Property Managers, The Downside

scrooge-28854_1280-PDProperty Managers (PM) that do turn-key management have goals that are often opposite of an owner.  This is especially true of inexperienced PMs.  A PM makes money when they fill a unit.  A PM makes money every month when rent is collected, sometimes even if it is not collected.  A PM makes money when your place needs maintenance.  A PM makes money on an eviction.  A PM makes money when they turn the unit.  A PM makes more money when they have to evict and turn a unit, than when they are renting it to a long term, good quality renter.  A PM makes more on subpar renters, than solid ones.  You make more money on a long term, good quality renter.  Remember, great tenants manage themselves.  It is cheaper to lower your rent, and get better tenants, than hire a PM.

Want a good PM Contract?  Make the PM pay you your anticipated rent, every month, unless the tenant moves out in accordance with your lease.    If the tenant is evicted, make them pay for the eviction costs, and the re-filling of the unit, while still paying you your portion of the rent.  Let the PM get reimbursed for any damages from the tenant themselves, instead of you trying to collect the damages.  That PM contract will never happen, as a being a PM is a no-risk venture.  A PM has no ‘skin’ in the game, and they want to keep it that way.  100% of the risk is the owners, yet the guaranteed profits are the PMs.  If the PM was subleasing the property from you, they would have a different methodology.

Many PMs are failed realtors, turned PM.  They typically do not even own rental property, and are getting their landlord education at your expense.  There are good ones too, know who you are dealing with and make sure you drive the show, not them.  Set up your rental criteria.  They are the professionals; a professional PM should be able to match a tenant to your specifications.  When a PM brings in tenants that do not match your criteria, reject the renter and look for a new PM, the task is obviously too difficult for them.

A PM needs to be more than just a rent collector.  They need to be a tenant manager.  Collecting rents is easy; the banks have already figured that out with automatic Bill Pay.  Fixing the property is just a phone call to a reputable firm that specializes in the problem you have.  You do not need a PM.  You are going to pay for the fix anyway; the PM will just add their fees to the bill.  The PM rarely goes to the property themselves; they send a maintenance crew.  A call can be received anywhere in the world, maintenance firm phone numbers can be found on the web from anywhere, and invoices can be paid automatically.  A PM takes a few calls, and coordinates the effort.

Even an average PM will know when your lease is being violated and how to enforce it.  They will be able to inspect the property, and know when the tenant is causing excess wear and tear.  They will require the tenant to fix the item, or bill the tenant for it.  They will be able to get your damaging tenant out, before they cause too much additional damage, not after several leases when you have thousands of dollars of damages.  A good PM is a tenant manager first, and a property manager second.

But actually managing the tenants takes work for the PM, and the ability to know how to work for you, not themselves.  Often, extra felon guests will arrive when a subpar tenant starts to rent your unit.  The PM will look the other way, knowing they would not get paid if they prevented the extra tenant.  The PMs are not on site, they do not know what goes on.   These are the things that lead to police incidents, and will lead to an expensive situation for you.  Never rely on a PM to do the diligence it takes for you to succeed, unless you do the diligence ahead of time.

Are you a property manager? Have you ever used one? What was your experience with them?

8 Replies to “Property Managers, The Downside”

  1. Wow I am glad that I don’t own rental property in the states.. It sounds there are a lot of shifty PM’s over there..

    Over here if you are a bad or unethical property manager, a property owner is likely to switch with the amount of competition there is..

    I’ve always been a glass half full kind of guy 🙂

  2. I always thought that after I reached financial independence and did some traveling, etc. That I would get a property manager, I have not researched this but being away from the property for months at a time, I’m not sure I”m comfortable with that. I still have a few years to figure out the specifics and a lot can change, but I’m thinking of either flying back every 3 months or to have my Realtor check things out on a quarterly basis. Any thoughts on this?

    1. If you are in contact with a cell phone, you can do it yourself. You should have someone ‘on the ground’, that you can call. It may be a local handyman, or your Realtor. I am planning on RVing when I retire. Being gone for 6 weeks at a time, then coming back to MN for about the same. Maybe live in MN for longer in the summer. I am not planning on getting a property manager.

      But in reality, if you get a call, just call the company that you need to fix it. Some issues might be fixed over the phone. Sometimes you will call a plumber out, and there is not a problem. No different than if a Property Manager was doing it. Remember, they are just taking and making calls too.

  3. I agree no need for PM specially local ones if not too many units. I manage 4 duplxes myself, have a demanding fulltime job, have 3 small kids, wife works fulltime. Below are my philosophy which aligns with your post:

    1. Get good long-term renters even if it is month-to-month case-by-case basis (typically they don’t leave at all but likes to have the flexibility and I can raise rent anytime).
    2. Good and honest handyman that charges reasonable fees (~$15/hr) for fixes except late night emergencies.
    3. I advertise, interview and sign up the tenants myself.
    4. I coordinate the fixes.
    5. I tell tenants to deposit rent to the Bank (I don’t even go to them to collect) or through Bank Quickpay. I made this clear from the very beginning.
    6. Any delay in rent, I immediately send email and a letter to remind them of penalty.

    So, far no rent later than 5th.
    I don’t do the maintenance bec I like to spend my free time with my family/kids, as much possible, before they grow-up and then the kids will not have time for me (when I have the time). So, I am willing to let go that part for the sake of building my relationship with my family (higher value).

    Besides, my SKILLs are improving since I am doing it myself and learning from prev mistakes or honing the good ones. If you hire someone to manage, then you will never grow your skills.

    1. Thank you for the comment!

      All great points. I am not doing the kid thing, so I have the time to do maintenance. I am on the early retirement train. Learning is key. If you do not know how to do something, how do you know it is being done correctly? When you hire yourself to do things, you are basically learning on the job.

  4. Finding the right property manager is actually the challenge.

    I agree with a lot that you are saying Eric, however, we find that investors sometimes think that they can just ignore the property and it will take care of itself.

    Personally, I have been doing property management for over 25 years, and was never a “failed” real estate agent.

    Many real estate agents think they can make some easy money by adding management, without realizing the time and energy it takes, for what amounts to a small amount of money per home. We have many out of town investors who own one home here, that we make $60 a month on management fees (though we only get paid if we collect rent. We do believe in pay-for-performance. And we don’t get paid if the house is empty.), and those investors believe that we should have someone available to talk to them daily for an hour a day.

    That can be a problem, especially for smaller firms.

    Aspect Properties manages over 850 units at any time, not including our own, and has a staff of 20 employees. We constantly try to tell people that using a larger company gives them a better chance, because we always have someone available to take their call, or their tenant’s call.

    If you are working full time and looking for passive income….a property manager can remove some major headaches. If you have the extra time, are retired, or your significant other and family won’t miss you, we understand self management totally.

    The right property manager should let you sleep at night. A good property manager should help you take care of problems before they occur. A great property manager should never nickel and dime you. Aspect Properties only collects our fees when we perform and we don’t add to invoices. The price you are quoted by the contractor is the price you will pay.

    We also don’t charge to “renew” a lease. That is a silly and “no good reason” charge to a homeowner. We love long term tenants. Unlike your statement above, we do not make more money turning over a tenant. By time we pay an agent, either ours or an outside agent, and the time it takes to do the marketing, list the property, prepare new lease paperwork and the loss of management fees, we are lucky if a new tenant makes us $50. We would always rather a happy investor client than an extra $50.

    Property managers take homework. It can be worth the time!

    http://www.aspectproperties.com

    1. Thank you for the comment.

      There are good property managers, and bad ones. Unfortunately, many are bad. I may have to use one myself some day, but if you do not know how to manage properties yourself, it is hard to manage the manager of your properties.

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