inspection. Then it took them another month to get someone to paint three walls and clean the house. Despite the many phone calls asking them to do their job, our house sat for two months before it was rented again (it rented like two days after they finally got it ready) so we lost $3200 in income. They just made excuses for all of it. None of the companies we checked out got great reviews. They had gotten better than some and there aren’t very many in the area for us to choose from but we will try one more company before we decide to sell that property. It would almost be cheaper to fly out and do the repairs ourselves!
Is it ever better to manage a place out of state?
I’m so sorry to hear that Debbie. Managing a property out of state is challenging, but you can do it if you have a trusted contact there such as a friend or family member who can check on the property if you need them to. It helps to get a long-term tenant in place. Let us know what you end up deciding!
I inherited a cozy cabin by the lake from my grandparents. Despite occasional challenges like burst pipes during winters, I enjoy the hands-on experience of maintaining and renting it out to vacationers.
I hear you CCD!
It’s clear that property managers play a pivotal role in simplifying the complexities of rental property ownership. Their ability to handle legalities, tenant interactions, maintenance coordination, and market insights provides real value to property investors seeking a more hands-off approach. I have been following you since the Pandemic happened and can say that your methods never failed me to learn new things about rental properties. I am planning to move to the UK soon and hopefully, some of your guidelines will be followed too.
Thanks HD, and best of luck with the move overseas!
4 siblings own a commercial property (inherited it) Kept the property manager/lawyer who managed for the family. I discovered the manager has missed the due dates for paying the property taxes and has incurred late penalties at our expense (from the reserve) Wrote the manager and haven’t gotten a response. I asked that the manager pay us back from his/her of personal account. Over the last 4 years he/she was late three of the four times. There seems to be a pattern here. Any suggestions? The penalties total, so far, $315.00. I am requesting back tax payments for 4 more years.