Real estate investing can be a lucrative venture, with the average investor generating $124,000 in gross rental income annually. Although some may see real estate investing as a source of passive income, it’s essential to remember tenants and clients are relying on you to provide excellent, on-demand service.
So, what happens when you believe you’ve bitten off more than you can chew? It’s time to call in a property manager.
When should I consider hiring a property manager?
The answer to this question will vary and depends on an investor’s level of experience, portfolio size and the desired level of involvement with guests and tenants.
Nicely, who currently has 15 lease-option homes in her portfolio, says she reached out to a property management company after purchasing and renting her seventh home.
“There’s a tipping point of where you feel overwhelmed,” she said. “And there’s another tipping point to where you’re making enough money to where it makes enough sense to pay [a property manager].”
“The reason why we’re real estate investors is so we can live our best life now instead of in 40 years when we retire,” she added while noting that property managers can help investors achieve that goal.
On the other hand, Greer says investors should hire a property manager as soon as possible, especially if they’re a newbie purchasing properties outside of their local area.
“If the property is remote from where you are (greater than 30 minutes), you definitely should evaluate getting a property manager,” he said. ” If not, you’ll be self-managing, and it’s a three-quarter-time job for each property.”
Greer says having a property manager already in place can help investors decide which properties to purchase based on the level and scope of service that the manager offers.
Investors who have chosen a full-service company with an expansive service area will have the range to purchase a property in another city or state and can quickly scale their portfolio.
However, investors who have chosen a partial-service company that only offers rent collection and advertising may need to stick closer to home and keep a smaller group of properties.
What kind of property management company do I need?
Nicely and Greer say investors must know property management companies are not one size fits all. There are full-service and partial-service models, and there are companies that specialize in residential or commercial properties.
“There’s full-service property management, and it includes marketing, reservations and sales, guest services, property care, and financial management,” Greer explained. “These companies also take care of permitting.”
“There are other platforms and companies out there that I would call partial service,” he added. “They’ll syndicate the property across multiple channels, and then the investor or owner will take care of guest services.”
“That’s the primary difference people should start with. Most investors want full service because it’s more scalable.”
Beyond choosing between full and partial service, Nicely says investors need to know the distinction between residential and commercial property managers.
Beyond financial and maintenance services, Nicely says residential property managers need to have impeccable customer service since your renters are the ones responsible for the return on investment you’ll experience.
On the other hand, commercial property managers need a different set of skills that rely less on customer service and more on logistics.
“Property management commercial spaces like truck shops and office spaces do take a different skill set,” she said. “Those tenants are looking more for a car count.”
“They want to know how much traffic is coming by the location; they want to know what property improvements they can make, they want to know how many people the fire marshal says they can have in this property, and they want to know what it’s zoned.”
Lastly, Nicely and Greer say investors need to determine if they want to choose a local or national management property.
Nicely prefers working with “ma and pa” businesses who only manage local properties.
“There are some national property management companies that manage a lot of beach houses in multiple states,” she said. “I don’t know if those people are going to know the local market and the really good ins and outs as someone who is local who is managing local properties in this one beach town.”
Greer says national companies can be an excellent option, thanks to their better advertising power and resources. However, he notes investors should make sure large-scale companies have local experts who will serve as a point person.
“It’s very key the company has local staff, and the investor knows who’s going to be taking care of that property,” he said.
How much does hiring a property manager cost?
There is no standard cost for a property manager since each company has its own set of services, contracts, fees, and terms.
“Like any other service, it depends,” Greer said. ” Like when you’re getting an insurance quote, the cost depends on what you’re getting. It’s important that when people evaluate what the cost [of a manager] is, that they’re considering what’s included.”
Greer says a company may have a low management fee that’s only 10 to 15 percent of the gross rent. But, the company then tacks on smaller fees for every additional service.
“[These low-management fee companies] charge [owners] for credit card fees, advertising fees, and charge them to get photos of the property, etc.,” he added.
“What investors need to look at is the effective management rate, so from all the money being generated, how much am I getting back.”
Nicely says she’s noticed that most companies operate on a sliding scale where the fees will increase or decline based on the number of properties you have.
“It depends on the property and how much handholding comes with the property,” she explained. “Some contracts say the company gets 10 percent [of the gross rent] until they’re managing ten or more properties, and then they come down on their percentage.”
“However, I’ve seen some vacation management companies where the percentage goes up as you add more properties and bookings and how much you want to be involved,” Nicely added. “For example, I’ve seen the fee jump from 30 to 50 percent.”
What does a property management contract include? Is there room to cancel?
Much like every other answer thus far, it depends.
Nicely says most companies will take state-issued real estate commission forms and contracts and edit them to include stipulations for things such as repairs and tenant approval.
“For example, you can set a limit for repairs in the contract,” she said. “You can say that you can fix anything up to $1,000 and take it off what you give me every month.”
Most contracts are for 12 months, and companies will automatically renew them unless you ask for a renegotiation, Nicely noted as a word of caution.
Greer says investors need to comb through contracts carefully and zero in on the cancellation process. Most companies charge a fee for cancellation and require that all future reservations are still honored.
“At Vacasa, it’s very important for us to keep the reservations guests have booked,” he explained. “So if someone books a property for a family retreat or something like that, the homeowner can get out of the contract with a 30-day notice but they have to honor the reservation that’s after that 30 days.”
I’m having a hard time choosing between two management companies. What should I do?
Greer says there are plenty of excellent property management companies that offer comparable services. If you’re feeling stuck between two or three options, Greer says investors should look at the incentives each company offers alongside investor reviews.
“Ask them if they have a program that measures the satisfaction of their investors or homeowners,” he noted while mentioning that Vacasa has a standard net promoter score that’s updated quarterly.
Furthermore, Greer says investors should give bonus points to companies that help with permitting and offer opportunities to build your portfolio.
“In more mature markets, there’s a pretty standard regulatory process,” he noted. “Even with that, investors typically need some support in getting the property permitted correctly. So, ask if the company helps with permitting and fees.”
“Next, you should ask about what opportunities for additional investments can that company bring to you,” Greer concluded.
“There are homes within a management portfolio that end up selling, and it’s likely that property management company will know when an owner wants to sell their house, and they can help make those connections.”