One of the biggest advantages of having a property manager in place is that they not only do all the actual management for you – selection of tenants, completion of appropriate paperwork, inspections etc. – but they also do much of the accounting. From most of my property managers, I would get a monthly statement detailing the gross income, the expenses incurred, their commission and the net amount transferred into my bank account. This makes for very easy accounting.
Typically, property managers charge anywhere from 4-15% of the rental income to manage your properties. Usually the bigger your portfolio, the lower commission rate they will settle for.
Another advantage of using property managers is that the less pleasant work of evictions, notices of rental increases and notices requiring tenants to remedy shortcomings in keeping the property clean and tidy, no longer need to be handled by you personally.
So how do you choose a property manager?
Just like with the selection of a property to buy, or the selection of a real estate agent to work with, or the selection of a tradesman to work on your properties, it is somewhat of a numbers game. Go with recommendations from friends or other landlords, interview prospective managers, ask them how they have dealt with particular problems in the past, and then try them out. You can always change them later on if you do not see eye to eye. However, it may not always be so easy to change agents, especially if you have bought the property with the tenants in it.
Let me tell you about an experience I had with an agent in the UK. I bought a property with tenants in it and by extension I got saddled with the agent who had originally rented it to them. As it was my very first investment property, I didn’t want to have an agent manage the property for me, I wanted to manage it myself. But it wasn’t that easy. The agent kept their security deposit because he had found the tenants and even though it was my property, he demanded that they pay the rent to him and then on top of that, he withheld that rent and didn’t pay it to me. I had no legal recourse unless I evicted the tenants which ultimately I had to do. It was all very amicable as the tenants knew what was happening. They spent one night away from the house to make it legal, I then presented the eviction notice from the courts to the agent and he was forced to return the security deposit and pay me what he owed me on the rent. After that, my tenants came back to me, we signed a new lease and I managed the property myself. But as a warning, it does not always work out that way where there is an amicable eviction and wresting your property away from another management agent.
Just because you use one management company to look after one or several properties, it should not be a foregone conclusion that you always use the same firm for any subsequent properties you acquire in the same area. In fact, engaging two competing firms can be healthy, in that they will each try to do well by you to win over more business. This relates back to my earlier programme on selecting builders. Always get three quotes for any job and don’t get complacent by using just one builder all the time. The same applies to agents.
You can lose your tenants and your rent very quickly if the property manager does not respond quickly to repairs or complaints from tenants. Let me tell you about a situation I had when I first went into the property investment business in the UK. I had some tenants move into one of my properties and they had signed a lease agreement and paid a month’s rent in advance as well as a security deposit. I had turned the management of that property over to an agent with the understanding that my tenants would call them with any problems that arose and they would act on my behalf immediately upon hearing about any issues that needed to be resolved.
What happened next with these tenants was a nightmare. Unbeknownst to me, the roof started to leak in the master bedroom from day one. During the night, if it rained, they had to set out buckets to collect the water that was coming through the roof. They called the management company the next morning and were told that a roofer would be there to fix the problem. This went on for three weeks and each time the leaks were getting worse. The management company kept promising to send the roofer.
At the end of the three weeks, my tenant’s father who was a lawyer, sent a letter to me threatening to sue me if I didn’t give the tenants their security deposit back, but also their first month’s rent and another month’s rent to compensate them for all the emotional upset that had been caused and the physical inconvenience of living under those conditions as well as all the time that they lost from their jobs looking for another place to live. The upshot of the story is that the management company never sent the roofer, they never notified me and they behaved totally irresponsibly. In the end, I lost my tenants, I lost money, and the management company lost me as a client.
Of course, none of this would have happened in New Zealand because the law protects both landlord and tenant. However, if you are looking to invest in other countries, be sure that you know the current laws regarding all aspects of property investment.
To summarise:
On the plus side agents can save you:
paperwork
having to deal with courts and eviction notices
unpleasant issues like informing tenants of rent increases and complaints against them
On the minus side, they can be:
Lazy or irresponsible or negligent
Slow to get the proper repairmen out quickly
Neglectful about informing you when there are serious problems with your property
Here are some additional facts that could be deal-breakers for a landlord in selecting a property manager.
One of the first things I learned to do when selecting an agent was to see what the caliber of his tradesmen were like. Did he have a decent plumber, roofer and electrician? Were they reliable? How much were their average prices? One of the most frequent expenses a landlord can have with his property is plumbing. During my years as a landlord, the number of times I had been called to send a plumber to one of my properties, and the number of times other plumbers who picked up on previous plumbers and told me they did it wrong, and the outrageous sums of money they charged for their mistakes, made me seriously consider going to school and learning how to be a plumber. I eventually did find a plumber who was moderately priced and knew what he was doing. The downside was it took so long for him to come out and fix the problem. So if you get a property manager who seems reasonable, try to check out the tradesmen that he has on his books. As nice as the property manager may be, it’s his tradesmen who can ruin your reputation as a landlord.
Now let’s say that the tradesmen all check out. Now you are faced with an equally monumental task of checking out the capabilities of a prospective property manager. The laws of a country change frequently and you, as well as your property manager, should keep on top of those changes. Your manager has to chase the rents, document everything, pay you the rent on time and make sure that he has referenced the tenants properly and has accepted documents that are legally binding. Both you and the management agency have to keep on top of all the properties that you own: when the rents are due, when they are paid, when they are posted to your account, whether the correct amounts have been paid, that you have up-to-date agreements between yourself and the agency, that all your tax records are accurate.
If you think that property management is like a walk in the park, you will be in for a rude awakening. There are complex tax issues, laws governing those taxes, laws concerning tenant rights, landlord rights, evictions and contracts. You need to be prepared to spend a great deal of time and energy as a property investor. It’s not a question of just finding a wonderful property. You then have to make sure it remains so. A property manager may not know that the building is developing dry rot. He may not know that the wiring needs to be replaced. He may not know that there is subsidence to the building. But since all of these things and many more greatly affect the property that you are buying, you need to keep on top of these things. These are things that the property manager is not responsible for. So while you can always get yourself a property manager to handle the day-to-day operations, you cannot really afford to be an absentee property owner.