2 more points I did not see really covered that much.
1. What a property management company might charge depends on area and quality of tenant. For example I have friends that do property management. If a property is a 400k house in an upscale area with high income and low crime the property manager is typically dealing with well educated tenants and more stable with incomes. They might manage for 8% in those cases as they have less headache and make more off of higher rents.
The average rental with maybe 1,000 plus rents might pose an average headache to manage so they do 10% of rents.
The stuff in questionable or low income areas for most investors expecting 10% to be charged is a pipe dream. It will take a special type of PM to manage those tenants and likely much more ongoing wear and tear to the unit with repair calls and slow to pay the rent if at all. The PM might have to make multiple trips to collect rent, eviction notices, etc. Some of the good PM companies in that range because rent is low and headache is high they charge 12 to 14% fees.
If investor thinks they will buy some old dumpy house in the hood for high cash flow, with little to no headache-repairs, and a PM to take it on for 8% they are a dreamer and need to come back to Earth.
Investors tend to have all of these thoughts that are not founded in reality. Sometimes they just do not have the experience to know what the reality will likely be owning these assets. That is why getting involved in your local real estate association and listening to the REALITIES of experience of others in your local market can be gold to learn from. There you can match up your thoughts and ideas with real world case studies and see ( what is the property, the area, the tenant, investor mistakes) that made a property lose money, break even, or do very well.
2. Residential most agents are focused on making SALES. Think about this. Most brokers or agents are not principal brokers who own their companies. They typically are working for a brokerage even if they have a sub-company. So right off the bat they have a split with their brokerage before business costs and taxes to pay. The first year newly licensed agents about 80% fail the first year. Within 5 years time the remaining 20% the first year about 80% of those have now failed. So if you start out with 1,000 agents and 80% fail the first year there is 200 left. In 5 years out of the 200 maybe 40 have survived. So think of that out of 1,000 getting licensed maybe 40 in 5 years are thriving and doing well. This is one of the toughest professions in the world to be highly successful but I love the challenge on the commercial real estate side as it makes me improve every single day.
Most of these agents live hand to mouth and are living off of any revenue they can bring in. The national average income in residential for agents might be 30k or something and 50k for brokers. Remember there are a lot of part timers and higher income earners that can misalign the real averages. Also agent retention rates are higher right now as it is top of the cycle markets in most parts of the country and a mediocre agent who can fog a glass can possibly generate a sale. A lot of the herd will be thinned again when the next down cycle happens. The same will happen for investors that get lucky a few times in a rising market to make a buck but do not have sound business principals and processes for long term plans to thrive in any market cycle conditions. I saw this in the last downturn in 2007. Investors were overconfident, businesses were expanding everywhere and anywhere without as much though to location, brokers and agents were making great money so they were taking trips, buying cars, bigger houses, etc. Then the train slowed or went off the tracks completely in many markets and all of those were caught by surprise.
In residential many of these brokers or agents when approached to do property management might take it thinking it is small money but easy money in between transaction sales. Nothing could be further from the truth. When there are no sales happening for the agent they might be hyper focused on the investors rental because they need that 75 bucks or 100 that month. As soon as that sale comes along where they can get THOUSANDS then the focus on your property and time involvement starts to dwindle heavily. Communication becomes less and problems with the tenant can increase. The agent is trying to HIT IT BIG with the sale. They could make in one sale what they could make in 3 years managing the investors rental property and dealing with a tenant.
So with residential brokers and agents there are very few who ACTUALLY ENJOY property management. It is key to ask qualifying and discovery questions to the potential management company such as:
- Do you focus on property management only or sales also?
- Do you actually enjoy property management? If yes. What about it specifically do you enjoy?
- How do you communicate to the investor and in what time frame when a problem arises? What specific processes do you have in place?
- Do you have multiple references from other investor clients that have been with your company for years that I can talk to?
- Do you charge actual cost for repairs or do you have built in bonuses to your company for referrals to outside vendors?
There are tons of other questions to ask but one of the most important to me is if they are passionate about what they do instead of the rate they charge. The cheapest rate from a PM doing volume or one that can't stand the work and is just trying to make money can make your property lose tons of money. I have rarely seen a PM company on the residential side that LOVES doing that. If you find a good one treat them like GOLD. There are many brokers/agents/property management companies out there that are a dime a dozen. The high level quality companies and professionals however are very rare which is why they can be in HIGH demand and do not work for cheap fees. One important factor evaluating purchasing a property for rental investment factor is the PM fees. Some investors in the beginning factor out that cost to massage the numbers to talk themselves into buying a certain property as they are frustrated finding deals so start bending their underwriting criteria. This is a huge mistake as then when you no longer want to manage a property or you need to scale that fee was not accounted for so now you might have a break even property or negative income after PM fees.
