“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.
My results were due to the combination of buying and selling the right property at the right time and the due diligence I put in to hire the right property manager after my purchase. 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.
What Property Managers Do
As in most things, one size does not fit all. Property management includes a variety of 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.
Types of Property Management Fees
The fee structure for property management often depends on the type of properties under management. For single-family homes and small (2-4 unit) multifamily properties, managers typically charge only the monthly management fee and a new tenant placement fee. Owners of apartment buildings may pay additional fees however.
Landlords hiring a management company should expect to pay all or a combination of the following fees.
Ongoing Management Fees
Most managers charge between 7-10% of the rent collected each month.
This fee should cover all ongoing work the property manager performs, not just rent collection. Owners should specify that any percentage of rental fees refers to rents collected, not rents due, to avoid penalties for delinquent tenants.
New Tenant Placement Fees
Turnovers and filling vacant units require plenty of time-consuming work.
Between coordinating the old tenant’s move-out, cleaning up the unit, advertising, soliciting, screening tenants, and signing a new lease agreement, most of the work involved in managing rentals comes from turnovers. So, property managers typically charge one-half or a full month’s rent to place new renters.
Be careful to specify in the property management contract that they only charge this leasing fee when placing new tenants, not when the manager simply renews a lease agreement with an existing tenant. NOTE: If you don’t mind managing your property while occupied, but don’t want to hassle with filling vacant units, consider simply hiring a leasing agent to advertise and fill vacancies only.
Initial Setup Fee
Some property management firms also charge an initial setup fee for the creation of an account on the books of the agency, the initial inspection of the property, and notification to residents of the new manager. Usually ranging from $150-$500, you can often negotiate this fee away.
Property management services sometimes charge a flat monthly fee during vacancies to continue earning revenue regardless of the unit’s status.
I don’t like these fees, as they not only exacerbate your losses during vacancies but don’t incentivize the property manager to fill your units quickly. These fees can particularly bite into your short-term rentals as an Airbnb landlord.
Routine maintenance of apartment buildings – keeping common areas clean, taking out garbage and snow and leaf removal – are generally included in the monthly management fee. Extraordinary repairs or repairs are borne by the property owner, who may also be charged a management markup on the services.
Some property managers charge landlords a set fee when they initiate the eviction process, sometimes as much as $200-$300 per evicted tenant plus court costs and filing fees. Aim to negotiate these fees away as well.
Property owners and managers typically contract for specific terms and conditions, over a preset period. Double check for any contract termination fees before signing a property management contract, and only agree to paying them for early termination mid-contract!
Hidden & Other Fees
Some unscrupulous property managers find ways to bury fees in their contracts to nickel and dime clients.
For example, some charge a fee every time they visit the property. Or they may charge a fee every time they send a contractor out to the property to make a repair.
In extreme cases, they even take kickbacks from contractors.
When hiring a property manager, insist on only two types of fees: new tenant placement fees and ongoing management fees as a percentage of the rent collected.
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.
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.
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.
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.
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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?”
Some owners suggest making out a list of questions to ask a property manager before the interview to be sure you do not miss anything.
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.
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?