Most new investors believe that the only value of a property manager is to collect the rent. I wish it was that simple. When I first started, I managed my own properties. What a mistake! After about 8 properties I knew that I was not a property manager. Each month I had to knock on the tenant's doors and discover that, even though their cars were in the driveway and I could hear the TV, no one answered. After losing a few months rent this way I placed all the units in the hands of a bad property manager (I was no better at selecting property managers than I was at screening tenants). She did collect the rent but then never deposited it into my account! Finally, I got the properties into the hands of a good property manager, 4 of the 8 tenants were evicted and good tenants installed. I believe that mistake probably cost me close to $10,000. Today I am a Realtor in Las Vegas and almost all of my clients are out of state/country investors. I have clients with enough properties that I could make a business of it. Am I considering managing the properties? NO WAY! In order to be successful at managing properties you need hundreds of units to justify the staff, software, processes and misc items like a trust account (where you keep deposits). However, I now have enough experience to know that a good property manager has a lot more to offer than screening tenants and collecting rent. Below is a diagram showing the four phases of information I expect from a good property manager.
Many people spend a small fortune on real estate seminars, coaches, books, videos, etc. While the lessons learned through these channels can be very valuable, little of it applies to any specific local because they are all different. So, what might work great in Portland, Maine might be disaster in Houston, Texas. Successful investing requires local knowledge, not general knowledge. The local knowledge you need includes:
- Type: Condo, high rise, single family, duplex, single story, two story, etc.
- Configuration: Two bedroom, three car garage, mud room, etc.
- Location: Usually a very specific area. For example, west of 23rd St and south of the river, etc.
- Rent Range: If the majority of the population to which you want to rent are willing and able to pay $1,000/Mo to $1,300/Mo. you should only be looking at properties that you can purchase, rehab and profitably rent in the same rent range.
- Property laws, taxes and regulations: This is a catch-all category of local/state issues that affect landlords. An example is evictions. In Las Vegas an eviction typically takes less than 30 days and costs less than $500. Clients tell me that in California, if a tenant knows what they are doing, an eviction can take up to a year and can cost thousands. Nevada and Texas have no personal income taxes so a 5% return is actually a 5% return. If you buy a property in a state with a high personal income tax rate, you need to factor this into your actual return.
Where can you get the local knowledge you need quickly and at no cost? Property managers. Every day they work with properties and tenants. Property managers know the type, configuration, location and rent ranges that rent best. They are also experts on the local/state issues that affect landlords like evictions, rent restrictions, taxes, etc. So, if I were considering investing in a market, I would interview 3 to 5 property managers for the position of my (future) property manager. I have a list of property manager interview questions and if anyone would like a copy, drop me an email.
The typical method of buying a property and then having a property manager rent it is a recipe for failure. I have owned 20+ investment properties and for the last 7 years I have almost exclusively dealt with investors. Six (and sometimes 7) days a week I am involved with finding properties that meet the dual criteria of sustained profitability and probable appreciation and overseeing rehabbing properties for my clients. Based on my experience, I feel I stay well informed on the rental market here in Las Vegas. However, I NEVER consider a property unless the property manager approves. She has saved us on multiple occasions by alerting us to properties that rent poorly. For example, based on our analytics software and process and my personal inspection of the property I felt it was a good property and sent a video to both the property manager and my client and my partner. We all liked the property. A couple of hours later the property manager called after viewing the property video and told me that the floor plan was very difficult to rent; "Don't buy this one". We followed her advice and looked for another property. Sometime later I found the same floor plan in a couple of other similar areas in the city and these properties had unusually long time-to-rent and rented for less than the other properties in the subdivisions. The lesson here is that NEVER buyer a property unless your property manager approves. The property manager is on the same side of the fence as you; they only make money if the property rents. They do not want another un-rentable property and an angry client.
You only have a good estimate of the profitability of a property once you know the estimated rehab cost. During the due-diligence period I always have property manager walk the property and tell me what is necessary to minimize time to rent and maximize rent. The property inspector is only looking for problems like a leaking water heater or non-functional heater. The property inspector does not care if the walls are painted black and the ceiling purple as long as the paint is not pealing. The property manager cares about the cosmetics: curb appeal, colors, flow, smells, etc. Prospective tenants assume that all the home systems work and only look at the cosmetics. In general, I do most of what the property inspector recommends and all of what the property manager recommends.
On rare occasions, the property manager will notice things about the property that will make it an undesirable rental property and you may cancel due to their recommendation. This "final" evaluation is very important.
After Close of Escrow
Light rehab & cleaning
Most property managers I have worked with will handle light rehab: replace carpets, paint, minor plumbing, etc. In my case, I have a trusted team of contractors that can do the rehab faster and at a lower cost than most property managers.
The only way to find tenants is through marketing. The property manager I work with posts the images and description on the MLS, Craigs List, Postlets, etc. Marketing is not just about posting the property's photos and information on various marketing channels, they must also follow up on each lead and get potential clients into the property and get them to submit completed applications.
Prospective Tenant Screening
Proper tenant screening is critical to finding good tenants. Some of the aspects of tenant screen include:
- Credit - These days may renters have bad credit but the key is understanding why their credit is bad. A recent applicant had a combined credit score in the mid 500’s due to medical collections. Her child got very ill and she had no where near enough money to pay for what was needed and the result was medical collections. If we did not consider the medical collections, her combined credit score was in the low 800’s. Another applicant had a reasonable credit score but upon further examination we discovered that in the past they had two collections for back rent.
- Criminal History - If the applicant has any criminal history (federal, state, county, sex offender, etc.) you do not want them.
- Back Child support & Alimony - If it comes down to meeting a court order or paying rent, you lose.
- References - The current landlord is not relevant because if the tenant is a problem, they will likely give good reviews just to get rid of the tenant. The one that matters is the prior landlord. Essentially, you ask if, “Would you like them back?” If the answer is yes, we may have a winner.
Collect all the rent on schedule
The most important task of a property manager is collecting the rent. The process is likely different where you are but below is a simplified description of how it works in Las Vegas:
- Rent due on the 1st
- On the 3rd a pay or quit notice is pasted on the front door.
- A few days later an eviction notice is filed.
- About 20 days later the tenant is removed from the property with the assistance of the constable.
While the above sounds easy, if the tenant does not pay all of them on schedule it takes a lot of time. And, while you may be willing to accept sad stories in lieu of the rent, property managers have heard it all and they want the money. Are you really prepared to do this in the face of a really, really good excuse for not paying the rent?
Long term tenant/cost management
There are multiple aspects to this issue including whether the tenant's living habits are damaging the property. If so, then the property manager needs to be proactive on this. How would you know if there is damage? I know of two ways: 1) Whenever there is a need for maintenance, the property manager's handyman enters the property for the repair and reports back to the property manager if they see any issues. 2) Periodic inspections. In the lease agreements I have seen the landlord has the right to enter the property at reasonable hours with a 24-hour notice. Most landlords do an inspection at least once a year.
All properties need preventative maintenance. For example, if there are tree limbs toughing the side of the house or the roof, long term you are going to have (expensive) problems. Periodic HVAC service, guarding against snow buildup, etc. Small problems can become expensive disasters if they are not corrected early.
If you think the only value of a property manager is to collect the rent, either you have the wrong property manager or your expectations are way too low. The property manager we work with is THE critical member of my investment team and should be on your investment team too.