I have been building a portfolio of rental properties for the last 15 years and have nearly 70 properties. I have managed the properties myself, used a professional property management company for my rentals, and even owned a property management company. I understand this business from both sides, so let me show you whether it’s good to hire a property management company for your rentals.
You should not hire a property management company to manage your rental houses. The cost is rarely worth the service provided. The only exception is when you have a small portfolio and don’t live near those properties. Even then, there are better ways to manage your rental properties.
Using a property management company can be alluring. Granted, there are some advantages, but these are trivial, and there are better ways to accomplish those benefits. I will explain the drawback of using a management company, propose a better solution, and even explain how you might want to use a property management company more effectively.
How Do Property Management Companies Work?
The first thing you need to know about using a property management company for your rentals is how it works. A property management company will find a tenant for your house, which includes screening potential tenants and making the selection. Once the tenant is in place, they will handle all interactions with the tenant, including collecting rent and handling maintenance issues. In addition, the property management company will handle an eviction should the need arise.
Typically, the management company charges the equivalent of one month’s rent upon selecting a tenant and 10% of the monthly rent going forward. In addition, the management company will bill you for additional expenses such as repairs, tenant calls, and legal fees. The fees charged by a property management company are negotiable. At one point, I had a property management company agree to charge only 8% of the monthly rent to manage over 25 properties.
Handling Repairs and Maintenance
When repairs are needed, the property management company will handle all aspects of this maintenance. They will find a suitable contractor or use in-house staff, and they will often oversee the quality of work. You will be billed for this work.
Using a property management company to handle repairs is not a cost-efficient way to manage your rental houses. The management company has no incentive to keep the costs low because the landlord pays the bill. It is much easier for them to have a stable of workers and send out the first qualified person, regardless of cost. An essential aspect of managing rental properties is managing the operating expenses, and once you engage a property management company, you have lost control of this crucial task.
If you object to this way of handling repairs, the property management company will call you when repairs are needed and let you arrange the work. At first, this may sound reasonable, but then you have the hassle of finding workers, soliciting bids, and ensuring the quality of the work. This will allow you to control operating expenses better, but what service are you getting for your 10% monthly fee? None. Never go this route.
The property management company signs a lease with a tenant, and this lease will list the company as the landlord, not you. They will collect rent, take their fee, and pay the remainder to you. If the tenant doesn’t pay, the management company will send collection letters and attempt to collect payment for you. If the tenant must be evicted, the management company will usually handle the court action and removal.
This collection and eviction service may be worth the 10% fee, but often you don’t need these services. In that case, you get very little for the 10% fee. With a $1,000 per month rental, you are paying the property management company $1,200 a year, and they are acting as a check forwarding service. Suppose the tenant stays three years, stops paying, and must be evicted. In that case, you have spent $3,600 in management fees for an eviction. You can hire an attorney to perform the eviction for a fraction of that cost, assuming the tenancy ends in eviction.
A Better Solution
To build an extensive rental portfolio, you should start by managing the properties yourself. This approach will allow you to learn all aspects of property management, including finding tenants, addressing repairs, and handling evictions. This knowledge is invaluable as your number of units increases. If you ever decide to hire a property management company, you will be able to evaluate their level of service.
As your portfolio grows, you can hire an employee to take care of management details and pay them a percentage of the rent. An employee will often charge less and perform a wider variety of services. You can instruct the employee on how to pick contracts, and they will handle details of your business that a property management company wouldn’t.
How to Use a Management Company Effectively
A well-run property management company is skilled at finding and evaluating tenants, which is well worth the cost of one month’s rent, and maybe a little more. As explained above, such a company’s drawbacks are how it handles repairs and what you get when everything is going smoothly. You could use the property management company to find the tenant and sign them to your lease for a one-time fee. After that, you manage the property and save the 10% monthly fee. If an eviction is necessary, you step in and handle it or hire an attorney to do it for you.
When a Management Company Might Help
In some cases, when you have a minimal number of properties and you don’t live near them, it may be a good idea to use a property management company. I still prefer hiring an employee in the area on a part-time basis. That being said, using a property management company is not a disaster under this scenario. Keep in mind that, in most cases, hiring an employee would be more cost-effective if you have more than 15 properties in that area.
Another case for a property management company is when your property ownership will be limited to a short time. For example, suppose you have inherited a property you plan to sell. In that case, it may be a good idea to use a property management company to handle everything until you divest yourself of the house. If you do this, be sure your agreement with the management company allows a new owner to cancel the deal.
In general, hiring a property management company is not worthwhile. The costs are high, the level of service is low, and there are better options. The get-rich-quick gurus recommended this to overcome the objection about the hassles involved with rental houses. These gurus want the rental business to seem effortless, making it easier to sell their expensive seminars. It’s far from effortless, and in most cases, a property management company will drain your profit and hinder your ability to succeed. Except for very few exceptional circumstances, you should not use a property management company to manage your rental houses.
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