What Do You Need To Know About Hiring A Property Management Company

The idea of having to manage your own rental property can be daunting. The idea of buying a house, and then renting it out is great. Once you have tenants, they can pay your mortgage while you collect on real estate equity. However, there are some potential headaches you are signing yourself up for. Some horror stories I’ve heard include being woken up at 3am to find out that the tenant’s boiler isn’t working. In even more frustrating possibilities, if a tenant stops paying rent or decides to break lease unexpectedly, the landlord must deal with the aftermath.

From both a legal and financial perspective, it pays to be a good landlord. Great tenants demand for and rents from great landlords. Undesirable tenants are okay with “slum lords”. If you’re going to be a respectable landlord, it’s important to pay a lot of attention to your tenant’s needs. Happy tenants help stabilize your monthly cash flow of rent payments and keep your real estate investment sound. In addition, to keep the cash flow coming, you may have to replace tenants quickly if the need arrives. However, for many including myself, I bought rental properties so that I can collect on passive income. I didn’t intend on signing myself up for active property management or tenant-recruiting responsibilities.

Hiring a Property Management Company

As with almost all things in life, your time and inconvenience can be outsourced for a price. Some landlords of rental properties just starting out would consider managing their own rentals to save costs. Yet they are often unprepared for the consequence of that decision. Tenants have a plumbing issue? The landlord needs to personally go fix the issue if they are handy, or find the cheapest plumber nearby.

On the other hand, I put a lot of value in not having to think about my rentals. My goal is to create passive income streams and assets. This mindset is something that’s often mentioned from those that have been really successful in real estate investing. Furthermore, some of my rental properties are not even in the state where I live; in my case, I don’t have the physical ability to check-up on tenants or manage logistics if anything goes wrong. The answer I found, is of course, to hire a local property management company that knows the area around my investment.

What do Property Management Companies do?

A property management company essentially manages all operations of running your rental property business. Yes, you need to think about this as a business. If you are not thinking about your real estate investment as a business, you are better off buying a REIT, which can be managed like a stock.

As with any business, there are several components to the operations:

Marketing

This is more important than some people think. If your tenant moves out, it is important to quickly find another tenant to avoid vacancies in your property. Every month the property is not rented, rent is not paid. When that rent is not paid, you have revenue stream problems. You need to know how to market your property in your local area to find great tenants, quickly.

Rent Collection

This is likely the only revenue stream for your rental. Thus, you need to make sure that rent is always coming in as expected. You have to resolve late or missing rent quickly. Resolution may include something as simple as contacting the tenant to remind them; or in worst scenarios, resolution may need to be handled through legal procedures.

Quality Control

Potential tenants should be properly vetted. Background and credit check are typical procedures. You want to ensure that your tenants will be able to pay rent, and would also respect your property. On the other hand, you need to be careful of stepping on any housing discrimination laws.

Monitoring and Upkeep

While the tenant is living in your property, it’s important to check-in on them at least quarterly. You want to ensure the tenant takes care of your property, and there are no red flags of improper use. Also, this is a good opportunity to fix any small damages from wear and tear before they become big damages.

Repairs

If something is truly broken, you will have to find a contractor and schedule time for a repair job. This involves searching for the right contractor; as well as coordinating the the project.

Book keeping

How much rent did you collect? How much property tax and repairs have you paid for? All of your income and expenses need to be accounted for to run a profitable business.

As you can see, there are a lot of different things to think about when managing your rental property. You can certainly get lucky and find great tenants that maintains the property well, and don’t need oversight. However, that’s a big risk as there is a far higher probability that something will go wrong. Personally, I like the peach of mind. This is why I hire a property management company; their job is to run my real estate investment without much of my involvement.

What To Expect When Hiring a Property Management Company?

How much does it cost?

Let’s get the most common question out of the way. How much is it going to cost to hire a property management company for your rental? Typically, a property management company should be invested in the success of your rental business. They do that by charging you a percentage of your monthly tenant rent. Depending on the company and your situation, costs can be as low as 5% to 20% of rent collected. I’ve seen some companies charge as much as 25% if it’s a short-term rental business.

As a reference, below are the terms with my property management company on how much everything costs:

• 1 year home warranty
• 8% of monthly rental
• Onboarding fee of $100
• 50% finder fee, none when there’s a tenant, re-key
• 15% -20% renewal fee or $250 , whatever higher
• 10% on top mark-up on repairs

It’s important to negotiate for terms that make sense for you. Make sure the cost of the property management company overshadows your potential profits. Otherwise, you may be forced into a though situation; you have to self-manage in order to not be losing too much money, or ditch the investment altogether.

What’s My Interaction with the Property Management Company?

Most of the larger property management company streamline their interactions with you (and the tenant) through an online portal. They will provide you a website that typically include:

• Your account information with them,
• Where to send the rent payments
• A place to submit requests,
• Running ledger of the rental property,
• Statistics and history on your rental property

The property management company should also have provided you with their email and phone number. Since they are expected to be on-call for the tenant, rest assure that they are also on-call for the landlord as well. For example, my property management company assigned me a team of 3 specific people to reach out to at any time. These are the same people that will email, call, or text me in case there are any issues or specific tenant requests.

The property management company would typically contact you if there are any repair requests by the tenant. In order to take as much of the load as possible, the company will ask you to authorize a threshold cost for repairs. Any repair that costs below that threshold, they wouldn’t want to bother you with. For example, if your threshold is $200, and a broken smoke detector costs $50, they will simply fix it for the tenant and bill you later. This level of customer service keeps the tenant happy by resolving their situation quickly. It should also keep you happy for not having to be bothered by small issues; and keeping the investment a passive experience.

What’s My Interaction with the Tenant?

There should not be any. You hired a property management company so that you do not have to deal with tenant issues. The property management company can provide you with all the information on your tenant as you request it. There is no obligation for you to keep track of your current tenant, or look for new ones.

Bottom Line

For someone like me who believes that real estate investment in rentals should be passive, hiring a real estate management company is a no-brainer. This is particularly true while only having a handful of properties. The money I save by managing the property on my own is just not worth the unexpected headaches; I don’t plan to take on a property manager side-hustle. Furthermore, I couldn’t self-manage in the first place, because my investments are out of my home state. Handling tenant matters remotely just adds on to the headache.

The bottom line is to think about your rental property investment like a business. Is outsourcing operational costs worth it to you? Does the numbers add up on your balance sheet? Will you still make a decent profit while hiring a property management company? If you ask yourself fall these questions and it makes sense, then I recommend you go for it. Look for a property management company with good terms, great reputation, and who would hopefully be a long-term partner in your investment.