So you want to get into Real Estate Investing, but don't know where to begin? You see everybody talking about the bigger margins online and you really want to get in on that, like really. You start researching around about the different expenses you have to deal with, how to do a market analysis to figure out where and how to buy. Things get overwhelming pretty quick, believe me I know!
Enter the Property Management company (PM). You find out they pretty much take care of everything! No more worrying about tenants, or getting up in the middle of the night to fix pipes! It all sounds good and dandy at first, but wait....how much does a service like this cost. You scour the web looking at different sources, start calling around and finally get someone on the phone who knows what they're talking about. You hear the dreaded numbers..10% of gross rent, or in some cases $100 minimum.
Btw if anybody tried to charge you a "minimum" maintenance fee, then walk away while you're starting out. You'll most likely be paying a Premium for them to sit in their office all day and forget you exist.
10% of gross rent is the going rate for rental property management, which I recommend you negotiate down after 5-6 properties. A point or two could really make a difference there. Back on topic. How in the world do they expect you to pay 10%??? Lets say you bring in $600 per month in rent. 10% is obviously $60 per month of income going directly to the management team, kind of like a retainer.
That just means they'll answer the phone when you call. Now we're down to $540 to work with. $280 worth of a mortgage each month, $40 for taxes, and $50 for insurance. That leaves you with $170 per month instead of over $200 of cash flow! Everybody wants their piece these days. You say "I'll think about it" and take on managing the property yourself.
This can be some of the biggest hurtles for some people and can set your business up for failure in the future if you're not careful. Finding a good tenant is the single most important step to being a strong real estate investor. Someone who will respect your property while they're there and report minor issue before they become major headaches. Someone who has consistent income and will always be on time with their rent. The best way to do this is by gathering information and verifying that.
Do you know how to run background checks, credit checks, hard pull? soft pull? Applications and fees to charge? Do you have an office so you're not meeting prospective tenants at the food court in the mall? I use this specific example, because I've rented an apartment from a family who didn't have an office for their business. It's not pretty.
Honestly if running your own properties is your goal, then go for it, but at least look into a good PM software if you're going to do it yourself. I believe my PM uses the number one software on this list. It'll have all of these questions answered in an easy to use interface. As a savvy investor you might also consider finding a PM just to find the tenants for you. That'll also take care of the advertising side of the house which can be a major pain, and getting a proper lease in place. From there you take the reins and maintain the property however you see fit. Running cost for finding a tenant in my area is half the cost of the first months rent.
Maintenance Fees
So you've found the dream tenant and get them all moved in, leases signed, and keys handed over. A couple months down the line they give you a call and tell you the water heater spilled its guts all over the living room. First step, panic...wait that can't be right. I guess we should go look at the damage? Water heater is completely dead meaning no hot showers and newly disgruntled tenants. It's late so no contractors are answering the phone.
You call first thing in the morning and beg and plead the guy on the phone to get out to your property that day, which doesn't go over well. He does show up that day though, and tells you the water heater needs replaced. Along side that he mentions the floor in those two rooms are now damaged and redone. He quotes you $1,500 for the new water heater and heads out for the day. You head back to your house mentally drained and call around for a couple quotes to replace the subfloor and decorative wood planks. You talk it over for a minute and he seems upset by the short notice of the job, but agrees to get it done and quotes $3,000 for the work!! Wow?? When did the things get so expense????
The issue here is that work on rentals always need to be done on short notice, required by law in most states. You don't have an established relationship with these guys so there's no guarantees they'll give you break. On the other hand with a PM in the mix you generally get a notification the day issue happens and an invoice of the work to be performed. If it's emergency maintenance it's handled immediately by the standby team.
The last issue I had with a water heater it was replaced in a couple hours, even before I got the email that something had even happened, and the cost? It was right around $800 for the new water heater, and $1,000 for flooring in two small rooms. PM companies can typically bring in contractors for half the cost or more because they work with such a huge client base. The contractors don't want to lose this work from this company because it pays out so often which means giving a better price is only good for them, a no brainer.
Unfortunately we didn't know this going in this time around, so we're currently out $4,500 and possibly shopping around for a good PM company, because we're already exhausted.
Collect Late Rent and Report Delinquencies
Now we're past the water heater incident and a new month comes around. Finally, a chance to actually see your hard work pay off and collect that sweet passive income everybody has been talking about. After all the account needs a little padding after everything that happened last month. The 1st rolls through...no check. The 2nd passes without a word....The 3rd comes around and you give them a call to see what's going on. No answer. The 4th you try again, worried now, and they answer your call! "We're not happy with the way the water heater incident was handled and would appreciate a little more professionalism and timeliness with issues in the future.". They go on for a few minutes, you waive the fee for paying late and finally get to collect your money over the phone.
Crisis averted, this time. What if they simply decided not to pay anymore because they're upset they had to go 3 days without hot water? What are the steps you take from there? Do you know how to report to the major credit bureaus? Me neither. If you ended up needing to take them to small claims court is that something you would know how to do? What lawyers to talk to? If you planning on going the route of managing yourself this will be something that you need to investigate from the beginning and know a couple good lawyers around the area, plus the limitations of evictions in your state.
A good PM should head up all of these issues for you. A lot of them will take care of calling the lawyers, setting up the court dates, sending out the eviction notices. All of this out of that measly 10% you were so worried about before. Obviously you'll still need to pay the lawyers and any fees that come from pursing the eviction, but the process is much more simplified on your side. Just make sure to be mindful of all the different angles if this is something you would like to do. Stuff like this is enough to keep most people from ever going down this path or trying again after it happens to them the first time.
Just be Informed
Even if you figure out how to do everything perfectly, eventually it just becomes too overwhelming. You might even be the best person for a certain job, but are you, as a business owner the best person for the job at 2 in the morning? If you understand the cost of your time and brainpower as an entrepreneur the answer will always be a hard NO. You're way to valuable at this point to be replacing toilets and digging snakes out of AC units. My recommendation is to always go with a PM over doing the work yourself or you might majorly stunt yourself on any further largescale financial plans because your passive income is keeping you far too busy. Make sure to do your research and make the decision that's best for your situation and if that doesn't work for you down the line, bring in some help! Happy Spending!
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