Investing in real estate is supposed to create passive income, but if you are managing your rental properties yourself you are actively working on the investment. To create a truly passive income, you need to hire a great property manager who can take care of the renting, repairs, accounting and everything else that comes along with rental properties. I love long-term rental properties because of the returns they offer. I am making over 20 percent cash on cash returns on my rentals properties, and I show you exactly how I do it in my complete guide to purchasing long-term rental properties. I recently had my staff start a property management company to manage my properties, my parents have used a property manager on their rentals and my sister is a property manager. My sister actually provided some great information on how to find a property manager for this article.
My experience with property managers
I helped my sister start her property management company when I was in high school back in 1996. I did not do a lot of work in the company, but I helped show houses while she was going to school about an hour away. Her property management company focused on college rentals because that is what she primarily invested in. She started investing in college rentals at a very young age and has 7 college rental properties now. That may not seem like a lot of properties, but they all have multiple units and a lot of cash flow. She managed 120 houses at the peak of her property management company but recently scaled down to handle just her own rentals in 2011. She has a doctorate in physics and decided she would rather concentrate on teaching and physics projects than property management.
I asked my sister to help me with this article since she has much more experience with property management than I do. She had some fantastic ideas for investors who are looking to hire a good property manager, many of which I will discuss below.
How much does a property manager charge?
Typically a property management company charges between 8 and 12 percent of the gross rents received and some companies charge leasing fees on top of that. A typical leasing fee can run as much as one month’s rent. If you are paying 10 percent of gross rents and one month rent for a leasing fee, that can eat into profits very quickly. I think most investors should be able to find a decent property management company that does not charge that leasing fee. You do not want to hire a property management company based on their cost, it is much more important to pay a little more if you know they will take care of your properties.
Identifying good property managers
The first step in picking a property management company is finding potential property management companies. By performing a simple web search you should be able to find the largest property management companies, but there are many smaller management companies that may not show up in those searches. My real estate office which has about 30 agents has three property managers and none of them advertise except for word of mouth. My suggestion is to always ask your contacts in the area who they know. If you know a Realtor, title company, investor or anyone else in the area, ask them who they recommend for a property manager.
Before you call a property manager for an interview, do these things first
Property managers will promise great service, but how will you know until you actually hire them and see how they do? My sister suggested some great ideas to help investors get an idea of how good a property manager is before you interview them.
1. Check to see how many vacant properties a property management company has listed before you call them. They should have a website or directory that lists the properties they have for rent. When you call the property management company later on, ask them how many total units they manage. You can then calculate the vacancy rate for that particular company. Check the vacancy rates in your area and see how close the companies vacancy rates are to the regions vacancy rates. My sister says a few companies she knows of that have 10 to 20 percent vacancy rates in our area now and our regional vacancy rate is under 2 percent. Red flag!
2. Call the property management company as a potential renter on a house they have listed for rent. According to my sister, you will most likely reach someone’s voicemail. See how long it takes them to call you back, how knowledgeable they are and how soon they could show the property. When asking questions about the home, ask simple questions that the manager should know. Ask how old the home is, how many square feet it has, how many parking spaces, what type of heating. This will give you a great idea of their knowledge and service level. My sister said people would be very surprised on how many companies will not call back a potential renter.
3. Drive by properties a property management company has for rent and see how well they are maintained. As an investor, you will be depending on the property management company to maintain or make sure the tenants are maintaining the property. If there is a dead lawn in front of every house a particular management company manages, that is not a good sign.
4. Check the BBB to see if a management company is a member or has had a lot of complaints filed against them. This suggestion can be deceiving because almost every company that does a lot of business is liable to make a couple of people mad. Some people just like to complain, no matter how fairly or unfairly they are treated. The BBB gives companies that have complaints against them a chance to respond and give their side of the story. If a property management company cares, they should at least be responding to complaints to explain how they saw the situation. If you see a company with an abnormally large number of complaints against them from investors that may be a bad sign.
What should you ask a property manager during an interview?
Eventually, you will need to interview property managers. There are many questions to ask the property manager and they will have their own sales pitch to give you as well. Here are some questions to ask a property manager once you have narrowed down a few good candidates.
1. How many properties/units do you manage?
2. What is your specialty? College rental, single family, multifamily, commercial?
3. How long have you been in business?
4. Ask if they are a member in good standing with the BBB. You should have already checked on this, but you can see how their answers compare with your research.
5. How many people work for you? This will give you an idea of how much they can handle based on how many units they manage.
6. Do they have a real estate license? Many states, including Colorado, require property managers to have a license.
7. How much do you charge and are there any extra fees for leasing?
8. Do you have any monetary agreements or affiliations with the contractors you use? Most states require property managers to disclose any kickbacks they receive from contractors. Many property managers use contractors as an extra source of income, either by marking up prices or having ownership.
9. Do you own rental properties yourself, what kind, how many do you own? If a property management company has 100 units they manage and they own 85 of them, whose properties do you think they are going to try to rent first?
10. What type of insurance do you carry? A property manager should have E and O insurance if licensed and general liability insurance at a minimum. The last thing you want is someone getting hurt at one of your properties and suing you because the property manager who screwed up has no insurance and no money.
My property management company
Single-family rentals are relatively easy to manage, but I now have 16 and I plan on buying many more; in fact I plan to purchase 100 by January 2023. I think single-family rentals are relatively easy to manage, but that may be because I have my wonderful wife who does most of the managing. I promised her as soon as we reached 10 properties I would either hire a property manager or start a property management company. By using my team to manage properties, it has made things much easier for me. I have scrapped the idea of starting my own company because I have too much else going on, and property managers don’t make that much money.
Hopefully these tips will help you find a property management company. Don’t be surprised if many of the companies you call aren’t taking new clients. It takes a lot of work to manage properties and many companies do not add new clients. I know my sister would not add new clients for years, unless she knew them personally. If you have any other tips, please leave a comment and let me know.
Also for more information on how to buy the best rentals which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon bestseller.