Property Management: Where's the profit?

Question

When does it make sense to get a property manager? Working the numbers, and considering a possible annual vacancy, it seems to zap out entire profit for the year if we are paying 10%, then one month of rent for a one-year lease, and two months rent for a two-year lease. Does it not make sense for single-family homes? We're confused 😊

Alan Grobmeier · Answer

@Clifford R Fowles, NEVER.  Or unless you are too far away to manage.  Or maybe 30+ properties.

pm is very profitable.  You get 1st months rent for placing a tenant, 10% of the gross thereafter.  Then you also get to upcharge to ‘project manage’ any maintenance issues.  If you have a brother in law that’s into ac, plumbing, etc., you can get a ‘kickback’ as well.  Evictions are ‘bonus money’ as the circle starts over.  ;-)

Kenny Dahill · Answer

@Clifford R Fowles, property management is an investment state of mind.  A few things:

• What is your investment strategy?
• Where are you located?
• What is your portfolio size?

Consider the fact that more than 75% of landlords self-manage their rentals.  But why is that?

• Debt on property:  If you have a mortgage then that can be 70%+ of AGI, plus the 20% PM costs and your deal doesn't pencil very well.
• Volume:  The vast majority of landlords own less than 5 units, 1 rental unit is the most common as expected.  You can self-manage 1-5 units easily
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Here are the 4 typical 'landlord'/'investors and their goals:

• Real estate investor:  They buy rentals for passive income and want to max their profits.
• Wealthy Individuals:  These wealthy individuals view real estate as a commodity and use it for investment diversifying or tax benefits.  They are not too worried about squeezing every penny of profit.  They commonly are informed by their financial advisers to do this.  It's also not uncommon for them to own free-and-clear, which generates more cashflow.  They don't want to handle tenant issues or even be involved, they simply want a certain pref return.  They hire property managers to handle the headaches.
• Accidental Landlords:  This is a large group who either inherited a property or might have been moved for work.  Their strategies are commonly a mixed bag of "break even" to "I want to make $XXX per month".  They typically don't take the ROI perspective.  This group will commonly hire a PM because they accidentally became a landlord and do not want to handle the headaches.
• Corporate Funds:  The last isn't a person but an investment group or some type of corporation.  They'll be similar to the wealthy individual, focused on their pref.

There is a need for property managers and it mostly resolves around their strategic planning.  I am sure @Anna Sagatelova can contest which type of landlords are the best/worst to work for.  I'm assuming the corporate funds and wealthy individuals are the easiest clients to handle and individual 'investors' are the most difficult.

The simple fact is property management  and mortgages combined make it extremely difficult for any investment to look attractive.  Property Managers aren't all bad, but it can be a difficult job when they're being micro-managed by the landlord.  They serve their purposes for the accidental, wealthy individual and investment group type of landlords.  Luckily there are plenty of software sites that make it easier for landlords to self-manage now.  Especially for out of state landlords who need local support.

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Anna Sagatelova · Answer

Clifford, I think "when" is when your portfolio starts to suffer because you/your employees can't keep up with the demands of the repairs, chasing after tenants for rent, etc. There's no magic number that is right for everyone. Location matters much more, in my opinion - are you managing from afar? Out of state?

Also, shop around - different property managers have different rates. 10% is standard, but I know we certainly don't charge 2 months of rent for a 2 year lease... that might be the exception from one PM, not the rule (in your market). Also, some PMs will give you a discount if you bring a large volume portfolio. We measure volume in total units, not really whether some are SFR vs. multis.

If you're considering PMs, you must have some concerns about how your properties are being handled now - if you have any specific questions, feel free to message me directly.

John Warren · Answer

@Clifford R Fowles the issue comes down to scale. Although 10% of the gross sounds like a lot to you, the reality is that money isn't really much to entice a quality person to build a business around. For instance, lets say your house rents for $1200 per month. The manager makes $120 for managing the property. In order to do a good job though, the PM needs to have excellent software in place, probably needs to have an office somewhere, and needs to have a maintenance staff. In addition, when a turn over happens we all expect our PM to be able to install carpet, lights, counter tops, siding, roofing, etc.

We as the investors also want to talk to our PM all the time. Maybe you want to have a quarterly call, or a even a monthly call. In order to make any money the PM needs to have 100 doors.... you get the idea.

If you have one property, you should probably just self manage. It is best for everyone.

Dennis M. · Answer

Look There’s plenty of room for profit ... if your the pm

Mel Hayes · Answer

Unless you have a ton of doors, try to avoid it.  It's going to cost you a lot more than just 10% a month.

Sam Shueh · Answer

If you want to have no hassle. Another scenario is you own a duplex you hire someone as PM while you enjoy the privacy as a resident.

Property Management: Where's the profit?

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