I'm a Property Manager - Ask Me Anything

[Tick]

My wife and I both own a property management company and are big fans of both the book and the forum.

We've been into RE investment for a while now and really enjoy talking about this topic. If you have questions about property management, feel free to ask us and we'll chime in as fast as we can.

Just keep in mind that real estate law varies wildly from place to place so I can give you my best advice but when it comes to certain topics it's best to chat with an attorney in your area.

 

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[ZCP]

Average percent to build in for vacancies, maintenance, utilities? Most common issues for the owner and the owner's cash flow? Stupid first time owner mistakes and things new owners overlook? Local tax breaks that could help the bottom line? Top 3 go to advertising things to get vacancies from 70% to 90%?

Thanks for doing this!!

 

[SteveO]

Welcome. I own a property management company myself. My focus is on properties that I own with investors.

It is a tough job as you well know.

 

[Yankee427]

See you are in Alaska. I'm sure there are some other issues you deal with there as here in the lower 48.

How often do you run into tenants that are just unreasonable with anything?

 

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[Tick]

Average percent to build in for vacancies, maintenance, utilities? Most common issues for the owner and the owner's cash flow? Stupid first time owner mistakes and things new owners overlook? Local tax breaks that could help the bottom line? Top 3 go to advertising things to get vacancies from 70% to 90%?

Thanks for doing this!!

Average to build in for vacancies can vary from place to place. For example here in Anchorage, I have 6 vacancies in 140 properties managed, putting us at 4.2% vacancy but there's a major housing shortage here. I know that's kindof a none-answer so let me say this. My nest advice would be to interview some local property managers and ask them. That can be as easy as a phone call. Most don't mind answering basic questions like that but just be polite and keep in mind they're probably busy.

Maintenance: The average cost of maintenance in the US is 1.5x monthly rent. So if your place rents for $1000 per mon, you'd spend an average of $1,500 per year on maintenance. This number will be lower on new construction, and higher on older construction but that's the average. A common rookie mistake is not taking maintenance into account when you initially do your cashflow numbers. It's a house, stuff breaks. Get over it.

A good PM will manage repair costs by negotiating with vendors for lower pricing. When you are a single property owner calling, you are only bringing them so much business. But when PM with hundreds of properties calls, they know that building a relationship with them will bring them a constant stream of business so they're more likely to negotiate a lower price. They also know that doing a better job is in their best interests. If they piss you off, they've lost one work order. If they piss me off, they've lost hundreds.

Rookie Mistakes: Spend the time and the money doing thorough background checks. The best way to avoid an eviction is to keep them out in the first place. If it doesn't smell right, hold out for the right tenant.

Keep your rent prices below max. I know that sounds counter intuitive, but you'll get a larger pool of applicants to choose from. A great tenant who takes care of the place and stays for three years at $1000/mon is always far more lucrative than constantly cycling, repairing, and advertising a place at $1200. When you look at the cost of vacancy, you'll see how quickly that adds up.

Remember, keeping vacancies down isn't just finding new tenants, it's keeping the good ones. Take care of them. Be fair, honest, and get maintenance requests taken care of in a timely manner. Keep your rent prices slightly below market and you'll keep them there. It just takes SO MUCH time to make up for even a small vacancy by increasing rent.

For example if your place rents for say $1000/mon. You think it can rent for $1100.

Scenario One: You tell your tenants that rent is increasing to $1100 at the end of the lease. They decide to move out and after cleaning, repairs, pictures, advertising, multiple showings, applicant screening, etc you go one month vacant. It will take you the next 10 months just to break even plus you had the costs and time spent on all that other stuff.

Scenario Two: You tell your tenants that rent is increasing to $1,050. You explain that this is below market but they've been great tenants and you'd like to keep them around. They'll probably stick around and you won't go a day vacant.

Advertising: On the nicer places, I encourage owners to use a professional photographer. Yeah, it's a $150-200 hit, but that's just once and good pictures will get a place rented FAST. Craigslist works but is time consuming and full of scammers, dirtbags, and cheapskates so just know that going into it. We syndicate out advertisements on 200+ websites like Zillow, Rent.com, etc and those tend to supply us with a higher quality applicant than a craigslist ad.

Local tax breaks.... that's a toughy. I'd use a tax adviser for that. I've never regretted handing money to my tax adviser. I always get it back and then some.

 

[Tick]

See you are in Alaska. I'm sure there are some other issues you deal with there as here in the lower 48.
How often do you run into tenants that are just unreasonable with anything?

As I've been in this more and more I learn to spot that bad ones early. When they start picking the place apart in the first few minutes you know you've got a picky tenant on your hand. We don't deal with slumlords so most of our properties are in good shape relative to the price. I had a dude come in the other day to new construction condo. Super nice but had some very minor spots that needed cleaning. He immediately zoned in on these and started ripping the place apart. He didn't get a call back.

I certainly don't mind doing minor things to keep someone happy but I can't be running my maintenance guy ragged cleaning stray hairs from below a cabinet.

We've been accused of being racist of course. No, I'm not kicking you out because of your race. I'm kicking you out because you trash the place and don't pay rent. Some people like pulling that card. Depending on the judge, it sometimes works for them but we always win in the end. One chick in particular, it took four attempts to get her kicked out. With the right judge her race card plea worked. The fourth.... not so much. Found a bag from a Coach Purse inside as we were cleaning out afterwards. She dug her one hole.

Problems that the lower 48 doesn't deal with..... how about my wife missing a showing because there are two moose licking her car. That was weird.

 

[Tick]

It is a tough job as you well know.

Yes it is. The green/brown stuff in this picture is exactly what it looks like.

 

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[DeletedUser394]

Yes it is. The green/brown stuff in this picture is exactly what it looks like.

WTF. Is there a backstory behind this?

 

[Tick]

WTF. Is there a backstory behind this?

Sewer line backup

 

[KassandraTB]

The average vacancy in a balance market is 10%. Most common issues is making sure maintenance supports The goals. Ex: fridge goes out and the goal is 10yr hold-then just replace it. Stupid first time mistakes- going overboard and not keeping track of records and knowing numbers. Tax breaks- cost segregation on the building is a cool one! Advertising-rentals.com go where professionals shop. Craig's is okay but tend to be lower end tenants. Tenant mix is vital to a building and an asset.

Sent from my HTC One_M8 using Tapatalk

 

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[KassandraTB]

Yes, pm is ugly and takes more work than people realize.

Sent from my HTC One_M8 using Tapatalk

 

[KassandraTB]

Unreasonable tenants... Best advice is to learn people skills on how to deal with them. Lots of books out there. Disc profile. Conflict resolution books. And so on.

Sent from my HTC One_M8 using Tapatalk

 

[StartupsRFun]

What are your thoughts on AirBnB?

 

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[Tick]

What are your thoughts on AirBnB?

I'm not familiar with that yet. We don't do short term rentals. Believe it or not, Anchorage isn't that great of a market for short term rentals. The season is too short and most folks land in Anchorage and then go on to their next destination, ie: Kenai, Denali, etc

 

[PHD]

Interesting that this thread has popped up now. Just yesterday I was talking to my fiance about starting up a property management business, the reason being that where I live in Australia I feel the market needs a shake up. In all my years of renting (7+) I have seen nothing but terrible PMs that are impossible to contact, don't look after the tenant or the owners and as far as I can tell do very little work.

I will be following with interest.

 

[Tick]

PHD, that's pretty well why we started ours. We were doing a better job on our properties than anyone else could do. There was a huge vacuum in the market place for someone competent and honest. Quite a few of the businesses up here in Alaska have settled into the good-enough trap and that's easy to do when you have no competition. Then all of a sudden someone comes in with that there new fangled tech-no-lo-gieeee, and starts kicking your teeth in.

 

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[SarahSH]

This is a great thread...thanks for posting! We just hired a property manager for one of our properties and one of the main reasons why I hired them was because of their use of a wide variety of marketing methods. They did very detailed you tube videos (with some good copy, I might add) and used the metrics to get a feel for how much interest there was in the property. Nobody else in the area was doing anything like that. Our house was rented quickly and for more $$ than I thought we should get for it... Usually I list the properties about 100$ less than what the other comps are going for so I totally agree with you on underpricing the market. We have enjoyed some long term tenants this way.

 

[pro]

What kind of annualized returns, after property management fees/repairs/insurance/taxes, are the landlords who retain you for property management getting based on:

• worst case
• best case
• average

 

[Lakeview]

@SarahSH - Love your avatar pic.

@Tick - I can understand a property management as in managing your own properties. With your knowledge of managing properties, why the attraction of managing for others? Seems like it is not as lucrative. Clearly I'm missing something. Help me understand how it would be a wise business compared to just staying with your own properties.

Thanks in advance, great thread!!!

 

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[IceCreamKid]

Why the attraction of managing for others? Seems like it is not as lucrative.

I can't speak on Tick's behalf, but I will say that what pulled me towards starting my property management biz years ago was the idea that you can start creating monthly cashflow for yourself even though you don't have any money invested. You're essentially "borrowing" someone else's asset and taking a cut of their cashflow in exchange for your services.

I'm currently only in the single family home niche right now, but am aiming towards branching out to apartments. Feel free to reach out if you have any questions for me though, I have so many systems in place to automate every little detail of the property management process.

 

[Tick]

@SarahSH - Love your avatar pic.

@Tick - I can understand a property management as in managing your own properties. With your knowledge of managing properties, why the attraction of managing for others? Seems like it is not as lucrative. Clearly I'm missing something. Help me understand how it would be a wise business compared to just staying with your own properties.

Thanks in advance, great thread!!!

Glad you like the thread. Thanks! It can be very lucrative if done correctly. Just like any other business, you have to focus on building a company, not building yourself a job. We do everything we can to focus on that idea as we grow. We hire early, hire well, pay well, and focus on building a scale-able business. Paying ourselves has taken a major backseat to building the business. A common problem I've seen with unsuccessful franchisees is that they all seem to pay themselves very well, all while whining about their shitty part time employees and how they can't afford good marketing.

Frankly, I don't want to manage my own stuff for very long. I want to build a successful company that can run for the most part on it's own. The money I make will pay to buy properties located in places that the economy fits my portfolio goal. For example, here in Anchorage the appreciation and equity building is great because it's a stable market and the home prices are high. But for those same reasons, rent isn't enough relative to the cost of purchase (cap rate) to make for great cashflow properties. The next properties I'll buy will be in Oklahoma City, OK and I'll be handing them off to someone in town to manage for me. OKC is a strong, growing, and diversified economy with high rents relative to the low cost of building which means I get great cashflow and that better meets my goal of financial freedom than a property that has better appreciation but lower cashflow. Different markets/properties support different goals.

I can also only buy so much property with limited cash in limited amount of time. Check out my post in the thread "How to People Become Billionaires in Real Estate"

 

[Tick]

I can't speak on Tick's behalf, but I will say that what pulled me towards starting my property management biz years ago was the idea that you can start creating monthly cashflow for yourself even though you don't have any money invested. You're essentially "borrowing" someone else's asset and taking a cut of their cashflow in exchange for your services.

I'm currently only in the single family home niche right now, but am aiming towards branching out to apartments. Feel free to reach out if you have any questions for me though, I have so many systems in place to automate every little detail of the property management process.

Bingo. We actually prefer managing single family homes. I don't like them as an investor but I love them as a PM. They attract better tenants and the margin tends to be better. To be clear, they are not good investments unless you buy them way under market, I just like to manage them because they are profitable and low headache from a PM perspective.

Here's the other issue we ran into with large complexes. Let's say you have 100 total units managed. Of those 100, 25 are in one large 25-unit complex. One day one of your employees screws up big time, the owner gets pissed and fires you. You just lost 25% of your income. We found ourselves in a similar situation. Never got fired but realized we were at risk and decided to diversify a bit. I've seen it happen to another company. They managed 500 units. 350 of those were under a gov't program umbrella. One day the gov't program decided they were going to do something different and just like that, they lost 70% of their gross income. Nothing they did wrong, just gov't acting like gov't. That's a bad day.

 

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[SarahSH]

Yikes, that is a bad day!

Right now, we rely heavily on property managers to take care of our properties (single family houses we have lived in) most of them are near military installations. So far, I don't have any complaints and am glad to pay someone else to take care of things since we don't live near any of our properties.

As a property manager, what types of things do you do to market your services to prospective owners who may have a place they would like to rent out? Where we just came from, the turn over rate is fast because it is mainly military. The market is saturated with houses for sale and the local realtors are mostly focused on selling and getting listings than managing rentals. With that being said, do you have relationships with realtors who end up with unsold properties who don't want to get into the property mgmt business?

 

[SarahSH]

@SarahSH - Love your avatar pic.

Thanks!

 

[Tick]

What kind of annualized returns, after property management fees/repairs/insurance/taxes, are the landlords who retain you for property management getting based on:

• worst case
• best case
• average

I'm trying to figure out how to best answer your question without just looking like I'm dodging it, so here goes. We'll practice some math so I can walk you through how to figure out that answer. It's not as easy as say stocks but allows you much more leverage and ability to improve your own situation. The challenge is that there are just SO MANY variables involved. The biggest one being the type of financing you secured. Let's say you're the new proud owner of a four plex in the bedroom community of Eagle River, just outside of Anchorage. You purchased the fourplex for $500,000.00

Scenario 1: You purchased it on a FHA 3.5% down loan at 4.5% w/ a 30 yr term, financing $482,500. You'd have a principal and interest payment of 2444.76
Pros: Low amount of cash to get started, great cash-on-cash return, build equity using other people's money
Cons: You HAVE to live there the first year, low or no cashflow, potential to be over-leveraged

Scenario 2: You purchased it on a conventional loan with 25% down, 30yr term, financing $375,000. You'd have a principal and interest payment of 1900.07.
Pros: High cashflow, no overleveraging, cash leftover to fix mistakes and repairs.
Cons: Bad cash-on-cash return, slower equity building, HUGE initial investment

You get $1400 per rent per unit, totalling $5,600 gross monthly income. Repairs would probably average 1.5 x monthly rent, $8,400 per year. Insurance would be the same, taxes would be the same. Management average is 9-10% of gross rents plus leasing fees. Add in trash, heat, and common area electric, etc.

At first glance, Scenario 2 looks like the better option because you're getting $544.69 more cashflow BUT you had to sink another $107,500 of your hard earned money to get that $544.69 more a month. In scenario one, you only had to spend $17,500 to get the place. You aren't cashflowing yet, but you're building equity with someone else's money.

I hope that answers your question. I wish I could just say X% is normal but there are just too many variables. If you want cashflow and don't need a giant equity payout when you sell, I like the midwest. Look for places that have job growth and a diverse economy that isn't dependant on just one industry. That new oil boom town may be cool now but when Exxon Mobil decides to leave and takes all your tenants with it, you're still stuck paying the mortgage. As an investor I like clean, mid priced, multi unit buildings. Single family homes are hard to make cashflow unless you buy WAY below market.

 

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[pro]

Let's say you're the new proud owner of a four plex in the bedroom community of Eagle River, just outside of Anchorage. You purchased the fourplex for $500,000.00. You get $1400 per rent per unit, totalling $5,600 gross monthly income. Repairs would probably average 1.5 x monthly rent, $8,400 per year. Insurance would be the same, taxes would be the same. Management average is 9-10% of gross rents plus leasing fees. Add in trash, heat, and common area electric, etc.

If you bought it with cash:
Repairs $5600*1.5=$8400/12=$700
Insurance/taxes=$8400*2=$16,800/12=$1400
Management=$8400*0.1=$840 +$100 for lease fee=$1,000
Trash/Heat/Electric=$1,000
Expenses=$4100/month in fees

Revenue: $5600/month
Revenue-Expenses: $1,500/month
Annual return: $18,000/year
75% occupancy: $13,500/year

So the return: 13500/$500,000
= 2.7%

It seems bad for the landlord. Can you correct this?

 

[chrisbiz4444]

If you bought it with cash:
Repairs $5600*1.5=$8400/12=$700
Insurance/taxes=$8400*2=$16,800/12=$1400
Management=$8400*0.1=$840 +$100 for lease fee=$1,000
Trash/Heat/Electric=$1,000
Expenses=$4100/month in fees

Revenue: $5600/month
Revenue-Expenses: $1,500/month
Annual return: $18,000/year
75% occupancy: $13,500/year

So the return: 13500/$500,000
= 2.7%

It seems bad for the landlord. Can you correct this?

2,7% on the money levered. Cash on cash return would be much greater. With a 3.5% down FHA loan you would only be dropping $17,500. Or in the conventional situation $100,000 which in that case would be giving you a 13.5 % cash on cash return. Plus you have equity building and the possible 1031 exchange once you are ready to dump.

 

[pro]

2,7% on the money levered. Cash on cash return would be much greater. With a 3.5% down FHA loan you would only be dropping $17,500. Or in the conventional situation $100,000 which in that case would be giving you a 13.5 % cash on cash return. Plus you have equity building and the possible 1031 exchange once you are ready to dump.

Wouldn't the compounded interest rate exceed the 2.7% return?
If the FHA loan rate is 5.04% the landlord is losing money.

If the property return is over 5.04% then getting a mortgage makes sense

 

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[Tick]

Pro - Those were just example numbers I threw together to illustrate how financing affects the numbers. You may very well not cashflow on a property at a given price, but if the equity building makes up for it and that meets your goals, then great. Every property you look at will have different numbers. It took me 8 months to find my first investment property that meet all my numbers.

Keep in mind that rental cashflow isn't the only way you make money on real estate. You make it on tax advantages, mortgage paydown, and appreciation as well.

In my opinion, it's almost ALWAYS a terrible idea to pay cash for a property. You are missing out on the ability to use leverage, using someone else's money to buy it (the bank's) and someone else's money to pay it off (the tenants). I bought my fourplex for $975, the cost of a well inspection. My wife negotiated her commission as the agent to be the down (3.5%) and next thing you know we had a fourplex building equity, providing us with a place to live for $800/mon, and when we moved out a positive cashflow. All for the initial investment of $975.

Different places you buy will have different metrics. Some places, like Anchorage, are great for building equity and appreciation but stink at cashflow. Other places, like Oklahoma City, are great for cashflow but have next to zero appreciation and slow equity building. Neither one is right or wrong, it just depends on your goals.

 

[CashFlowDepot]

Do you use ACH for collecting rents?

I switched to that about 10-12 years ago and it has been a lifesaver for both me and my tenants. (especially now that I live out of the country) I can collect all rents in about 5 minutes with no trips to the bank for deposits. The tenants love it too.