Many have made the case that buying and holding real estate investments is the best investment around. However, it comes with two major challenges. The first is financing, depending on your finances and credit score. The second is property management. Without good management, even the best purchases can go sour. Property management is the very lifeblood of any successful hold. And because of this, it can never be neglected.
When approaching this challenge, the first question to ask is simply whether you have the time to manage yourself and the patience for all the details.
I have seen investors have great success using management companies, so there’s no one way to do it. Obviously, it depends on the quality of the property managers you are using.
Here are the advantages to each approach:
Advantages to using a Management company
1. Chance to save money
Management companies generally charge 10 percent of collected income and the first month’s rent for each new tenant. This is a substantial expense that you can save by managing the property yourself.
2. Increased control
It’s a lot easier to make decisions and implement them yourself or through your employees than it is through a third party, even if they really are interested in following through with your plan.
3. Avoidance of fraud
Unfortunately, not every property management company is run ethically. Some receive kickbacks from contractors, pocket rent from “vacant units” — or engage in other such unsavory activity. Managing yourself can make it easier to avoid being a victim of these types of things.
4. Gained experience
It is extremely important to know the ins and outs of property management, even if you are not the one doing it. It’s much easier to evaluate how well others are managing your properties if you know how to do it yourself and have experience in that area. It’s easier to see which excuses are legitimate — and which are not — if you’ve done it before.
For example, we had one management company tell us that Craigslist wouldn’t work in a certain area, and we trusted them. We eventually took the building over, started using Craigslist and, lo and behold, almost all of our new leases come from there. Managing properties will also give you a better perspective on an area, which can help fine tune your buying criteria.
Advantages to managing yourself
1. You care more than anyone else
I consider this the most important factor. Consider it a universal truism that no one will ever care as much about your properties as you do. And caring translates into effort. That extra effort can potentially be the difference between a performing property and one that bleeds money every month.
2. Infrastructure already in place
Early on, you won’t have an office or policies or a staff — or anything else that property management companies generally have. But management companies will have all the leases, applications, notices of entry and other such documents, as well as screening procedures and knowledge of the landlord/tenant laws in your state (at least they should).
If you go it yourself, you will have to put these things together. Management companies will also have an extensive list of vendors and contractors to use that you will have to find if you do it yourself.
3. Ability to save time
The more time you spend managing, the less time you have to look for other potential properties to buy or other business opportunities — and you lose out on time to simply to enjoy life.
Opportunity cost comes into play here; everything you do means you can’t do something else at that given moment. If you can find a quality management company, that can undoubtedly save a lot of time.
4. Opportunity to outsource headaches
Unfortunately, property management has a not-altogether undeserved reputation for producing a large number of headaches. It will require a thick skin to deal with angry tenants and severe maintenance problems. Most tenants are great people, but those won’t be the ones you hear from very often. Instead, the bad apples and discontents will eat up a substantial amount of your time and energy (and sanity).
Becoming your own property manager
If you choose to manage yourself, make sure to talk to an attorney and familiarize yourself with landlord/tenant law and fair housing. Complying with fair housing shouldn’t scare anyone off; it’s pretty straightforward (i.e. don’t discriminate!), but it’s important to be intimately familiar with it to avoid any pitfalls.
You will also need to gather or create the necessary documents (lease, application, etc.). You can find standard forms at most office supply stores or online. If you make one yourself, make sure to check it off with an attorney. You will also want to come up with general policies. For example, when to file for an eviction, when late fees will apply and how much will they be, whether you will accept payment plans, etc. These policies are important, as you can use them as an anchor to hold onto when tenants try to pressure you into something.
And most importantly, never skimp on tenant screening.
Vetting a property manager
If you choose hire a manager, the best place to start is to ask for referrals from other successful investors. If a manager has a proven track record with another investor, it’s much more likely they’ll do well for you, too.
Regardless of how you find a property manager, it is critical to vet them thoroughly before hiring them. You should interview them, ask for references and interview those references as well. Make sure this manager specializes in the types of properties you own. If you own C rentals, a management company that specializes in A rentals will almost certainly do a terrible job and vice versa.
Some questions to ask include:
- What are their management fees?
- How long have they been property managers and how many properties do they manage?
- How many evictions do they have each month?
- How long do properties usually stay vacant before being leased?
- How do they screen and do they accept people who’ve had evictions? (If they do, it should be only after five years or so or with a larger deposit/co-signer.)
- How do they handle maintenance requests?
- What is the minimum charge for a maintenance visit?
- What do they do when a tenant doesn’t pay rent?
- How do they intend to market my property?
Don’t go easy on them. Getting the wrong management company can be disastrous. And if you hire a management company that isn’t working out, do not be afraid to make a switch.
Buy and hold may be the best investment around, but it isn’t without its challenges. Management is certainly one of those, but don’t let it dissuade you from investing. All it takes is a diligently executed plan, whether managing yourself or carefully hiring a property management company to manage for you.