How to Get Started in Real Estate – Part 10

How to Manage Your Property

This is Part 10 of a series on how to get started in real estate. Each article is a bite-sized tutorial gleaned from 30 years of investing experience. The goal is to remove as much doubt and fear as possible, so you’ll begin, or continue, the process of creating enough passive income to change your life.

This might be a short lesson, but arguably, it could be one of the most important!

Now that you own the property, it must be managed properly. Management is often cited as the most important component of a profitable real estate asset.

Frankly, this should be decided before you make the purchase, but we’ll go over the basics now.

Self-Management

To Self-Manage or Not?

I hear this question a lot and I fully understand it, but it still makes me cringe.

Certainly, when someone is starting out, or if margins are thin, many will assume that self-management will save them money and allow them to make more profit. On the surface, that makes sense, and it’s fully understandable.

As you progress in your real estate career, you’ll discover that self-management will often cost you more money and time than you think you’re saving.

I had this attitude from the very beginning. I was too busy to think about managing real estate. Up until that time, all my property was professionally managed. However, I decided to do it on one property to get some education.

I owned a property with a cell tower on it. The rent from the tower covered all my expenses. The property also had two houses on one lot. One sheltered eleven construction workers. They paid rent with money orders. They were “mostly” on time. The other was rented by a family of four. They paid regularly.

Despite reasonable rent collection, things still broke, and there were still problems. I learned quickly how many calls a manager likely fields during a typical week. Those calls are even tougher when you don’t speak your tenant’s native language!

One day, as I was fixing PVC pipe, in the rain, in the mud, in the back yard of one of the houses, I decided that the lesson was over. I had learned enough. I sold the property for a profit.

Why Not to Self-Manage

First, if you’re just starting out, you should be the last person that you want to hire as your manager. You’ll be getting “on the job training.” Would you hire someone and pay them top dollar if they had no skills, no experience in your field, and had to learn everything as they got deeper into their job?

It’s not out of the question, but you would need quite a bit of patience and should be prepared to lose money and time. (I made multiple trips to the hardware store for that simple PVC repair.)

Managers are paid by a percentage of the rent that is collected each month. Though you would pocket that money if you were the manager, here is where you’ll “pay” if you manage yourself.

• You’ll get every phone call from the tenant, no matter what time of day and no matter how small the issue.
• You’ll have to arrange repairs and maintenance or do it yourself. You’ll likely pay retail for the repairs.
• You’ll have to make sure the property is cleaned up and made ready for the next tenant when there is turnover. Either you do it, or you hire it out.
• You must screen each prospective tenant. Will you choose a good one? How will you do background checks? Will you charge an application fee? Will you know how much to charge for rent?
• You’ll be the one to evict tenants that don’t pay.

Each of the bullets listed above will cost you time. What is your time worth? The small percentage of rents that you pay the manager will likely easily offset the cost of your time.

Professional Management

Why to Hire a Manager

Here is what you get with a professional manager:

• They take ALL the phone calls. You are only contacted for the big stuff, like lease renewals, new tenants, and large repairs. Even then, you simply need to give your approval for them to do the work.
• The manager will take care of routine repairs and maintenance. Typically, they won’t bother you unless the cost goes over a specified number that you pre-arrange with them. Through their relationships, they will often get discounts on repairs and maintenance because they manage many properties.
• They will handle all tenant turnovers. They will get the place cleaned, painted, repaired and ready for the next tenant.
• The manager will screen new tenants. They will do background checks. They will charge the prospective tenant for the application. They will also get the highest rent possible because they have many other properties in the market, and they know the market rent.
• The manager will evict tenants if the need arises. Otherwise, you must hire the attorney and show up at court.

Other functions of a third-party a manager:

1. Creating a budget
2. Accessing market intelligence
3. Marketing
4. Managing renovation
5. Increasing rents

Summary

In summary, a manager will take almost all the burden of management off your shoulders. You will spend a little time each month “managing the manager”, but over time that becomes routine.

They will know the highest market rent you can charge. You might not. They can get repairs done cheaper than you can.

They will put good tenants in your property. This is important, because bad tenants are hard to evict in some states, and they can also be destructive. By eliminating these characters from renting, you save on repairs, legal work, non-payment, and excessive vacancy. Those are very costly to a landlord.

One last thing. If you have a relationship with a property manager, they can become part of your due diligence team when you’re looking at new properties. They will know what repairs the new property might need and will know what market rent you can expect to achieve. They are extremely valuable during acquisition.

They also might become a source of new deals. Because they manage multiple assets, they often know that a property will be up for sale before it becomes public. Even if that property is sold publicly, your management company could give you a leg up in the negotiations because they know you and the seller.

Professional management will help your real estate portfolio grow and be more profitable.

With that said, I do have some friends who have systems to self-manage their short-term rental properties. This is an unconsolidated market and self-management is not uncommon. However, with multiple properties, you’ll still want a system in place and a layer between you and the guests.

It’s obvious that the message is to avoid managing your own property. For reasons stated above, professional management will save you time and money. Use that time to find more property!

To your success!

Tom