Nearly 11 million people in the United States out of about 330 million individuals own rental properties to generate income. And of the roughly 50 million rental housing units in the U.S., roughly 41% of those units (20.5 million) are operated by individual investor landlords.
Although classified as “passive income” from the Internal Revenue Service, being a landlord can be a lot of work. In addition to arduous work of finding good tenants, landlords must also answer calls from their tenants when something goes wrong — usually in the middle of the night, on the weekend, or while you’re out of town. Of course.
Some of these calls are major and must be addressed immediately, such as a faulty heating or air conditioning unit (especially in Texas in the summer). Less urgent maintenance items could be fixing an appliance or minor carpentry repairs. Because of those headaches, about 50% of individual investor landlords choose to hire a property manager to handle all the day-to-day operations — for a fee, of course.
Before looking at the pros and cons of hiring a property manager, it helps to define what a property manager does first. Basically, a property manager acts as a middle man between the owner of the property and the tenants. Basic responsibilities include understanding local laws and code regulations, handling maintenance calls (especially those middle of the night ones), and working with contractors to get those repairs made. (Keep in mind, the landlord is still responsible for the direct costs of said repairs. Managers also typically make the budget and collect all the information the owner needs to pay taxes on the income generated by the unit.)
Another big piece of the property manager’s job is filling vacancies. This is a crucial role because empty properties don’t generate any income. Ideally, the property manager has experience marketing properties, screening tenants, handling showings, and negotiating leases. A good property manager has to know the laws where your home is located to be able to handle any registrations with the city the home is in.
None of these duties are particularly difficult, but they do take time, especially if you don’t do it all the time to get a good, efficient system in place. Even some of the best, long-term tenants who take great care of your home can get downright cranky when things aren’t working right. My husband is great with handling these interactions, but not every real estate investor is up for this challenge.
- Do you understand the local laws and regulations around home rental in your area? All 10 of our properties are in Tarrant County, but in five different cities within the county and each one has their own rules when it comes to tenant-occupied housing. One city requires a new inspection in between each new tenant. Something I just found out when I posted the for rent listing and someone from the city called me as they troll the local for rent listings. The city charged about $125 to come out and make sure the property is safe and up to code. These inspections are weird as there often isn’t a lot of information about what they’re coming to inspect (so you know what absolutely needs to be working). I’ve also found many of the inspectors are hired third-party contractors working without a set script from the city so the rules can change. Sometimes the inspector just checks for working appliances, vents, egress, and fire alarms. Other times they can get nitpicky, like the one inspector who argued our brand new kitchen needed a backsplash.Since we always work to keep our properties in good condition and safe for our tenants, these aren’t hard tests to pass. But they can be stressful and the city inspectors are often worse then plumbers when they say they’ll be by the property between 8 am and 6 pm so you spend the day waiting. A good property manager should understand all these local rules at the get go and be able to set the meetings, attend the inspections, and coordinate any necessary repairs. Their knowing these hoops from the get-go should get a new tenant into your property as soon as possible, saving you on vacancy costs. The downside of this is it can be important for you, the owner, to also understand these rules. Plus I personally have found most property managers don’t know as much as they should about local laws.
- Do you have a relationship with local vendors to fix issues when they arise? Repair management is a huge part of the job of owning a property for rent. You can try to do the work yourself, but that can be time consuming if you have another job. And no matter how handy I think I am, a professional can usually do it 10 times better than me in half the time. Plus, we’ve found it’s better to have a team of contractors on all for specific problems, like plumbing, roofing, foundation, and appliance repair.My husband has done an amazing job creating a team of professionals who take his call and act accordingly when there’s a problem. I make sure to always pay them promptly so that they know they will get paid for their work. (Side note – it’s amazing how many people try to argue with vendors about prices after the work and stiff them for payments.) A property manager is likely also managing several other properties and knows who to call when such issues arise. Due to the volume of their work, this makes contractors likely to work with them and often at a volume discount. However, working with a property manager means you aren’t there to personally oversee the repairs so what they do might not be cosmetically what you envisioned. Plus, you aren’t building those relationships personally in case you lose your property manager.
- How well do you handle conflict? This is what I find a lot of folks aren’t prepared for — the conflict that in inherent with owning a rental unit. How will you handle it if a tenant is routinely late with their rent or, worse, stops paying altogether? What if you start getting noise or other complaints from neighbors? This can lead to some awkward conversations. For example, we had one couple who kept flushing their condoms down the toilet causing plumbing issues in our older home. Our plumber (nervously) delivered the news to my husband who had to pull the tenants aside and tell him to change their behavior. Awkward. But that’s the funny story. The more difficult ones are giving people notices to vacate the property due to non-payment and having to hold firm when they give you a sob story. These personally stories are probably true, but it makes it hard to be make the best professional decisions when emotional.Property managers have the luxury of taking the emotion out of any conflicts. They are not emotionally attached to the property or the tenants (nor do they feel a need to be “liked” which is my problem). They can be firm, matter of fact, and by the book — it’s not their property, they’ve just doing their jobs. Good property managers also should know some in between tips that can help with a sticky tenant, such as incenting a bad tenant to move by offering their security deposit back the day they turn in the keys (a tip I learned from my broker.) This hybrid solution got the tenant to move out quickly and got him motivated to take all his stuff with him, leaving me with an empty property. This is far superior than having to evict the tenant or the tenant fleeing in the middle of the night and leaving a house full of junk that you have to hire someone to haul off.
- Are you good at record-keeping and accounting? When it comes to keeping good records of your property expenses, all expenses have to be kept separate from each other. This can be annoying if you’re going to Costco and need to have three separate charges to buy air filters from property A, a new toilet for property B, and a case of beer for yourself to deal with properties A and B. Part of wine service of a property manager will be to keep all these expenses separate and easy for you to handle come tax time. Your property manager should also be helping set a regular budget for expenses and well as routine maintenance. The manager should be looking ahead to preventive maintenance like getting the AC and heat inspected each year to prevent problems. The budget should also give you some idea of longer-term items that may need replacing so you can plan ahead. There will always be some surprises, but a good property manager should be helping you prepare that in 3-5 years you can expect to replace the roof, replace an appliance, or trim the trees. Handling this jobs when it’s not an emergency is more cost efficient than waiting for a tree to fall on your roof.That said, it’s not difficult to keep up with your expenses now that everyone has a smart phone on hand at all times. Personally I’m a fan of an app called Expensify which allows me to forward my expenses and then sort them by property. It also has some nice features allowing me to split a single expense (like tax services) over all the properties. And if you’re working with your own team of contractors, ask them when and what will need to be replaced in the future so you can make your own budget on what expenses to expect.
- Are you local to the property? Do you plan to stay that way? Proximity is key when it comes to owning a rental home. If you do it yourself, you’ll need to be available to show it to prospective new tenants, meet with your tenants, and arrange work from contractors. So far, all of our properties are about 30-45 minutes away from our house and we try to keep them clustered. That helps for meeting tenants, but it also helps for repairs. We have found most contractors also cluster their activities and only work in certain parts of town. Many will only work in the Fort Worth area and not in Dallas at all, and vice versa, even though the cities are just thirty miles apart. If you live out of town (or have plans to move of the area), your likely better off hiring someone who can be on the ground to go over to the place and check on it for you. Having someone on the ground who can lay eyes on the property can be key in an emergency.
One of the biggest cons of hiring a property manager is the cost. Depending on the property, the location, and your deal with the property manager, you can expect to pay between 8% to 12% of your gross rent per month as a maintenance fee to the property manager. Then there are additional costs you can expect such as placing a new tenant or renewing a lease.
On the pro side, how much time do you want to spend on this enterprise? Depending on what else is happening in your life, it may be worth those fees just for the peace of mind to outsource the day-to-day and just take a check for whatever is left over. Your choice.
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