Why Using Property Management Is a Waste of Money

purse-522622_1280-PDThis post is likely to rankle a few feathers, especially for the property managers out there. But first a disclaimer; I have 24 rentals that I manage and maintain myself.

I manage and maintain a property for another person, and I have a real estate license. I even have a full-time job.  I have used a big name property manager in the past, with 100% of tenants provided by them that did not make it a year.

So I know a bit about property management and property management companies. I know many other owners that have had similar trouble with property management firms.

This is a companion post to one I wrote earlier.  Property Managers, The Downside

Here Are 8 Reasons Why Using Property Management is A Bad Idea

If you are making over $200K per year in your real estate investing, you can skip this article; you do not have time to read it.  You can make more by doing, not reading. If you are only making ~$150K per year, like myself, continue reading.

 1. Sacrificing Your Cash Flow

When you hire a property manager (PM), expect to pay about 8 to 10 percent of your rents to the PM.

In reality, that doesn’t seem like much, but you are actually giving up a significant part of your cash flow. At a $1,000 a month rental, that’s a $100 fee.  If you invested $20,000 in a property that you expected to get a 10% cash-on-cash return, you will get back approximately $2,000 annually, after the PM fees.

Skip the property manager, and your return would be $3,200.  That’s a whopping 60% higher!  In addition to the monthly fees, paying a month’s worth of rent to actually place a tenant blows the numbers out even further.

2. You Have a Higher Motivation

Secondly, many PMs are failed Realtors or property investors.

They could not make it in the residential sales, or investment game, so they became a PM.  They have never managed an investment property of their own, yet they seem to think they know how to manage yours.

Even if they have worked for a PM firm, they have not felt the pain of a bad tenant and had to open their own checkbook to pay for it.  Their motivation is to make the commission, not make you money.

Thirdly, a PM doesn’t have to be close to the property.  They just have to make calls.  In one PM contract I read, they only guarantee four hours per year of on-site time to handle the property.

Everything else is additional at $75 per hour.  I think $1,200 for working four hours a year is pretty good wages.  Where do I sign up?

3. Making Money at Every Turn

Property managers make money when they fill a rental.

They make money when they do maintenance, as a markup. They make money when they have to do an eviction (for their bad tenant). They make money when they turn a rental for a new tenant. They make money when they place a new tenant.

The more a PM churns a unit, the more they make.  Like a stock broker. You make more money with a buy and hold strategy, keeping a tenant as long as possible. The only way to make sure you make the most money is to make sure you take charge of the property management decisions.  No one is more concerned about your profit than you!

 4. The Property Management Guarantee

When a PM brings in a tenant, they usually guarantee the tenant.

But the PMs guarantee isn’t a refund like you get at Walmart; the PM just gets you a new tenant, an exchange.  Sort of like the weatherman getting a weather forecast wrong.  They just do another forecast.

That new forecast is likely wrong too.  The PM doesn’t guarantee the rent.  They do not pay out of their own pocket to bring your rental back to the condition it was in before they brought in the subpar tenant.  They do not refund your eviction cost, or your lost rent.

In my own rentals when I was first starting, I had a PM bring in two sets of tenants. One tenant got laid off and wanted to move out of state after nine months. The other I had to evict, at my expense.

My replacement tenant lasted about 8 months, where the tenant had to move due to her kid being picked on at school. These situations could have happened to anyone, but they have not happened to me since I started doing my own property management.  And I have four times as many units than I had back then.

5. Live Close to Your Property

I am a firm believer in a rental property should be close enough to walk to.

That is a bit of an exaggeration, but if you are over an hour’s drive from your rental, you probably need someone to do some of your work for you. That work costs money, and your investment return will be less.

If you take the attitude that you can increase your return by as much as 60%, just by looking closer to home, you can look for opportunities that may bring in more profit; even though the cap rate might be less.  Looking closer to home mitigates many of the unknowns about property investing.

You do not have to live close by your property, but you may be able to exponentially increase your profitability if you do.  You know your neighborhood, use it to your advantage.

6. Buy Two (or three) Hats

When you are a property investor, you need to determine your strengths.

Often, you can be good at multiple things, and increase your revenue.  Similar to the way companies either buy other companies, or do their own work in-house to save money, you can too.

 First, you are an owner or investor.  If you are an LLC or Corp, you already are doing some of the work in-house.  As president, you make the decision to buy a property.  You go back to the shareholders to get the capital to buy it.  Often, the president and shareholder are one in the same.

Once you buy a property, you need a property manager.  You can hire it out to an outside firm, and give away up to 50%+ of your cash flow, or you can manage it in-house.  Create your own PM Company, sort of a subsidiary to your investment business.  You can do this even if you only manage one property – your own.  You do not need a separate legal entity, just the mentality that you actually have one.

When you are in the PM role, take off the owner hat, and put on a PM hat.  Skip the owner emotions when you are making PM decisions, but know that when a tenant damages a property, you pay, not the owner.  You will make a better decision.  It would be nice if all PMs could be held accountable that way.

7. Maintenance Man to the Rescue

When you have the skills and tools to do some maintenance, you can do a similar hat switch.

In the real world, a tenant will call the PM and describe a problem.  The PM will call a maintenance guy.  The maintenance guy will fix the issue 90% of the time.

If it is a larger issue, they will let the PM know, so the PM can get an authorization from you to fix it.  And you have no choice but to authorize, you are generally at their mercy.  What are you going to do, say no to a new furnace and have an un-inhabitable place?

So, you have your own PM Company and your own maintenance department, which may consist of a single part time worker (you).  You answer the call directly from the tenant.

You might troubleshoot it over the phone.  Maybe the tenant sends pictures via a text message or email, after all this is 2014 not 1980.   You can determine the skills it would take, i.e. plumber, electrician, HVAC, handyman, painter, cleaner, carper cleaner, handyman, etc.

You can call a maintenance guy to head over and fix the issue, or troubleshoot it further.  If you have the tools, skills and time, you can do the fix yourself.

Odds are, no matter how busy you are, you have enough time to stop and make $100 per hour.  You schedule a fix when you have some time, and get it done.  An emergency might require a faster action, and subcontracting out the work if you do not have the skills or time.  If you fix things at home, you can fix it in a rental.

In the 25 rentals I manage, I average I suppose one or two calls per week, maximum.  Many weeks I do not get calls.  That’s 50 to 100 per year.

It works out to a maximum of two or three calls per year, per unit.  Many are just questions, no on-site visit required.  There might be one or two calls per month that need maintenance.  That’s about a half a call per year, per unit, for maintenance.  Some units call more often, some never call.  I am hardly ever called at night, I cannot think of a call in the past year that was after hours.

8. Simplifying Property Management

So, you can be a PM, and be anywhere in the world, as long as you have internet or phone access.

You need a phone, and a Rolodex, or Google.  Most people use Google (or Bing) now, it’s 2014.  A short list of contractors helps, but there are 1,000s of companies that do all of the work that might be required, if you cannot be there to do it yourself.

Save money, increase your profitability, and be more self-sufficient by taking on more roles.

Have any of you regretted using a property management company?

This post was originally posted here

 

6 Replies to “Why Using Property Management Is a Waste of Money”

  1. My Aunt owns a rental property and she’s the one who manage it. For her, it’s better if she would manage everything rather than paying money to someone else. Aside that she can save a lot of money monthly, she can also build a good relationship with her tenants.

  2. You make some good points, but for someone who lives in NYC and wants to buy rental property…it’s almost impossible. I’ve really been considering turnkey investing as others have, but I’m also a little unsure as I’m putting my investment in the hands of a property manager. I’ve also considered just investing in REITS, but they don’t have the same advantages (especially tax advantages) that real estate investing does. So what is someone who lives in a high cost area and also isn’t handy to do?

    1. Thanks for the comment Andrew. NY is a challenge, not because there is no investment opportunities, but because the hurdle of entry is very high. But once you are in, life long tenants are yours. Attend a local RE investor meeting, there will be ideas there. There are also opportunities to buy into a partnership that is investing in apartment buildings.

      Long distance investing is OK, but you have to understand the dynamics of the areas you are investing in. You need a larger 12%+ returns for lower class neighborhoods. Otherwise what seems like a great investment could turn bad after the many long-distance costs. Start evaluating properties, using Cap rates and ROI formulas, to get practice.

  3. I appreciate your remark about “Live Close to your Property”. Reminded of a Sunday afternoon when I was on the couch, and decided to take a nap. Woke to the sound of rapid knocking on my door. Kid from 2nd floor says to me, “there’s water in the bathroom”. How bad? I asked. About 2 inches deep! Ran to the 2nd floor, tried to turn off toilet valve, but valve failed. Ran to the basement and shut water off there. What if I hadn’t been home? What if I lived an hour away? How much longer would the flood have continued? Moments like those are a reminder the closer you are / easier to contact, the better it is. When I had a property manager bc I had to live out of the country a couple years, I was definitely “sharing in the profits”. After I got back and was ‘owner occupied’ again it was amazing how much less $ I had to spend on repairs. Hmmm…. 😉

    1. Thank you for reading!

      It is definitely an advantage to live close. I save a lot of money because I can do simple things. And even the amount of time spent on calls is likely less for me than someone with a PM. I can resolve many issues over the phone, a PM would have to send a person out there.

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