STEP #5: IS A PROPERTY MANAGER REALLY WORTH TEN PERCENT OF YOUR RENTAL INCOME?
I live over 700 miles from my investment properties and utilize a property management firm. I made the decision based on: Time Management, Distance From properties and Number of Properties. Property management cost my business about $10,000.00 per year and is my second highest cost, behind real estate taxes. Is it worth the cost? For me yes, maybe not for your business.
RESPONSIBILITIES OF A PROPERTY MANAGER
- Be on call 24/7.
- Make routine and requested repairs by scheduling entry and repair people with tenants.
- Advertise when the property is vacant.
- Knowledge and compliance of Fair Housing Laws.
- Accurately establish a rental value.
- Screen applicants and select a tenants.
- Get lease signed and collect security deposits. Be aware of security deposit and habitability requirements, and ensure your lease is legally enforceable and compliant.
- Schedule move in of new tenants.
- Collect rent and timely submittal of funds to owner.
- Resolve Tenant, Homeowners Association, City, Property Owner, etc. concerns and complaints.
- Evict speedily when necessary.
- Make any repairs or cleaning to make a unit rent ready
- Did I say – BE ON CALL 24/7- JUST REMINDING YOU!
YOU HAVE TWO CHOICES
You can serve as your own property manager or hire a Professional Property Management firm. I was my first rental property manager. I lived close to the unit and had some repair skills and the time. I later learned I did NOT understand all the state’s legal requirements.
Example: Tenant Security Deposit Laws
Proper bank account: A security deposit must be segregated from a landlord’s own funds (including rent money) and held in a federally insured, interest bearing, bank account.
Yearly interest: A landlord must pay a tenant interest on his or her security deposit yearly. This can be paid by crediting rent or through monetary payment. The landlord does not satisfy this requirement by letting the interest sit in his or her bank account.
When managing your own property, you MUST learn ALL legal requirements.
REASONS FOR MANAGING YOUR OWN PROPERTIES
- You maintain 100% control of your asset.
- Less odds of being ripped off. Examples – Being overcharging for repairs. Stealing rent, etc.
- A property manager may violate the law increasing your liabilities. Example: In Chicago if the grass is > six inches, the city fines you $600. I am not kidding as I paid that fine on at least three occasions because my Management Firm failed to mow the blasted grass! And yes the firm reimbursed me.
- The biggest pro – You save money. Property management fees are paid monthly and can average ten percent or more of rent.
- Let’s look at two examples with and without a property manager.
| RENT/EXPENSES | YOU MANAGE THE PROPERTY MONTHLY CASH FLOW | HIRED PROPERTY MANAGER MONTHLY CASH FLOW |
| Rent | $1500 | $1500 |
| Mortgage | $800 | $800 |
| Insurance | $67 | $67 |
| Taxes | $167 | $167 |
| Misc. Maintenances | $100 | $100 |
| Property Manager 10% | N/A | $150 |
| Tenant Finder Fee- 1 month rent | N/A | $125 |
| PROFIT | $366/month | $91/month |
CONS FOR MANAGING YOUR OWN PROPERTIES
- Time consuming especially if you work full time or travel for business. For most of my career I traveled 50% sometimes internationally.
- Need to respond 24/7. I noticed most things go wrong at 3 AM?
- If you don’t know the federal, state, and local laws associated with renting you will eventually suffer the financial consequences. Among several laws you must comply with: Occupancy Certification; Security Deposit requirements, etc. Your lease MUST be legally enforceable and compliant.
- Inadequate Tenant Screening: Common mistakes include: failing to properly screen tenants, conducting a credit and background check and checking references. You may be tempted to rent to a friend, co-worker or family member (NEVER EVER DO THAT). Treat your rental property like a business. My friend rented without conducting a credit check or checking references. That tenant recently moved out owing him $16,000.00.
PROS FOR HIRING A PROPERTY MANAGEMENT PROFESSIONAL
- The key is to find an honest, knowledgeable management firm that understands all regulations and legal issues. This Will reduce your liability and risk.
- Your rental property is a business. A good and ethical property manager will treat it that way and avoid making decisions based on emotions or fears.
- Far fewer headaches and stresses, dealing with tenants, contractors, Homeowners Association complaints, City official, and 3 AM calls.
- The management fees you pay are usually tax deductible on rental properties.
- Increasing tenant retention.
- Accurately establishing a rental value and increasing rents as marker rates rise.
- Getting a discount on maintenance cost with preferred vendors.
- Protecting the condition of your asset.
- Reducing likelihood of late payments and evictions.
THE COST OF HIRING A PROPERTY MANAGEMENT PROFESSIONAL
The property management fees are paid monthly. This fee is often a percentage of your rental amount. So, if your home rents for $1,300 and the management company charges a 10 percent fee, you pay $130 per month. Usually, your management company will deduct the amount of their fee from the rent that’s collected. Other companies charge a flat fee regardless of what your property earns.
The management fees should cover:
- From rent collection to routine maintenance.
- Enforcing the lease, sending notices and correspondence, managing tenant relations, and maintaining detailed and accurate accounting records
In addition to a property management fee, the firm normally charges a fee for finding tenants. Usually, it’s a percentage of your first month’s rent, a flat fee, or in some cases, a full month’s rent.
Leasing fees will often include services like:
- Preparing your property for the rental market.
- Pricing your home by conducting comparative market analyses.
- Taking photographs.
- Listing your home for rent online.
- Including your home for rent on the property manager’s website.
- Showing the property and responding to inquiries from prospective tenants.
- Screening applications.
- Reviewing and signing the lease agreement.
- Collecting the security deposit, pet deposit and other move-in funds.
- Conducting a complete move-in inspection with pictures and a report.
Some of these activities may be extra. Ask the Property Manager if there are any other extra fees and costs.
All fees MUST be included in the contract you sign. READ THE CONTRACT!
Your property management company might have an up-charge on maintenance invoices. This means they collect a percentage of what you pay to cover their costs of coordination and scheduling. So, if your plumbing cost is $500, the management company may charge a 10 percent fee on top of that, bringing your total cost to $550. {Remember- EVERYTHING IS NEGOTIABLE}
The best way to eliminate or lower a fee is to propose a different arrangement. Also, you can and should negotiate as your portfolio of properties increase.
CONCLUSION – PROPERTY MANAGERS MUST DEAL WITH THREE Ts: TENANTS, TRASH AND TOILETS!
The main downside of buying a rental has always been its management. Someone has to deal with the ugly three Ts: Tenants, toilets, and trash.
Today, property management is more difficult because of COVID-19.
- Increasingly many tenants are skipping rent payments.
- State or Federal laws may restrict your rights to evict. However, your mortgage payments remain due!
- Getting renovation work done takes longer than usual.
- Conducting house showings may be dangerous to your health. {Follow the CDC Guidelines. ALWAYS wear a mask!}
- Cleaning a unit requires more professional cleaning services and due diligence. You, the owner have the liability.
You can successfully manage your own properties if you have the time, competency and willingness to deal with the Good, Bad and Ugly!.
It is possible to overcome living in a different state or considerable distance from the property. Rent can and should be electronically deposited. Just as I have a plumber (those blasted toilets), electrician and handyman for my personal home needs, you can identify those types of professionals, close to your properties to service your rental properties.
Make the best decision for YOUR rental property business.
I have hired over half a dozen property managers. I would only recommend the current manager. If you decide to go with a property manager, interview several and check their references. CHECK THEIR REFERENCES!
ALWAYS READ THE CONTRACT BEFORE you sign a management agreement.
The next real estate blog will discuss the steps to increase your probability of hiring an HONEST PROPERTY MANAGER!
MY #1 LESSON _- HIRE SLOW – FIRE FAST!
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I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger, with a NC State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.
I left a corporate career because I had a desire for making a difference as a speaker and writer, to help others. I was blessed to be coached and mentored by strong women and men in both my family and professional life. It is my time to serve and give back
DISCLAIMER
I started my first business at ~13 years of age (small but brilliantly created plant nursery). I am a successful investor in stocks, options, real estate and happy to share my personal finance and investment lessons learned with you.
However, I am NOT a licensed financial advisor. Please do not construe my suggestions on this blog, as recommendations for your personal situation. For individual finance advice please seek your own licensed CPA or fiduciary financialadvisors.
I write this weekly blog to make an impact by reaching an audience and demonstrating the need for financial literacy. I will help you get there.
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