One of the biggest mental barriers to buying and owning rental property is the perceived work that comes along with it. How many of us have heard stories of a landlord being awakened in the middle of the night (and on a weekend) to respond to a tenant’s clogged toilet? We’re busy professionals and we simply don’t have time for that kind of stuff.
We want to invest in more “passive” income, where we can create wealth in our sleep–or at least while we’re enjoying time with our families and on our hobbies. Owning a rental property doesn’t sound so passive when the phone rings at three in the morning.
Instead, would-be real estate investors often find themselves opting for real estate funds, REITs, crowdfunding, or another (less hands-on) form of investing. I think all of these are great options, and I’ve found myself heavily invested in those as well.
However, I believe that owning properties is an amazing vehicle for developing long term wealth. I’ve seen it in the lives of some family members, friends, and a good number of financially-free physicians.
I’m sure you would agree that the idea of owning rental property is great–at least, in theory. But in reality, how are we supposed to own a rental property but still have the time to pursue our jobs, travel, spend time with our loved ones, and golf?
The key is simple: Find good property management. Sure, you could manage that property on your own, but is it worth it? In most, if not all, cases, I believe that you should leave the hands-on management up to someone else and free up your time. After all, your time is the most valuable resource.
Finding a good property manager is easier said than done, however. How can you find one of the good ones? What’s the evaluation process? Well, I’ve compiled a few essential things to look for when you select one for your property:
This one is pretty obvious. You want someone who knows how to handle things properly, so they’re not calling you at the slightest issue. Find out how long they’ve been managing properties and the number of properties and/or units they have in their portfolio.
Ask them how they handle tenants who pay late, how they handle tenant complaints, and what they do with known troublesome tenants. They should also understand local laws when it comes to regulations, evictions, and standard operations of the building.
I’ve dealt with a good number of property managers in my relatively short time as an investor. Finding someone who focuses on the details is crucial.
Running a business, which is what owning rental property is, requires every penny to be tracked and documented. After all, when it comes to tax time, the IRS wants that information. Will your property manager hand you poorly-written expense reports? Would they calculate the net operating income accurately?
Going hand in hand with the last point, finding a property manager with good organizational skills will save you some major headaches. If they have a clear process for even the little things (collecting rent, screening potential tenants, resolving maintenance issues, etc), you can be much more confident in their ability to handle larger things when and if they arise.
Also, if you have a business-related question, especially around tax time, an organized manager will be able to answer it. This is your business, so finding someone with this trait will help ensure it runs smoothly.
This is a big one. The whole idea of having a property manager is off-putting to a lot of potential investors, largely because it implies a sense of reduced profits. Having to pay a manager means you’re limiting your returns, after all.
Well, I just consider it a standard expense when I look for a rental property. I make my projections on returns based on an expected management fee and make sure I’m happy with that before purchasing the property.
What is the standard fee? Well, it varies according to the type of property you have. I’ve found that if it’s a single family home, management fees tend to run 8-11% of the monthly rate. For multifamily, they seem to run from 5-8%, depending on the size of the building. Again, make sure you ask for a full fee sheet because typically, there are so many additional fees for example when there is tenant turnover or even when there’s rehab.
I’ve found this to be extremely important. Not only is your property manager the manager of a building, they’re also an organizational leader. Trust me, if your tenants can’t stand your property manager and the way they talk to them, they will consider leaving. It’s happened to me.
Tenant turnover can be a killer on the bottom line -especially when you lose good, reliable tenants. Find someone who has a good demeanor. Fortunately, whether or not they have this characteristic should be pretty apparent after a few face-to-face meetings.
Communication Skills and Responsiveness
Have a property manager that’s hard to get on the phone? Right off the bat, that’s a major red flag. Communication is everything in this business, and the property manager is basically your eyes and ears when you can’t physically be at the property.
You’ll find a good property manager will communicate immediately (when appropriate). They may handle it themselves first, but they should make you aware.
Finding yourself leaving tons of messages and sending emails before getting a response is not what you want. It may be that they’re bad communicators or they just have too many properties to manage. Whatever the case, if you’re not getting the response you need, you’ll be in for a bad time.
There have been a good number of advances in technology that have made the lives of both tenants and managers way easier. Online rent payment options, portals for tenants and managers, and online maintenance requests have made communication simple.
As an owner, I now really appreciate having some sort of portal that I can log into to check my statements. Still, that last part isn’t a deal breaker for me, because having a manager who is good at reporting can make up for the lack of a portal.
However, it’s still nice to ask if they use a management system that allows you to do so (like Appfolio). Many tenants would even rather pay online than dropping checks in the mail. It’s a convenience thing, and the more convenient you make it for the tenant to pay their rent, the beter.
Patience and Willingness to Teach
If you’re a novice property owner, having a manager with the willingness to explain things is an invaluable asset. Believe me, I’m still learning how to be the best owner and how to make effective decisions.
I’ve asked my property management a good deal of questions, trying to understand certain things, like why they patched something instead of replacing it, or why they set up their leases a certain way, or what their process for dealing with trouble tenants is. The list goes on.
Bottom line: They should be patient with you and willing to teach you.
I’ve made mistakes in hiring a property manager and I’ve definitely seen how that can affect the way your business runs. A good manager has to wear many hats. They must be handy, they have to be knowledgeable, and be good with people (for better or worse). All of this comes from experience, yes, but it also takes the right kind of person.
I’ve rushed to find property management in the past, and I’ve paid for it with unhappy tenants, poor accounting, etc. It’s not fun. However, it took those situations for me to understand what makes a good property manager, and it made me realize that I shouldn’t compromise.
The tough part is discovering these traits before you hire them. Do this by asking for examples of accounting, what procedures and policies they have in place for other buildings, and paying attention to how they interact with you. In fact, don’t be shy. Tour another property that they own. Call those landlords and find out how happy they are with the management.
I believe this part is just as important as finding your building. You need someone capable and competent to run not only the building but your business. They are your connection to the tenants and they need to handle that effectively.
Property management will free you up to what you wanted in the first place: enjoying time with your families and collecting that passive income.
Do you self-manage your properties or do you hire property management?