Built a 6-figure profit with rentals. What's next?

[Erich Henson]

Fast forward 20 years from first reading Rich Dad Poor Dad, I've built up a portfolio of 50 rental houses, a 10-plex, a couple office buildings, and a tax-free annual net profit of around $200k.  I've achieved my dream of leaving the rat race!  Or have I?  You see I manage my properties myself and my wife and I want to fulfil a dream of moving out of state to live somewhere warm and close to a beach but I'm realizing that if I hire property managers to take my place, my profit will be slashed in half or worse. :(

So it's back to the drawing board.  To move away, we either cut our lifestyle in half or figure out a way to give our portfolio a "make-over" to somehow squeeze more profit out of it while at the same time hiring management so that I don't have to work on it full-time..

I'd love to hear any success stories of others who have been in our shoes or advice on what direction to take.  Some ideas I've had are to start selling off properties and try to 1031 exchange into an apartment complex with management or sell off properties and 1031 exchange them into properties closer to where we want to move to.  I think maybe a mastermind class would be helpful if anyone has a suggestion for that..

Thank you!
  

[Nathan Gesner]

Originally posted by @Erich Henson:

Thank you for your advice.  I saw several posts questioning why hiring a property manager would cut my profits in half.  Here are the numbers:

Annual total gross rent received: $800,000

Annual cost of property management (10%): -$80,000

First month's rent goes to property manager as finder fee: -$66,666 / 2 year lease = -$33,333

Total cost of property manager: -$113,333

Current annual profit; $200,000

Net profit after paying property manager: $86,667

What's the average annual income of a full-time property manager? Shop around and find out. I bet it's less than $60,000 a year which is half what you assume the property managers will charge you. Educate yourself on what a good property manager looks like, then shop around and compare prices. When they tell you management will cost 10% plus first month's rent for all new leases, explain that you could hire your own dedicated PM for $50,000. It's all a negotiation. I charge 11% and no leasing fee and drop it to 9% for Landlords with eight or more units. If you walked in my door with 60 that gross $800,000 a year, I would be willing to drop it to 6%. That would make enough for me to hire another full-time employee and that employee could manage your 60 plus 60 more, meaning the next 60 would be profit.

If you honestly can't find anyone, just hire and train your own. There are plenty of people out there looking for a $60,000 job!

I just did a quick search and see First Service Residential has nearly 400 reviews and a 4.6 star rating. Shop around and see what you can find. Just remember: cheaper doesn't mean you'll make more money.

You can start by going to www.narpm.org to search their directory of managers. These are professionals with additional training and a stricter code of ethics. It's no guarantee but it's a good place to start. Regardless of how you find them, try to interview at least three managers

1. Ask how many units they manage and how much experience they have. If it's a larger organization, feel free to inquire about their different staff qualifications.

2. Review their management agreement. Make sure it explicitly explains the process for termination if you are unhappy with their services, but especially if they violate the terms of your agreement.

3. Understand the fees involved and calculate the total cost for an entire year of management so you can compare the different managers. It may sound nice to pay a 5% management fee but the extra fees can add up to be more than the other company that charges 10% with no add-on fees. Fees should be clearly stated, easy to understand, and justifiable. If you ask the manager to justify a fee and he starts hemming and hawing, move on or require them to remove the fee. Don't be afraid to negotiate!

4. Review their lease agreement and addenda. Think of all the things that could go wrong and see if the lease addresses them: unauthorized pets or tenants, early termination, security deposit, lease violations, late rent, eviction, lawn maintenance, parking, etc.

5. Don't just read the lease! Ask the manager to explain their process for dealing with maintenance, late rent, evictions, turnover, etc. If they are professional, they can explain this quickly and easily. If they are VERY professional, they will have their processes in writing as verification that it is enforced equally and fairly by their entire staff.

6. Ask to speak with some of their current owners and current/former tenants. You can also check their reviews online at Google, Facebook, or Yelp. Just remember: most negative reviews are written by problematic tenants. The fact they are complaining online might be an indication the property manager dealt with them properly so be sure to ask the manager for their side of the story.

7. Look at their marketing strategy. Are they doing everything they can to expose properties to the widest possible market? Are their listings detailed with good quality photos? Can they prove how long it takes to rent a vacant property?

This isn't inclusive but should give you a good start. If you have specific questions about property management, I'll be happy to help!