What's your experience with management companies and how did you scale with them?

Question

I'm currently in the process of beginning my real estate investing journey.  I've been doing a lot of preparation work such as putting together the tools need to scan and find good deals, screen tenants, secure sources of financing and I'm working with an attorney colleague who is helping me draft an airtight rental agreement.  However, one key missing piece of my puzzle is managing the property itself.

A lot of my research has shown me that a lot of property management companies in my area and region provide the white glove service of screening tenants, dealing with evictions, maintenance requests, marketing, etc.  While this might work out well for someone who wants to have a completely hands off experience with their property, I've found that in most cases using a property management firm eats away a lot of cash flow in a potential deal.  There doesn't seem to be some kind of hybrid service that a company offers.  For example, if I wanted to screen the tenants myself and do the marketing/leasing myself, but outsource the maintenance/maintenance calls, this service doesn't seem to exist.  It's either all or nothing.

Typically what I see from these companies is: "The fee for our services is 10% of the monthly rent throughout the term of the lease. We charge 100% of the monthly rent when the lease is renewed." Say for example you have a 1700 sqft 3bd 2ba SFR that you bought for $200k at 20% down, which is renting for $1800 (at least that is what a decent one goes for in my area). After Operating expenses, taxes, insurance, maintenance, the mortgage/financing, and a small Capex reserve the investment cash flow is roughly -$180 a month! Obviously these numbers aren't an example of an actual deal but not totally unrealistic. It seems such a bad idea to rely on a property management company, especially with a small portfolio of less than 5 units.

All that said, my question is this:  Do property management companies really prevent that many headaches? Is it really worth it?  And if it is worth it, how did/do you scale with it? Any insight would be greatly appreciated!!

-Andrew

Joe Norman · Answer

Just like with any other type of service, it just really depends on who you hire. There are mechanics out there who will do a great job maintaining your vehicle to prevent headaches, and others that are sleezy and charge you for work that isn't needed/isn't performed. There are fantastic Realtors who go above and beyond to make the process of buying/selling as stress free as possible, and others that you can't even get on the phone.

So, to answer your question "Do property management companies really prevent that many headaches? Is it really worth it?" - it depends on who you hire.

Dani Beit-Or · Answer

IMO this is not a simple yes/no question.

Here are some questions you should be asking yourself to help you determine whether you should use a PM or not:

- Are you and the property close (are investing locally or remotely)?

- How good/skilled/comfortable are you w/ handling tenants, issues, communication, responsiveness, etc.

- How available are you? Super busy and not very available to handle things when they come up or the opposite.

-Is the the type of property and the type of tenants you are dealing with demanding? ie older property w/ potentially more issues and "needy" type of tenants?

These Qs should lead you towards making a better decision.

I'll add that:

- If you think using a PM is hands-free than you are mistaken, but can you find a PM that will handle 90% of the “noise” and you will still need to be ~10% involved - that's doable

- You can always start one way and change.

Soh Tanaka · Answer

You should manage yourself if you like the idea of managing properties, have time to manage properties, and have the knowledge or are willing to acquire the property management knowledge. In my opinion, you should not look at this from a financial point of view, as one can argue that it'll cost you money even if you manage yourself by giving up some hours, and I'm sure your hours mean something to you.

If you decide to hire a property management company, know the 3 types of property management companies and which one you like to hire. One will try to reduce the cost (initially,) one will try to reduce the risk, and one will try to make you decide what to do.

Best wishes with your journey!

Drew Sygit · Answer

@Andrew Brady why do you need anything other than catestrophic medical insurance?

For that matter, why do you need home, car or life insurance?

No one wants to pay property management fees - until they get in over their head and are looking at potentially losing thousands of dollars.

So, how penny-wise and dollar-foolish are you?

Esta Ryder · Answer

I have many clients who use different property management companies and I wouuld tell you that they are not worth it.  If you have under 5 units, you should be able to manage them on their own.

The maintenance/maintenace calls can get very expensive to have a management company do because they can nickel and dime you.  I would suggest finding a handyman who is very good and willing to take those emergency calls for you.

You can scale it by automating as much as you can and having a system in place with steps for evicting, finding tenants, getting a property ready after tenants moving out, etc.

Good luck!

What's your experience with management companies and how did you scale with them?

Most Popular Reply