Manage Your Properties Well
Good property management is the number one factor in the success of your real estate portfolio. By reducing your repair costs through inspection and preventive maintenance, and minimizing vacancy with effective tenant screening, a good property manager will earn you far more than you pay out in fees.
Yet the first question many investors ask potential property managers is, “What do you charge?” Instead, they should be asking property managers what services they perform. Property managers differ wildly in the services they provide for your property, and we’ve seen them all; from property managers who substantially improved a property to ones who were actually responsible for their client losing their investment. It is up to you to interview a prospective manager thoroughly and then keep tabs to make certain they are doing the job.
In the second half of this article, I’ll provide a complete checklist of all the services any good property manager should perform. You should settle for nothing less. But let’s first address the issue of what such a good property manager will cost you.
What A Good Property Manager Really Costs
Generally speaking, you get what you pay for. I advise my clients to focus on what they do best, and not worry about paying a little extra for a competent professional that can save them time and money.
Of course, before hiring a property manager, you need to be sure you’re clear on all fees they will charge, and be very clear on what services they provide.
Property management fees are usually based on gross rents collected. This means that the property manager won’t get paid if the property is vacant, or rent isn’t collected. This is ideal since it motivates the property managers to be more particular about who they rent your property to.
Over years of property ownership and management, our experience tells us that conscientious property manager cannot do everything required for a flat 6% – 8% of gross rents collected and still make a profit. At 10% they might break even.
When a property manager places a new tenant, they will usually collect an additional percentage of the first month’s rent, plus any “out of pocket costs” incurred while marketing the property. Some management companies charge 6% of the annual rent, while some companies do not charge anything at all.
As repair and maintenance are necessary, some companies will place a surcharge on the work they hire out, while others will use their own maintenance people and charge an “administrative fee” for that.
With good management, annual operating expenses will be in the neighborhood of 30% of your gross rent, including management fees. If the difference between a decent manager and a great manager is 5%, and your property rents for $1,000 to $2,000 per month, then you’re only paying between $50 - $100 more per month for the peace of mind that comes with knowing your property is well maintained.
If you’re still not convinced, or considering managing a property yourself, read the next section, which provides a checklist of every service a good property manager should provide.
What Every Property Manager Should Provide
Many investors do not realize the number of things a good property manager must provide, and therefore are more willing to use a cheap manager, or attempt to manage a property themselves. This effort might save you some dollars but is it really cost effective?
Scrimping on management, or doing everything yourself will save between 5% - 10% (between $50 - $200) per month. In return for those savings, you’ll need to spend more time collecting rent, fixing problems late at night, and going to court to evict a problem tenant. This is why I recommend investors hire a professional, and focus their time and effort elsewhere. Any time you can hire something done professionally for less than you earn in your career, you should do it.
A property manager should do all of the following when they are taking care of your property/investment:
1. Screen prospective tenants
- Obtain an application and credit report from each individual over 18 years of age that will be residing in the property.
- Verify employment and personal references for each applicant.
- Speak with their current landlord, but more importantly their previous landlord. *Think about this for a moment. If you receive a call from someone considering renting to a tenant you are anxious to get rid of. What are you going to say? We'd all like to think we would be honest, but would everyone? Previous landlords have no conflict of interest and are therefore more candid.*
- Visually examine each applicant’s current drivers license and social security card, and keep a copy for the file. It is important to verify that the person applying is really the person they say they are.
- Trust your intuition. Without exception I have always been able to tell whom I would rent to from the first phone conversation. If something about a tenant doesn’t add up, be extra cautious. They might look great on paper, but isn’t it odd that a credit card company issued their deposit check? On the flip side, don’t discriminate against good applicants if they don’t fit your ideal. I once rented to a family with seven children that no one else would rent to, because I noticed that their children were some of the most polite, clean, and well behaved I’d ever met. They were the best tenants I ever had.
- Always require cash, money order, or a certified check for the initial move in and deposit. The last thing you want is for that personal check they gave you to bounce after they are already moved in.
- Complete the rental agreements, provide all disclosures, rules, by-laws for the property.
2. Take Care of Your Property
- Before a tenant moves in, the property should be thoroughly inspected to insure all items are in clean and working condition. Moving can be hectic, and first impressions are very important. If a tenant moves in and has to deal with a lot of non-functioning items, you will have an unhappy tenant who will very quickly make you an unhappy landlord.
- Arrange for all repairs at the best rate possible from your various trade people/sub contractors.
- Drive by the property at least once a month, to make sure maintenance is being performed properly. Note how many cars are in the yard, look for unauthorized pets, and whether it’s possible more people are living in the property.
- Treat the tenants with courtesy and respect at all times. Take their complaints seriously, and respect their privacy.
- Resolve all health and safety repairs as quickly as possible once aware of the problem. All other repairs should be taken care of within seven days.
- Keep the Owner of the property informed in the manner the owner designates: phone call, email, or postal mail.
- Have an emergency contact number for the owner and tenants twenty four hours a day. This is an absolute must to keep your liability to a minimum as well as insure safety for the property and tenants.
- Schedule regular property inspections every six months. It is more efficient to do preventive service than an expensive repair. In particular, look for water leaks that will lead to expensive and dangerous mold infestations. Be sure to checkall smoke detectors and have the tenants sign an acknowledgement that the detectors are working. This minimizes your liability if the tenants remove the batteries from the smoke detectors when one of their children’s toys needs a battery.
3. Stay Current on All Legal Issues and Changes *All that stands between you and a lawsuit is your property manager and if they don’t do the job correctly, both of you can and will be sued.*
- Re-read 2H, regarding mold and functioning smoke detectors.
- Megan’s Law
- Lead Based Paint Disclosure for properties built prior to 1978.
4. Provide Statements of Accounting
- Render a monthly statement for the previous month by the 10th of the following month. The statement should include copies of all receipts, without exception. If the IRS audits you, they will want to see those receipts.
- Provide accounting in a format easily understandable. Most property managers now use QuickBooks or Excel. If you don’t understand their statement, let them know and make a request. You should readily be able to identify beginning balance, rents collected, expenses paid, ending balance for each individual property.