How and When to Hire a Property Manager for Your Real Estate Rental

How and When to Hire a Property Manager for Your Real Estate Rental

Since I live in California and all my real estate rentals are in Texas, I heavily rely on property managers to look after the day-to-day landlord responsibilities. I get asked about this a lot… Who manages the properties? How do you find a good property manager? What stuff do they handle, and is it all worth the cost?

This post is a brain dump of everything I know about property management, and why I believe it’s the backbone of your rental real estate business. Hiring the right property manager could mean the difference between making a profit or a loss, as well as having a fun vs. a horrible real estate investment experience.

First, you gotta have a good attitude about property management

One of my biggest pet peeves is hearing investors complain about how bad “all” property managers are. I heard a guy the other day telling me he’s on his 9th management company in 5 years, because “everyone out there sucks.”

Call me crazy, but if you enter into a relationship with the expectation that your partner is going to disappoint you, eventually you will find a reason to prove this true. Also if you cycle through property managers without learning or improving your experience each time, perhaps there are unclear expectations that you have for the partnership.

I encourage all investors to think of their property manager as the COO of their business. They are a partner, not a contractor. The stronger the communication and relationship, the better chance you’ll have of a positive investment.

Most of what a property manager does is deliver bad news. They are the messenger, not the cause of the bad news (usually). Something to keep in mind if and when things go wrong.

What does a property manager do?

While each management company is slightly different, here are the typical tasks of a property manager.

Tenant dealings: The property manager handles all communications with renters from start —> finish. This includes finding potential tenants, screening them, setting expectations, rent collection, inspections, responding to tenant complaints, handling disputes, and eviction if necessary. A property owner should never need to talk to a tenant directly.

Leases and legal stuff: Each city and state has different legal requirements for renting out real estate. It’s the property managers job to know the local rules, write and sign leases, and make sure all parties are living by the terms of their agreement. Most property managers are required to have a license within the state they do business.

Maintenance and repairs: Property managers find, hire and oversee contractors to do general upkeep and fix stuff when it breaks. Yardwork, plumbing, electrical and cosmetic repairs are commonly handled by the property manager. Depending on the size of the work, they may involve the property owner to approve any costly repairs. (Personally, I’ve given my property manager permission to proceed with any repair work under $300, and contact me for anything higher than that.)

Accounting and admin: Most property managers use accounting software to track all the incoming rent and outgoing expenses for each investment property. They provide a monthly balance sheet to the investor, as well as annual P&L statements that can be used for tax filings and records.

Miscellaneous & value-add items: A good property management company can also offer additional services and tools to make the investor’s life easier/happier. These can be listed in the contract (for example, my property manager will represent me in court, for a fee, if I ever need local representation) or just common sense type of activities (my property manager sends out warning emails before a large storm hits the area or when there is a change in local legislature that affects me).

What does a property manager NOT DO?

Profitability: A property manager is the COO, not the CFO. While they understand the overall goal of an income property is to turn a profit, they themselves are not responsible for whether the real estate investment makes money or loses money. Not all managers have an investor mindset.

Predict or prevent disasters: A good property manager has experienced and dealt with all types of shit and disasters you can’t even fathom. But while they might be able to foresee most common rental issues, they cannot stop all bad stuff from happening. They are not fortune tellers.

Realtor activities: Unless the property manager is a licensed real estate agent (some are!) they won’t be able to represent you in buying or selling an investment property.

Personal accounting stuff: It’s not the property manager’s job to give you tax advice, file your taxes, handle your property insurance, deal with your bank, or service your mortgage.

Manage renovations and large upgrades: Property managers are not general contractors. They also only get paid when tenants are paying rent, so they usually do not manage large renovations, remodels, or design upgrades.

Costs to hire a property manager

The 2 most common fees are an ongoing management fee and a commission for lease-related activities. It’s important for new investors to include these fees in their rental property analysis if they plan to hire a property manager.

Management fee: Typically between 8-10% if incoming monthly rent, this management fee covers almost all management activities. This fee is taken out before any other expenses are paid. For example, if the monthly rental income is $1,000, and the management fee is 9%, the management agency will deduct $90 each month.

Lease commissions: When a property manager finds a good tenant and secures a 12-month lease, they take a commission usually equal to 1 month’s rent. Commission amounts vary by location, housing type, and sometimes longer or shorter lease terms. Also, if a tenant extends or renews a lease, the property manager may collect a lease renewal fee.

Other fees: Some management companies charge a marketing fee to advertise a property, registered agent fees to represent an LLC, mark-up fees to oversee large repairs, or other custom work outside of their usual scope. These fees are custom and sometimes negotiable.

Should you hire a property manager?

Every real estate investor needs to figure this out for themselves. In some cases, a professional property manager is a legal requirement, but in most cases it’s a matter of preference. Here are some questions and things to consider:

Do you have the skill set to manage tenants? Personally, I don’t have a great track record negotiating with tenants. I’m too nice, give people the benefit of the doubt, and somehow always get screwed. It’s worth it for me to hire a property manager with people skills so I don’t have to learn these skills myself.

How close is your rental property? If you live far away, it can be hard to service your property and tend to your tenant needs. Some state laws even require local property management if an owner lives out of state. That said, many tasks can be done remotely and if you feel comfortable finding boots on the ground when needed, then perhaps self managing is a fit for you.

Time and scalability: Most real estate investors hold a full time day job, and it can be difficult to play landlord in their spare time. The problem compounds when they own 2,3,4+ properties. Hiring a property manager allows you to offload tasks so you can scale your investing business without overloading yourself with work.

Are you well organized? Managing a property is like managing a business. It requires extreme organization, even if it’s just a single rental unit. Property managers have proven systems and methods in place to help them stay on top of management.

Can you afford it? In some cases, investors have no choice but to try and self manage their properties. Perhaps they can’t afford the management fees or don’t believe the services offered are quite worth the expense. Everyone has a different opinion on this.

Do you know the tenant & landlord laws? One thing I love about my property manager is she stays current with all the local laws and is an expert in her industry. If I didn’t have a manager in place, it would be my responsibility to know and abide by local laws.

Self-management and workarounds

If you’re not quite sold on a property management service, but still want to offload tasks, there are a few workarounds I’ve seen investors have success in.

  1. Hire a “friend” to manage your place, and pay them a smaller fee. This keeps you engaged and still managing most of the bigger activities, but you can offload some easy tasks to your friend. This might include showing the property to a prospective tenant, fixing a small maintenance request, or even just driving by once and a while to check on things.
  2. Use online property management software. BiggerPockets has a great list of software companies that help landlords do accounting tasks, collect rents, track and keep rental paperwork and other small tasks to help stay organized. Cloud software is becoming very popular (and cheap!) to help investors manage multiple rentals.
  3. Shadow a property manager, and learn to do it yourself. One of my friends hired a property manager for the first year he owned a rental. During that year, he learned everything he could about tenant management, and also made friends with his tenant who wanted to renew a long term lease. When he felt confident in his management capabilities, he cut out the middleman to save on management costs.

How do you find a good property manager? 

Before choosing my manager, I set phone call interviews with ~6 top recommended agencies in the area. I asked them all the same set of questions, cross referenced their answers, and went with the one I felt was most capable in the end. We’ve been working together over 6 years, and things are still going strong.

Here are the questions I asked (outside of the typical service overview stuff) when searching for my property management firm:

  • Do you invest in real estate personally? Tell me about your properties!  If you can find a property manager that has an investor mindset, they may inherently understand your needs a bit better.
  • What management software(s) do you use? To me, it’s important that a property manager utilizes current technology and tools to be the most efficient at what they do. Any sign of unorganization scares me, because ultimately I’m the one that suffers if they can’t stay on top of their duties.
  • What services don’t you offer?  This is a great question to see how they manage expectations. I’m very wary of the management company that says “we handle everything!”. Also, their answer reveals duties that you will have to cover as an owner if they can’t do it.
  • Walk me through your process of marketing vacant properties: Hearing their methods demonstrates their knowledge advertising and finding tenants. I want to hear that they exhaust every avenue possible to find a potential tenant.
  • Who will I be dealing with day to day? My property management company has a general manager, a dedicated renewals rep, and a couple assistants. It’s nice knowing how their office staff all work together, and who to get a hold of if I have any issues.

Ongoing communication and success tips

I mentioned at the start of this article about keeping a positive attitude toward property managers and business partners. Here are some other tips I would give fellow investors based on my successes (and failures)!

Get out of their way! Early in my real estate career I made the mistake of thinking that I know everything. But, I slowly learned that the more I interfered and tried to do other people’s jobs, the more I would screw things up. Sometimes you have to trust that they know better than you, even if you disagree on something.

Take a lot of notes. Whenever I talk to my property manager about something important, I follow up with a written email outlining what we just decided on. It’s very easy to forget what you talked about, especially when you own more than a few properties. 🙂

Always be positive and fun. Property managers deliver bad news all the time. They rarely call just to say “everything’s going great!” Since 90% of your communication is about things going wrong, it’s important to stay upbeat and as positive as possible. Remaining calm and collected makes you someone who they want to solve problems with. If you are angry and abrasive, nobody will enjoy working with you or helping you make money.

Forgive, forget, and move on stronger. For every mistake my property manager makes, I use it as an opportunity to build a stronger relationship. Many investors take the opposite approach, and slowly dismantle their partnerships over time. Mistakes will happen with anyone you work with, so take a long term approach when your COO slips up.

Ask about their other clients! This is a huuuge untapped area many investors miss. Property managers know 1,000 other investors and owners – many of them older investors that want to offload their portfolios. Asking your property manager for introductions is a great way to find off-market investment opportunities, or perhaps even experienced mentors!

I would love to hear your experience with property managers. Any success tips or failures you want to share?

Cheers, and have a wicked day!
Joel

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How and When to Hire a Property Manager for Your Real Estate Rental

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