When you purchase an investment property to rent out to tenants, you have a choice to make -- hire a property manager or manage the property yourself. Property managers aren’t cheap, so at first, this might seem like an easy choice, especially to inexperienced real estate investors. However, it’s important to know just how much value a property manager can bring to the table before deciding which way to go.
How much does an investment property management company cost?
Just like other service-based businesses, the fees charged by property managers vary tremendously.
Having said that, 10% of collected rent seems to be the industry standard for long-term rental properties, and the vast majority of property managers I’ve ever talked to charge between 8% and 12%. Some also take a bigger cut of the tenant’s first month rent to help offset the time and expense of putting a tenant in place, while others don’t. For example, a property manager may charge half of the first month’s rent plus 10% of rent on an ongoing basis. You may also be able to get a better deal if you have several rental properties, or a multi-unit property.
If your property is rented on a short-term basis (such as a vacation rental), it’s important to expect property management fees to be significantly higher (think 25%-40% of collected rent). This may sound astronomically high but consider the extra work that goes into managing a short-term rental. For example, if you rent a beach condo on a weekly basis, your property manager needs to get as many as 52 different "tenants" per year, while a manager of a long-term rental home likely needs to find just one new tenant a year, if at all.
Whatever your situation, it’s important to shop around for a property manager. Not only do the costs vary, but so do the services that are included with those costs. I suggest getting information from a minimum of two to three reputable property managers in your local market so you can compare.
Consider the value a property manager can add
The major downside to hiring a property manager is the cost. However, if the value you receive from your property manager exceeds its cost, it can be well worth it.
- Marketing know-how: A property manager will advertise and market your property to prospective tenants. My property manager has a large advertisement that runs in the local newspaper and features all of their listings -- a much better attention-getter than a simple classified ad you run yourself.
- Rental market knowledge: Here’s one area where a property manager can really create value. A good property manager will know how much they can get for a property without overpricing it. For example, I had assumed $800 in monthly rent from one of my rental units, but my property manager told me I could get $895 without too much trouble -- and they were right. This alone justified the 10% property management fee in this case.
- Showings: Your property manager will physically show the property to prospective tenants. Not having to do this is can be a major time-saver.
- Collecting rent: Do you really want to track down your tenants to collect rent each month? A property manager will collect rent on your behalf and deposit it into your bank account.
- Screening tenants: Property managers have the systems in place to properly screen tenants, such as by conducting credit checks and verifying references.
- Dealing with tenant complaints: Property managers also have systems in place to handle tenant concerns and complaints efficiently and professionally.
- Evictions and late rent: Unless you’re an experienced real estate professional, it can be extremely difficult to navigate the eviction process or even to strictly enforce rent due dates. A property manager can be an extremely valuable asset if you find yourself needing to deal with non-paying or otherwise troublemaking tenants.
- Maintenance and repair help: Property managers typically have repair professionals on call that do work for reasonable prices, and also have contractors who they can use if your property needs major work. And, because these professionals are getting repeat business from your property manager, they tend to do work more quickly and cost-effectively than the professionals you could find.
- Bill payments: Property managers can handle bill payments on your behalf, including things like property taxes, insurance, and utilities. For example, I don’t ever see the water bills from my investment properties -- they are sent directly to my property manager.
As a personal example, one of my investment properties is a triplex that brings in approximately $2,500 in monthly rent. My property manager charges 10% of collected rent, so if the property is fully occupied, they’re making $250 per month. To me, this is well worth the price. In fact, the money I saved by getting repairs done quickly and more cost-effectively than I could have done on my own probably justified a year’s worth of management fees all by itself.
As Warren Buffett once said, "Price is what you pay, value is what you get." Many landlords get tremendous value from their property managers, so it’s important to consider what you get before you choose to self-manage.
Who should consider self-managing their rental properties?
In some cases, self-managing can be a smart idea. However, here are some of the questions to ask yourself before you decide to own a rental property without employing a property manager to deal with the ongoing operations:
- Is owning rental properties an investment activity for you or is it a job? Managing rental properties is a time-consuming business activity. Finding and screening tenants, dealing with repairs and maintenance issues, and the other aspects of managing properties can take a lot of time, especially if you have several properties. I strongly advise against self-managing unless you plan on dedicating serious time to your rental properties.
- How far is your rental property from your home? Your time is valuable -- if you live 30 minutes away from your rental property, that’s an hour out of your day plus whatever time you spend at the property every time you have to go there. Plus, being far away from a rental property makes it difficult to deal with urgent issues on your own.
- Do you want to maximize profitability? As I’ve mentioned, the biggest downside of hiring a property manager is the cost. In many cases, the cash flow of an investment property is already rather low, so the difference of 10% or so of the rent can make a big difference.
- Do you need to be in control? One of the biggest lessons I learned when I hired a property manager is that they know what they’re doing and don’t need your input with day-to-day issues. If you want total control of your property when it comes to choosing tenants, performing maintenance tasks, and more, you might be a good candidate for self-management.
- Do you really want to deal with tenants? Screening tenants can be a hassle, especially if you do it right (credit checks, calling references, etc.). Plus, even if you screen your tenants well, there’s a good chance you’ll eventually have to deal with an unreasonable tenant, late rent, or an eviction. If you feel like you’re well equipped to deal with these things, great. If not, a property manager can be worth every penny.
Which is the smartest move for you?
In full disclosure, I hire a property management company to handle the day-to-day operations of my own rental properties. I simply have no desire to deal with tenants directly, I already have a full-time job, and I feel that the value a property manager brings is easily worth 10% of the collected rent.
However, that’s just me. While I believe most rental property owners would be better off hiring a property manager, there are some circumstances where do-it-yourself property management makes sense. For example, if you intend to treat your real estate investments as a part-time or full-time job and/or want as much control over your rental properties as possible, you can certainly maximize the profit potential of your properties by managing them yourself. Just be aware of all of the things a property manager would do on your behalf before you make the decision.