Don’t Lose Your Profits To Property Management | Thursday Thought

If you’re like most real estate investors. the early stages of your journey began (or will begin) with properties close by that you can manage and maintain yourself.  You know the local market.  You have good good contractors and repair people for things you can’t do.  You can go collect rent checks yourself.  This is all fine and good, but what about when you want to look into higher cap rate investments in other parts of the country.  Or, perhaps your portfolio of properties is getting too big to manage yourself.  “High class problems,” my most lovely friend would say.  If you really want a significant real estate “empire” though, you are going to need to look into having an expert company take care of at least some of your holdings.  Before you do this, there are some things you most certainly need to keep in mind:

  • The first and most obvious is to check their references.  Don’t be lazy about due diligence here.  Get a list of their clients and call a few.  Check some of their properties and make sure they are well kept.  You might even want to go on a site like Bigger Pockets and see if any of the good folks there have had experience with your prospect.  You can learn a lot at a site like that, especially from someone else’s tale of misfortune.
  • READ THE CONTRACT!  While it’s not the user agreement for iTunes (which takes a CNN article to explain), it’s going to be somewhat complicated and have various cost breakdowns.  I’d even go so far as to suggest having a lawyer review it first.  The main thing you want to have in crystal clear, bullet point detail is the breakdown of fees.  Normally you will be looking at a one time setup fee (usually not much more than $100) and a monthly fee of around 10% of the rental income.  There might also be a one time “leasing fee” if the property management firm is finding you a tenant right from the get go.
  • Give yourself options in the contract when it comes to choosing contractors for repair work.  Some property management companies will have arrangements with contractors to hand them work and might even get kickbacks from it.  In turn, the rates can be quite a bit higher than if another local contractor was used.  Sometimes to the tune of $7000 for a boiler repair that could be done for $350!  Make sure your contract is setup to require more than one estimate and the ability for you to bring in an independent estimate on any work that comes up.  Also make sure it has to be done in a reasonable time frame.
  • Have a clause for a certain amount of check-ins on properties in a given time frame, especially vacant ones.  Your property management firm needs to be diligent about keeping an eye on your investments.
  • Protect yourself in the event either party wants to terminate the contract.  If you live in New Jersey and have properties being managed in Las Vegas and it’s not going well, you don’t want to find out when the poop is hitting the fan that you have a huge early termination fee to pay.  You also don’t want your company to up and quit on you with no recourse.  This is a very important part of the contract.
  • Keep the term as short as you can.  Most companies want one or two years and won’t do month to month.  Try to avoid two years if you can and keep it to one with simple renewal terms.  Like with anything, a contractor looking to get a renewal is more likely to put in the extra effort and thus it’s good to not have that renewal too far in the future.  The length of the contract can also come into play with some other possible fee rates that look at the entire rental income over the term of the contract.

With all this in mind, you may be thinking that you’d rather just stick with a small, local portfolio and manage it yourself.  I understand.  But I also know that I’d rather have 50% return on the efforts of 10,000 backs than 100% return from only own.  If done right, a good property management firm can be a key factor in your path to meaningful financial success in real estate.