IF you own rental property and you’ve hired a property manager for “hands-free” management.
Like the friend of mine who once called for some advice.
She had purchased 3 rental properties over a few years and had successfully managed them herself.
She wanted to travel, so she hired a property management company to look after the day-to-day affairs of her properties.
She thought it would be as simple as interviewing a few companies, and hiring the one with the best experience and professional staff.
Real life experience has taught me, however, that…
Nobody cares about your money
as much as you do
And this is definitely true with property managers.
Why? Because a property manager gets paid to manage your property, including:
- Collect the rent
- Lease apartments
- Deal with tenant requests, etc.
And not only is there an inherent conflict of interest in some of these tasks…
But people usually give their property manager too much leeway in the decision making process that involves their rental income.
I’ll continue with my friend’s story shortly, but first I want to share 4 important reasons why you must manage your property manager…
Or risk losing rental income every single month.
#1 – Paying For ‘Theory’, Not Performance
This fee varies widely from company to company, not only in the amount charged, but in the way in which it is calculated.
Most companies charge anywhere between 5% and 10% of the actual rents collected each month.
So if your property manager collects $10,000 in rent and you pay a 6% fee on actual rents collected, you’ll pay $600 + taxes.
There are some companies, however, that charge based on the potential rents to be collected each month.
Think about that for a minute.
If your property manager tries to collect $10,000 but succeeds in only collecting $8000, and you pay a 6% fee on potential rents collected, you’ll still pay $600 + taxes. That’s $120 more than if you had used a company that collects based on actual rents.
I don’t recommend using companies that charge based on potential rents. There’s no incentive for a property manager to work harder to collect rent due if they know they are getting paid anyways.
I recommend you pay for performance, not theory.
#2 – Too Much Tenant Turnover
When a tenant leaves your apartment, property managers also charge a leasing fee for renting the unit to a new tenant.
Leasing fees can add up quickly on any property, and can easily turn positive cash flow into negative, especially when combined with some of the extra costs involved with leasing.
Some companies charge a flat rate (such as $300) to lease an apartment, while others charge 50% of one month’s rent.
I recommend a flat fee instead of a percentage, especially in areas where rents are high and a percentage charge would be higher than the typical flat fee. Keep in mind that the total cost may be different depending on rental rates in your town or city.
What most people don’t know is that there are TWO hidden problems with leasing an apartment that will impact your pocketbook:
Problem #1 – Property managers usually collect more income from immediately leasing to a new tenant, instead of convincing the existing tenant to stay.
Yes, it’s more work for the manager, but the financial rewards are worth it for them.
For example, if an apartment rents for $1000/month, and you are paying a 6% management fee, the property manager receives $60 per month to collect the rents, deal with tenant issues, etc – obviously not a lot of money.
However, if the existing tenant decides to leave, the property manager can re-lease the apartment and, if you’re paying a flat rate, collect a $300 leasing fee – FIVE TIMES the amount of what they would collect in management fees. Ouch.
Problem #2 – When a tenant leaves, there are ALWAYS other costs to consider – cleaning the unit, garbage disposal, painting the walls, and of course any repairs caused by move-out of the past tenant and move-in of the new one.
And if you use your property manager for the repairs and maintenance, they also get paid for the work – which is a conflict of interest as I’ll explain later.
Assuming the tenant is a good one, it is almost always in your best interests to convince the tenant to stay.
Find out why they are leaving and try to fix the problem or even give them a break on rent. It can be much cheaper than paying for all the typical costs in the move-out/move-in process.
#3 – Excessive Maintenance
They will either do the work themselves and charge you a fee, or they will markup the cost for outsourcing to tradespeople.
Of all the property management fees, this is the type that is the most easily abused.
And sometimes the property manager won’t even realize it (they think they are helping the building owner by ‘keeping on top of every repair’).
What many people don’t understand is that it’s a conflict of interest to leave your property manager in total control of maintenance and repairs –
The more problems they find,
The more they get paid.
Does that mean you shouldn’t use your property manager to fix problems, or worse, you should become a ‘slum lord’ by not fixing anything? Of course not.
What it does means is that YOU should take control of the when the repairs and maintenance are completed on your properties. You should base it on your cash flow, your expected short and long-term plans for the property, and any other considerations you find important.
You should not allow your property manager to fix things every time they receive a phone call from a tenant, or every time they drive by the property ‘looking for work to do’.
One way to handle this, and not have your property manager calling you for permission on every repair, is to give them a maximum monthly limit for repairs they can spend before they must get permission from you.
For example, you could give them a $100 monthly cap, not including emergency items (with a strict list of what defines an emergency – e.g. no heat, major water leak).
This will go a long way towards keeping your maintenance costs under control and more cash in your pocket.
#4 – Poor bookkeeping
Many small property management companies don’t use proper accounting software for bookkeeping, specifically tracking receivables (rent due).
I’ve used more than one property manager over the years that used Microsoft Excel spreadsheets to track how much money was due from each tenant each month, how much they had paid, and any balances owing.
The problem with spreadsheets is that they are prone to simple mistakes, such as mis-typing a formula for calculating rent due for a tenant.
And in my experience, these typos usually happen in such a way that you are being paid less than you should be receiving, and the property manager is keeping the balance.
That would never happen if the property manager was using proper double-entry accounting software.
In fact, I’ve seen this problem so many times with various property managers, that I now recommend investors track all their rent receivables in their own accounting system.
That way they can track, right down to the penny, exactly how much each tenant owes them and eliminate lost rent.
Back To The Story
So what about my friend that wanted to travel and hire someone to take care of her properties?
It turns out she had hired a very ‘proactive’ management company that was constantly looking for problems to fix.
They would charge her all sorts of high fees for everything they did at the properties, some of which were higher than if a dedicated professional was called in.
And sometimes they charged her and didn’t even fix the problem!
You might think that this is an isolated problem, but I find it’s quite common with smaller property management companies (and even some large ones).
My friend had selected what she thought was a good company, but her maintenance costs and other costs were out of control. And because she was being paid net rents (after deducting maintenance expenses), she couldn’t ‘refuse’ to pay the bill.
To make matters worse, she had been traveling a lot and wanted to do more, so she wasn’t around to keep an eye on the property manager. When she approached him with her problems, they didn’t listen and kept on billing her.
My advice? I told her to fire the property manager, get a new one, watch her management fees and tenant turnover closely, and tightly control spending on maintenance and repairs.
It’s the only way to consistently keep rental property performing with good returns.
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