May 21, 2020
Real estate investing is a fantastic way to grow your money and let it work for you. It’s an often- used strategy that can open the door to financial freedom, early retirement, or even become wealthy. But like all investments, there are pitfalls to avoid, and if not executed properly, can result in a ton of headaches and painful financial losses. One of the questions faced by investors is whether they should utilize professional property managers or do the work themselves. Let’s dive into this topic a bit.
The answer, as in many areas of life, will be different for everyone, depending on what your personal situation is. It’s a matter of weighing the pros and cons of what the best use of your time is or and whether or not you want to deal with your tenants.
In general, if you only own a small number of properties, you may do just fine by doing your own property management This is especially true if you are a hands-on kind of owner. You may get much satisfaction from doing your own repairs and solving problems. However, this too may turn out bad for owners who even have just one or two rentals.
When they learned that I had gotten into property management, two of my personal friends volunteered their stories and told me that they wished they had hired a property manager to take care of their last rental. These ones did not know how to properly ‘vet’ their tenants, going off of emotional surface factors such as “they look like they’re really nice” or “I like these guys -- they’re cool!”
Both ended up selling their rentals to cut their losses after their tenants had destroyed their house, costing thousands to repair. One couple said that they were out an additional five thousand dollars the tenant never paid for the three months’ rent prior to their eviction. Both owners say that they’ve learned their lesson so that, if they decide to invest in a rental again, they would definitely use a PM to take care of it.
Then, there are landlords like Charles Hobart, a retired professional photographer who managed three of his own rentals for several years (by the way, Charles is my own father). He is ultra-friendly, likes meeting people and always has a soft heart to help them anyway he can. A self-described “avid DIY (do-it-yourself) guy,” he views himself as a pseudo handyman who doesn’t mind getting calls from his tenant, values the rewards in maintaining his own properties to benefit his tenants, and relishes in the learning opportunity to fix things, even though he takes three times as long and costs himself financially because he loses precious opportunities to get tenants in sooner! (Really, it’s painful watching him but he insists on doing things his way...I apologize for digressing. He is, after all, family.)
After six years of managing his own rentals while in retirement , he has scaled back to only one rental home. Out of six renters, all of whom he selected and approved on his own, three thrashed two of his units after their move out, requiring significant repairs each time. This resulted in major rehabs that obviously ate into his profits. Yet he maintains that, if he had to do it all over again, he would again self-manage his properties, with one major exception.
“The one thing I would do differently would be to have you (April) approve my tenants first,” said Hobart. Lucky for him, I am there to do this because I have a PM business. Otherwise, he would be right back to square one because there is no service that I know of where he could go just to find good tenants without signing a PM agreement.
At the very least, now he values much more the process of vetting his prospects seriously, as opposed to his previous method of approval -- if he liked them upon meeting them once, they were approved. Because he is my dad, I volunteered to vet his last two tenants for him. These turned out to be the best tenants he ever had who regularly paid their rent on time, and of the one that moved out, left the place in great shape. The other tenant is still living there, paying regularly, with minimal fuss.
Another investor I interviewed who owns about a dozen properties, managed his own rentals for many years and was successful at it. He, too, enjoyed knowing his tenants personally and felt that he could do most repairs on his own properly and was good at what he did. Eventually, though, the constant maintenance requests got the best of him. He decided that PMs were worth the price to free up his days to do what he wanted as he sought more time to devote to his volunteer endeavors and to his family. Now all of his fourplexes are all professionally managed.
On the other hand, if you own more than just a few rentals, you will more likely need the services of a good property management company. PMs will take over many tasks that take up much of your time, especially with regards to handling unpleasant tasks that most landlords hate having to deal with on a day-to-day basis, such as shopping vendors to handle maintenance requests or issues that can consume hours.
So that brings up a good question: What DO PMs do anyway?
“Management companies deal directly with prospects and tenants, saving you time and worry over marketing your rentals, collecting rent, handling maintenance and repair issues, responding to tenant complaints, and even pursuing evictions,” says nolo.com, a website dedicated to helping people navigate through legal questions and provides legal help.
With such a list of duties that most, if not all, large investors would not want to touch with a ten-foot pole, it's no wonder that PMs are viewed as a valuable piece of their investment strategy and they are willing to pay for this service. PMs free up investors valuable time that can be better put to use to grow your business, which includes searching for new properties, evaluating deals, meeting other investors to arrange financing or managing current projects in various phases of remodeling.
Rick Taggard, an investor with a sizable portfolio in both California and Nevada says that, for him, property management is a must. “Can you imagine what would happen if a couple of my rentals in Las Vegas lost their A/C in the summer and I’m out working on my ranch and my phone’s not with me? I can’t afford to leave those tenants without air conditioning in that kind of heat, those repair needs must be addressed ASAP, so I have people that do that for me quickly. I also have to make sure that every tenant has been properly checked before I agree to rent to them. Nowadays, credit and background checks have to be done so that I know who I am really renting to. Some of my properties are apartments with multiple renters in the same building. I have to make sure that, not only can new tenants have the track record that they can pay monthly, but also that they do not pose a threat to my current tenants.”
Some other things to take in consideration on whether hiring a PM makes sense for you or not:
If your property is not near to where you live. In this case, you really do need someone nearby to take care of the day-to-day activities on a monthly basis and to be able to look out for your property. Additionally, if the property is out of state, then it’s even more imperative that you have a professional company manage it. They would likely know the legal ins and outs of their business, especially when it comes to tenant rights, unpaid rents or evictions. This is further magnified in the current corona-virus pandemic with tenants having the ability to forgo payment and not face evictions. Furthermore, some states, such as Nevada, have laws requiring property management if you live a certain distance away from the property.
If your rental is a side hustle. Here again, you may not have the time or energy to deal with the tenant(s) you have, as your full-time job is doing something else. Plus, as in the above situation, you may not be ready to handle the legal aspects of property management.
You don’t want to deal with your tenants. Most mom-and-pop landlords think that renting out an extra house can be a smart and easy gig to pad some extra income, not knowing how a friendly start with a prospect can quickly lead to a seemingly unending nightmare. Then when things get to the point in which an eviction is inevitable, many find themselves hate having to become the ‘bad guy’ and taking legal steps to evict someone they started out liking. This emotional strain is usually not anticipated and is very difficult to go through, in addition to the financial expenses and probable fix up costs to get the rental ready for the next tenant, since the majority of evicted tenants do not leave the place in great shape.
You don’t want to employ others. Perhaps the best scenario for you is to hire a resident manager to take care of your properties. However, you don’t want to be an employer for whatever reason, you can contract out that service by hiring a property management company. You, then, simply pay a fee to get their services without being an employer yourself. The PM company is not considered an employee.
You have to have control. Some owners are simply not comfortable letting someone else handle something as important as their rental property. They feel that they must be ‘hands-on’ when it comes to repair matters/costs or dictating policies regarding the tenant. In this case, you would do well to manage the properties yourself.
Of course, there are even more scenarios that are not discussed here. Needless to say, property management is a time-consuming and difficult business and, in the right situations, can do wonders for your investment strategy. But, it’s like life insurance, you may not want to pay for it because you think you don’t really need it. Until you really need it, of course.
If you have any questions on these or other situations, please feel free to reach out to me.