Picking a Good Property Management CompanyNov 11, 2020
The goal here is to give readers a list of what should be expected from a reputable and professional property management company. The question that all real estate investors eventually need to ask themselves—Do I want to be a real estate investor or a real estate landlord?
We often define the role of a typical landlord as the property owner who collects rents every month themselves, mows the lawn, puts the “for rent” sign out, and keeps the books to input financials into TurboTax for their annual taxes. Our readers are usually not the kind of investors with the time or desire to become landlords or increase their portfolio of landlord-centric properties. The most valuable asset of a solid real estate portfolio is the trade-off of time and labor for returns that come without your daily blood, sweat and tears.
However, many landlords end up rushing to a property manager to try and get their life back, only to find that a lot of management companies will never care as much as they do about their property. Real Estate Management companies are generally mediocre at best. It’s not hard to see why. On $1,000 rents per month a property management company will make anywhere from $60-$120/month from that one property. Doesn't sound like much of an incentive, does it?
Property management is a numbers game—appropriate volume is essential to make things worth it. And unfortunately, as volume increases, personalized service and care tends to go out the window. If you're a landlord and are dying to join the world of hands-off investing, a poor property management experience can turn you off from the entire process an lead you to sell your property and claim that “real estate investing doesn’t work”.
Well, you'd be half right.
Take the wrong approach to real estate investing and it likely won't work out. But manage and invest correctly and it'll work almost every time.
The following ideas are going to be generalizations based on mostly western US market trends and details. We'll focus on the details of the residential multifamily market as opposed to luxury markets, vacation rentals, hotels, or other asset classes.
Here's a comprehensive list of questions we recommend each interviewing landlord should ask a prospective property management company prior to hiring them for your real estate portfolio. This is a big deal for you, so get it right! A mismanaged asset can be a terrible investment experience that will cost you far too much.
Questions You Should Ask a Management Company:
- Tell me about your vacancy rate per product type? (get a narrative form answer with data to back it up)
- Tell me about the management software or interface you use and you will have me use as your client.
- Tell me about your disbursement process and what my expectations should be?
- How do you handle your rental deposits at the beginning and end of every lease?
- Tell me about your banking?
- Where is it at?
- Who is your companies banker? Can I talk to them?
- Who at the PM company handles the banking and what are their qualifications?
- What fraud protection measures go into place to protect me as a client and the tenants you will procure for me at my property?
- Do you have a third party audit done by an accounting firm?
- Who is your management team?
- How engaged are they in the day to day operations?
- What is their experience?
- How much has the company grown under this management team?
- Do you have 2 current clients and a past client that no longer works with you I can speak with?
- Tell me about your reviews online to shed light on the good and the bad (you should have the reviews you’d like to go over ready to discuss from Google Places, Yelp, or other social media sites). Don’t solely weigh your opinions by what the reviews say. Remember, they work with tenants who sometimes don’t like to take responsibility for their actions, etc. You want a professional and complete response to the concern and “the other side of the story”.
- What is your process at move-in for the tenant and for me as the landlord?
- What is your process when a payment is late and when does that process start?
- Do you have retained legal services? With whom and what does it include?
- What do you do to avoid vacancy or lost income opportunities?
- How do you handle deposit returns and what is considered “Normal wear and tear” vs “tenant responsibility”?
Each question above is an excellent start to understanding the nature of the management company you are working with—their culture, proactive process, leadership, competency, proactive vs reactive natures, and their ability to deliver an experience that will keep your needs prioritized and maintain your asset. One of the leading expenses of a mismanaged property is vacancy. So it is absolutely crucial to understand the ways in which a management company oversees this part of the business model.
How We Tackle Management For Our Properties
At FIG we have a management team that oversees all of our clients' properties. There are a few extra things that our team does that we believe are crucial to maintaining full units.
They include the following steps:
- Each project has listings that are showing available at all times in order to keep a line in the water. This lets them collect a steady stream of interested tenants. Even if there are no vacancies at the time, it’s crucial to always be marketing.
- Leases are typically 12 months, but every tenant has an inspection on their property every 6 months. These inspections give an opportunity to check on compliance for the number of tenants occupying the space, if there are any pets, the condition of the property, and to build on the relationship that manager has with the tenant to ensure a positive living experience. This also allows them to evaluate what can be done to earn their confidence in a lease renewal. If appropriate, it also gives the option at the 6 month check up to offer a small incentive of no more than $10 to get a renewal right then if the tenant knows they will be wanting to stay.
- If there is not a renewal at the mid point of a lease, then 90 days prior to the lease expiring, the manager reaches out to the tenant to inform them of the upcoming lease expiration. At this point, management offers another incentive to renew if they respond and commit in the next 30 days. If there's no response by 60 days prior to the expiration another reminder to notify the manager of a renewal or the property goes back to active status and they will not be guaranteed a renewal once the 30 day out mark hits. This gives a FOMO incentive (Fear of Missing Out) by not renewing nor having the choice about moving.
These additional steps create a solid understanding of upcoming vacancies well in advance so that we can stay proactive with openings vs reactive. This also eliminates long turn overs and because of the 6 month inspection, we have a good idea of the type of condition the unit is in, letting us prepare our turnover crews for any repairs (reducing the time needed to stay vacant.)