Having rental properties can be a great way to create regular sources of income in a real estate portfolio. But since you maintain ownership of the property, you’ll need to consider how you’ll ensure the property is maintained and attractive for potential tenants. One of these ways is by using a property manager or property management company. But is it worth the costs? Is it better to hire a property manager or self-manage your rental properties?
Hiring a property manager depends on the amount of effort you’re willing to invest in your property. If you want to remain totally hands-off, then a property manager may be worth the extra costs. I prefer to avoid those costs by front-loading my properties with as many qualified applicants as possible. I do this by charging less than other rental properties to pick renters who will be willing to maintain the property in exchange for cheaper rent.
It all comes down to your business model, though. So let’s talk about what a property manager actually does, how they usually get paid, and a bit more about how I avoid these costs altogether.
WHAT DOES A PROPERTY MANAGER DO?
A property manager’s job is to ensure that your rental home is occupied and maintained. You can consider them a go-between for you and your renter. Your manager will take care of things like:
- Getting the property rented if it’s vacant
- Collecting rent
- Handling repairs
- Maintaining the property
- Handling tenant disputes
- Collecting or issuing keys or key codes
If you cannot handle these things due to location, effort, or time, having a property manager can be good for your peace of mind.
HOW DOES A PROPERTY MANAGER GET PAID?
Typically a property manager is paid on some sort of commission-style arrangement. The terms vary, but it’s normal to see them receive a cut of the first month’s rent if they’re responsible for getting the property rented. They’ll then receive a small amount of each month’s rent which goes towards their time spent maintaining the property. Things like mowing the lawn or other cosmetic upkeep are usually paid for with these monthly commissions.
Sometimes, they’ll receive additional payments for repairs, “statement fees,” or extra work. They may also receive a fee if they have a deal worked out with certain companies or handypersons.
IS IT WORTH THE COST TO USE A PROPERTY MANAGER?
Here’s where I get some friction when I talk about the value of a property manager. Determining whether or not it’s worth the cost is dependent on the variables that are unique to your business. Can you maintain the property on your own, or are you located too far away? Do you want to be involved in dealing with your tenant issues, or would you instead focus on other aspects of your business?
These are essential things you’ll need to consider when owning rental properties. For me, though, I tend to think it’s not worth the extra cost of a property manager solely due to what I call “alignment.”
Since property managers are paid on a commission-style basis with a higher commission on the first month’s rent, they’ll make more money turning over renters. As they’re also paid monthly no matter the reason, I can’t guarantee the quality of work they’ll do maintaining my property. Also, since they usually have a deal worked out with third-party companies to do repairs, it’s in their interest to hire people who will give them the highest kickback regardless of who does the best work.
Again, this is just my opinion. But I think that property managers are interested in getting the most money possible with real estate. Those ways are usually not aligned with what works best for me as the owner.
HOW I HANDLE RENTING PROPERTIES WITHOUT USING PROPERTY MANAGERS
You see, it’s in my best interest to have tenants who stay for the long term. Any time a property is vacant, I’m out that rent money. In addition, I’ll need to pay more money to attract new renters. Costs like cleaning, repairs, and listing fees – these all add up, not to mention I’m still on the hook for the mortgage. When I get new renters, I need to make up that loss with their first rent payments. It’s a cycle of playing “catch up” that’s not a factor if I have renters who stay for multiple years. But having long-term renters isn’t as profitable for a property manager. Do you see where I’m coming from?
So how do I get around needing someone else to help me maintain a property? It comes down to finding the right tenants. Finding the right renters who are willing to stay for multiple years is the highest priority.
How do I find them? It’s simple: I make sure I have a flood of applicants. Whenever I list a property for rent, I can almost guarantee dozens of applications head my way quickly. It’s not because my places are swanky or more luxurious (though I tend to think they’re nice) or that I’m in a hot area. It’s because I undercut the other rental listings and offer my places anywhere from $50 – $100 less per month.
To me, this lower rent is well worth the trade-off. Since I have the cheapest rent, I get the most applicants. Since I have the most applicants, I get to be picky and will only rent to tenants who meet specific criteria.
These criteria are two questions on my applications –
- Do you own a lawnmower?
- Do you own a toolbox, and can you use it?
If the applicant answers “no” to either of those, I won’t rent to them. I want my renters to be self-sufficient and able to handle minor things without my intervention. If there are bigger things than that, then I have a dedicated team of professionals my renters can call, but I don’t want to be contacted for burnt-out lightbulbs. If you, as the renter, can handle basic maintenance and want to have some autonomy in the property, then I’m willing to rent to you at a discount.
The discount is still less than what I’d pay a property manager, and I can have handy tenants that stay for the long haul.
Whether or not a property manager is right for your business depends on how you value your time. If you want to be hands-off totally, they might be worth the extra costs. If you can dedicate a little time to investing in the right tenants, you won’t need a property manager at all.
But again, this is all just my opinion. Do you see it a different way? Leave a comment and let me know.