Kevin Brenner, Capt, USAF
Just Fire Yourself All Ready
Well, you’ve reached the top. You spent months, maybe even years, educating yourself about all the wealth-building power of REI. You’ve spent late nights scouring online forums and reading every REI book you could get your hands on. You’ve asked all the right questions to all the right people at all the right meetups. And finally, you were rewarded with the ever elusive opportunity that all true investors chase – the Deal. Because you are educated in the ways of the Deal, you instantly recognized its value and wrapped it up under contract. After spending weeks working with lenders, lawyers, title companies, and real estate agents, you finally closed. Now what? Well, that’s easy – it’s about time you got yourself fired.
I Don’t Need A Property Manager, I’m Handy…
Before everyone loses it tells me how much they love their jobs and their careers and that they could never imagine being fired – hear me out. I mean you need to fire yourself from managing your investment property. While being a landlord has its charms, it’s not an ideal path to follow, especially if you want to continue to grow your investment portfolio. In fact, it’s a tremendous time-sucker that frankly isn’t really worth it. But, as a hard-charging Airmen myself, I figured I was different. I thought, “How difficult can it really be? I’m handy around my house. I spent a few summers in high school working for a contractor, so I know my way around a reciprocating saw. Besides, if I can hold out and self manage for a few months before I PCS I’ll save a boatload of cash. Plus, I’ve been a tenant for years, so I have a pretty good idea about how this whole operation works.”
After landlording a 100% occupied Quadplex for the summer, my attitude towards property management took a complete 180 and I was ready to throw in the towel. Between the maintenance requests, the constant complaints, the moldy drawer cheese (another story for another day), the smelly neighbor drama of 2018 (also a hall of fame tale), and the stolen door knobs – I was about ready to tear my hair out! Just before my PCS, I finally wised up and hired a professional Property Manager (PM). At first, the idea of property management seemed silly to me. Why should I pay someone 10% of my gross income to manage adults in their homes? Turns out, there’s just a lot more that goes into it all. More importantly, hiring a quality PM allows you to focus on your next deal. No investor gets rich off of their first deal. It’s there 50th or 100th deal that they finally begin to develop real wealth. So how in the heck are we going to get to 10 or 25 deals, let alone 50 or 100 deals, if we are bent over our tenant’s toilet, in full plumber regalia, addressing its “low flushing capacity?” Simple – add a PM to your team!
Is It Really Worth It?
Talk to nearly every business owner and entrepreneur out there and you’ll hear the same complaint over and over again, “It’s just so hard to find quality workers out there!” Well, the same principles apply to REI. Remember, as an investor, you own and operate real property – and that’s a business. If you want to be successful, you have to treat your properties like the business that they are. And as you can imagine that takes a lot of work. So you need to hire out some help to join your agent, lawyer, and lender. Enter the PM.
A good PM can literally make or break your investment portfolio. If your PM isn’t responding to tenant requests, or worse off, isn’t even placing tenants then you don’t make any money. And if you don’t have any tenants to pay the mortgage, taxes, and insurance, then guess who’s paying that bill…you are. Additionally, PM’s are also regulating the income and expenses for your property. They collect rent, handle maintenance requests, maintain an operations budget, handle your property’s bookkeeping, disburse owner payments and statements, and summarize the performance of your building through the use of advanced management software. My PM also handles project management on my remote rehabs! PM’s really come through during tax time when your CPA is asking you for a summary of all deductible expenses for your Schedule E. The first time I went through this I was freaking out, but like a stork delivering a baby, my PM sent me a complete yearly operations summary with all expenses clearly identified and labeled. Sent that off to my CPA and Boom! All done. Essentially, my PM does all the annoying work that I can’t do because I live 600 miles away from my investments and honestly wouldn’t want to do if I lived 1 mile away! Along with your lawyer and CPA, a great PM is a key part of a real estate investors team. So is it worth 8% per month? 100% Y-E-S.
PANIC! I Can’t Afford a Property Manager!?
Because you are an educated and savvy investor, you know that you should be calculating management expenses into your expenses when analyzing deals. Even if you want to self manage for a while, you should still run your numbers as if you were going to hire a manager. This way, when your business inevitably takes off, you aren’t stuck scrambling looking for a super cheap PM. The problem is, that PM’s do not have standard prices. So how do you figure out what to include in your deal analysis? It’s easy, just call some in your market and ask them what they charge. While the monthly rates are relatively standard, usually between 8%-10% per month for small multifamily and single-family residences, the fees can vary widely. Some PM’s may charge a tenant placement fee – sometimes it’s an entire month’s rent! Others may charge a fee if your tenant resigns for another year. If you are looking for project management on a rehab, expect to pay your PM to oversee everything. Every market is different, so do yourself a favor and call around. Google is a great tool to find some PM leads. Also, lean on your network to find PM’s that come highly recommended. Typically, any given market is chock-full of management companies. So how do you filter out the good ones from the nasty ones? Keep reading…
The Good, the Bad, and the Ugly!
Saving yourself, your hair, and your business from a bad PM is all about the interview process. You have to ask the right questions. Some PM’s tantalize out of state investors with below market rates and fees. Investors who sign on sometimes find out that these “sharks” are taking their money and not even placing tenants. Or worse, they are telling the investors that their units are unoccupied when in all actuality they are occupied and the PM is skimming all the rent off the top (cough cough Clayton Morris). Never fear, just utilize the list of questions below when interviewing your PM’s. Pay attention to how they answer these questions. If you are not comfortable, then dig deeper and ask them for more information. If you get the feeling that they can’t provide that information, then they probably haven’t been in the game that long, and may not be worth it – especially if you are an out of state investor!
How do I hire a property manager?
Behold – The List
Essential questions to ask during an interview with a potential PM.
1). What are your SFR/MFH rates? What are your fees?
Pretty self-explanatory here. Get an idea of their fee structure before you waste your time asking about the nitty-gritty details.
2). How long have you been in business? How many units do you manage? How many employees do you have?
It’s important that your PM company has been around for at least a few years. I like to see a company that has been in business for a minimum of 3-5 years. This way you know that they aren’t a flash in the pan start-up operating out of a garage somewhere. Having employees and associate managers is extremely important. A professional PM company should have a few managers, a bookkeeper, a secretary/office manager, and multiple contractors and handymen on staff (more on that later).
3). Have you ever evicted a tenant before?
It’s important to know that your PM knows the local and state tenant-landlord laws surrounding dispositions and removals (evictions). Bad things happen, and while a lot of tenants are good people, sometimes a major life event like the loss of a job or medical situation stops them from paying rent. Your PM should be prepared to handle any and all of these and other similar scenarios. Ask your PM if they charge late fees? Do they keep the late fees in house, or do you get a piece? Also, ask them when a disposition will be filed in the event a tenant fails to pay rent. Who pays for the court fees? Who attends court? How will they coordinate with the local sheriff during an eviction? All of these questions need to be asked. If your PM hasn’t dealt with this yet, it’s probably time to hang up and find someone who has. As an owner, you don’t want to be worrying about all of this stuff – especially if you are paying a PM!
4). When do you send owner disbursements? What PM software do you use? Who manages the property’s bookkeeping?
Be clear with your PM that you expect regular owner disbursements. Remember, you are running a business here and your income pays for the property’s mortgage and enables you to purchase future investment properties. If they cannot guarantee consistent owner disbursements then do yourself a favor and walk. Additionally, your PM should be using some sort of advanced software that offers an owner’s portal (Appfolio, PropertyWare, Buildium, etc.). Do some research on the big software companies and find one that you like. It’s a lot easier to keep tabs on your investments if you can easily navigate the owner’s portal of your PM’s software. If your PM doesn’t use software then W-A-L-K. In today’s day and age, it’s unacceptable for PM’s to not leverage the power of the internet to manage properties. Plus, you need to be monitoring your investments and have 24/7 access. You can’t do this if your PM has a massive bookkeeper’s ledger circa 1953 locked in their office. To that end, your PM should have a professional bookkeeper on staff. Ask who will be handling your books and how much experience they have. You definitely want a pro who knows how to handle property expenses. They will save you so much headache come tax season.
5). What type of clients do you typically take on? What grade of properties do you typically manage? I have a D- property, would you help me manage it?
Disclaimer – this is a trick question. If the PM you are interviewing even considers taking on a D- property, then you need to hang up immediately. Think about it from their perspective for a moment. A D- property is probably in a war zone that collects bottom dollar rent with a lot of crime or at a minimum, trouble tenants. The PM would have the most headaches and be making the least amount of money with this property. As a professional investor yourself, you know that investing in war zones and D neighborhoods is a bad move, so you obviously don’t have a property there. If your PM stumbles on this question, then they are clearly super desperate for your business. If they are desperate for business, then they probably have screwed up with past clients and are frankly not worth your time or money.
Making the Leap…
Take a moment to reflect why you got into this business. Remember that real estate is one of the best ways to achieve financial freedom and build wealth over time. If you want to continue to pursue your dream of achieving financial freedom and early retirement then do yourself a favor and get FIRED. We all know you have more pride than that, so QUIT first. A wise woman once gave me some of the best advice: Don’t trip over dollars to pick up dimes.
In short, it’s okay to shell out the money to hire a PM. Remember, you are hiring a professional who has the time, resources, and staff available to take care of your investment and facilitate massive growth in your own business. I promise that if you account for management fees in the front end of your deal and use the above list to hire smart, you will be well on your way to advancing your REI portfolio and career.
Kevin Brenner is an Active Duty Air Force Captain, ADPI Hero, REIA creator, blogger, and an active multifamily investor. You can reach out to him through the ADPI Facebook group!