Don’t Hire a Property Manager. Sell Your House To One.

     I stumbled into real estate investing. If you wade through the posts I have made on this blog you will find that I have been involved in several aspects of real estate but I rarely plan my activities. I prefer to educate myself to recognize opportunities and position myself to seize those that look interesting when they present. Early on, I started accumulating single family rental properties. I liked the financial rewards.

     Some of my tenants were great—most were not too bad. They were easy to get along with but I never wished to have too familiar a relationship with even the best. I was running a business. When the tenant called me they usually wanted something, the house needed repairs, or they were letting me know the rent was going to be late. Oftentimes they would tell me the latter around the 3rd of the month—I already knew the rent was late as it was due on the 1st.

     Some of my tenants were difficult. They were demanding, unreasonable or whiny. I really disliked the whiny ones. They never seemed to be happy. Even if I did everything they asked for they always had further complaints. They always wanted a little bit more but I knew that even if I gave them the extra bit they asked for it wouldn’t be enough. Ultimately, the fault was mine. I am the one who gave them the keys. I became better at screening but I still sometimes made mistakes.

     I have rarely enjoyed dealing with the city governments where my rentals are located. I don’t happen to think rental registration or inspection ordinances are constitutional. (They ignore the rights of the tenant and the owner to be secure in their homes without unreasonable [unwarranted] searches. They treat rental properties differently than owner occupied properties which are not held to the same standards. They are, primarily, revenue enhancement systems. Fortunately, a few judges have written decisions striking down some of these ordinances.) Sometimes dealing with the city inspectors is a minor inconvenience—sometimes it is a major PITA.

     I learned to be an effective landlord, largely by trial and error, but I can’t say that I truly enjoyed the job. Fortunately, there was an easy solution available. I hired property managers to take over my rentals. There is a cost to this service but my rentals are profitable—they can easily support the cost. My freedom has always been much more important to me than my income and with management I was much more free. Rent collection issues were handled. Minor repairs were handled. I was rarely bothered by a tenant. It wasn’t long before I didn’t even know who some of my tenants were. My managers freed me to pursue other opportunities whenever they arose. The cost was well worth it.

     However, I still had to manage my property managers. I have had a few. The first one wasn’t a very good fit for me at the time (now that I have learned to delegate more easily they would probably be a much better fit). One had awkward communication systems. My current manager is quite good, but they cannot possibly manage my properties as well as I can. They can’t know all my preferences and, frankly, it wouldn’t make sense for them to ask me mine. I hired them because I don’t want to handle everything myself. It wouldn’t be feasible for them to learn every owner’s preference and to handle situations differently for each owner. They do a good job, not perfect, but quite good.

      I decided to divest myself of most of my rentals but didn’t want to sell all of them at once (the taxes would be brutal). I wondered if I could find a way to handle my rentals with less management responsibilities than is needed with my PM. I believe I found a way. In Michigan, selling houses on land contracts (these are called deeds of trust in other states) is quite common. This is a way to sell a house on terms, with monthly payments. It is seller financing without the deed transferring until the loan is paid completely.

     You probably know that the Dodd-Frankenstein Act strictly regulates selling houses on terms to owner occupants. It does not regulate selling houses to non-owner occupants, to other investors. I have been selling off my inventory of rentals to other local investors who wish to build their portfolios. My land contracts are short term (~3 years). My investor/buyers now have all the responsibilities of ownership. They screen the tenants, repair the houses, deal with the city inspections, pay the taxes and send me a check every month. They do everything a property manager would do except their interest is even stronger than that of a property manager. They are the owners. They have a vested interest in making sure the properties are maintained. They are free to sell these properties anytime they wish to capture any increase in market value they might have or to cash them out to capture their equity. I expect some of my buyers will hold their land contracts for the 3 year terms and then refi to cash me out. Some will cash me out early (some already have). The sales will occur in different years so my tax bill will be easier to manage.

      This model has been working so well that I have begun to purchase rental homes specifically for other investors who wish to expand their portfolios. The investor approves of the house, I buy it, then I resell it to the investor on land contract terms. If you are interested in seeing details of some case studies let me know below. In the meantime consider if instead of giving your property to your PM to manage you might be better off selling them the property.

      I discuss land contract sales further and provide a case study in my next post: Land Contract Case Studies. Plain Vanilla.

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