Make sure you understand the role of a PM and how to select a reliable one.
Property managers (PM) are not typically considered an essential piece of your real estate investment team—unless you live out of state. Honestly, if you buy a local property there are a lot of compelling reasons you shouldn’t have a PM.
The biggest reason people opt out of having a PM is the cost of their services cuts into your monthly cash flow.
Still, having a PM can save you a lot of time, energy, and—probably most important—stress when it comes to your rental properties.
What PMs Offer
Let’s look at what PMs do (or should do):
- Find tenants and avoid vacancies. Finding good tenants is not always easy. It takes time, advertising, and a serious level of vetting to place tenants who won’t cause damage to the property and will stay for years. The best way to kill your cash-flowing property is to have tenant turnover every year. You’ll end up not receiving rent for a couple of months (at best), plus you’ll need to expend money to make the property “rent ready.” A good PM can find tenants and keep them for a time, which ultimately improves your cash flow.
- Maximize rent. Property managers understand the market, the neighborhoods, and the tenants likely to call your property “home.” Using their vast knowledge and resources, they can market rental properties to maximize the rental income, further improving your ability to cash flow and putting you on the road toward buying additional properties.
- Deal with all the “stuff.” Don’t like dealing with calls at 2 a.m.? Don’t like having to deal with tenants not paying? Then don’t!! Property managers are the interface among you, the landlord, and the tenant. Let them deal with all the other stuff and just present you with the rental income.
Selecting a PM
Now that you have a basic idea of what a PM should be doing, let’s dive into how to perform due diligence when selecting one.
Experience. First and foremost, make sure they have experience—not just experience, but experience dealing with your type of property. If you have a single-family property and they deal only with large apartment complexes, they might not be the best fit. Additionally, if you own a “small” property, they may dismiss you and not give you the same attention and dedication they would for a large 30–40-unit complex.
Location, location, location. If you live out of state, it would be difficult to serve as a PM for your rental properties. So, why would you hire someone who isn’t local to your property to serve as the PM? Being local allows the PM to know the best vendors when things come up. They know the area, and they know what the property should optimally rent for. Additionally, they are likely to have more personal interactions with the tenants, which can go a long way when or if issues arise.
Due diligence. Besides collecting their fees, PM goals are to keep the tenants happy and to keep the landlord (you!) happy. We recommend discussing the PM’s ability to perform semi-regular property inspections to ensure anything major gets caught before it becomes a major problem. Sometimes these inspections cost a small fee, but it certainly beats the dollars you may pay if your HVAC goes out!
Communication. Being an out-of-state landlord can be one of the easiest things. You simply wake up to see a rental deposit in your bank account. Or, it can be an excruciating experience if you can’t ever get in touch with your PM company when needed.
To ensure there are no communication delays, make sure you understand the methods of communication your PM prefers and their typical response time.
In-house vs. subcontracting. This one, in our opinion, isn’t a deal breaker. By having in-house maintenance, you can avoid some of the costs that come with subcontracting, especially if the fix is relatively minor. Have you ever seen a $150 diagnostic fee for something a child could fix?
It’s important to know what you are getting yourself into when you hire a PM and which option they use so you can better understand potential maintenance and repair costs.
Fees. Although most PM companies charge a flat 8%-10% fee based on the gross monthly interest, making it appear easy to compare PM companies, don’t fall into the trap of comparing apples to oranges. It’s important to look at additional fees the PM company may charge—tenant placement fee, tenant renewal fees, vacancy fees, late payment service charges, and potential eviction fees, to name a few.
Choosing the right PM company is a vital component of any rental property. A PM can cost you or save you hundreds or even thousands of dollars. So, do your due diligence, and don’t balk at paying a higher fee if a PM will end up saving you thousands of dollars in the long run.
Zach Lemaster is the founder and CEO of Rent To Retirement. He is a seasoned real estate investor who has accumulated a large portfolio of rental properties across multiple markets, including single family, multifamily, commercial, and new construction.
Lemaster is passionate about educating others on the numerous benefits of real estate investing and how to use real estate as a means to create the lifestyle each person desires for their family.