A very common question in the Real Estate investing world is; how do I invest in an area I don’t live in? This is a difficult question for me to answer, since I have never invested outside of my market. With prices in urban areas well out of reach for many investors it is a very important topic. Instead of completely ignoring the subject, I have decided to take on the subject one step at a time. The first article will be how to find a great property manager, which is a key to any long-distance investor or any investor who doesn’t want to manage properties.
I have never used a property manager on my personal rentals, but my parents have used a property manager on a couple of rentals we own together. I don’t discuss these rentals much, because they were purchased when I was in college and were purchased without using my strategies and techniques. They cash flow, but not nearly as much as my current rental properties. One of the properties is a 2 unit college rental and one is a single family rental property. We have used my sisters property management company to manage these two rentals and she has done a great job.
My sister’s property management company
I helped my sister start her property management company when I was in high school back in 1996. I did not do a lot of work, but I helped show houses while she was going to school in Boulder about an hour away. Her management company focused on college rentals, because that is what she primarily invested in. She started investing in college rentals at a very young age and has 7 college rental properties now. That may not seem like a lot of properties, but they all have multiple units. She managed 120 houses at the peak of her property management, but has recently scaled down to handle just her own rentals in 2011. She has a doctorate in physics and decided she would rather concentrate on teaching and physics projects than property management.
My sisters name is Wendy Adams and I asked her to help me with this article since she has much more experience with property management than I do. Wendy had some fantastic ideas for investors who are looking to hire a good property manager, many of which I will discuss below.
How much does a property manager charge?
The reason I don’t hire property managers is they cost money and single family rental properties are relatively easy to manage. I have seven single family rentals (not including the ones I own with my parents) and I plan on buying many more, in fact I plan to purchase 100 by January 2023. I say single family rentals are relatively easy to manage, but that may be because I have my wonderful wife Jeni, do most of the managing. I promised her as soon as we reached 10 properties I would either hire a property manager or start my own property management company. One of my best friends is going to start working with me soon, so he can learn the Real Estate business. One of his first tasks is going to be setting up a property management company. Hopefully the company can keep all the hassle from myself and my wife and maybe make a few extra bucks as well.
Typically a property management company charges between 8 and 12 percent of the gross rents received and some charge leasing fees on top of that. According to Wendy a typical leasing fee can run as much as one months rent. If you are paying 10% of gross rents and one months rent for a leasing fee, that can eat into profits very quickly. I think most investors should be able to find a decent property management company that does not charge that leasing fee.
Identifying property managers
The first step in picking a property management company is finding potential property management companies. By performing a simple web search, you should be able to find the largest property management companies, but there are many smaller management companies that may not show up in those searches. My Real Estate office, which has about 30 agents, has three property managers in it and none of them advertise except for word of mouth. My suggestion, is to always ask your contacts in the area who they know. If you know a realtor, title company, investor or anyone else in the area, ask them who they recommend for a property manager. Many small property management companies do not advertise and may be more difficult to find.
Before you call a property manager for an interview, do these things first
Property managers will promise great service, but how will you know for sure until you actually hire them and see how they perform? Wendy suggested some great ideas to help investors get an idea of how good a property manager is, before you interview them.
1. Check to see how many vacant properties a property management company has listed before you all them. They should have a website or directory that lists the properties they have for rent. When you call the property management company later on, ask them how many total units they manage. You can then calculate the vacancy rate for that particular company. Check the vacancy rates in your area and see how close the companies vacancy rates are to the regions vacancy rates. My sister says there are a few companies she knows of that have 10 to 20 percent vacancy rates in our area right now and our regional vacancy rate is under 2 percent. Red flag!
2. Call the property management company as a potential renter on a house they have listed for rent. According to Wendy, you will most likely you will reach someone’s voicemail. See how long it takes them to call you back, how knowledgeable they are and how soon they could show the property. When asking questions about the home, ask simple questions that the manager should know. Ask how old the home is, how many square feet it has, how many parking spaces, what type of heating. This will give you a great idea of their knowledge and service level. My sister said people would be very surprised on how many companies will not call back a potential renter.
3. Drive by properties a management company has for rent and see how well they are maintained. As an investor you will be depending on the property management company to maintain or make sure the tenants are maintaining the property. If there is a dead lawn in front of every house a particular management company manages, that is not a good sign.
4. Check the BBB to see if a management company is a member or has had a lot of complaints filed against them. This suggestion can be deceiving, because almost every company that does a lot of business is liable to make a couple of people mad. Some people just like to complain, no matter how fairly or unfairly they are treated. The BBB gives companies that have complaints against them a chance to respond and give their side of the story. If a property management company cares, they should at least be responding to complaints to explain how they saw the situation. If you see a company with an abnormally large number of complaints against them from investors that maybe a bad sign.
What to ask a property manager?
Eventually you will need to interview property managers. There are many questions to ask the property manager and they will have their own sales pitch to give you as well. Here are some questions to ask a property manager once you have narrowed down a few good candidates.
1. How many properties/units do you manage?
2. What is your specialty? College rental, single family, multi family, commercial?
3. How long have you been in business?
4. Ask if they are a member in good standing with the BBB. You should have already checked on this, but you can see how their answers compare with your research.
5. How many people work for you? This will give you an idea of how much they can handle based on how many unit they manage.
6. Do they have a Real Estate license? Many states, including Colorado, require property managers to have a license.
7. How much do you charge and are there any extra fees for leasing?
8. Do you have any monetary agreements or affiliations with the contractors you use? Most states require property managers to disclose any kickbacks they receive from contractors. Many property managers use contractors as an extra source of income, either by marking up prices or having ownership.
9. Do you own rental properties yourself, what kind how many do you own? If a property management company has 100 units they manage and they own 85 of them, whose properties do you think they are going to try to rent first?
10. What type of insurance do you carry? A property manager should have E and O insurance if licensed and general liability insurance at a minimum. The last thing you want is someone getting hurt at one of your properties and suing you, because the property manager who screwed up has no insurance and no money.
Hopefully these tips will help you find a great property management company. Don’t be surprised if many of the companies you call aren’t taking new clients. It takes a lot of work to manage properties and many companies do not add new clients on a continuing basis. I know my sister would not add new clients for years, unless she knew them personally. If you have any other tips, please leave a comment and let me know.