One of the first questions for people entering the landlord game is whether to hire a property manager or manage the new rental themselves. As with everything in life, there are positives and negatives to each strategy. So let’s run through the issues that go into making this decision.
First, the property you buy will most likely need some renovations. You’re going to have to be in charge of this yourself and get bids, shop for materials, make decisions, etc. And it will cost more than you think — probably a lot more — and it will take longer than you think, probably a lot longer.
Before you purchase — and this is best to do during your home inspection — try to get an experienced investment property owner to come with you, and maybe a contractor, to get a better estimate on those costs. Provide a healthy contingency of cost, like 50 percent, and a time contingency of 100 percent in your schedule. Better to be safe, than surprised.
Pros and cons of managing
Once you get the property closer to rent-ready status, you’ll need to make some decisions on whether you manage the property yourself, or hire someone to manage it.
Pros – Managing the property yourself allows you to keep the best control of your tenants, service their issues, keep good relations with them, and keep a better watch on the property. It will also save you somewhere between 8-and-10 percent of rental income and probably dramatically increase the chances that you will keep it occupied.
No management company has anywhere near the incentive that you do to keep it rented and to keep your tenants long-term. You’ll learn quickly that when faced with a vacancy, you’ll jump to get it rented. You will also save yourself one-half month or a full month’s rent in fees for handling the re-leasing process yourself.
But … you will also learn it is a lot of work!
Cons – The negatives about managing the property yourself are best seen in three separate scenarios: Renting it when it is vacant; what it takes in terms of monthly management; dealing with more serious issues when they arise.
- Renting the property when it’s vacant is typically the most time-consuming and toughest part. You’ll need to place rental ads, respond to emails, interview potential tenants on the phone, and meet with good prospects at the property to show the unit.
- You will probably have a few no-shows and probably have to show it 5-to-8 times and take rental credit applications from several different parties. Then you must review the applications, pull a credit report (and it’s a real pain, but try Transunion’s SmartMove service), review the credit report, comply with state and federal housing laws, call employment references, call personal and past landlord references, etc.
- If all looks good, you need to prepare a lease (get the standard state association of Realtors lease from your Realtor and all the addendum’s) negotiate on the terms, meet with the tenant, run them through the lease, be there during move-in day, etc. You’ll also have to finalize the prior lease with any tenant leaving, resolve the security deposit and any repairs, etc.
It’s a lot of work!
Once the tenant is in place
If you put your property in good condition for rental, this part of the process is the easiest. Some properties and tenants are a breeze, but I’d guess that you’ll have to deal with about 3 to 5 minor issues per year (like the neighbor’s dog is barking). Figure on at least one more major issue, like calling a plumber or electrician. Overall, this process is not too taxing — if the property is in good shape and you follow the advice that follows.
Here are some tips to ensure things go well:
- Treat your tenants with respect
- Be attentive to their needs
- Negotiate fairly with them on issues.
If you follow those tips, it should lower the hassle of owning rental properties.
Major issues can occur, too. So if your tenant stops paying, or there’s a major flood, or fire, you have to deal with it regardless of whether you have a property management company. And it’s going to be a lot of work and time involved, especially if the property is far away.
Overall, learning the management side will probably best teach you the ins and outs of owning real estate, save you some money, and probably make your properties more profitable because you’ll treat tenants respectfully and keep the units occupied.
Property management company handling the issues
There are many quality property management companies that can do a great job for you. As noted above, they probably charge 8-to-10 percent and a half month’s rent for re-leasing. They will handle the above issues for you, except when major issues require your input — or checkbook!
But the most important first step is to interview several rental companies. Call references, get copies of their insurance and make sure they have the proper type and adequate insurance in place.
Once you make the decision on which property management company to hire, keep on a friendly and professional basis with your manager. Things will go wrong but just because you are paying for management doesn’t mean you can blame the property management company. Part of your role is to inspire them to help handle the issue and obtain the best possible outcome.
If you’re super busy with your regular life, but own property or properties, a management company could be a good idea. You’ll still be pretty involved, if for no other reason except to maximize your value and keep those nice, consistent rental checks coming to pay the bills!
Keep in touch with the management company, the tenants, inspect the properties every once in a while, and do your best to help get it rented when there’s a turnover in tenants.
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Leonard Baron, MBA, CPA, is a San Diego State University Lecturer, a Zillow Blogger, the author of several books including “Real Estate Ownership, Investment and Due Diligence 101 – A Smarter Way to Buy Real Estate.” Read useful tips for real estate buyers in his blog, Making Smart and Safe Real Estate Decisions. See more at ProfessorBaron.com.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.