Your property manager is the most important factor in whether your investment is a money making and satisfying venture or a drag on your portfolio that gives you a ton of heartache. A great management company can take a mediocre investment and make it profitable while a bad management company can take the best investment and drive it into the ground by selecting bad tenants and not taking care of the property. Take the time necessary to choose wisely and hold them accountable, especially in the early going. If they know you are looking at the numbers carefully and asking appropriate questions, they are more likely to make the effort on your behalf. Here are some questions to ask potential property managers:
- How many doors do you currently have under management?
- There is no correct answer to this question, but it should feel right to you… the number needs to be large enough to give you a sense that they have the adequate level of experience to manage your units, but small enough that you feel you will be important to them. Fifty doors under management are not enough, and perhaps 5,000 is too many…
- What is your staffing level? How many in the office and how many in the field?
- The staffing level should be appropriate to the number of doors under management. Make sure they don’t have 20 office staff and one lonely guy fixing leaky faucets and plugged toilets. Again, no hard and fast correct level, but the staffing should make sense relative to the number of doors being managed.
- What maintenance and rehab can they do with internal resources and what needs to be outsourced?
- Can they have plumbing, HVAC, electrical resources on staff? How about minor rehab such as replacing windows, counters, bath fixtures, etc?
- For outsourced work, what is their markup over the vendor cost?
- If the property manager is overseeing the work and paying the vendor, they will need to be compensated. I’d say 10% is a reasonable amount of markup; perhaps less if the bill is larger.
- What is their initial tenant placement cost?
- Advertising, showing the unit, screening and signing leases are all real costs and you should anticipate being asked to pay for them. The equivalent of two to three weeks of rent is acceptable in my view. This placement fee is an area you can negotiate with the company and in some cases, management companies don’t charge for this at all. If you do pay a placement fee, the expectation should be that if the tenant does not stay the entire term of the lease, the property management company should find a replacement tenant at no additional cost to you.
- What is their charge for lease renewals?
- About 2-3 months prior to lease expiration, your management company should be reaching out to tenants to find out if they intend to renew their lease. (self-managing investors should do this as well) If the tenant has been prompt with rent payments and has kept the unit in good condition, renewals should be offered at current market prices. If the tenants do renew, this is an indication that they have been well served by the management company and a fee for this is not unusual or unwarranted. Often, this is $150 or so. It’s honestly a small price to pay versus having the unit empty for any given time and having to roll the dice on tenant selection again.
- How will they share your monthly numbers?
- Your management company should provide you with a monthly accounting of how much income you received from rents, pet fees, etc and the expenses that were covered by them, including maintenance items, management fees and vendor markups. They may send this accounting via email, or they may grant access to an owner portal where you can log in at any point in the month to see how things are going. Their method will likely be determined by their property management software. Ask to see a sample monthly report or screenshots from the portal to make sure you are comfortable with the level of information provided.
- When do they pay owners and by what means?
- Property management companies will have a cut-off date each month; all rents received, and expenses incurred by that date will be paid to owners that month, and anything after the cut-off date will paid in the following month. Oftentimes, this cut-off date is the 15th which allows for late arriving rent to be paid out to owners that month. Does the management company pay via electronic funds transfer directly into the account of your choosing? To me, this is a must have; I don’t want to wait for paper checks and the additional effort to deposit them.
- What is their monthly management fee?
- What percentage of rent will they take to manage your properties? I saved this to last for a reason… While this will be your biggest property management expense, it should not be the primary reason for choosing a company to manage for you. A company with a very low management fee may not have the ability to fund the resources necessary to adequately manage the property and ensure tenant happiness. 7-10% of collected rents is the usual range. Don’t let your management company convince you that they should be paid even when the unit is empty! You may hear, “but we work even harder when the unit is vacant trying find new tenants, etc”. My rule is that if I don’t get paid, they don’t get paid. It makes sure the management company’s compensation is aligned with yours….
I hope you find this topic important, and the information provide valuable. As stated previously, there is nothing that will influence the success or failure of your investment as much as the property management piece. Take the time necessary to find one that will work well with you to optimize your returns.
As always, all the best to you in your investing future!
