Using Property Management

[Chris Lo]

I got a newbie question. 

If Property Management Company can pick the right property, take care of it and tenants, and everything related to the property for ~10% fee, then why doesn't everyone do it?

Maybe many people don't know about it?

It seems like a best way to buy, refi, and repeat with a PM.

[Tim Johnson]

There are many property management companies that also buy and sell real estate. Usually those two functions (even in those cases) are kept separate. 

I've never heard of a PM "picking" properties for you as an investor - what do you mean by that?  Their 10% fee is very specifically related to a few management tasks for your property / units. PMs are like real estate agents... or any other profession - they're not all the same. There are great ones, who you learn to trust your investments and buildings with, and there are others that you learn to avoid. PMs will not help you pick, buy, or refinance your loans as part of their management fee. If you find one that can though... please let me know :-)

[Jim K.]

@Chris Lo

So at least you see that something is clearly questionable with the basic premise.

[Nathan Gesner]

I help investors find properties regularly, but it's for a separate commission like any sale. Once they own it, then i start managing it for a percentage of the rent income.

[Scott M.]

We do this all the time, help our clients buy or sell property.  But as @Nathan Gesner said this is a different service from property management, it is buying and selling real estate.  Good news is the commission on the sales side is far cheaper then the ~10% you pay them to manage.  But there is separate commission on each buy/sell.  

[Steve Vaughan]

Originally posted by @Chris Lo:

If Property Management Company can pick the right property, take care of it and tenants, and everything related to the property for ~10% fee, then why doesn't everyone do it?

It's not 10%. Small landlords are also charged placement fees, usually 1 month's rent.  1st year PM fee is now 18%. 

If they are busy and don't get your vacancy turned for an extra month, that's another 8%. There are also repair overrides.  10% is fantasy land. 

[Steve K.]

Originally posted by @Steve Vaughan:

Originally posted by @Chris Lo:

If Property Management Company can pick the right property, take care of it and tenants, and everything related to the property for ~10% fee, then why doesn't everyone do it?

It's not 10%. Small landlords are also charged placement fees, usually 1 month's rent.  1st year PM fee is now 18%. 

If they are busy and don't get your vacancy turned for an extra month, that's another 8%. There are also repair overrides.  10% is fantasy land. 

Steve Vaughan makes a good point. For example my PM charges 7% as a base rate but with lease-up fees, annual/quarterly inspection fees, notice delivery/eviction fees, etc.all factored in, the effective rate is more like 12-15% in my experience. The main reason not everyone uses property management is probably because of these additional costs and their impact on cashflow/profit but also because not everyone trusts a PM to manage their property as well as they would themselves. It can be more difficult than most noobs probably realize to find a good property management company. I finally found one I trust but I self-managed for years and still actively manage my management company plus still self-manage several of my properties. My PM is about as good as they get IMO but I find they are more limited in tenant placement than I am. In order to comply with fair housing laws they go by stricter acceptance standards than an owner might. For example they accept the first qualified applicant typically and use the same criteria for everyone whereas an owner might screen by looking at "soft criteria" such as eye-contact, handshake, general feeling on whether the tenant will be a good fit for the property, etc. This can be a good thing or a bad thing, but most experienced landlords who are good at self-managing probably feel that they do a better job screening and retaining tenants than a PM, which results in less turnover and higher cashflow.   

[Steve Vaughan]

Originally posted by @Steve K.:

Originally posted by @Steve Vaughan:

Originally posted by @Chris Lo:

If Property Management Company can pick the right property, take care of it and tenants, and everything related to the property for ~10% fee, then why doesn't everyone do it?

It's not 10%. Small landlords are also charged placement fees, usually 1 month's rent.  1st year PM fee is now 18%. 

If they are busy and don't get your vacancy turned for an extra month, that's another 8%. There are also repair overrides.  10% is fantasy land. 

Steve Vaughan makes a good point. For example my PM charges 7% as a base rate but with lease-up fees, annual/quarterly inspection fees, notice delivery/eviction fees, etc.all factored in, the effective rate is more like 12-15% in my experience. The main reason not everyone uses property management is probably because of these additional costs and their impact on cashflow/profit but also because not everyone trusts a PM to manage their property as well as they would themselves. It can be more difficult than most noobs probably realize to find a good property management company. I finally found one I trust but I self-managed for years and still actively manage my management company plus still self-manage several of my properties. My PM is about as good as they get IMO but I find they are more limited in tenant placement than I am. In order to comply with fair housing laws they go by stricter acceptance standards than an owner might. For example they accept the first qualified applicant typically and use the same criteria for everyone whereas an owner might screen by looking at "soft criteria" such as eye-contact, handshake, general feeling on whether the tenant will be a good fit for the property, etc. This can be a good thing or a bad thing, but most experienced landlords who are good at self-managing probably feel that they do a better job screening and retaining tenants than a PM, which results in less turnover and higher cashflow.   

Yup.  With scale, we get discounts, too.  My PM charges 8.25% with no fill or renewal fees. 

But like you, I am more selective on the tenant front than my PM. Minimal legal requirements seems to be their criteria.  I ask questions. 

I get notified before a licensee comes out (plumber, hvac, electrician) because they are much more limited in scope of repairs they can perform than I.  Good thing, too.  They've wanted to send out electricians to repair fluorescent light ballasts for $150. LOL   I provided a $25 LED fixture to swap that was 100x better.  Good idea they said.

With experience we can help train our PMs.  With volume we receive the most favorable terms.  Glad I waited before using one.  

[Julie Hartman]

@Chris Lo Property management isn't as easy as some make it out to be. Sure, if you get a great tenant and the property is taken care of and rent is paid on time, then it can be great. It's dealing with the bad apples where you figure out which PM's are worth their weight in gold. Most property owners don't like stepping in the muck so they pay someone else to do it. We have procured many clients who thought they could easily manage their owner property until things turned ugly with their tenant and then called in reinforcements to handle it. Learning each owners particular needs and meeting them is an art form and we work really hard to do that.  

[Drew Sygit]

Many turnkey operators have PMC's so they can advertise they are a one-stop shop.

Unfortunately, many of them only do the PMC stuff because they have to. They also put their best people on the sales side, which makes them the most amount of money.

[Seth Young]

@Chris Lo It depends on if the company is going to live up to the 10% fee! I would say do as much research and try to connect with current and previous clients. If the company provides a truly passive investment opportunity that you can trust and rely on, then it is a bargain in my eyes. Also, make sure you don't get locked into a property management agreement. The best property management companies tend to keep their contracts open so that they can prove the management service is worth what you are paying! Best of luck in all your investing. 

[Greg Weik]

A lot to unpack in this thread.  PM Companies are all very different, in terms of fees and services. 

-I hear DIY landlords tell me all the time that they are "good at tenant selection" - as noted above, eye contact, handshake, etc.  The bottom line on that is no DIY landlord has the empirical data to know if they're good or just lucky.  As a PMC with thousands of doors to draw experience from, we are actually, objectively, good at it.  Our criteria and selection process are never going to be rivaled by a "DIY handshake" landlord. 

-I absolutely help my clients identify their next rental investment properties, and I do it for free. It takes me only a minute to look at an address, determine what it will rent for, and draw from our vast portfolio of nearby properties to give the client some insight into what type of tenant applicants we are likely to see for a given property.  I know that if they buy the right property for us to manage, it's a win-win.  No reason for me to charge for this good-faith gesture on my end.  No one has a better front-row seat of which investment properties succeed or fail than a seasoned property manager.

-Fees:  they range quite a bit from company to company, but we place tenants for free once a client brings 2 or more doors for us to manage.  With a single door, tenant placement is a nominal $500.  Monthly management is 7%, capped at $149.  The only other fee is a $200 annual fee on 1/1.  For that, our clients get the best service and results in the industry, hands down.  Other companies charge more because they have to... because they are generally inefficient. They also pay their in-house PMs commission, which necessitates higher prices to the client. PM is all about systems and processes and technology, and most PMCs are stuck in 1995.

-To the OP @Chris Lo - the reason most DIY landlords don't hire PMs is that they often step over dollars to focus on pennies.  Most DIY landlords in my experience do not have the right philosophy on building true wealth through rental property ownership.  They often see a PMC as an "added expense" and believe they could "do that themselves."  Many DIY landlords do manage their properties successfully themselves - at least for a time - and they believe this is proof they "know what they're doing."  But... many of those same DIY clients end up coming to RES, hat in hand because at some point the wheels have fallen off and they don't know what to do. 

Rental property wealth (if you're doing it right) happens with appreciation and not strictly through cash flow.  Cash flow should be money in the back to prepare for the rainy day.  I've trained most of my clients over the years to trust the process, to trust that RES has their back, and to not sweat the small stuff.  

When you own a rental, there will be repairs, there will be vacancies at times, there will be problem tenants.  But when you look back over a 5 or 10 year period and realize the appreciation you've gained, you then realize that the PM company was there all along to manage the small stuff and they were worth more than you paid them.  

Time is your most important asset - even when it comes to a rental property.  If you value your time, find a good PMC who can give it back to you for a small fee. 

[Elijah Rosett]

@Chris Lo No one will care about your investment as much as you do. Of course, there are amazing PM companies out there. Once you expand enough or start investing out of state it becomes much more of a need aswell. But especially when you're starting out, I suggest self-managing. This lets you learn the business and will also help you identify a good PM from a bad. A bad PM who is overcharging you for everything because you don't know any better is a great way to ruin all your cash flow and turn you off from REI.

[Kenny Dahill]

@Chris Lo, focus on the net expense of property management.  It's more than their monthly fees.

I view property management in different tiers.  Property management makes sense for larger portfolios or investors that I call 'wealthy individuals'.  Essentially those who are diversifying, perhaps their accountant or financial planner advised them too.  Some hire out because they're either afraid or have zero desire to manage.

However, for smaller portfolios and properties with mortgages, it doesn't always make sense.  A single unit doesn't take a lot to manage.  For my 5 rentals, I cannot justify 10-18% annually for something that takes me 5 mins per month.  If you have a mortgage on the property, the gross profit is probably $200-800 per month without management.  So an additional $100 per month in expenses is 15%-50% of potential profit.  And that doesn't include additional maintenance costs, which seems to be the most common frustration amongst landlords.

Similar to real estate, every landlord and their needs are unique.  Depending on your goals and desire, you may or may not justify hiring a property manager.

It's also best to keep any sales tractions as a separate deal/agreement when using the same PM.  It's a great service they provide since they know other landlords who might be selling.  That's one of the best advantages to hiring a PM, IMO.

[Chris Lo]

so i see there's a separate commission for PMC to find a deal. Whether i go through a realtor, Turn keys, or PMC, most likely i have to pay find a deal and close the deal. 

From my understanding, Turn keys fix the house and sell for at or above the value of the house. If this is not what i'm looking for, and what i want to do is buy a fixer upper and get it fixed my own with a contractor and designer, then is it better to go with a realtor or PMC to find a house? 

I'm thinking Realtors just want to Sell the house. Letting you know whatever and whenever something opens up in the Market based on what i tell them what i want.

With PMC, I think, they have the database of history of the house, previous owners/tenants, what type of are tenants live nearby, what type of tenants i can expect and etc. With all this database, they can suggest whether the house is good or not. Also i could be their potential client for property managing so they would treat me better with useful information in the beginning.

In the end, it may be better to use a PMC to find a deal(or bring my deal to them to check if it's good or not) then a realtor. Did  i get this sort of right?

PS. i didn't know before but the fact that i can deduct tax on PM and other expenses, "10%" might not be bad after all.

[Kenny Dahill]

@Chris Lo, response to your last reply.

Turn Key:  Correct.  Similar to PM, they generally have a bad rep.  Similar to PM, there are great ones and terrible ones.  The fearful part of turnkey is when they select the tenant and you acquire their tenant.  You don't know their screening criteria and process.  They'll accept whomever to get the sale completed.

PM vs Realtor:  Reality is most PM's are realtor's as well.  To your point, they do have that tenant market data.  However, you could easily do your own due diligence and research market rates in the area.  Generally speaking, you should have a good idea of the type of market class you're investing.  And, if a PMC brings you a deal, guarantee they're going to ask for a commission.

Tax Deduction:  Sure, it can be deducted but you're still paying for it.  Most landlords try to be zero sum anyways with their taxes.  By the time you deduct depreciation, interest, taxes, and other maintenance expenses then there's probably not much to gain from that 10% PM deduction.  At least from my experience.  Therefore, you're unlikely to realize that tax savings.

[Tim Johnson]

Chris, just to reiterate what I stated at the beginning of this thread last week - a lot of PMs are real estate agents - and many realtors own PM companies. 

Some RE agents just chase commissions - and some PMs are next to worthless (though these don't last long). But a lot of them (both realtors and PMs) work really hard on building relationships with their investor clients and providing excellent leads and service.  Don't worry about titles and definitions too much - seek after real relationships, that involve trust and friendship.... it's possible (and desirable), even when running things as a business. Best wishes with all of your deals...

[Matthew Irish-Jones]

@Chris Lo our agents help an investor pick the right

property, then a client has the option of using our property management service if they would like.

Not everyone uses a PM company because some

People are local and are willing to trade time for

money.

Some property managers are bad as well so that can turn investors off to using the service if they had a bad experience.

Lastly, it’s not as easy as 1,2,3. No agent no matter how good they are can perfectly predict the market or set up a perfect pro forma. There is always some risk and some speculation involved and the investor should always be intimately involved with the process…. In the end it’s their money and their risk.

[JJ Conway]

Remember, hiring a PM does not equal a passive investment. It might in the eyes of the taxman, but you still have to "manage the manager" and understand the numbers of your business

[Peter Tverdov]

OP just keep in mind you are asking this question on a forum that is FILLED with DIY landlords.

Most people have no concept of time value or what their time is worth. If you want to focus on more important things, find a good one and get out of the way and let them do their thing. Warning, there are some companies out there that stink but newsflash that goes for every industry and service in the world.

 I simply roll my eyes at the posts about "training my PM", you guys are the clients I fire very quickly. Don't micromanage. They can either do the job or they can't.

I have personally made many clients tens and sometimes hundreds of thousands of dollars the way we manage property, find a deal and hand it to them or help them force appreciation when they didn't know it was there.