When it comes to income, the term “passive” exists on a sliding scale. Very few things are truly passive (meaning you put in zero work and receive income in return).
Take, for example, one of my favorite subjects: producing income from owning rental properties. The IRS considers this income to be “passive,” but in reality, there are plenty of day-to-day tasks that need to be performed to make sure the property is performing well.
Some of those tasks include, but aren’t limited to:
- Collecting rent
- Advertising and marketing vacancies
- Screening tenants and showing the property to potential renters
- Making sure lease agreements are signed correctly and collecting safety deposits
- Making sure the property is in compliance with local and national standards
- Handling maintenance requests
- Working with vendors to make sure work is scheduled and completed
- Paying vendors
- Paying utilities
The extent to which these things need performed depends on how many units or apartments are in the building. You may need to do only a few of these things on a monthly basis – or you may need to do them all on a daily basis.
When you look at all the responsibilities laid out like this, the next logical question becomes this: should you manage your own rental properties?
If the answer is no, then you’ll likely be in the market for a property manager of some kind. This process isn’t necessarily easy, and despite the extra work involved, there is something to be said for managing the property yourself.
As with nearly everything, there’s no one perfect answer for all scenarios. Because of this, I thought it’d be good to take a deeper dive into this question. In regards to property managers, Shakespeare said it best: “to hire or not to hire?” (Slight paraphrase.)
If you’re wondering the same, there are some key questions to ask yourself.
Do you have the time?
All of the tasks I mentioned above aren’t necessarily difficult – on their own. They become really problematic when they start to stack up. Imagine spending days trying to fix up a unit while marketing and showing the same unit to potential renters. Then multiply that by twenty or thirty units.
I mean, if it’s your full-time job and you have the time to dedicate to it, that’s one thing. However, if you’re a physician who is already stretched at work, and you already don’t spend as much time with your family as you want…well, imagine throwing this job on top of it.
And make no mistake, it is another job. That’s why there are professional companies that handle it.
So, you have to really ask yourself: how much free time do you have to devote to it?
One of my own properties is a condo that my wife and I lived in during our residency. It’s a one-bedroom condo in good condition and in a great part of town. Competition for renting out that apartment has been pretty fierce, so we’ve had the luxury of being able to pick-and-choose amazing tenants.
This has allowed us to be able to manage this property ourselves; I almost always get paid on time, and maintenance issues are few and far between.
Then there’s the six-unit property I own on the other side of town. It’s not bad by any means, but it’s an older building, so despite recent renovations, plumbing and electrical issues arise fairly often.
With this property, I felt I didn’t have the time to deal with the tenants and the building issues, so I hired a property manager. It all had to do with how much time I felt I would have to devote to it.
Do you have the expertise?
As we know, there are plenty of tasks involved in making sure the building is and continues to be a good investment. To get these tasks done right, you need to know how to deal with multiple issues that might arise. Not just in maintenance, either – you’ll be dealing with vendors, tenants, and even local government, depending on what the issues are.
Partly due to this, the same property, managed by two different parties, can end up with completely different financials at the end of the year. It’s like any other business. The person making the decisions is the one who makes sure you’re keeping your tenants happy and safe, and of course, driving increased income.
Do you have that expertise? If not, or if you’d like more (never a bad idea), a good route is simply by reading books, articles, and hunting for other resources. And of course, experience is always a great teacher. Beyond the knowledge, though, you have to ask yourself if you’re willing and prepared to be in the trenches, learning while you’re doing it.
At this point, I’ve been around enough properties to know what property managers do. Most of the time, it’s not extremely complicated. But when it does get complicated, having someone who knows how to deal with that type of situation is vital.
Don’t even get me started about all the proper local, state, and federal guidelines required to make sure you’re in compliance with all regulations. If you’re not, there’s a real possibility that you get sued or that the county will shut you down.
Are you willing to keep up with all the current news and regulations to make sure you’re in total compliance?
How much is it to hire a property management and is it worth it?
I’ve found that for smaller properties, property managers will look to receive 8-10% of gross rents. As the property gets larger, you might see closer to 5% in management fees.
There will also be some additional fees around the time the property becomes vacant and you have to re-rent it. There might be showing fees and placement fees, which are quite common. Those fees are often some percentage of the first month’s rent (often around 50%).
As a side note: while you can bargain to the lowest possible level for all these management fees, you’d be removing a lot of incentive for the property management to do a good job and spend any real time or effort on your property.
It’s almost always best to pay enough to make sure they're well compensated to do their job. If you’ve selected a good manager, after all, they usually have their fees set for good reason.
Do you live close to the property?
Being a good property manager means being able to get to the property quickly as issues arise. Certainly, there are some issues that can be done over the phone or with fancy online portals these days.
However, if there’s a large geographic barrier between you and the property, it becomes difficult to manage it. What if you have to pop over there for a major issue?
This directly relates to the time issue as well. Do you have time to occasionally check out the property in person, especially when immediate needs pop up?
Remember, time is money, so even that commute time is an opportunity cost; time you could be spending doing other things or with other people.
Can you afford the property management fee?
This question depends on how well the property is cash flowing without one. Ultimately, does hiring a property manager at 8% create a negative cash flow situation? If so, of course, it wouldn’t make sense to pay a property management fee.
Personally, I believe that if you’re a practicing physician, you should hire property management. Sure, there are exceptions, like the one-bedroom condo I own.
However, outside of that, I believe that your time is best spent elsewhere. Your time is extremely limited and worth quite a bit. It’s better to keep as much time free, so you can spend it how you want. In this case, spending time with your family on the weekend without the worry of having to answer phone calls about flooded toilets makes a lot of sense.
Your time is your most valuable asset. I say: be willing to invest in others (and other companies) to free up as much of it as possible.
In fact, I’ve learned not to look at property management as an optional expense. When doing my due diligence on a potential real estate investment, I cook it into the numbers. Essentially, when I calculate my assumptions, I add in the 5-10% property management fee.
How do you know if you’re hiring a good property manager?
This one takes some experience. While there are some traits that I look for in a property manager, I think the next best thing to firsthand experience are referrals from others you know.
Why not leverage their experience in dealing with the property managers. If they’re being treated well or the investment is doing great, people are happy to share their resources. You simply need to ask.
In any case, when you’re researching property managers, be conscientious when looking at statements. Don’t be afraid to fully vet and do the proper due diligence.
Ultimately, while I believe that hiring a property manager is the way to go, it’s all up to you. Ask yourself these questions, and determine what works best for your situation.
The thing is, real estate can be relatively passive. It often just requires a lot more due diligence up front to make sure you’re purchasing the right property or hiring the right staff.
If you do it right, you can enjoy all the great benefits that owning rental properties has to offer – without having to give up time to achieve them.