Understanding The Basics Of Property Management

Many buy and hold real estate investors decide early on that managing their own rental properties simply isn’t worth the time and effort. This is especially true for investors that own properties outside of their immediate geographic area. While there are pros and cons to managing your own properties, ultimately it comes down to personal preference and capacity. Some people would rather be more hands on and save a few bucks while others gladly shell out a small percentage of their income to let somebody else manage the property.

For those investors that opt to outsource the management to a property management company, knowing what questions to ask and what charges to expect is an important part of making a good hiring decision. In almost any market, you’ll find numerous property managers of all shapes, sizes and colors. For those investors less familiar with how property management companies work, here is a basic checklist to help get you started:

Leasing:

How much does the property management company charge to place a new tenant in the property? I’ve found that anywhere from half a months rent up to a full months rent is fairly standard. Be sure to find out how the property manager advertises for a tenant. A property manager with a lower leasing fee may not spend as much on advertising or may not offer a co-op for other agents representing potential renters. Saving a few dollars on leasing may actually cost you more in vacancy if it takes longer for the property manager to place a tenant in the property. Also, it’s important to understand how the property manager screens applicants. At a minimum a property manager should:

1. Verify Income
2. Obtain credit report (look for prior judgments, eviction history, credit history)
3. Run criminal background check
4. Have a stated debt to income approach (ie. rent amount cannot represent more than 33% of tenants gross income)
5. Check rental references to understand rental history

Management Fee:

All property managers charge a certain monthly percentage for managing the property. This is typically somewhere between 8% and 10% of the gross monthly rent. An important question to ask the property manager is whether this fee is only charged against actual rent collected or if it is charged monthly regardless of whether a tenant is in the property. It’s also important to understand what services are included within this management fee. Some of the fees listed below may actually be included as part of the management fee and not charged independently.

Renewal Fee:

This is a fee most property managers charge to handle the paperwork associated with renewing the contract for the tenant for another year (or more). This fee is typically anywhere from a few hundred dollars up to a half month’s rent. While this may seem like an unnecessary fee, I’ve found that a good property manager can save you thousands of dollars in vacancy and turn-over expenses if they are good at keeping tenants in the property for multiple years.

Eviction Fee:

These are fees associated with filing the eviction and handling the corresponding court proceedings. I’ve found that this really varies from one property manager to the next. Some property managers simply pass on the actual filing costs, but manage the eviction as part of their management services. Most, however, charge a few hundred dollars (on top of the filing fees) to handle the eviction and court appearances.

Repair Escrow:

Most property managers ask the investor for a maximum dollar amount that the investor would be willing to spend for maintenance/repairs without having to provide specific approval. This is really to help insulate the investor from having to make insignificant decisions that could easily be made by the property manager. To accomplish this, most property managers hold between $200 and $400 in a repair escrow specifically for these types of maintenance requests.

Repairs:

I actually think this is one of the most important aspects to property management. You may find a property manager that beats the competition in almost every other category, but if they don’t have a good, affordable solution for repairs and turn-over expenses, you may still end up spending more money. Some property manager simply outsource the maintenance to third party contractors that may charge high handyman rates, while others have handymen on staff that can make repairs and handle turn-overs at a very affordable cost. It’s important to know and understand this distinction when interviewing property management companies.

Inspections/ Trip Charge:

For many investors, it’s important that somebody get their eyes on the property at least two or three times a year to make sure the tenant is taking care of the property and ensure there are no major issues. Most property managers include drive-by’s as part of the management fee, but may charge for a specific inspection or trip charge (of $50 to $100) to go into the property and make assessments as to the condition of the property.

Insurance:

While most investors don’t equate home-owners insurance with property management, there are now a handful of companies that actually offer homeowners insurance as an additional benefit. I’ve found that the premiums are fairly competitive with other landlord policies, but since the policy belongs to the property management company, any claims against it do not negatively impact the investor personally (i.e higher rates on personal insurance because of claim history). Also, I’ve found that many of these master policies available through the property management company do not make exclusions for vacancy. Whereas most landlord policies lose coverage once the property has been vacant for 30 days, a master policy will stay in effect regardless of vacancy.

While different markets are going to have different nuances associated with how property management is done, understanding the basics (above) is important in selecting a property management company. Whether it’s a single real estate agent with a portfolio of 30 properties or a large firm with over 1000, ultimately you have to be comfortable with who you choose and trust that they will do right by you. The great thing about a free market and competition in this industry, is if the first company you select doesn’t work out as well as you had hoped, you can always change companies!