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How to Find a Property Manager Who Won’t Kill Your Bottom Line

Property Manager Blog - SRMD

Summary: Finding a decent property manager is a difficult proposition. In our experience, good property managers are few and far between.  While interviewing property managers is a time-consuming process, it is absolutely necessary for your success as a real estate investor. This post covers the characteristics you should look for in a property manager, and how to screen managers to find the one who will most closely care for your property like it is his/her own.

 

When choosing a property manager, the goal is to find someone who cares for your property like it’s his/her own. Unfortunately, this is a difficult proposition. Good, proactive, reliable property managers are few and far between. Even more disappointing, if you find a decent property manager, you may discover that a year or two later he/she isn’t so good any more.

Inevitably you will go through multiple property managers over the life of your real estate investing business.

Over the last four years, for example, we’ve worked with eight different property managers in four different locations. In addition to those we’ve worked with, I’ve also screened an additional 20+ property managers both on the phone and in face-to-face interviews.

 

Why so Many?

This doesn’t include the experience Kenji had with property managers when he was doing speculative investments. Part of the reason the Mississippi house mentioned in his article, My Worst Real Estate Investing Mistakes, sustained heavy losses was due to extremely poor property management.

I don’t mean to sound like a pessimist.

But I give you these warnings so that you understand the gravity of the diligence required when screening property managers. I also want you to realize how imperative it is that you not only make the right choice when hiring, but also understand the importance of closely monitoring your property manager’s work over time to ensure things are being done in the most appropriate and cost-effective way.

Just as a good property manager can ensure your property is functioning at the highest level; a bad property manager will without a doubt kill a property’s profitability. You do not want to have to come out of pocket every month to pay for your property manager’s incompetence.

The point of this post is to share our approach to interviewing property managers with the hope that it will help you learn how to identify the right property manager for you.

To assist in your screening, I’ve also created a downloadable property management interview guide. You can download this for free at the bottom of this post.

 

Identifying Good Property Managers

The easiest way to find a good property manager is to get a recommendation from someone you trust.

If you want to learn exactly which team members you need to build a rockstar real estate team, be sure to download our FREE Guide below!

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Probably the first place to start is your real estate agent. In particular, if your agent is an investor agent, meaning that he/she works with investors (or even better, is an investor himself/herself), he/she may have lots of experience with local property managers and will be able to point you in the right direction. In addition to your agent, you can also check with your local contractor or mortgage broker for recommendations.

Getting referrals from multiple members of your team makes it possible to use triangulation to determine which property manager is the best bet. If a specific property manager’s name keeps coming up over and over, that’s who you should start interviewing.

Another good potential source of referrals is someone investing in your local area. One way to get a decent property manager’s contact is to join a local investor group or go to a local real estate investing conference to network. In either case, you can ask around to see who the other investors are using and would recommend.

This approach is obviously more difficult if you are an out-of-state investor. For this reason, we’ve created the Semi-Retired Facebook Community to help you create personal connections with local area investors in good markets. Bigger Pockets can also be a source of referrals when investing out-of-state.

If you don’t luck out using any of the above, you can try Yelp reviews. If you’re looking at Yelp, be sure to pay special attention to reviews written by property owners. You’re always going to find a few reviews from disgruntled renters, which you can largely ignore. What’s most important is that you see that owners are happy with the property manager.

Once you have a few decent options from Yelp or from your contacts, you should make the time to interview multiple potential property managers to find the right fit.

 

Nine Interview Topics for Screening Property Managers

1. Rental Property Ownership

I would argue that the most important quality you are looking for in property managers is whether or not they personally own rental properties. Property managers who are investors themselves understand what it is like to be an owner. And if they use property managers rather than manage the properties themselves, they also know what it’s like to deal with property managers and their fees.

Real estate investors look at their properties in a very specific way; you want your property manager to be able to put himself/herself in your shoes. If you find a property manager who owns rental properties and uses property managers, it’s very important.

2. Management Structure

Property managers seem to come in two different flavors: generalists and specialists.

Generalist property managers manage everything for an individual property. This means that a single person rents the unit, handles the maintenance and turnover and is your main point of contact if there are any issues. The benefit of this setup is that the property manager knows your unit inside and out. He/she also knows your tenants personally, since he/she placed them in the unit in the first place. The downside is, of course, the property manager is a jack of all trades in this system and may not develop expertise in any particular area.

Specialist property managers divide up the tasks among different “specialists” in the office. There is often a leasing specialist (and sometimes even a renewal specialist), a maintenance specialist, a bookkeeper and even a designated person who handles customer service. The nice thing about this setup is that you do get some efficiencies by having someone only taking care of leasing for example. By specializing in one area, they become highly proficient at determining fair market rents and putting together the listing. The obvious downside is that everything is split up and often one hand doesn’t speak to the other. You will likely find that you are bounced around from person to person before you reach the specialist who is charged with handling a particular issue.

Which one is better? It’s hard for me to say that one model is better than the other. So your choice probably comes down to personal preference.

3. Standard Fees

The fees for management and leasing are different for all eight of our property managers.

Management fees generally run 8-10% of gross rents per month.

In our experience, the exact rate is negotiable depending on the number of properties you own. We negotiate a lower monthly rate with most of our property managers once we have 5-6+ units/doors with them. Our current lowest monthly rate is 7%.

Leasing fees usually range from zero to one month’s rent. The zero is usually associated with a high monthly property management fee. Most of our property managers charge 50% of the one month’s rent.

When a tenant wants to renew their lease, there are sometimes additional fees. One of our property managers charges $150 for a renewal. Others charge nothing for renewals.

One property manager we use charges 10% for property management but nothing for leasing and renewals. However, this particular property manager collects a one time fee for registering a unit in their system.

While it’s important to compare fees, I wouldn’t base a decision to hire a property manager on cost alone. Sometimes it’s worth spending a little extra to get good service.

4. Hidden Fees

It seems like most property managers “nickel and dime” their customers. Therefore, be sure to ask about every fee imaginable, so you aren’t surprised later.

The biggest fee (and one that many new owners aren’t aware of) is an up charge on all repair/maintenance calls.  For example, if a tenant calls your property manager about a leaky faucet and the plumber charges $150, you’ll get a bill for $150 plus an additional fee. This can be a flat fee, a flat percentage or a sliding scale.

Among these, the flat fee or the sliding scale is the most reasonable to us because it is supposed to cover the extra administrative time it takes to handle these calls. A flat percentage should make you run the other way. This is because your fee goes up with the cost of the repair or issue. I just interviewed a property manager in in OKC who charges 25% on top of the cost of the repair or service! So for a $2,000 repair, you’ll end up paying an additional $500. Yikes!

 

Another Example

Another hidden fee is an up charge for paying your bills. For example, we had one property manager charge us 10% whenever they paid a utility bill. As above, the flat percentage didn’t make sense to us. Luckily, we were able to negotiate to have this fee waived.

Inspections are another area where property managers can hide fees. Be sure to ask if your property manager does yearly or bi-annual walk-through inspections and at what cost. Some property managers will do these walk-through inspections at no cost. Other property managers charge around $100 per property inspection. The goal of these property inspections is to see how your renters are keeping up the property and to identify any maintenance issues early, before they cause too much damage.

We’re currently doing an experiment with one of our property managers to see if the bi-annual property inspections actually save us money in practice. Once the year is finished, we’ll update you on how it went.

For us personally, we would rather pay more per month to a property manager in management fees than deal with the these hidden charges. In addition, we believe that by increasing the management fee, you are better aligning incentives with the property manager, i.e., they will have an incentive to increase rents, not spend more in service calls, maintenance and property inspections.

5. Renter Placement

There is a wide range of what property managers will do for screening tenants.

Screening tenants can range from basic credit screening to more in-depth criminal, national and in-person screening. Obviously, the more in-depth the screening, the higher the likelihood is that you get a better tenant.

One of the most frequently used and most basic of criteria is credit score.

While you might think credit score would be an excellent screen, there is a potential downside to only using this method. Consider the tenant who has a slightly sub-par credit score. This tenant will likely have difficulty renting units, so he/she will be motivated to stay in an apartment for a longer period of time. This might be the type of tenant you actually want.

Using a strict cut-off might take out potentially good options. And not digging a little deeper to understand why a “good” renter has a low credit score will cause you to miss an opportunity.

Another screening tool is to call tenant references. This can be extremely effective in identifying problem tenants. The downside (yes, there is one!) is that tenants can list their friends as references or even have their friends pose as previous landlords and give them good reviews. Nevertheless, we tend to favor property managers who make the effort to call references rather than just write it off as a lost cause.

Overall, we try to assess whether or not a property manager has an effective approach for screening renters. We then rule out those that seem to skip steps or have loose policies.

6. Rental Property Showing

There is also a range of what property managers are willing to do in terms of showing units.

Many of the property managers we work with now use self-showing technology such as Rently. The downside of this is that their staff never actually meet the prospective renters. The renters let themselves into and out of a property alone.

I think there is a lot to be gained from actually meeting a renter in person and interacting with them as they view the unit. Doing this not only gives you information about the potential tenant, but also allows you to gain insights into your property. If multiple potential renters note there is not enough storage, for example, it’s probably worth addressing this by adding a storage unit (and offering it for a monthly fee to the renter of course!).

Using Rently isn’t necessarily a deal breaker for us. It’s just that if we (or you) come across a property manager who actually meets prospective renters in person, we consider it to be a good thing.

7. Flexibility and Willingness to Adapt

When we first started working with our two property manager groups in the Seattle area, neither of them had rented out a detached garages or storage units before. They had never marketed them. They didn’t even have a lease that covered them. Since this was new to the property managers, doing so required flexibility and willingness to try something new.

Along those lines, another area that is often new to property managers is collecting pet rents and non-refundable pet fees. In our experience, pets add to maintenance costs. Therefore, if you’re going to rent to a pet owner, you need to collect more money from your tenant to cover these higher costs. On occasion, we’ve run into property managers who had never charged pet rent before or collected non-refundable pet fees.

It’s insightful to listen to property managers’ reactions when you bring up pet rents, non-refundable pet fees and renting out garages and storage units. Some property managers are entirely closed to trying anything new. Others have good explanations for why it has not worked in their market in the past. Others are open and excited about hearing about different ways of doing things.

If you run across a property manager who is not open to new ideas, you should consider moving on. On the other hand, a willingness to work with the owner to think creatively about maximizing rent is a great sign for your future relationship.

8. Additional Services

Another criteria that we look for in property managers is whether or not they provide additional services and at what cost.

For example, we often ask property managers to give us rent estimates and attend property inspections even before we’ve purchased a property. If you are new to a market, this is a good way to screen property managers.

It’s not foolproof, but it’s a good sign when a property manager is willing to provide these additional services without a preexisting relationship.

9. Communication

During the course of an interview, you’ll probably be able to determine if you’re able to communicate effectively and work with a particular property manager. It’s important to look for someone who listens and can engage in a rational discussion.

You do not want a “yes” man/woman. You want someone who will give you their honest opinion, not just what you want to hear. For example, we have a friend who had a rental sit on the market for three months because the rent was too high. It turns out the property manager knew the rent was too high but didn’t say anything. Our friend was told that the property should rent for that amount when she bought it.

You also don’t want a manager who constantly makes excuses and doesn’t admit to mistakes. A simple “sorry” often goes a long way and helps facilitate good ongoing dialogue between owner and property manager.

In the end, the relationship with your property manager forms the basis of how successful you will be as a property owner. I sometimes wonder if we should choose where we buy properties solely on the quality of the property manager.

I am not kidding. Your bottom line depends on it.

Action Plan

  1. Network to identify potential property managers
  2. Download the Interview Guide
  3. Interview multiple property managers to find the right fit
  4. “Manage the manager” by closely monitoring your property manager and holding them accountable over time

Download Your Build Your real Estate Team Guide Now!

Do you want to learn how to creatively fund your real estate portfolio and achieve financial freedom? Join the conversation! Follow our Semi-Retired MD  Facebook page and join our Doctors or Professionals  group!

Semi-Retired M.D. and its owners, presenters, and employees are not in the business of providing personal, financial, tax, legal or investment advice and specifically disclaims any liability, loss or risk, which is incurred as a consequence, either directly or indirectly, by the use of any of the information contained in this blog. Semi-Retired M.D., its website, this blog and any online tools, if any, do NOT provide ANY legal, accounting, securities, investment, tax or other professional services advice and are not intended to be a substitute for meeting with professional advisors. If legal advice or other expert assistance is required, the services of competent, licensed and certified professionals should be sought. In addition, Semi-Retired M.D. does not endorse ANY specific investments, investment strategies, advisors, or financial service firms.

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Hi, we’re Kenji and Leti

we provide coaching and mentorship for doctors and high-income earners

Several years ago, we were newlyweds working as full-time hospitalists. On paper, it looked like we had everything: the prestigious careers, the happy marriage, the luxurious rental home, the cars, etc.

But in reality? Despite having worked for several years, we had very little savings. Despite our high income, we had very little freedom in terms of time or money.

One thing was clear: we had to do something.

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