Rental property management companies award passive income investors the ability to grow a portfolio, without adding any additional work to their schedule.
Truly great rental property managers will take care of all the day-to-day operations of an entire portfolio.
Hiring a management company for rental properties can be a bit tricky, but aligning your services with a good manager is a great investment in your future.
As a property owner, one of the first decisions you’ll need to make is whether to hire a property management firm to oversee your investment or to become a landlord and do everything yourself. Making the property manager vs landlord decision requires careful consideration, as each strategy warrants its own considerations.
First things first, you have options. As one of the most meaningful decisions you can make as a rental property owner, it’s critical to identify and measure the pros and cons of each path. Managing a rental on your own can be financially rewarding, but at the same time, it also requires large amounts of time and effort. On the other hand, hiring a rental property management company offers a reduction in day-to-day responsibilities, freeing you up to do what you want. That freedom, however comes at a cost and can have a long-term impact on your bottom line. To better understand your options and what they entail, we break down the strengths and weaknesses of each endeavor.
What Is Property Management?
Rental property management is the practice by which a third party is given the responsibility of maintaining a residence’s status quo and appeasing its occupants. Property managers are, therefore, traditionally hired by rental property owners to oversee the daily operations of their real estate assets, and deal with any questions or concerns the tenants may have. In the event the property is vacant, it’s the property managers job to make sure the house is rented. As its name suggests, property management takes care of every aspect of a rental home, from marketing vacant space and signing leases to collecting rent and calling for repairs. Few strategies, for that matter, are more beneficial for a rental portfolio than hiring a third party property manager, which begs a simple question: How do property management companies work?
What Does A Rental Property Management Company Do?
The cost of property management is a valid argument, especially when you consider detracting from your bottom line, but I can assure you it’s doing anything but. Yes, it’s true that a property management company will cost additional money to hire, but I like to think of it as an investment, as opposed to a cost. You see, a good property manager can very easily return more than their own initial cost. After all, the average property management company will typically award investors with the following:
Property managers will collect rent from tenants
Property managers will listen to maintenance requests and address the problem
Property managers can deal with defaulting tenants that are months behind in rent
Property managers will market a subject property to limit vacancies
Property managers will keep detailed records of everything happening at the property
Collecting the rent is one of the most obvious tasks of a property manager. If that’s all property managers did, however, it would certainly be harder to justify hiring one – especially with online payment capabilities. Of course, that doesn’t mean collecting rent is easy by any means. If all of your tenants are paying their leases up font in full and you don’t mind paying a great law firm when things don’t go right, you might wait to evaluate all of the services. Yet, most real estate investors are not in that situation. Some operate in markets where it is a battle to reel in the rent every month.
Regular Property Maintenance
Dealing with tenant maintenance calls is perhaps the biggest driver for real estate investors to enlist the help of a property manager. It isn’t just about the maintenance, however: dealing with the tenants can often be the biggest challenge. Sometimes their needs aren’t big or expensive, but the timing and urgency is. It may be blocked and back flowing pipes on the weekend, or being locked out in the middle of the night. A lot of these calls can be irritating to a landlord, but if they are always treated that way, bigger issues with renters and rental property performance are sure to arise. Rapid and responsive customer service is needed to optimize income properties.
Property managers will deal with these requests, alleviating you from the burden. If it is small, the requests may be handled internally. Larger and more complex issues may be delegated to outside specialists. Sophisticated property investors normally have a property management agreement which authorizes the company to handle up to a certain dollar amount of repairs without needing express permission first. This just streamlines the process, and ensures issues don’t get worse if you can’t be reached.
Property management companies can call for regular inspections and routine maintenance such as:
Anything Else A Tenant Might Need
The property management company will essentially act as the “middle-man” and connect tenants with the necessary services.
Dealing with Defaulters
This goes beyond slow payers to those seriously in breach of their leases. They could be more than a month past due, or be risking the condition of your asset, or the police could be involved in a criminal issue. Sometimes these things can be worked out directly with renters. In other cases, it may require lawyers, or even going to court. A property management firm can handle this for you, and save you a ton of time and stress in these situations. Having a professional third party in between can often speed up better solutions compared to a DIY landlord that may appear an easier target for malicious tenants.
This is a lot more work than some understand at first. A good management company is taking on the cost of marketing for tenants, showing units, and screening prospective renters. There is a lot of expertise brought to the table here. It may be the most valuable thing property management companies offer. Then there is supervising move-in and move-out activity.
Bookkeeping is probably the least fun part of real estate for most investors. At the same time, great bookkeeping and invoice handling is critical for minimizing taxes, keeping the best vendors, and generally keeping the cash flowing. If your property manager offers to run the books for free, you had better take advantage of it. If not, there’s no reason you can’t hire someone to manage your books. Rental properties are best left as a passive investment, after all. Conduct the appropriate research to uncover a good bookkeeper in your area, and determine whether or not their services will bring value to your own business.
The Cost Of Property Management
The cost of property management remains the primary concern for those sitting on the fence. If for nothing else, average property management fees can run investors somewhere in the neighborhood of eight to 12 percent of the monthly rent value. Some property managers will also charge a flat fee, in addition to the monthly percent. As it stands, eight percent represents a pretty good value, whereas 12 percent may seem a little on the high end to some. It is worth noting however, that not all property managers are created equal. It is entirely reasonable for a great manager to ask for 12 percent if their services justify their own cost.
Landlord Vs. Rental Property Manager: Weighing Your Options
Whether hiring a rental property manager or managing an asset alone, only the investor will know what’s best for the property. It’s important to take all the necessary steps in evaluating each strategy in order to make the best decision for long-term success. Regardless of which side you fall on in the property manager vs landlord debate, make sure your decision works best for your investing strategy and your long-term financial goals. Better yet, weigh the pros of each method below to make a more informed decision.
Benefits Of Being A Landlord
You are your investment property’s gatekeeper and have responsibilities to both your tenants and your rental business. Tenants have certain expectations, and as a landlord, it’s your job to ensure those expectations are met. As the head of your business, you have a duty to make sure operations run smoothly and your mortgage gets paid. The duties and responsibilities of a landlord include, but aren’t limited to:
Setting rental rates
Maintaining clean environment
Responding to repair request promptly
Finding new tenants
To be a successful landlord, it requires a combination of patience, knowledge and interpersonal skills. Not everyone is cut out to do it. JD Esajian, co-founder of FortuneBuilders, said it best: “Being a landlord is sort of like being a teacher. Most students like their teachers until they get their first bad grade, or until they get yelled at for the first time. It’s important to remember that you are running a business, not a popularity contest.” At the end of the day, your job as property owner is to protect your asset to get the most out of it as possible.
Becoming a landlord has its share of perks, which include:
Income: Renting will generate a monthly check to cover your mortgage and depending on current renting rates, you could also pocket a large profit each month.
Tax Deductions: As an investor’s best friend, tax deductions will come in handy down the road. These deductions include costs associated with repainting, replacing damaged furniture, replacing water pipes and disposal duct, buildings and contents insurance, accounting processes, cleaning and gardening, professional services, and wear and tear depreciation (upwards of 10 percent of the gross rental income).
Less Costs: Becoming the landlord will save you somewhere between eight and 10 percent in property management costs. When it comes down to your bottom line, every penny counts.
Benefits Of Hiring A Rental Property Manager
Sometimes in business, it’s just better to pay a professional to do it. For investors, a property management company can add significant value to your investment as they deal directly with prospects and tenants, helping to save you immense amounts of time and stress. They also bring a wealth of know-how and experience to your property, giving you peace of mind that your business is running like a well oiled machine. Duties and responsibilities of a property management company include, but are limited to:
Setting rental rates
Finding new tenants
For investors, the addition of a property management firm can be very advantageous, especially for those with multiple properties or with limited time. However, it comes at a cost—which can range from eight to ten percent of the monthly income, or a flat annual fee. Here are a few of the ways property management companies earn their keep:
Higher Quality Tenants: Management companies employ rigorous screening processes to pinpoint reliable tenants and shield your investment from the bad ones. These professionals have experience analyzing information about candidates to ensure your property has the best tenants possible.
Shorter Vacancy Cycles: A good property management company will shorten the amount of time your property sits vacant, working around the clock to improve and prepare it for rent. Experienced companies will have a time-test tenant retention policy to keep clients happy and situated for the long term.
Better Processes: A property management company can streamline and improve the processes of your rental property, especially when it comes to collecting rent. As the difference between success and failure, collecting rent on time is the only way to maintain consistent cash flow and a property management firm can significantly upgrade this.
Fewer Legal Problems: A good property manager has the knowledge of the latest laws as well as past experience to ensure you’re not leaving yourself vulnerable to lawsuits. With a stringent screening process, a management company can help investors avoid costly and time consuming legal problems.
Less Responsibility: Probably the biggest benefit of hiring a management company is less responsibility. Along with less stress, investors will have more time and freedom to invest in other aspects of their business or future endeavors.
How To Find The Right Rental Property Management Company
The best place to find a property manager is through your local network. Like anyone else that you use, it is usually better to work with someone you know or is referred to you from a reliable source. Networking meetings and investment clubs are a good source, in addition to talking to contractors and handymen you have worked with in the past. You should also reach out to your local realtor and even fellow investors to see if they have a company they feel comfortable with. The more options available, the better chance you can find someone that fits for you. After you round up some potential candidates, your work is far from over.
You should ask your property manager as many questions as possible. You need to find out if they know the area and the market. They may have a grasp of the national scene, but that isn’t nearly as important as what is going on in your neighborhood. Ask them about what other properties they manage and what they think of your property. You also need to discuss expectations and job requirements. They should be doing the bulk of the talking while you just listen. You don’t need to work with the most experienced manager, but they should have an idea of what is expected from them and what they will do for you. A property manager should relieve many of the everyday burdens that come with owning a rental property and free up time for you to focus on other areas. If they are incompetent or you get the feeling they are going to call about every problem, you should look elsewhere.
In addition to knowing what they will do for you, the obvious follow up is how much it will cost. Property managers can do a multitude of different services, each of which may come at a different cost. Before you enter into an agreement with anyone, you need to know exactly what you are getting out of it. A property manager can charge a flat fee or a percentage of the monthly rent. This isn’t necessarily an area where you want to nickel and dime yourself. If a better manager that will take care of a broad range of items comes in at a slightly higher price, you shouldn’t balk at the cost. Saving money is always nice, but the difference between 10% and 8% of the rents received doesn’t equal a large amount of money. If you make the commitment to seek out a property manager in the first place, you should know the costs and accept them. This is one less headache you will have to worry about in your investing business.
Over time, you will build a relationship with your property manager and put more on their plate. It is also OK to ask and seek their input on your property. If they are getting a percentage of rents received, it would benefit them to think of ways to increase the rent. If this means adding on a deck or some other costly feature, you can kindly say no thank you. However, there are plenty of simple items that can add to the bottom line. Having open lines of communication is important, but you need to remember that you are the owner and the buck should stop with you. If you give up too much control and allow your property manager to conduct tenant interviews and dictate the rent amount, you have nobody to blame but yourself if things go badly. Let your property manager work without you being in the way, but realize that you still the final decision maker with your property.
Do I Need A Property Management Firm?
There are plenty of investors who fully support the use of a property management company. However, there is no rule stating that anyone needs a property manager. Therefore, plan on hiring a property manager if:
You plan on acquiring multiple rental properties. The more rental properties one has in a portfolio, the more necessary property management firms are.
You are not within close proximity of your asset. If the rental property is far from where you live, it’s a good idea to hire a manager who can keep better tabs on it.
You don’t want to actively manage the property. If you view the property as a source of passive income, you’ll need a property manager to take care of routine maintenance and daily operations.
You can afford the added cost. Property managers will charge a percentage of the rental fee, which is well worth it. The same fee can rid landlords of a lot of headaches and free up a lot of their time to invest in other places.
Hiring A Property Manager
Hiring a property manager is a task that mustn’t be taken lightly. At the very least, you get what you pay for. As I already mentioned, property managers will request anywhere from eight to 12 percent of the rental cost, but their fee may not be representative of how good they are. It’s entirely possible for an inadequate property manager to overcharge and for a great one to undercharge. That said, the only way to know if you are hiring the right one for your business is to mind due diligence. Don’t simply base your decision on the average property management fees; dig a little deeper and find one that meets your specific criteria.
First and foremost, identify what it is you want the most out of a property manager. What is it you need your manager to do? Compile a list of needs and wants, and use them to pick the right company to represent your property. Next, vet them accordingly. Can they do what they promise? Get testimonials and talk to current clients of theirs to get a better idea with their satisfaction.
Rental property management companies—specifically good ones—are worth their weight in gold. It is entirely possible for a truly great rental property manager to save/make investors more money than their initial fees. That said, the cost of property management is more of an investment than an expense. There is no reason to believe using management companies for rental properties can’t elevate even a new investor’s career to the next level.
Have you ever thought about working with a property management company? Please let us know your thoughts on the idea in the comments below: