At some point in your investing career, as you continue to build your portfolio, you will likely need to hire professional help to maintain and manage your properties. Such professional help is often called “property management.” Today I’m going to walk you through considerations on the timing of hiring a property management company. This is based on my own experiences as well as watching successes and failures of my clients.
Investing at a Distance
The first consideration is the location of your investment. If you are investing at a distance, meaning your rental property is outside of a short drive range, I’d encourage you to explore hiring a property management company. What you will gain in this scenario is peace of mind. You never know when something will break or you might need to make an immediate repair. And when investing at a distance, it can be quite difficult to get to your property in a timely manner.
Additionally, when you invest at a distance, you put yourself at a disadvantage in regards to local networking. A good property management firm has strong local contacts in the form of contractors, maintenance guys, and even in the local government to ensure that your property is being taken care of well and by the right team.
You Have High Earnings
If you have a high amount of earnings, regardless of the source, your time is inherently more valuable than someone with median level earnings. You must always consider the value of your time in making decisions.
Just like you shouldn’t be preparing your own tax returns, you shouldn’t manage your own property if the value of your time is high. Hiring a property management company benefits you by saving you time. Offload and outsource as much as possible. While outsourcing can be expensive, it will not be as costly as losing your own time.
For example, let’s say you earn $250,000 per year. Arguably, your hour is worth $120 per hour (divided by 2,080 working hours per year). You need to look at each rental and ask “can I make more than $120 per hour if I manage this property myself?” If the answer is yes, manage it yourself. If the answer is no, outsource immediately.
There is an argument to be made about non-monetary value such as joy, happiness, and expansion of knowledge. If managing the property yourself will bring you any of those things and you feel that is more valuable than your monetary hourly rate, than by all means don’t outsource the management.
You’re Not Handy
I’m all about learning how to make repairs and manage a property. However I’d suggest you learn how to be handy on a primary residence rather than a rental. The reason being that you are losing money every day that the rental is not 100% operational between the holding costs and the lost rents. On the primary residence, you can at least live in the property while you learn handy tips and tricks. Thus it “costs” less to learn in your primary residence.
Take a finance guy (or an accountant like me) who is really good at managing money, making investment decisions, talking with clients, etc. Should that guy spend his time learning how to become handy? NO! It’s a waste of time. By hiring a property management company, you can outsource the task and move on.
What to look out for when choosing a Property Manager
You should not blindly outsource to property management. Property managers are expensive, charging 8-10% of gross rents, but bad property managers are even more expensive when you have to pay for their mistakes.
You'll know they're not a good property managers when you notice the following things happening:
- Cannot send you a professional and timely financial statements
- Cannot provide you with financial statements free of mistakes
- Takes a kick back from contractors they hire
- Does not check on the property regularly
- Collects rents and issues reports (that’s not property management)
Don’t hire a bad property manager. Always check referrals and local reputation.
When you Shouldn’t Outsource Property Management
There is a big difference in reasons you should not hire a bad property manger vs not needing to hire one at all.
So when should you not hire a property manager? Four instances jump into my mind:
- If you are investing locally
- When your time is more valuable managing the property
- If you are a super handy person
- When you can design a technology system to get around property management.
The first four seem pretty straight forward, so let’s talk about that 4th instance:
Technology exists today to remove functions of property management from property managers. For instance, our firm has developed, and is in the process of rolling out, an accounting system that essentially takes away the property managers collection, reporting and maintenance responsibilities. This new function can collect rents, pay bills, manage maintenance calls, and provide you with a live dashboard to show you where everything is at with your property at any time. No more waiting 20 days to get the prior month report. No more surprise bills.
The best part about our system? You can manage it all virtually.
This system is a great step in the right direction. Unfortunately, this doesn't cover the physical presence of a manger; knocking on doors, connecting with contractors, etc so you would need to do that piece yourself or hire a property manager. But what this does accomplish is huge by removing the accounting and finance function from the property managers. We’ve found that they aren’t as good at it as we are (and many of the property managers we have interviewed agree!). If you can utilize and leverage technology to get around hiring a property management company, do that! You will save a ton of money along the way.
All that being said, don’t underestimate the value that property managers can bring to the table. Find the right one and your investments will be maximized. If you have questions about the process, our new system or if the timing is right for you, reach out to our team today for your free consultation.