The Ultimate Guide To Investment Property Management

As a property owner, one of the first decisions you’ll need to make is whether to do everything yourself or hire an investment property management firm. Each strategy presents a unique set of advantages and disadvantages. Your life could look drastically different based on which option you go with, so your decision should be made carefully.

Managing a rental property on your own can be financially rewarding, but at the same time, it requires large quantities of time and effort. A property management service can free you of the day-to-day responsibilities but requires a financial investment. To help you better understand your options and what they entail, we break down the pros and cons of each endeavor.

What Is Investment Property Management?

Rental property management is the practice by which a third party is responsible for maintaining a residence’s status quo and appeasing its occupants. Therefore, property managers are traditionally hired by rental property owners to oversee the daily operations of their real estate assets and deal with any questions or concerns the tenants may have.

If a property or unit becomes vacant, it’s the property manager’s job to fill the vacancy with a good tenant as quickly as possible. As its name suggests, a property manager takes care of every aspect of a rental, from marketing vacant units and signing leases to collecting rent and calling for repairs. Few strategies, for that matter, are more beneficial for a rental portfolio than hiring a third-party property manager, which begs a simple question: How do property management companies work?

What Does An Investment Property Management Company Do?

The cost of investment property management is a major consideration, but your investment can pay off in various ways. A great property management company can easily provide a greater return on the cost. Here are some of the merits of hiring an investment property management company:

• Property managers will collect rent from tenants.

• Property managers will listen and respond to maintenance requests..

• Property managers can deal with tenants that are behind in rent.

• Property managers will market upcoming vacancies and fill them as quickly as possible.

• Property managers will keep detailed records of everything happening at the property.

Rent Collection

Collecting rent is one of the key tasks of a property manager. If rent collection was the only duty of a property manager, then you may think you could do it yourself . This is especially true since many tenants pay rent through online portals.

However, property managers are helpful when things go awry, which they often do. They can deal with tenants when they begin to default on their rent. They also have a working knowledge of landlord-tenant laws for when things get sticky, such as during an eviction process.

Regular Property Maintenance

Managing property maintenance and repairs is arguably the biggest driver for hiring a property manager. Keeping up with routine maintenance is time-consuming, yet the biggest hassle is often fielding complaints from tenants.

Sometimes their needs will be urgent and come at inconvenient times. This can quickly get irritating for a landlord. Dealing with clogged toilets in the middle of the night doesn’t exactly lift the spirits. Over time, this can create tension between a landlord and a tenant. Because rapid and responsive customer service contributes to the desirability of a rental property, it is sometimes best to hand over these responsibilities to a neutral third party.

Property managers will deal with these requests, alleviating you from the burden. Smaller requests may be handled internally. Larger and more complex issues may be delegated to outside specialists. Sophisticated property investors normally authorize their property manager to handle repairs up to a certain dollar amount without needing express permission first. This streamlines the process and ensures issues don’t get worse if you can’t be reached.

Property management companies can call for regular inspections and routine maintenance such as:

• Lawn Care

• Pressure Washing

• Preventative Maintenance

• Plumbing Issues

• Fixing Appliances

• Drywall Patching

• Anything Else A Tenant Might Need

Dealing with Defaulters

This goes beyond slow payers to those seriously in breach of their leases. They could be more than a month past due or be risking the condition of your asset, or the police could be involved in a criminal issue. Sometimes these things can be worked out directly with renters. It may require lawyers or even going to court in other cases. A property management firm can handle this for you and save you a ton of time and stress in these situations. Having a professional third party in between can often speed up better solutions than a DIY landlord that may appear an easier target for malicious tenants.

Sourcing Tenants

This is a lot more work than some understand at first. A good management company is taking on the cost of marketing for tenants, showing units, and screening prospective renters. There is a lot of expertise brought to the table here, and it may be the most valuable thing property management companies offer. Then there is supervising move-in and move-out activity.

Bookkeeping

Bookkeeping is probably the least fun part of real estate for most investors. At the same time, great bookkeeping and invoice handling are critical for minimizing taxes, keeping the best vendors, and generally keeping the cash flowing. If your property manager offers to run the books for free, you had better take advantage of it. If not, there’s no reason you can’t hire someone to manage your books. Rental properties are best left as a passive investment, after all. Conduct the appropriate research to uncover a good bookkeeper in your area, and determine whether or not their services will bring value to your own business.

What Does Investment Property Management Cost?

The cost of investment property management remains the primary concern for those sitting on the fence.

Although property management fees vary, the industry standard is in the ballpark of 10 percent of collected rent. Anywhere between 8 and 12 percent isn’t out of the question, and often depends on the quality of services provided.

For some investors, forking over 10 percent of their rental income may simply be out of the question. For others, paying a fraction of their rental income is well worth it. Otherwise, they’d have the opportunity cost of the other income-producing activities they could pursue in their free time.

Is An Investment Property Manager Worth It?

Many property investors find that hiring an investment property manager is worth the cost. First and foremost, some investors simply don’t want to be a landlord. Dealing with tenants and maintenance issues successfully requires specific skills and character traits. Many investors would also argue that the day-to-day responsibilities of property management would prevent them from pursuing new business ventures.

Aside from these two main points of consideration, property managers can add value to your business in a variety of ways:

• Marketing expertise: Most investment property management professionals offer their marketing expertise. This means that they can attract good-quality tenants and fill vacancies efficiently and effectively, thus protecting your bottom line.

• Local market knowledge: An experienced property manager will know how to price a unit in a way that will bring you the most profit without ostracizing tenants.

• Showings: Having a local property manager will pay off in a variety of ways, especially if you’re a long distance investor. For one, they can physically show the property to prospective tenants so that you don’t have to visit the premises unless absolutely necessary.

• Working with tenants: Managing tenant relations is hard work, even when you have stellar tenants. Investment property management firms can screen prospective tenants, deal with their complaints, collect late rent, and even manage an eviction process if they have to. A good property manager provides you with a degree of separation from your tenants so that you can focus on the big picture of your business.

• Maintenance and repairs: All properties require routine maintenance, plus any repairs that come up from time to time. Property managers typically work with a trusted team of professionals who take care of things quickly and efficiently.

Self-Management Vs. Rental Property Manager: Weighing Your Options

Whether hiring a rental property manager or managing an asset alone, only the investor will know what’s best for the property. It’s important to take all the necessary steps in evaluating each strategy to make the best decision for long-term success. Regardless of which side you fall on in the property manager vs. landlord debate, make sure your decision works best for your investing strategy and your long-term financial goals. Better yet, weigh the pros of each method below to make a more informed decision.

Benefits Of Self-Managing Rental Properties

You are your investment property’s gatekeeper and have responsibilities to both your tenants and your rental business. Tenants have certain expectations, and as a landlord, it’s your job to ensure those expectations are met. As the head of your business, you have a duty to make sure operations run smoothly, and your mortgage gets paid. The duties and responsibilities of a landlord include, but aren’t limited to:

• Setting rental rates

• Collecting rent

• Maintaining clean environment

• Responding to repair request promptly

• Marketing/advertising

• Finding new tenants

To be a successful landlord, it requires a combination of patience, knowledge and interpersonal skills. Not everyone is cut out to do it. JD Esajian, co-founder of FortuneBuilders, said it best: “Being a landlord is sort of like being a teacher. Most students like their teachers until they get their first bad grade, or until they get yelled at for the first time. It’s important to remember that you are running a business, not a popularity contest.” At the end of the day, your job as a property owner is to protect your asset to get the most out of it as possible.

Becoming a landlord has its share of perks, which include:

• Income: Renting will generate a monthly check to cover your mortgage and depending on current renting rates, you could also pocket a large profit each month.

• Tax Deductions: As an investor’s best friend, tax deductions will come in handy down the road. These deductions include costs associated with repainting, replacing damaged furniture, replacing water pipes and disposal duct, buildings and contents insurance, accounting processes, cleaning and gardening, professional services, and wear and tear depreciation (upwards of 10 percent of the gross rental income).

• Less Costs: Becoming the landlord will save you somewhere between eight and 10 percent in property management costs. When it comes down to your bottom line, every penny counts.

Who Should Consider Self-Managing Investment Properties?

Not every investor should self-manage their investment properties. Sometimes it’s an issue of skills and personality, and other times you may simply dislike being a landlord and would rather be doing something else entirely. More importantly, self-managing is time-consuming, and you need to consider the resulting opportunity costs.

Here are some reflective questions to help you decide whether you should consider self-managing investment properties:

• Do you consider renting properties as your career? Is owning rental properties something you consider a job or solely an investment activity. Self-managing is time-consuming and its activities can amount to a full-time job. Unless you have a significant amount of time to dedicate, hiring an investment property management firm is recommended.

• How long does it take to get to your rental property? How quickly can you respond to an emergency or physically show a vacancy to a potential tenant? Traveling back and forth from your property can take up time. Hiring a property manager often makes logistical sense if you live far away from your property.

• What is your ideal profit margin? The biggest drawback of hiring a property manager is that it eats into your profit. Dedicating 10 percent or more of your cash flow to investment property management could be the tipping point for your finances. If paying for a property manager doesn’t make sense financially, don’t do it.

• How much control do you need? Some property investors like to have control. They want to make sure they know everything going on with their property, right down to each tenant’s most recent credit score. If you feel uncomfortable relinquishing control to another party, then self-managing may be the best option for you. On the flip side, hiring a property manager is a great solution if you just want to collect your rental income and leave the rest up to someone else.

• Do you want to deal with your tenants? Working with your tenants can be a challenging job. It involves screening potential tenants, collecting late rent, responding to complaints, and even forcing evictions. It’s hard work even when you have the best tenants in the world. If you don’t feel cut out to deal with your tenants, then an investment property management company might be the answer.

Benefits Of Hiring A Rental Property Manager

Sometimes in business, it’s just better to pay a professional to do it. For investors, a property management companycan add significant value to your investment as they deal directly with prospects and tenants, helping to save you immense amounts of time and stress. They also bring a wealth of know-how and experience to your property, giving you peace of mind that your business is running like a well-oiled machine. Duties and responsibilities of a property management company include, but are limited to:

• Setting rental rates

• Collecting rent

• Assigning maintenance

• Marketing/advertising

• Managing relationships

• Finding new tenants

For investors, adding a property management firm can be very advantageous, especially for those with multiple properties or with limited time. However, it comes at a cost ranging from eight to ten percent of the monthly income or a flat annual fee. Here are a few of the ways property management companies earn their keep:

• Higher Quality Tenants: Management companies employ rigorous screening processes to pinpoint reliable tenants and shield your investment from the bad ones. These professionals have experience analyzing information about candidates to ensure your property has the best tenants possible.

• Shorter Vacancy Cycles: A good property management company will shorten the amount of time your property sits vacant, working around the clock to improve and prepare it for rent. Experienced companies will have a time-test tenant retention policy to keep clients happy and situated for the long term.

• Better Processes: A property management company can streamline and improve the processes of your rental property, especially when it comes to collecting rent. As the difference between success and failure, collecting rent on time is the only way to maintain consistent cash flow, and a property management firm can significantly upgrade this.

• Fewer Legal Problems: A good property manager has the knowledge of the latest laws as well as experience to ensure you’re not leaving yourself vulnerable to lawsuits. A management company can help investors avoid costly and time-consuming legal problems with a stringent screening process.

• Less Responsibility: Probably the biggest benefit of hiring a management company is less responsibility. Along with less stress, investors will have more time and freedom to invest in other aspects of their business or future endeavors.

Do I Need A Property Management Firm?

There are plenty of investors who fully support using a property management company. However, there is no rule stating that anyone needs a property manager. Therefore, plan on hiring a property manager if:

• You plan on acquiring multiple rental properties. The more rental properties one has in a portfolio, the more necessary property management firms are.

• You are not within close proximity of your asset. If the rental property is far from where you live, it’s a good idea to hire a manager who can keep better tabs on it.

• You don’t want to actively manage the property. If you view the property as a source of passive income, you’ll need a property manager to take care of routine maintenance and daily operations.

• You can afford the added cost. Property managers will charge a percentage of the rental fee, which is well worth it. The same fee can rid landlords of a lot of headaches and free up a lot of their time to invest in other places.

How To Find The Right Rental Property Management Company

The best place to find a property manager is through your local network. Like anyone else that you use, it is usually better to work with someone you know or is referred by a reliable source. Networking meetings and investment clubs are a good source, in addition to talking to contractors and handymen you have worked with in the past. You should also reach out to your local realtor and even fellow investors to see if they have a company they feel comfortable with. The more options available, the better chance you can find someone that fits. After you round up some potential candidates, your work is far from over.

You should ask your property manager as many questions as possible. You need to find out if they know the area and the market. They may have a grasp of the national scene, but that isn’t nearly as important as what is going on in your neighborhood. Ask them about what other properties they manage and what they think of your property. You also need to discuss expectations and job requirements. They should be doing the bulk of the talking while you just listen. You don’t need to work with the most experienced manager, but they should know what is expected from them and what they will do for you.

A property manager should relieve many of the everyday burdens of owning a rental property and free up time for you to focus on other areas. If they are incompetent or you feel they are going to call about every problem, you should look elsewhere.

In addition to knowing what they will do for you, the obvious follow up is how much it will cost. Property managers can do many different services, each of which may come at a different cost. Before you enter into an agreement with anyone, you need to know exactly what you are getting out of it.

A property manager can charge a flat fee or a percentage of the monthly rent. This isn’t necessarily an area where you want to nickel and dime yourself. If a better manager who takes care of a broad range of items comes in at a slightly higher price, you shouldn’t balk at the cost. Saving money is always nice, but the difference between 10% and 8% of the rent received doesn’t equal a large amount of money. If you commit to seeking out a property manager in the first place, you should know the costs and accept them. This is one less headache you will have to worry about in your investing business.

Over time, you will build a relationship with your property manager and put more on their plate. It is also OK to ask and seek their input on your property. If they are getting a percentage of rents received, it would benefit them to think of ways to increase the rent. If this means adding on a deck or some other costly feature, you can kindly say no thank you.

However, there are plenty of simple items that can add to the bottom line. Having open lines of communication is important, but you need to remember that you are the owner, and the buck should stop with you. If you give up too much control and allow your property manager to conduct tenant interviews and dictate the rent amount, you have nobody to blame but yourself if things go badly. Let your property manager work without you being in the way, but realize that you are still the final decision maker with your property.

Hiring An Investment Property Manager

Hiring an investment property manager is a task that mustn’t be taken lightly. At the very least, you get what you pay for. As I already mentioned, investment property managers will request anywhere from 8 to 12 percent of the rental cost, but their fee may not represent how good they are. It’s entirely possible for an inadequate property manager to overcharge and for a great one to undercharge. That said, the only way to know if you are hiring the right one for your business is to mind due diligence. Don’t simply base your decision on the average property management fees; dig a little deeper and find one that meets your specific criteria.

First and foremost, identify what you want the most out of a property manager. What is it you need your manager to do? Compile a list of needs and wants, and use them to pick the right company to represent your property. Next, vet them accordingly. Can they do what they promise? Get testimonials and talk to current clients of theirs to get a better idea of their satisfaction.

Summary

Investment property management companies—specifically good ones—are worth their weight in gold. A truly great investment property manager can save/make investors more money than their initial fees. That said, the cost of property management is more of an investment than an expense. There is no reason to believe using management companies for rental properties can’t elevate even a new investor’s career to the next level.

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