By William Bronchick
Let’s say through savvy investing, you have managed to accumulate a portfolio of properties. It doesn’t matter if it’s a large or small portfolio. You may have even tried to self- manage them yourself. Now as you procure more properties you may find you may not be as organized as you once thought and find that some things may be falling through the cracks. Possibly you are just getting tired of getting the midnight or weekend calls (or both), the whining, repairs, trying to collect rents, keeping up with the books and everything else that goes into being a property manager. For purposes of this article, we are dwelling more on single-family rentals or small multi-family units. Larger multi-family units are normally handled quite differently.
On the plus side, as a budding landlord, you may find that managing your first few rentals will be a great education! However, as your portfolio grows you may find that you are repeating past mistakes such as not screening tenants properly and keeping up with maintenance and upkeep. In addition, proximity to your rentals from where you live can alone be a deciding factor.
Only you can decide what is best for your individual business, but whatever route you choose, it is imperative that rental properties are well- managed, safe, tenants communicated with regularly, upkeep maintained and so much more. Because of space limitations, we will also follow this article up with an article on “How to Choose a Property Manager”.
Marketing. Property management companies maintain a list of people that need to find a rental. They also can market on a larger scale than most of us can afford. Using a company like this can eliminate your need to run ads, show your property and other tasks when attempting to acquire a new tenant for your rental. This can save you a huge amount of time. It’s also Murphy’s Law that tenants tend to leave when you are the busiest or life is just crazy.
Tenants. One of the major mistakes that self-managed properties experience is the insufficient screening of tenants and the on-going communications with them that keep them continuing to rent from you rather than looking elsewhere. This can result in less than ideal tenants that don’t pay on time, don’t care for the property and only stay short- term.
A professional property management company will show the property, collect applications, check credit, call employers and past landlords, get references and any documentation needed to get your property rented- or not. In case a prospective tenant doesn’t qualify, a property management company knows what guidelines to follow in legally denying an applicant that doesn’t qualify.
Because of this intense screening process, a reputable property management company will usually find you the best and most qualified tenants. Because of their experience, they will also have a pretty “beefy” lease that holds the people renting your property accountable for taking care of the property, payment and other issues that may pop up.
Property Transition. A property management company will also normally handle all of the details when tenants are moving out and moving into your rentals. They will normally provide a move in letter letting the new resident know what to expect. They will also provide an orientation to the property showing the new tenants how things work, etc.
In moving tenants out, the property management company will normally send a move-out letter that outlines what needs to be done before the resident moves and what will be acceptable for the final walk- through in order for the tenant to receive their full security deposit back.
Liability. Property management companies that are reputable will be up to date on the latest Federal, State and Local laws governing landlord/tenant relationships. They are very familiar with discrimination laws and can keep you out of hot water with the governing agencies.
As mentioned before property management companies normally have pretty stringent leases that can hold both sides accountable.
Bookkeeping and Timely Accounting. Property management companies also keep books on your expenses, rental income, etc. They can also provide a continual financial report on how well your rentals are doing – by the unit. Finally, this information can normally be placed into your business accounting system by you, your bookkeeper or the management company.
Most self-managed rental landlords don’t keep as timely books as a professional company. Having a monthly report and accounting that is current can really help you see which of your rentals are performing or not. This can aid you in making adjustments to increase profitability.Handling security deposits can be another quagmire too. There are a variety of federal, state & local laws governing how security deposits are banked and how they are dispersed. It’s not uncommon for newer landlords to bank the security deposits in their regular business account and times of low cash flow they attempt to rob Peter to pay Paul they end up either commingling the funds or worse yet, spending it. A reputable property management company will take care of the funds, bank them in an escrow account and handle them legally and ethically.
Income. Many landlords who self -manage their rentals, don’t keep track of what market rental prices are and thus tend to undercharge. They are also reluctant to increase rents to market value for current or incoming residents. A property management company will keep current on what rents the market will bear and will make every effort to get that amount of rent.
In addition, these companies will also collect the rents and take proper and legal measures when rents are not paid in a timely manner. In many cases where rentals are managed by the owner, the tenant is aware who the owner is and this issue and others can get personal. Using a property management company takes the “personal” aspect out and makes it a business relationship.
Repairs and Maintenance. A property management company will normally take care of repairs and maintenance on your rentals. In many cases, they have someone already on staff or know companies that give discounts to get a better price. Be aware that they may put a markup of 15-20% on such services. It’s up to you to decide whether you want this service or not.
A good compromise is to allow any repairs under $150- $200 to be done as needed by the company but anything over that amount they have to get your OK and you reserve the right to find your own repair company. Like everything else, this needs to be part of your contract with the management company.
Insurance. Property management companies carry their own insurance in the event of mishaps, errors, omissions, etc. but don’t be surprised if the property manager requires you to list them as an additional insured on your properties.
Free Time. Using a property management company can save you a lot of time, stress and aggravation! It also put the tenants on more of a business relationship and distances you from the day to day issues associated with rental units.
Be aware that this does not absolve you from personally inspecting your rentals periodically. This will give you peace of mind and keep your management company on their toes.
The Downside. All of the above sounds pretty good doesn’t it? With everything in life and business, there are upsides and downsides. Let’s talk about some of the downsides of using a property management company.
You will spend 7-10% of your incoming rents in order to pay the management company. If you have rentals that aren’t able to cash flow very well, even at current market rents, you may have to self-manage. For properties that cash flow well this can be a big time saver for the owner, not to mention the stress it relieves.
Each time you acquire a new tenant, you will give up to 50% of the first month’s rent as a fee to the management company to cover their efforts and expenses in procuring the new renter.
If you are self-managing, you normally get a rent check from your tenant at the first of each month and then deposit it. With a management company, the rent checks have to go through their system and so you may have to wait 2-3 weeks or more in order to get paid for the current month’s rent.
Some management companies can tend to overcharge for repairs and maintenance. This is something you will have to keep in mind and keep tabs on.
Like people, management companies can get lazy. I have seen instances where the landlord thought their rental was in good shape, but upon inspection, the property had a lot of deferred maintenance because of a hands-off attitude by the management company.
You will be signing a contract with the property management company so be sure it specifically outlines both your duties and responsibilities and that of the management company.
So you have some more decisions to make! Only you, as a business owner, can decide what is best for your business. Remember- using a property management company is still not a “get out of jail free” card where you can be totally hands- off. It still requires some time and attention. That being said, it can save you time and money when done properly by a top-notch property management company.