What do property management companies do? And should you use a property management company, vs self-management?
Podcast Transcript:
Welcome to the Grow Real Estate Investing Podcast.
I’m Joe White & today I’m going to be discussing property managers and if you should be using one.
It should be said that I own a Philadelphia Property Management Company, called Grow Property Management; so I do have a bias; but I will still try to give as objective of a view as I can; as this is a real estate investing podcast, intended to accurately advise real estate investors.
Which brings me to some housekeeping: I’m not an attorney, an accountant, nor a financial adviser. I am a broker; but I’m not your broker.
It important you rely upon those individuals for fuller assistance and this is merely an informative guide.
1st what do property management companies do?
A property management company will manage your rental property for you, so you don’t have to.
Property management is a State licensed activity. Not all companies realize this and the penalties are stiff.
It's not unheard of that a contractor will sometimes decide they can start managing properties and will get themselves into trouble.
But here we are talking about well established property management companies. If they appear established, they likely are.
A good source to find an accredited property management company is through a national organization called NARPM.
It's like being a Realtor; but for property management companies.
Property management services vary wildly from company to company; but most property managers will completely manage every aspect of the rental property for you.
They typically will keep the property legalized with Federal, State and Local municipalities.
They will market for tenants, screen the tenants, validate them through a series of criminal / credit / background checks.
They will manage the security deposits, collect the rents, manage late rental payments, bounced checks, evictions, and tenant move ins and tenant move outs.
Property management companies typically handle any tenant repair requests and maintenance to the property, hopefully monitoring and responding 24 hours per day.
The costs of property management also greatly varies; but expect to pay 8 to 13% depending on what part of the country you are in.
The national average property management fee is around 10%; but in a city like Philadelphia, you would expect to pay 8%.
Now obviously a property management company alleviates all your landlord hassles involved with owning a rental property; and that is what tends to build my business.
I would say 70-75% of our clients that engage our property management service do so to avoid aggravation.
We get property owners looking to avoid the paperwork, the late night calls, tenant difficulties, the legalizations, ect.
A property management company does make real estate investing a much more passive form of investing and a lot more fun.
But from an investment perspective, does using a property manager make sense? Do the numbers add up?
I have never read a real estate investing book or source of information that didn’t advocate for the real investor to use a property management company.
Some books merely assume you will and really don’t get into the subject much.
The reason why is that a property management company should make you far more than they cost you.
In other words, you will hopefully get paid, to eliminate your hassles.
But there are also downsides, and I’ll get to those; but 1st here are the ways property managers increase your rental investment:
- They have relationships with vendors that an individual landlord can never have. They have incredible buying power.With each contractor, exterminator, roofer, plumber, electrician and attorney, they aren’t just bringing your property - they are bringing all the properties they manage.My property management company refers 6 figures in work to many different contractors.
So they tend to work for far less than they would otherwise, they tend to do a far better job, they tend to do it much faster and they tend to come back, if they need to make something right.
These vendors, like contractors and plumbers, are also well vetted by the time they repair your property.
We have likely tested a roofer 40 times, on other client’s properties, or our own properties; long before we send him up to your roof.
Do we ever run into bad contractors? Yes. Do we continue using them in more than a property or two? Absolutely not.
Also, most vendors prefer working through property management referrals.
Why? Because their workload goes way down. We simplify their day. They don’t need to spend time, they could be working getting paid, having to give estimates, since we typically already know the scope of work.
We know how much it should cost, we schedule the work for them and get them easy access to the property.
We are the path of least resistance.
Contractors are not known for being good at running a business and we take over those tasks for them.
And a property management company typically pays the contractor.
In the case of my company that means that as soon as we feel the work has been done to our satisfaction, we click a button and instantly pay the contractor by direct deposit.
The contractor doesn’t have to bill anyone, they don’t have to wait for payment, they don’t even need to take a check to the bank.
And all those reasons deserve discounts and all those reasons deserve loyalty.
- Increased Rent & Decreased Vacancy.Few landlords can compete with the level of marketing a property management company does to find a tenant.Not only should a property manager get you more far rent than you can otherwise; but they should also be able to greatly decrease your vacancy.
Saving you from a month more vacancy, will pay you more in rent from that month than one entire year in property management fees.
Remember there is never a day that most larger property management companies don’t have a vacancy so they are likely constantly in a state of marketing.
My company gets 40 to well over a 100 inquiries a day from prospective tenants. We maintain a waiting placement list.
Marketing vacancies is a property manager’s job & they are likely very good at it and they should also be extremely streamlined to do it as well.
Property management companies typically have staff to instantly answer the phones when prospective tenants call.
Many property management companies, like mine, offer instant showings and allow the tenants to schedule their own showings.
- Obviously a Property management company can save you from very expensive legal problems.
I don’t have numbers on how many landlords get into financial trouble with Federal, State and Local Cities; to me it feels like a lot.
Why? Because landlords become our clients when they are in distress.
They call us when they can’t fill a vacancy or when they are facing legal doom, having unknowingly found themselves in extremely hot water.
Rental properties have to be navigated through liabilities or it can be very expensive.
A property manager does this just by the nature of the property management industry and the required education to be in it.
I’ve seen landlords that have self managed without incident for several years; until they run into an issue.
And I have seen 10’s of thousands of lost dollars.
Is my perception skewed? Yes, again, property owners tend to come to me when they are in trouble.
The ones that avoid trouble might not come to us.
I have no idea if 1 out of every 10 landlords gets in trouble, 1 out of 100, or 1 out of every 1000.
I do know that I own rental properties also, as I’m an active investor and I have zero interest in hurting my investments the ways I’ve seen.
Okay, so earlier I mentioned there are downsides to using a property management company.
Here are a few:
- I mentioned that I get a lot of clients when property owners are in distress.Unfortunately, some of these owners are in distress from a bad relationship with their property management company.Real estate investing will never be passive. The books lie!
You can not simply handover control to a property management company and forget about your investment.
You must supervise.
Maybe that is tuning in every 6 months, maybe it's tuning in every 3 months, or maybe it's tuning in monthly; but you will need to supervise the property management company.
You are the property owner. You must keep the big picture facing the right direction.
- Is the property being cared for?I drive through the streets of Philadelphia, and I can pick out the rentals. They have that “look”.If it looks that way to me, it looks that way to prospective tenants.
It will look that way to an appraiser, to an insurance inspector and it will anger the neighbors.
An unloved property will cost you rent, increase your vacancy, it can increase your insurance and will cost you, and your neighbors equity.
And costing your neighbors equity, will come back again, and lose you even more equity.
Anyone that follows my podcast knows I love equity.
Cashflow protects us; and equity makes us rich.
- Hidden Fees.
Property management companies are chock full of hidden fees.Most companies will charge you a markup percentage for repairs, there can be a fee, just because the tenant is staying another year, there can be a fee if the property is vacant.Also many property management companies will require you to use them as your agent, if you decide to sell the property.Again, you can not be passive in your real estate investing. So pay attention!
So, it's clear my advice is to use a property management company.
I’m sure that’s not a surprise since I own a property management company; but I do believe that paying qualified professionals like attorneys, accountants and property managers ultimately will make you money.
I do believe an investor should use a property management company.
I think it's a logical investment decision.
Property managers make you scalable - you can own 1 to 10,000 units, as long as you have the management teams in place.
They give you money value of time - how much is your time worth?
Could you be using that time to make money doing something else, like concentrating on your career or finding your next property - Property managers are increible sources of property leads btw!
There you have it!
I’m Joe White. This was the Grow Real Estate Investing Podcast.
Happy investing anyone!
