Real Estate Power Team: Property Management

In my travels teaching real estate investment workshops, I have the opportunity to meet a lot of real estate investors across the country. One of the biggest headaches they all share is managing their rental properties. I've met the "burnt out" investor that has managed their properties for years and just want to sell everything off and get out of the business. I've met new investors that have lost everything on their first rental because they didn't screen their tenants and ended up with an eviction and a trashed property with thousands of dollars in repairs. I've heard every nightmare story imaginable. The mistake that all of these investors have made is managing their properties themselves with little to no experience.

Typically the reason an investor chooses to manage their own properties is to save money, or if they do decide to use a property management company they will often hire the cheapest to save a few bucks. Both are huge mistakes!  If you are going to manage your own properties…Get Educated! If you can budget in a good property management company I highly recommend doing so. A good reputable property management company will save you time, energy and money over the long term. The last thing you want to do is create a full time job managing all of your rentals.

Whether you decide to manage your own properties or hire a property management company…here are the details of what property management entails.

Marketing the Rental

A good property manager will know the local real estate rental market inside and out. They will know what the current market rental rates are.  They will know what and who your competition is. They will know the best marketing strategies for your type of property. They will often have a wait list of prospective tenants, referrals and an influx of new prospective tenants. Good property managers will maximize occupancy and rental rates.

DIY Tip…if you decide to market your own rentals spend some time researching how property management companies market their rentals. Choose a reputable company and follow their ads, notice how they write the listing, photos etc. Also, keep in mind the type of tenant you want to attract. If you are renting a condo in a retirement area…don't advertise the rental in a publication that a retiree would not bother to read. Use common sense!

Screening Tenant Applications

Screening a tenant is vitally important.  You want a tenant that will be responsible and pay the rent on time and take good care of your property.  It starts with the rental application; make sure your application asks detailed personal information.  Social security numbers, driver's license number, full name and current residence and previous addresses.  Be sure to perform a complete credit check, criminal background, verification of employment and bad check search.  To cover the costs of the background check charge a non-refundable application fee. One bad tenant can cost you more than just lost rental income.

DIY Tip… when you show the property meet the tenant outside at their car…. without being too obvious take a good look at the inside of their vehicle. The condition of their car might be a good indicator of how they keep their home. Is the car full of trash, dog hair…cigarette smell??? 

Collecting Rents

Rent MUST be paid on time within the time frame given in the rental agreement no acceptations!  Take your emotions out of it and treat this like a business, because it IS a business! The rental agreement is a binding contract in a true business sense and it is meant to protect you, your business and your property.  Know the laws in your state. There are many states that are in the favor of the tenant. I can't emphasize enough the importance of property management education and knowing the laws of your state before taking on the role of property management.

DIY Tip… when managing your own properties do not disclose that you are the owner of the property…you are just "working for the man". You Do Not want tenants knocking on your door in the middle of the night. You Do Not want them trying to appeal to your emotions with hardship stories.  Keep that separation and it will enable you to be the strong arm when necessary cause you're just doing your "job".

Regular Maintenance and Repairs of the Property

Property management is responsible for scheduled maintenance of the grounds and building such as painting or lawn service. If there is a maintenance repair issue, the manager will hire the appropriate subcontractor or handyman for the job. The management company is required to monitor the quality of all repairs. They have a strict budget with specific expenditures that they are required to follow outlined by you. A building that has been cared for has a better tenant retention rate.

If you are managing your own rental the lease agreement should include what the tenant is responsible for repairing and maintaining. For example, requiring carpets be cleaned every 6 months is reasonable and providing proof of the service with a receipt is a must. If the rental is a single-family home lawn maintenance can be written into the agreement. If you plan to manage your own rentals get a really good lease agreement that details absolutely everything! Your property is a lifetime investment that you worked hard for, so make sure you protect your investment in keep it in good physical condition.

Administrative work and Bookkeeping

The devil is in the details…another benefit to having property management is the administrative work and bookkeeping. Property managers are required to keep records of everything that takes place pertaining to the property. They must keep meticulous records for accounting and tax purposes. This is also essential for liability reasons. The manager must record all tenant interactions. In fact, many states have specific real estate property laws for the management company to follow which is a bonus for you.

DIY Tip… If you are acting as your own property manager consider investing in property management software or at the very least bookkeeping software such as QuickBooks. Ask your CPA what they recommend and what is compatible with their system.

Evictions

It's bound to happen, and the more rentals you have the odds are it will happen to you. If you have property management in place they will handle the eviction for you. There are many reasons why a tenant will default on their rent; it doesn't always mean that they are dirt bag scum balls. In this current economy we have seen really good people fall on hard times. It's your decision whether or not you want to work with them. Just remember that it's your business and you cannot let your emotions override your good judgment and business sense. There are also bad tenants that make a career out of preying upon naïve landlords. These are the kind of tenants that you want out of the property yesterday, the longer they stay in the property the more money it will cost you in lost rent and damage to the property.

DIY tip…sometimes it pays to pay your problem to go away!

Pros and Cons

There are more pros to using a property management company than there are cons. When looking at a potential investment property, if you run the numbers and your bottom line does not allow you to include the cost of property management…well then maybe it isn't truly a good investment. Here are the upsides and downsides of having property management.

Hands Off

Property Management companies deal directly with the prospects and tenants. They handle all of the details from marketing your rentals, collecting rents, handling maintenance, repair issues, tenant complaints and evictions when necessary. Your ultimate goal for investing in real estate is financial and time freedom right? Hiring property management is a big step closer to that goal. Knowing that your rentals are in good hands frees up your time so that you can pursue more important endeavors. Another benefit of property management is… you can expand your portfolio and own properties out of state. 

Saves Time and Energy

As stated before, as an investor you are now free to devote more time to finding and executing deals and expanding your business. As your real estate investment business grows you'll want to take that nice vacation in Tahiti…or pursue your passion donating your time to your favorite charity. Whatever it is…having systems in place allows you the time freedom to do what you truly want to do.

Anonymity

Having property management in place allows you to be anonymous!!! Your tenants should not know who owns the property, nobody should know if you have good asset protection! That's another subject. Bottom line is you don't want the tenants bothering you with small problems or complaints.  You want to protect yourself from a potential lawsuit from a disgruntled tenant too.

Added Cost

While that added cost could be factored into you rental fees, this can cause the price of the monthly payments to go up and limit your customer base.  Depending on your market the cost may be more than what the market can bare. Keep this in mind when running the numbers on your potential real estate deal…if the rent can't absorb the cost of property management, then maybe this isn't the best deal for you!

Bad Property Management

Do your due diligence! If you hire an incompetent company or individual, this can cost you money.  If they are not able to manage the property the way you want them to and the way it should, you can lose money on repairs, regular maintenance and even overall property value.

While the pros may out weigh the cons a property manager can be very beneficial to you

Your next step is to find a manager that is right for you.  This can also be a difficult process but not so straining that you have to give up and take on the task of management yourself.  I understand the inability to trust someone else with your lifetime investment.  But, I also understand the value of good property management and peace of mind.

When looking for a good property manager start simply by networking.  By now you should have built up a good network of trusted Real Estate Brokers and other Investors in your area.  Ask them who they have worked with in the past and who they are happy with.  What kind of results did they get?  What were the costs?  How long have they been managing properties for others? 

Web Search…  You can do a Google search for property managers.  Look at their profile. Research their company before you decide you even want to talk with them.  See if they have been managing their own properties or other owners and for how long.  They will have been listed with the state as a business and you can check to see if there are any problems.

Lastly, check with your local bank or other financial institutions.  They will have many foreclosures on their books in this economic environment and will likely have a Property Manager they deal with so that they will keep the property value up if the property is vacant or being rented out by the bank. 

Whether you act as your own property manager or hire someone else to do so, the additional income is well worth the time you invest.  Remember that owning rental properties can have its difficulties but the reward is the passive income and ultimately your financial freedom. 

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