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Landlord 101 Q/A: I’m a new to landlording. Should I hire a property manager?

Our next Landlord 101 class is coming up in May (http://events.linkedin.com/Landlord-101-How-successfully-find-keep/pub/565569). One of the common discussion area is hiring a property manager. The questions are usually something like “Should I hire a property manager?”, “Can I manage my own property?”, “When should I hire a property manager?”  The class is designed to help new real estate investors be successful when managing their own properties.  But, there are times when it is appropriate to hire a professional.  Here is an excerpt from my Landlord 101 book:

Property Managers

A common question is “Should I use a Property Manager?” In order to answer that question, it is important to understand what a property manager can do for you and it is important to understand your own goals and how using a property manager will affect how you achieve those goals.

If you are an accidental landlord, a property owner who has entered the landlord arena less by choice than by necessity, deciding to use a Property Manager may be an easier decision, and wiser decision, than if you have enter the landlord field by choice with the intent of purchasing more properties. The reason for this is incorporated in the services a property management company will typically provide.

Property management companies will typically provide most of the following services:

  • Market your property to prospective tenants and conduct showings.
  • Provide appropriate forms including applications, leases, and notices.
  • Screen tenants, including taking applications, running credit checks, interviews, and verifying employment and rental history
  • Inspect your property on a regular basis (limited by state law)
  • Handle communication with current tenants, both taking calls and letters from tenants and passing information to tenants from you, the landlord
  • Collect monthly rents, late charges, deposits, etc.
  • Handle the move-out process at the end of the lease, or eviction process (either directly or through a vendor)
  • Manage maintenance issues and approve and pay monthly bills for you the landlord.
  • Provide monthly accounting for income and expenses
  • Provide yearly reports, including those appropriate for tax reporting.
  • Provide expertise in landlord-tenant laws and perform all the above functions in a legal and ethical manner, protecting you, the property owner, from liability.

Property Management for Accidental Landlords

The last item in the list above is the most important for the accidental landlord.  If you are not someone who wants to be a landlord and are not willing and interested in taking the time to learn the legal and ethical responsibilities that go with being a landlord, then using a property management company is a ‘no brainer’. Hire a good property management company and focus on the activities and investments that get you excited.

Even if you are willing to learn the ropes, in hopes of saving yourself some money, keep in mind the cost of time required to perform all the other functions a property manager provides.  Your time may be better spent with more profitable investments including your current job, analyzing your stock portfolio, or spending time with your family and friends.

In any case, keep in mind that using a property management company comes with a cost.  Typical fees include a leasing fee that averages one month’s rent, and an ongoing fee of 5% to 10% of monthly gross income.  The total dollar amount of the fee will depend on your market, the number of units you have under the company’s management, and the amount of work involved in managing your property. The financial cost of a property management company is the most typical reason that a property owner may decide not to use a property manager.

If you are an accidental landlord, the risks of managing your properties without proper knowledge of your legal responsibilities outweigh the cost of having a property management company. For example, the total cost of using a property management company will likely run about two months’ rent for the first year, and only 1 month’s rent each year that you don’t need to re-rent the property.  In contrast, the eviction process can mean you go 5-6 months with no income, and that is if the eviction process is handled perfectly, with no mistakes on your part.  It is not hard to see how the investment in hiring a property management company can prove a better financial decision than the possible decision to let in a bad tenant.  Of course, there is no guarantee that a property manager won’t let in a bad tenant, but they will at least know how to handle the eviction process correctly if that happens, shortening the time spent with no income.  Property managers also have expertise in marketing properties and you should expect that they can get your property rented faster than you do, for more money.

This logic applies to those property owners who have purposefully entered the landlord profession, also.  But, the word “profession” is important, because if your plan is to own multiple rental properties and to enter the field full-time, dumping the 9-5 job, you need to treat it as a profession. That means fully understanding all aspects of the job.  That is why I recommend that real estate investors manage their own properties when possible, at least at the beginning.

First of all, managing your properties yourself will be good idea because it makes the out-of-pocket expense of managing your property far less.  By decreasing the management expense, you increase the cash flow and return on your investment.  As noted in the example above, this is dependent on your management skills being sufficient to lower the risks, such as avoiding evictions and reducing turn-over in your rental properties.

By performing the property management functions on your own, you will learn firsthand:

  • The features of your property that are valuable to prospective tenants
  • The missing features that would make your properties more valuable if you add them
  • The policies, rules, and standards that will protect your investment and decrease tenant turnaround
  • The physical aspects of your properties that need maintenance and improvement, and which aspects are common to most properties in your market
  • The practices and processes that will increase your own enjoyment and comfort level with real estate investing
  • The amount, and value, of the work that a property manager provides, so you can make a good decision when or if you decide to hire one

As a result of managing your own properties, you will ingrain the knowledge you need to make better investment decisions in the future.  You will more easily identify when a property is not only an acceptable investment, but when it will be a great investment. You will learn how to tell when a property will be low maintenance, when it will get a premium for monthly rent, and when it will attract long-term tenants.  These are all things for which you can learn the theory by reading, but which you can only truly learn in practice.

As you acquire more properties, you will likely come to a point when managing your properties will take so much time that you will want to hire help. You may hire an employee as a property manager.  But, before you get to that point, you will likely find that hiring an outside property management company will provide you services you need to make the best use of your time in identifying good investment properties and providing strategic direction, at an acceptable cost. When you come to that stage in your real estate investment career, you will have the in-depth knowledge of what the property management company’s value is, that you can better judge their services and even provide valuable strategic directions to them that will make their services more valuable to you.

Lastly, it is possible that hiring a property manager may be forced upon you by legal requirements. For example, in the state of Washington, property owners must have an in-state representative that tenants can contact to handle issues. Many other states and local municipalities have similar laws. If you don’t have a family member or friend close by that can act as that representative, you may be forced to hire a property management company.  Additionally, if your investment property is located too far away for you to conveniently show the property, meet tenants, handle inspections, or find maintenance contractors; you may find that you really need the services of a property manager, just because of the location.

So, hiring a property management company can be a good idea, especially under the following circumstances:

  • First of all, it is a good idea to hire a property manager when you don’t have the time or interest to gain the knowledge you need to be a professional and therefore successful landlord.
  • It is also a good idea to hire a property manager when the time you would spend performing those property management functions would actually be better spent in other ways: finding new investments, managing other investments, or even spending it managing your personal and family life.
  • Finally, hiring a property manager may be a legal or practical necessity if you own an investment property that is located so far away you cannot effectively manage it in person.

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