Some clients go ahead and manage themselves, get tired and hand it over to a professional, some keep going on their own and some head straight to the manager from weeks before closing escrow on their first property.
When thinking about whether to spend money on a manager or do DYI for your first property or properties, I think you have to think about the work, time and money involved for you as well as how many units/ people are involved. If you are strong on these then you can DYI the management and save 5-10% of the gross rents in the fee that you would spend on a manager.
It’s also about risk…
Management in real estate is a financial management job, logistics and employment job, people and communication job, legal job.
The cost of management: When you think of money taken out of your investment property cashflow it looks like this: if the building makes $1000 gross per month you will pay probably 10% of that for management which is $100. If your building is a 10 unit building making $6000 gross then $600 per month is paid out. For single-family resident you will think differently about spending $100 than if you pay $600 for the manager to handle 10 units.
A professional manager even on the $1000 per month rent can save you more money than the $100 you are paying them in so many ways.
Let’s look at what you get bang for the buck.
I’ll start with the last point since I live in CA it is blazingly evident that if you don’t know tenant law and rights, rent control laws, discrimination, and fair housing laws, you should not do it yourself. In CA and especially in cities like Los Angeles and San Francisco the tenant rights even if they are not paying the rent. So unless you can document every conversation, every communication on every problem they have with the unit you are opening yourself up to a lawsuit. You don’t know what you don’t know. If you live in a landlord-friendly state then this is not an issue. If you live CA then join an apartment association lie the AOA and do to meetings to educate yourself before you ever buy a property.
I can tell you that there is a world of difference between the rules I have to follow in CA versus Indiana or Florida for that matter. Buy in a landlord-friendly city and state.
For this reason, I tell my investor students to hire a manager for the first year of ownership, so they can get the unit ready, do the move in review with the tenant, if anything happens to the unit physically (and it usually does as soon as the seller hands over the keys), you can have their team fix it or use the home warranty plan. Once everything is smooth you can always take over. Let the professionals get it rolling. LEARN from THEM.
To get my free report 31 things to ask any Property Manager on how to vet and interview a property manager (because they come in all different sizes) go to our website and opt-in for the free report at Home.
It is eye-opening and mind-blowing the things you don’t even know that some people will do to take your cash flow.
Whether you need a manager does depend a little on the number of units, a lot on geographic area, the time you have available and your ability to communicate.
The number of units:
If you are buying a house as your first property you might think that’s easy to handle advertise get them in there and they will pay. But keep in mind that you don’t know how to read a credit report or calculate debt ratios or call prior managers to see if they were good tenants and if you use a “standard contract” you don’t know what it missing. So though the management of 1 unit may seem easy, or 2 or 4 units at some point the number of people you have to vet becomes a little daunting. And you don’t know what you don’t know. Definitely, if you are going to do it yourself then don’t go above 2 units. Keep it small while you are undergoing your learning curve.
You have to consider how far the properties are from your home or job if you are going to DYI the management. Driving there, fixing the problem and driving back can take a toll on your free time or lunch hours – the time you have available to react to anything that comes up. If the property is more than 30 minutes away I would say get a manager.
Here too it depends on the number of units. But let’s say you get a 4 unit building, 4 rent checks is not bad but as you grow do you really want to collect say 14 units’ checks? My experience is that a lot of tenants pay with cashier’s checks which means you get 2 or 3 or 4 checks fort that one rent. You have to log these in give receipts etc. a spreadsheet helps but as you grow your portfolio this won’t work, you will need a bookkeeper. Because not only are you collecting rents, but you will have expenses like taxes, insurance, handymen work, pest control, maybe gardener, business license for being a landlord, utilities, etc. so if you are not math-oriented you pay a bookkeeper 2 hours per month to do this. Probably at $15-20 per hour that’s $40 per month. If your rent is $1000 you might pay $100 in management which means you could have had no math or logistics to deal with for $60 more per month.
Logistics of management basically means being a project manager. If you buy 1 home as your first rental this may seem easy. But as you get up in unit count this could take 1-4 hours a month on simple stuff.
I mentioned this a little bit in a previous paragraph but to reiterate, you will need to coordinate with vendors on any repairs, service calls, etc.
Scenario: The tenant calls you to say something is broken and you call the service person to get a time and coordinate with the tenant or put the vendor in touch with the tenant but being out of the loop means now a problem can become he said she said. Professional managers have their vendors, they give them a lot of business so have their attention, have established a protocol on how vendors should communicate and document visits, interactions and competition of work documentation. If you are the landlord of 1 property you don’t have that impact on anyone’s business so they are less likely to go in the middle of the night for a plumbing job and document and it certainly won’t be cheap.
Logistics means the coordination of all the people involved in fixing problems, meeting city or county requirements on the condition of the property (like Section 8)
Logistics also means the coordination of the ins and outs of tenant turn over. What do you have them sign paperwork wise, do you have a condition of the unit check-in process, did you take thorough pictures of the condition before they move in, a video even, and have them sign off. Do you have the correct notices to them, are the required ones posted, etc.? You don’t know what you don’t know.
This is the critical part. I have seen DYI managers who have 5-6 doors (houses and plexes) to manage themselves, and they have to take calls at work, which is distracting, or 1 guy who only answered calls in the evening which meant tenants have been calling all day getting in a panic. My advice is that if you cannot answer the call in the day then have an answering service answer for you or a virtual assistant because if a tenant is in trouble and can’t reach you then they will call the authorities.
Communication also means the words you use. There are laws that are national and that are statewide and that are local or city-wide on what you can and cannot say to a tenant.
If you are a hot-head or reactionary in general if you are too soft-spoken or a pushover, don’t talk directly with the tenants.
Again you don’t know what you don’t know so if you are going to DYI the management take classes on how to pick tenants, what paperwork you must do and provide, the laws that govern landlords and tenants for your locality state and federal and create space in your life to communicate as the landlord and join an apartment association. Mistakes can be extremely costly. In other words is it worth saving the $150-500 per month to risk a $500,000 discrimination, bed bug lawsuit or destruction of your property or wrongful eviction case… I don’t think so.
There are so many laws that govern the area of landlord-tenant relations and in the United States they are getting tougher and tougher on the landlords. so the risk is great that you are misstepping and don’t even know it. so even for 1 single family home which seems easy to rent as a first-time landlord could hold legal risk. professional managers know the risks and how to protect you.
I tried self-management at my ex-husband’s insistence and it was a disaster or you might say the most expensive training we ever got but those are stories for another day.
If nothing else let a professional get things rolling then you can take over instead of the other way around.
If you want more education on real estate investing, consider joining the Cash Flow Academy online training course. During this course, we will dive into how to find great properties and turn them into a source of passive income.