Why Having Property Management Makes Sense
I often have investors debating whether they should do their own property management or hire it done. The arguments for both sides are interesting. The big and compelling argument for doing the management yourself of course is the savings of management fees. Let’s take a look at the pros and cons.
Pros For Hiring A Property Manager
Saves you time:
As an investor you want to spend your time finding great properties to invest in. I believe this should be your primary focus as an investor. Seasoned investors know they make their money investing in real estate not by getting paid to manage the property.
Emotionally based decisions
You do not want to get emotionally involved with tenants. This may be the biggest benefit for hiring a property manager. Property managers have systems in place and they are paid by you the investor to make a solid profit. When a tenant comes to you with ‘feel sorry for me stories’ and let me be late on rent payments (which often turn into no rent payments)the property owners tend to make emotionally based decisions that they typically live to regret. Indeed, there is no room for emotion in this business. Because a property manager is paid to collect rents they remove emotion and approach everything from a logical systematic approach to getting the rents collected. Additionally these property managers have heard all the stories and are trained in identifying fact from fiction.
A large database of tenants:
Property management companies rent a variety of properties and collect many applications. When multiple good prospects make application for one unit that leaves additional good tenants without a place to rent. These tenants can easily be a great source for your properties. Additionally they are aware when good tenants are in need of upsizing or downsizing apartment sizes. As they know who the good tenants are they can often reposition them into your rental units.
Less expensive repairs
As property management companies have a large database of service vendors wanting their business they often have economies of scale pricing which makes the repairs more affordable than you may get as an individual property owner.
Faster repair service:
As the property management companies provide lots of business for their vendors who do you think will get proprietary service when you need them, The individual investor or the property management company who brings them a lot of consistent business.
The famous author Malcolm Gladwell states in his book Outliers that is takes around 10,000 hours of continued practice to master a field. (This is roughly 5 years of full time service in a field to get really good at it). When you hire a property management company that has been around for around 5 years you have mastery. All seasoned investors know that property management is the life line of your investing business. If you want a great business that is profitable you want to have experience and systems to insure maximum profit levels.
Cons For Hiring A Property Manager
Cost of services:
A typical management fee runs around 10% of rents collected. Occasionally as low as 8% bit 10 percent is the norm. indeed one of your largest expenses.
Lack of personal involvement:
This could go in either category. There are times that an active investor likes to manage their property because they want all the controls. Of course this involvement takes time which may make it counterproductive but the beauty is you are in a business where you can make your own choice.
I was one of those investors who started out investing and managing my own property. I was one of those who wanted to save the money and increase my profits. This seemed like a great idea until I had to do my first eviction. Wow! How I wished I had some experience to help with this process.
NOTE ON VALUATION
There was also the mistake I made and I see investors make this mistake every day, and that is the evaluation of the property. This is a big one so you will want to follow this one closely. When it comes to investment property the value is largely arrived at based on the positive revenue it generates. When you manage your own property you tend to not include the property management fee as an expense.
These lower expenses will entice you to pay more for a property because the cash flow appears larger. Overpaying for a property is not a good way to build a portfolio. So if you do plan on managing your own property remember to at least include the expense of a property manager in your expense calculations so you pay a price proportionate to its true value and not a price based on reduced expenses.