There are a certain percentage of people every year who find that their schedule or their life is too hectic to continue managing rental property. If they don't want to get rid of their investments by selling, a property management company can be a good option. It can also be a good option that can allow you to own more real estate than you could find time to manage yourself, and still experience the wealth-building power of real estate.
Jeremy Higginson, a real estate agent, mortgage broker and investor, says he is too busy to manage his own property and it isn't really his niche, so he always hires a property manager. "I find a good manager makes me more money in two way," he says. "First, since I don't spend time dealing with the tenants or the maintenance I can devote more time to my primary businesses and make more money there. Second, I invest in property for the long term. A good manager knows how to maintain that property and offset my holding costs on that property so in five or ten years when I go to sell it, it will be worth a whole lot more then than it is today."
"My philosophy is set it and forget it," adds Higginson (about rental property).
Preparing to Hire a Manager
If you are a hands-on person who has managed your property for years or if you tend to micromanage, property management may not be for you. Owners who want to be involved in every detail should probably not be using a property manager. There are great companies out there, but the truth is you will probably not find anyone who would manage your property exactly the way you would. Instead, you can find management companies with good systems in place to manage and maintain your properties for the long run.
Many conflicts between owners and managers arise over unrealistic expectations or inability to let go and let someone manage. Before you pick a company, make sure you are the kind of person who would not nag or interfere with your manager, and make sure you give your manager enough authoiryt and flexibility to be successful.
Be Realistic About Cash Flow
If the very most important component for you of owning property is cash flow, a property manager may not be a good idea. Typically they will take a percentage of the rent, and will wish to spend a reasonable amount of money on proper maintenance and resident retention. If you are so tight that you would stress about sitting empty for a month or two, or that you would balk at making an appropriate repair, you may wish to reconsider.
Systems and Service
Some owners make the mistake of thinking the most important service property managers provide is to the owners themselves. While that is important, taking owners golfing or providing amazing reports and updates means very little if the property itself is not being well taken care of, and/or if there aren't good tenants receiving excellent service. So while it would be nice to find someone who gives you good service, it is better that they first provide good service to the property and the tenants.
Fees and Charges
To really understand how property management companies make you money, you need to review how you make money off rentals. A very small portion of your return is your cash flow. Other portions are your principle reduction and your tax savings. Probably the biggest portion of your return comes in appreciation and your overall gain from owning the property.
It has been said that good managers don't cost money, they make you money - and it would be best to take this perspective when looking at a company's fees. Don't focus on what they cost; focus on what value they provide. A low cost company that puts in destructive tenants who beat up the property and lower its overall value actually cost you more than a high cost company that puts in good tenants, properly maintains your property so it appreciates ahead of market conditions, and keeps your tenants longer (so you have less cost and down time).
There are three things you can do to reduce the likeliood of conflict:
1) Make sure the company you use has a good management contract that specifies charges and duties. Most companies will want a specified initial term, like a year, since they spend time and energy setting up and getting you know your property. Many conflicts are created because there is not a good management agreement upfront.
2)Let the manager manage. Many owners think they know more than the manager and insist on setting the rent and monitoring the tenants. A good manager is closer to the front line and will have a better feel for rents. It is not uncommon for an owner to insist upon a certain rent that is not realistic, and then get mad at the manager that the unit sat empty. Giving a manager the ability to set rents at market rate and get good tenants is essential to success. Also, many owners refuse to spend the money necessary to keep and attract good tenants by properly maintaining and improving the property. Make sure you allow the manager enough money to make basic repairs, like fixing a furnace or A/C or doing plumbing work, without having to get your authoirzation first. There have been major problems when a manager can't get hold of an owner and, say, a furnace is out, something that can become a violation of Utah law. Don't allow tenants to call you first. Require that they deal with the manager to resolve their issues first.
3) Look to the long term. Don't panic if a manager can't rent a place immediately. Sometimes it takes time to find the right tenant. Don't panic if a manager doesn't pick perfect renters all the time. Sometimes even the best landlords get fooled and have to evict. Make sure your manager is inspecting on a regular basis, and try to attend one of those inspections at least once a year.
These excerpts were taken from "Choosing a Property Management Company", published in the July/August 2008 issue of the Utah Apartment Association Magazine. (www.uaahq.org)