Choosing whether or not to use property management companies is a hard decision for many real estate investors. Some wouldn’t dream of investing in real estate without a property management firm in place before closing on a respective deal. Others, however, struggle to break free of the “do-it-yourself” mindset that prevents them from accomplishing more. As it turns out, using a property management company isn’t as obvious as I would have liked to assume. You may ask yourself questions like “What does a property management company do?” or “Are property management companies worth it?” If for nothing else, I am convinced the benefits of using a property management company far outweigh the negatives.
It is fair to say the argument stems from the cost one must absorb to work with a property manager, but I digress. The cost isn’t so much a negative, but rather an investment. While it does cost money to hire a third-party manager, I can assure you it’s well worth the price. What’s more, their involvement could very easily increase the chances of growing your bottom line. If that’s not enough, here are some of the important tasks a good property management company will contribute to your rental portfolio.
What Is Property Management?
Property management is the practice by which a third party is responsible for maintaining a residence’s status quo and appeasing its occupants. Therefore, property managers are 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. Property management companies can handle a variety of property types, ranging from single family homes to vacation rentals. Some further examples include condos, apartments, mobile home communities, and office or retail spaces.
If a property is vacant, it’s the property manager’s job to see to it 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?
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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. While property management companies have several advantages, they are so costly. 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 become.
You are not within 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 don’t want to be an employer. Hiring employees like a resident manager comes with several responsibilities, such as payroll and legal requirements. A property management company is not your employee; they are independent contractors. Using one will save you the burden of becoming an employer.
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.
You have limited time. Even if you don’t mind managing your property, you may not be able to actively work on the property every day. If you plan on focusing more on running your business, hiring a property management company may be your best course of action.
You can afford it. When choosing a property management company, you can expect quotes ranging from 5% to 10% of your rental revenue. The exception to this would be in the case of a down market. In this case, it is wise to continue managing the property yourself or with the help of a resident manager.
You have a property in the affordable housing program. Usually, in programs like these, owners may receive grants, tax credits, or loans with low interest rates in return for renting to those with low-income levels. With these benefits also come more complicated rules you must adhere to. Having a property management company that knows the ins and outs of these rules can help exponentially in the long run.
What Does A Property Manager 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, a property management company will indeed cost additional money to hire, but I like to think of it as an investment instead of a cost. You see, a good property manager can very quickly 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
Property managers will help simplify your taxes
Property managers will draft and execute new leases
Property managers will conduct rental rental rate studies to select ideal rent rates
Collecting rent is one of the most obvious tasks of a property manager. However, if that’s all property managers did, 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 upfront 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.
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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 are. It may be blocked and back-flowing pipes on the weekend or locked out in the middle of the night. Many of these calls can irritate 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 that authorizes the company to handle up to a certain dollar amount of repairs without needing express permission first. This 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 than a DIY landlord that may be 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. Simultaneously, great bookkeeping and invoice handling are critical for minimizing taxes, keeping the best vendors, and generally keeping the cash flowing. If your property manager throws this service in 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 their services will bring value to your own business.
5 Benefits Of Having A Property Management Company
The single greatest benefit investors are made privy to by working with property management companies is time. By enlisting the services of a good property management company, investors won’t be forced to manage the property themselves; they’ll be free to take on other responsibilities. The added time will help most investors find and acquire more rental properties to add to their portfolio. For others, not having to manage a property rids their lives of unnecessary stress. It is worth noting, however, that time isn’t the only reason someone may want to hire a property management company. There are actually several benefits to hiring a manager, not the least of which include:
Mitigate Liability: One of the little-understood perks of having a third-party property management firm is the buffer from liability a good property manager adds to an inexperienced investor’s portfolio. It can be easy for opportunistic tenants to make false accusations about rent collection tactics, illegal eviction practices, and negligent maintenance. A third-party manager can deflect many of the false claims levied in an investor’s direction.
Quality Tenants: Property management companies manage properties for a living; it’s what they are good at. As a result, the best of them have grown to know what to look for in a good tenant. It is, therefore, safe to assume hiring a property manager will result in better tenants for a property, which is great news for landlords. The better the tenant, the better the experience will be for owners.
Shorter Vacancies: Not only will a property management company advertise to fill vacancies, but it will also do so with a sense of urgency and efficiency. Again, since this is their job, real estate management companies are most likely better at filling vacancies than traditional landlords, which drastically shortens the length of vacancies. Meanwhile, landlords can increase profits throughout the year by keeping the asset in service.
Lower Maintenance Costs: Working with good property management firms will give investors access to their network of professional contractors. The contacts the property manager already has in place will work in your favor and save on maintenance costs. Not only that, but the contractors will also come with a recommendation, which is invaluable.
Better Reviews: Tenants tend to prefer working with property managers, as the process is almost always objectively smoother. As a result, the experience is typically better than dealing directly with landlords. Subsequently, renters are more likely to leave a good review when they vacate the premises. Those same reviews will serve to drive more traffic to the home when the time comes to find another tenant.
Other Things To Consider
I maintain that hiring a property management company is a great investment, but like everything else, be sure to mind due diligence and know everything you stand to gain by enlisting the services of a third-party property manager. As I already alluded to, property managers tend to bring more to the table than people realize. Having said that, here are a few more things you need to pay special considerations to before you commit:
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 of their services to justify their own cost.
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 represent 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 of their satisfaction.
Finding A Good Property Management Company
While good property management companies are highly beneficial, finding one can be challenging if you don’t know what to look for. Consider the aspects you want help with, and ask questions to potential companies. Do they stop by their properties? What is the tenant screening process like? How do they handle evictions when necessary? When hiring a property management company, be sure to exercise caution before making your final decision. Review the following tips to help you get started with your search:
Consult colleagues and your local apartment association for recommendations.
Search for certified property managers on the Institute of Real Estate Management’s Membership Directory.
Find a NARPM property manager on the National Association of Residential Property Manager’s site.
Thoroughly interview companies before making your decision.
Remember, it can take a few weeks to find the right fit. Always ask any questions you are curious about, and don’t be afraid to trust your instincts. You don’t want to sign a contract only to find their operations are not up to your standards.
Hopefully, you now have a better answer to the question “What does a property management company do?” Property management companies, specifically good ones, are worth their weight in gold. It is entirely possible for a truly great management company 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.
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