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

[Andrew Brady]

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

[Jeff Copeland]

"It seems such a bad idea to rely on a property management company" - I couldn't disagree more. 

For one thing, you are assuming property management is easy, and you have all of the required knowledge, skills, and abilities to successfully navigate everything from privacy and fair housing laws, to unit turnovers, advertising, showing, screening, rent collections, accounting, evictions, and providing 24/7 maintenance. 

Don't get me wrong: Self-managing is not a bad idea for your first few properties, and I highly recommend it for new investors. Otherwise you'll never appreciate how difficult it can be, or how easy a professional property manager makes it look. 

You have to know a lot of stuff about a lot of stuff to be a great property manager (for an idea of the breadth and depth of knowledge required, check out the list of training videos at http://www.evicttv.com/all-vid... (no affiliation, just a great repository of PM info)). 

If you do have the knowledge, skills, and abilities, that's great! But do you have the time? And is your time best spent on PM activities?

The other half of your argument relates to scalability, and is counterintuitive. Having effective property management in place is what can allow you to scale up, by spending your time building capital, researching markets, and buying more properties. 

My argument for property management looks at two scenarios:

Investor A self manages, because he loves saving 10% of his rental income buy self-managing. He can manage 5 doors no problem. But 10 years down the line, he's now managing 15 doors by himself and has little time for anything else. This isn't scalable at all: He is no longer much of a real estate investor, he spends all of his time doing property management. He doesn't have the time to research markets, analyze properties, or grow his portfolio. He's working in his business, not on his business. But hey, he's saving 10% on management fees, which is great. 

Investor B puts property management in place from day one, because her plan is to acquire 2-4 properties per year for the next decade, and she views property management fees as a wise investment in her time, which allows her to focus on implementing her strategy: researching markets, building partnerships, raising capital, and acquiring properties. Her property manager takes care of the tactics: everything from turning over vacant units, advertising and showing vacancies, tenant screenings and background/credit checks, rent collections, accounting, liability reduction, evictions, maintenance, and everything in between. 10 years down the line, she now owns 50 properties, which combined take her all of 5 hours per month to oversee. She easily has the capacity to acquire 50 more properties in the next decade, consolidate her portfolio though 1031 exchanges, or generate tax-free capital though strategic refinancing. 

Which investor has a better strategy for building long term generational wealth?