The question that every property investor must ask themselves:
“Should I manage my investment properties or outsource to a property management company?”
The answer to this question depends primarily on preference, proximity and capacity. Many people with smaller property portfolios and more time on their hands will decide to save money and handle the daily management of their properties. On the other hand, investors with larger property portfolios that have little availability will often decide to outsource to a professional property management company.
For the investors choosing to outsource to a property management company, there are a number of questions you need to ask, and expenses you need to be aware before making your hiring decision.
Below, you will find a checklist of fees and questions to help choose the right property management company for your needs:
Management Fee:
All property management companies charge a monthly fee to manage a rental property. This fee varies, but typically an owner will pay between 6-10% of gross monthly rent.
Questions:
1. What services are included in the monthly property management fee? Basic services will include rent collection, maintenance, financial reports, tenant relations, rental analysis, screening and property marketing.
2. Is the monthly management fee paid against collected rent, or do you need to pay the fee regardless of whether or not your property is occupied?
3. What types of properties do you manage? Residential (MFH/SFH)? Commercial?
Leasing Fee:
Property management companies will charge a fee for placing a tenant in your property. This placement fee is typically half to a full month’s rent, depending on the company. This is often higher for companies that use extensive multi-media marketing services to quickly find qualified tenants. Many property owners shy away from companies charging higher leasing fees, but often these are the companies that have the lowest vacancy rates. Further, owners will want to understand the specific screening procedures used to find quality tenants.
Questions:
1. What marketing tactics does your company use to find qualified tenants?
2. What screening process do you use to find high quality tenants?
3. What is your average placement period (time to find a tenant)?
Renewal Fee:
This is a fee property management companies charge when they renew a leasing contract for a set period of time. Many home owners despise this fee. However, maintaining existing tenants can save a landlord thousands of dollars in turnover expenses. Without a doubt, tenant retention is gold when it comes to maintaining consistent cash flow and maximizing your bottom line.
Questions:
1. Do you charge a tenant renewal fee?
2. What is your average tenant retention rate?
Escrow:
Property managers will often ask investors to set aside a reserve fund for essential property repairs. Property owners may set both a reserve fund and ‘maintenance limit’. They are typically the same, but not necessarily. To distinguish, a reserve is the amount of money left to address unforeseen issues and a maintenance limit is the amount the property manager has permission to use to take care of problems without prior permission from the owner. This typically involves setting up an escrow account where the property manager can pull funds as needed. The underlying purpose of this account is to promote efficiency.
Questions:
1. Do you require a separate escrow account for maintenance and repairs?
2. Do you contract a third party for handy man repairs, or do you have a handy man on staff?
3. Do you provide 24/7 maintenance assistance?
Having repairs contracted out to a third party can significantly increase the amount landlords pay for property repairs.
Additional Questions:
1. What professional property management groups are you associated with (NARPM, IREM, EIAA)? Does the staff or company have any professional designations?
2. Do you carry a fidelity bond for insurance protection?
3. What are your accounting procedures?
4. How long has your company been in the property management business in the area?
5. Do you take calls or schedule showings over the weekend?
6. Do you have copies of recent reviews/ testimonials that you could show?
7. Do you implement Fair Housing training for your employees?
Making a decision:
The types of management fees that a landlord encounters will vary depending on the company. However, the checklist above should arm you with the questions and basic knowledge needed to make an informed hiring decision. Also, make an effort to understand the maintenance procedures of each company. Typically, property management companies that have an on-staff maintenance crew, as opposed to a third party contractor will be more efficient and charge lower repair fees.
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