“Master your strengths, outsource your weaknesses.” This is a quote from Ryan Kahn, founder of The Hired Group.
Property management might not seem like a task anyone would naturally take a fancy to. There are lots of mundane tasks and unforeseen occurrences to deal with. This is why many landlords, especially in multifamily, hire a property manager or property management company to oversee their real estate investment(s).
In an ideal world, investors would be perfectly capable of keeping their properties profitable and expanding their portfolios at the same time, but in the reality that we live in, a property manager is likely your best bet against physical drain and mental burnout.
Prior to the twentieth century, property owners usually took it upon themselves to manage their own properties. It was cost-effective and since housing was in such demand, they only had to do the minimum to keep the houses standing. Tenement houses with poor ventilation, bad (if any) plumbing, and generally unsafe living conditions were all too common in those days.
Things started to change around the beginning of the twentieth century, however, when residential slums became so rampant that the federal government had to take notice. There was a crackdown on negligent landlords and new policies were put in place to ensure houses had a somewhat standard level of livability. By the end of the First World War, the cities had become a hub for middle-class occupations and rich tenants.
Things changed during the Great Depression. Property owners were forced to default on their payments and the banks had several properties they couldn’t manage. This situation gave birth to the first iteration of property managers, caretakers. Their job description was to keep the properties clean and well-managed and to see that the tenants were well taken care of. Promotion and apartment leasing was still the responsibility of the owners.
The advent of the Institute of Real Estate Management (IREM) and the post-World War II railway system changed the scope of property management. That was when property managers first emerged as we know them today.
A property manager is an individual or firm hired on behalf of the owner to oversee, manage, maintain, and administer a real estate rental. The exact responsibilities may vary but generally, a property manager is responsible for collecting rent, attending to the tenants’ complaints, finding new tenants, leasing vacant apartments/units, overseeing maintenance, and carrying out light repairs. Based on Investopedia’s definition, “a property manager acts on behalf of the owner to preserve the value of the property while generating income.”
Property managers are usually employed by investors who are either too busy or just not inclined to manage the properties themselves.
There are a number of benefits you can derive from working with a property management company with a proven record of turning out a profit on real estate properties:
Managing a property yourself requires you to be available 24/7 to attend to tenant complaints as well as leasing inquiries. Working with a property manager allows you to take time off for yourself. Rather than spending your weekend resolving plumbing issues, you can take some time to unwind, relax with some friends or work on expanding your portfolio.
Working with a good property management company affords you years of experience in managing real estate. This company, if they’ve been in the industry for long, is likely to have established, proven methods for dealing with certain issues. A good property manager comes with an in-depth understanding of housing laws and landlord-tenant policies. This knowledge might prove vital in helping you avoid legal problems and lawsuits.
A good property management company usually has a reliable process for collecting rent regularly and with little friction. When the rent is not forthcoming, the property manager usually has the authority to carry out evictions.
Marketing is one of the many responsibilities of a property manager. A good property manager knows how to advertise vacant homes and makes sure they are occupied as quickly as possible. They also know how to find good, long-term tenants and keep them satisfied, so that they are more likely to renew their leases.
A professional property manager knows how to screen out bad tenants and select only those who will pay their rent when it is due and present fewer problems generally.
Property managers generally charge their primary fees in two ways: a fixed monthly fee or a percentage of the total rent collected. This percentage may be up to 10% of the total monthly rent collected.
There are other secondary fees such as setup fees, late payment service charges, eviction fees, leasing fees, maintenance fees, and so on. A property management company may include all or some of these fees in a single overall management service bundle. More commonly, you may be required to pay for the separate management services as they are needed.
Here is a list of some fees you will likely be required to pay and their breakdown:
Some property management companies choose to collect a flat rate per month instead of a monthly percentage. This rate is usually charged based on the size of the home, locations, and the overall services offered. This fee usually hovers around $100 per month. This route is preferred if the property is vacant.
Most companies collect a monthly percentage ranging between 8% and 12% of the monthly rent instead. Gross monthly rent of $2000 would incur a management fee of $160 based on a percentage fee of 8%.
Property management companies often charge a setup fee of about $300–$500. This fee is charged to set up your account with the company. It may include inspection costs and the costs of notifying the tenants about the new management.
The leasing fee, also known as the tenant placement fee, is a fee charged by the property manager to lease vacant property to the tenant. Some companies charge half or all of a full month’s rent; others opt for a flat fee, while some don’t charge a special rate for leasing.
When tenants defer the payment of their rent, the landlord might decide to collect a late payment fee. Property management companies usually collect 25%–50% of the late fees.
A maintenance fee is charged monthly and may be included in the monthly management fee. It is important to discuss with your property manager and arrive at an understanding of what routine maintenance is appropriate given the age of the building. This allows you to set aside a fund each month for maintenance. This usually excludes major repairs as those are paid for separately.
Property managers often charge a couple of hundred dollars for handling evictions. This fee is charged for every eviction and includes the associated court costs.
There are certain key qualities you should look out for when hiring a property manager to oversee your real estate property.
This is perhaps the most important quality of a property manager. A lack of trust will not only affect communication and relations between the landlord and manager but will also impact the tenants negatively. A trustworthy property manager is crucial to a successful real estate investment.
An untrustworthy PM may present you with a shady contract that appears to save you money but costs more in the long run. This is one reason why you should always go over the fine print carefully.
A good property manager should be able to occupy vacant units within two to four weeks. Your best bet is to find someone who is excellent at advertising, knows their way around multiple channels, and is capable of highlighting the best features of a home.
Advertising doesn’t amount to much if the tenants don’t stay for the long term. Your property manager should be capable of making the tenants satisfied and comfortable by resolving their complaints and attending to their requests. This will serve to make the tenants more willing to renew their leases.
Some states require property managers to be licensed real estate agents. It is definitely worth it to run a background check to confirm your hire is right for the job. The property manager also has to be experienced with your specific property type. An experienced manager will be able to deal with the intricacies associated with the rental and turn up a higher profit for you.
Ask your prospective property manager how they screen tenants. Tenant screening is a process that must be gotten completely right so you don’t fall foul of the Fair Housing Act. The ideal property management company has an established process for screening applicants. This process must cover the same questions, background checks, and prerequisites for every applicant.
Whether you’re paying a flat rate or a monthly percentage, maintenance and miscellaneous fees can often rack up your management expenses. You should try to find out what other fees may occur along the line and do your best to have them included in the monthly payment, especially if they are recurring.
The company managing your property should have a stake in the real estate market, preferably the one you’ve invested in. Evaluating the success of their investment should tell you if they can adequately provide the services you require.
Technology has evolved to catch up with the breakneck speed of property management. A good PM knows how to seamlessly integrate tech into their service offerings.
According to Chuck Hattemer of Poplar Homes (formerly Onerent), your ideal property manager is someone “who knows how to leverage the data about your property to make precise and proactive recommendations.”
While it is true that price should be no object for a good investment, the cost of hiring a property manager can sometimes be so exorbitant that it outweighs the benefits. Some property management companies further complicate matters by refusing to be upfront with fees. Managing your property personally may appear to be the cost-effective option and it may very well be, if you have the experience and a small number of homes (one or two) to oversee. Alternatively, you can opt to negotiate down to the last penny and make sure you’re aware of every fee ahead of time.
A property manager allows you to spend less time on the property. This frees up your schedule and allows you to invest your time and attention gainfully.
The downside to this is a property manager can’t really treat your personal investment the same way you will. They probably have more properties they manage.
So, when should you consider hiring a property management company? You should reach out to a property management company if:
A good property manager can save you a lot of time and effort. You may or may not need one depending on the size of your portfolio and your preferred approach to management, but you can’t go wrong with a reliable and seasoned property manager.
About the Author:
Agnes A Gaddis is a specialist writer for real estate SAAS companies. She is a contributing writer for Credit.com, CXL, Getresponse, and Inman news. She’s a big fan of caramel coffee and mystery novels. Get in touch with her on Twitter @Alanagaddis or visit her website, agnesgaddis.com.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.