What To Look For When Hiring A Property Manager
One of the great debates of all time (ok, not really) is whether one should manage their own property or hire a property manager? I can’t answer that question for everyone as there are so many factors that go into the way you set things up, but for us we are in the process of turning everything over to property managers. We’ve definitely learned that owning a rental property is not “passive income,” but you can get as close to passive as possible by hiring a property manager. Check out our suggestions below for recommendations on how to learn basics of management and how to properly vet your property managers to set yourself up for success.
When starting out, manage it yourself
As with most things in real estate, we recommend you try everything yourself before hiring it out. So of course, we recommend you manage your first property (or more) on your own. This will teach you many important lessons of things you never would have thought of had you not experienced managing yourself. Having this knowledge and experience will help you to better hire a property manager and work with them. You learn how to properly screen tenants (and the consequences of not screening them right), you learn patterns of common problems tenants face, and you can better understand the time and effort that goes into managing a unit. Yes, you’ll even get those late night emergency calls personally, but that’s okay. This will help you better understand what problems your future property manager will face and will keep you knowledgeable on all things management. But as you acquire more properties, it is not sustainable--or worth the headaches-- to keep managing them yourself and is worth turning your homes over to a professional.
Interview the heck out of potential property managers
Once you feel like you have a hang of this management thing and it’s time to be a little more hands off, be sure to interview multiple managers before picking one. Often times the first one or two people you talk to will sound golden, but then when it comes down to the nitty gritty details you realize you are setting yourself up for failure (ask us how we know!!). Here are some questions we like to ask potential managers:
What is your experience? How many units are you currently managing? You want an experienced manager currently managing multiple properties
What is your tenant screening process like? If they don’t run credit, background, landlord references, or income verification checks, you may want to keep looking
How are maintenance requests handled? How quickly do you respond to maintenance request? They should at least contact the tenant within 24 hours and set up an appointment, if not sooner for an emergency. Hopefully they have an in house maintenance person or team that can get in quickly for emergencies, however, we almost always ask for one or two 3rd party quotes for most repairs. If a management company also owns the maintenance company, there is a conflict of interest and you are at risk of being charged higher amounts (again… ask us how we know), so always ask for multiple bids until you have a relationship of trust with that manager. Initially we ask to approve all repairs (often the contract says anything $250-500 is completed without your approval, but trust us when we say this can add up fast with ridiculous repair costs!).
How are late fees handled? This is one where you need to read the contract. Most property managers will want to keep any money collected from late fees. To us, this doesn’t make a lot of sense because as the owners we are the ones with all the financial risk and as part of their job description they are responsible to collect rent. That is what the management fee is for. Usually this is negotiable with a property manager and they will change the wording to let you keep the late fees. If you really like the manager you’re working with and they don’t budge here, try to split the late fee collections 50/50 or some other split. Find a solution that will work for both of you.
What kind of reporting can I expect from you? All property managers should be sending you monthly financial statements for your properties showing all income and expenses broken down in detail. This should be an expectation, if they don’t provide this as part of their general management, it may be time to keep looking for a more experienced company.
How are financials handled? Do they pay for bills and utilities? Do they want access to your business bank account to deposit rent and write checks for bills? Whatever you do, DO NOT give them access to your bank account--sounds like a no brainer but we learned the hard way when we gave our first company access and no preapproval needed on "minor" repairs. We do like the property manager to pay for as many bills as possible (again, goal is hands off), but that should come out of the rent and the remaining amount deposited into your account, or if expenses are higher then rent collected they will ask for a check to cover the remaining amount (but you should be aware of this anyway if any big repairs were expected and approved).
How many employees are at your company? We like working with established companies with multiple employees. That way, if something happens to our main manager, they have the systems and processes in place to quickly replace that person. With that said, we do work with one off managers for a couple properties so I wouldn’t say this is a deal breaker. Just keep in mind, whether an individual or company you want someone with experience who has dealt with hard situations like evictions, bad tenants, and filling units quickly.
And of course, what is your management fee? Expect to pay 8-10% of rents collected and sometimes an additional fee to fill a vacant unit. The big thing to keep in mind here is that you need to make sure the wording in the contract shows that they are only paid that percentage based of rents COLLECTED. Do not agree to a flat monthly payment regardless of what they collect, this is an almost guarantee that they will slack in their responsibilities in filling units quickly and may even be slow to collect monthly rent (again…. As us how we know!!).
Alignment of Interest
In any partnership, especially with property managers, you need to set things up so that both sides have an alignment of interest in your goals. The reason we are advocates of this principle is because we’ve seen over and over that if you don’t incentivize them to help you achieve your goals, they will almost always put in less effort for you and your business. One examples of this from above is with the late payment and rent collection negotiations. Think about it, if a property manager gets to keep any late fee collected, aren’t they motivated to collect rents late? Late rent = more money for them. Not a good set up for you as the investor. Same thing goes with paying them based off rents they actually collect, not just a standard monthly fee. If they only get paid when you get paid, you lessen your financial risk and ensure they are motivated to do their job day in and day out.
It’s worth the money
It’s sometimes hard for us to swallow the fact that we are “losing” 10% of our income just for a manager, but the more headaches tenants have given us the more we realize how nice it is to have a manager in place to handle the problems for us. Whenever there is a big problem and our property manager steps in like a champ and just takes care of it before you even find out it existed, we look at each other and say, “Dang, that manager is awesome. We’re so happy to have him/her as part of our team. I am happy to pay him $xxx so that I am not dealing with that situation right now”. The few headaches a year that you avoid as a homeowner are worth the monthly expense-- I can't explain how much less sleep I lose thanks to hiring property managers!
Again, as long as your properties are close to home, try managing first before hiring it out. When you feel like you are ready to pass the baton, just do your homework to ensure you are bringing in the right person or company to join your team. A property manager can be one of your greatest assets so take the time to do it right. If you have any other questions about hiring a property manager or even about managing a property yourself, let us know. Feel free to reach out on Facebook, Instagram, or in the comments below!