There two types of people I love to pay in this world. One is my accountant and the other are my Property Managers (PM). They are the muscle of my business and allow me to be truly passive in my investing. Without them, my business would not function as well as I would have to do more work than I want to. The reason why this site is called Master Passive Income is because I want to show you how to have a business that requires the least amount of work from you AND will always be bringing you money month after m0nth.
As I have shared in another post there are many reasons why rental properties are the best investment , and this is yet another one to add to the list. Out of all the ways to make money in the world, rental properties are the most passive of them all because you hire one person to manage your properties and the properties are doing all the work. The PM is just there to facilitate the property and make sure it is doing the job right.
If you decide to manage your properties yourself, you don’t need to have a Property Manager (PM) because you are the one the tenants call when there are any issues. I personally do not like to manage my own properties, so I hire a PM. If you do decide to have a PM, you must take your time and find one that you feel comfortable with and can trust. The PM is your employee for your business, and you need to treat him as an employee. There are 7 things I look for in a PM.
The PM should be able to return your call/text/email within the same day, or at the latest, within 24 hours. This is a non-negotiable. Only with good communication can your real estate business run well and keep you and your tenants happy.
When I am screening out PM’s before I invest in a new area I expect the PM to be on their “A” game and be in constant conversation with me because he wants to get my business. If the PM has horrible communication timelines and abilities while he is trying to get my business, I can only imagine how much worse it would be when I actually hire him to do the job. I have passed on many PM’s because of their lack of communication in the hiring period because it will more than likely get worse, not better.
You must be able to trust your PM. Remember, they are your employee, and they are working for you. One property manager I had was not trustworthy, and I had to fire her. There were missing receipts, unexplained expenses, upset tenants, etc. Don’t put up with a bad property manager. Get rid of them quickly. Like an employee, hire slow, fire fast.
Don’t put up with a bad property manager. Get rid of them quick. I treat them like any employee I have ever employed. If they are good, I treat and pay them well. They are running my business for me and if it was not for them, I would not have a business. But if they are a bad employee I get rid of them as fast as possible. Like an employee, hire slow, fire fast.
Everything the PM does should be ran through you, and you should be able to verify what they do. I give my PM’s the authority to spend under $100 per property per month without my approval. I don’t want to be bothered with a $5 toilet leak, but I do want to be bothered about a $300 water heater or a $2,000 furnace replacement.
I review every statement and every expense/income that I receive. If there are any issues or questions, I ask them right away. If the PM is unable to adequately answer my questions, I start to get suspicious of them doing their job well and how much I can trust them. Once the seed of doubt is planted, it takes a lot of time for the PM to build that trust back up in me so I am able to fully trust them.
Quality of work
When you have a good PM, the quality of the rehab or repairs she will do should meet your standards. You should be able to rely on your PM to make the property desirable to tenants and get top dollar for the rent. If your properties are run down the rent amount would be much lower than if you took care of the properties because they are not as desirable. Your PM is who makes sure the property is desirable. If you are not able to get the same market rents as the properties near you, look into the quality of product your PM is selling to the prospective tenants.
Just like hiring any other employee, check their references, and see if they have a good track record with previous/current landlords they are working for. If they have good references you have hopefully been able to get a leg up on finding a good PM.
I never understood when PM’s do not give references. I had one potential PM tell me that he will not give any references because his other landlords are confidential. This was a huge red flag for me. No matter the reason for him being secretive, this goes against points 2 and 3. It shows that they do not want to be held accountable and that they may not be trustworthy enough for me to hire them. I moved on.
The amount that I pay my PM is based on what I contract with them for their services. Some areas 8% of rents is the going rate and in others 10% is. If it is hard to find a good PM in a specific area, you may pay an awesome PM 12% because you are getting awesome service for your money. I have an area where I am paying 12% for my PM, but he is worth every penny.
On top of the commission for the monthly rents, it is wise to watch out for other fees that they may charge you. These fees add up quickly and eat into your cash flow each month. Some things I look out for are:
- Minimum monthly fee if the property is not rented. This is a non-starter for me. I was interviewing PM’s for a new area and came across one who had a minimum of $50 charge even if the property was not rented. Funny that he charged 10% of the rents for his commission and the home rented for $550. So he would only have a $5 incentive to get the property rented!
- Up charges for contractor repairs. Some PM’s feel like they are general contractors and add a % to the cost of rehab or repairs. I believe that this should not be a charge. This is a part of their business and their payment should be the % of rents they collect each month, not up charging for work they are not doing.
- Finders fees. I am totally fine with a finders fee because it does take a lot of work to get the property rented. They need to market the property, show the property to prospective tenants, handle applications, screen the tenants, and get it rented. Depending on the PM, you can be charged a flat fee or even part of the first months rent. Some have even wanted all of the first months rent which is a lot! If they charge a high finders fee, I make sure they guarantee one year occupancy before they can charge another high finders fee. That way, if I have to rent the property again in the same year, I won’t have to pay the finders fee again.
- Marketing fees. Some PM’s pay to market your property to prospective tenants. I find that this fee should be included in the finders fee for renting the property and not tacked on top of it.
- Charge to visit the property for any reason. PM’s can come up with many different ways to charge more money and this is an easy one they like to tack on top of everything else. I begin to ask what the monthly commissions they charge are for when I see charges like this. The commission is for running the property monthly and I feel they should not be many other charges than the commission percentage.
The biggest thing I can leave you with is this: When you get a good PM, pay them and treat them well. The PM whom I pay 12% of the rents, which is rather high for a percentage, is worth every penny. One day I thought to change the terms of our agreement once and bring the % down to 10%. After I considered the change, the amount of money I would save would not compare to the amount of dissatisfaction my PM would feel. The decrease would lower his desire to do the job right. Just imagine if your boss came to you and asked you to take a pay decrease all while you are the one making the money for him. That wouldn’t be good at all. Again, when you find a good property manager, pay them what they deserve.
Do you have any questions or comments? I want to hear from you. Please comment below.
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