Another Rule of 7: Choosing the Right Property Manager

[Vincent D.]

Maybe you’re OK managing your own properties. I tried that for a while, but started losing sanity, steadily, at about ten houses under management. It was a good learning experience, but necessity dictated that I farm out the labor. It simply made sense from an opportunity cost perspective. Besides, if you save dollars but despise what you’re doing, you’ll never endure the game of buy-and-hold real estate. It’s just not worth it in the long run.

Once you’ve come to this invariable conclusion, you’ll need to know what to look for in an outside Property Manager (“PM”). Here are seven standards to help you wade safely through the process:

It’s All In the Paperwork: Ask to see the prospective manager’s standard Management Agreement. Chances are, their boilerplate verbiage grants them all the protections while leaving you, the client, drifting in a sea of exposure. For the sake of brevity, I will advise simply to use common sense in anticipating what disagreements might arise between you and the Manager, and how the Contract wording should be changed to accommodate you. Plan as though a dispute will occur at some point, whereby the Contract will be necessary to settle the disagreement. Optimally, consult with a Real Estate attorney or an experienced Landlord (such as myself). Please, feel free to contact me through my site’s Contact page.

Meet the Staff: A great contract will do you no good if the manager(s) and staff are inept, lazy, or dishonest. Ask a ton of questions and turn on your “Spidey Senses” when you interview them. It is vital that you select a manager you mesh with and will be trustworthy.

Beware the Hidden Costs: You shouldn’t pay any more than 8% of gross rent as commission. This is an overt cost, but it’s important. Just as vital, if not more so, is how the PM routinely conducts its Repair & Maintenance (“R&M”) operation. They LOVE to knead in bloated up-charges to standard repair calls. Another sneaky revenue for the PM is the application of hefty late fees to tenants. Firstly, these fees should go to you, if anyone, so be certain that the Contract does not allow for the PM to assess heavy late penalties for its own benefit. This has a doubly negative effect – shorting your own potential income, and perhaps crushing a struggling tenant with that recurring fee that “breaks the camel’s back”. You need to maintain some degree of awareness of delinquencies and lean in with your own discretion as to how/when to assess late fees. As for R&M costs, I’ve arranged for my PM to assign ALL work to my own hand-picked, trusted contractor. This eliminates salty PM fees, gives me control over data and payments, and eliminates mystery surrounding the commensurate proportion of repair cost to repair performed.

Reporting is Key: What is the reporting capability of the prospective PM? Data should be available with currency no more than a day or two aged. It is vital to be provided certain reports, on demand. Among the most pivotal data presentations are the complete rent roll (tenant name, date due, rent amount, last payment, total unpaid balance, etc). You should also have ready access to lease information for each tenant, such as start and end date of lease and deposit payment received.

How You Should Get Paid: Careful here. Be sure that your Contract allows for you to receive rent distributions from the PM more than once per month. I once had a PM that paid out collected rents on the second Friday of each month. Meanwhile, many tenants pay a bit late or have a later pay date on their lease, which results in the PM retaining all subsequent rents until the ensuing month’s distribution. This will screw up your cash flow mightily. You may even want to mandate a weekly distribution or clearing of collected balances.

What is the PM’s Experience?: How long have they been in business? How many houses do they manage currently? In what areas do they manage properties? Do they have proper certifications to operate a PM company (state to state differences apply, but some require Real Estate Licensing and other qualifications). Beware of start-ups and franchises. I like someone experienced who operates with minimal staff and is not afraid to dirty his hands.

Finding Your Best Fit: To the PM who has hordes of units (200+?) under management, you will be a number. It will be difficult for this manager to make Contract concessions and other adaptations to your preferences, plus your inventory will be pitted against their many other available rentals, likely in your area of ownership. This causes them to market your property in the same trip as available properties from their other clients. On the upside, the “surplus” prospect traffic from other client showings may actually fill your lease more quickly. A very small PM company will likely lack experience, and perhaps they have only a few clients because they SUCK. Be careful. Conversely, they may indeed be capable, and it may be just the dynamic for your own portfolio growth and intimacy of owner-manager relationship.

There are more dynamics to Property Management than stated in this article, but these are all of high relevance when searching for the right partner and implementing a contractual relationship for management.

Until Next Time,