CHAPTER
17

Hiring a Property Manager

In This Chapter

One thing we can guarantee is that life is unpredictable, and as a result, how you run your rental properties will change as time goes on.

When you started, it was just you managing your first property. You might have had a day job and managed your property on the side while you earned profit. Now, as you purchase more properties, you might still want to keep your day job and have someone else help you manage the property. Or maybe you’re managing the property, but you want to tap into a property manager’s expertise to help you get higher rents. Or maybe you relocated to a different city and need someone to landlord in your absence. These are all reasons why you might need to hire a property management company to support you.

In this chapter, we focus on what you need to know to decide whether to hire a property management company, how to find the right one, and what you can expect when you do.

Why Hire a Property Manager?

As you progress as a real estate investor, you need to know about, and have access to, the right property management company. In fact, even if you don’t use them all the time, it’s smart to use property managers from time to time. When you get to the point that you have multiple properties to take care of, property managers can back you up, make you more money, and handle issues you don’t have the time or knowledge to deal with.

As you’ve learned throughout this book, good property management goes beyond just collecting rent. It includes everything from getting the property consistently rented to qualifying tenants and dealing with issues when something goes wrong. It’s nice to have someone else who can help with all that.

There are four key reasons you should hire a property manager:

More Time for You

Your most valuable personal asset is the 24 hours you have in every day. Even though new technologies enable you to get more done, there are still only 24 hours in a day in which to work, eat, sleep, spend time with your family, and so on. By hiring a property manager to manage some of or all your details, you’ll get some of your time back.

Just think—you won’t need to advertise, answer calls, qualify tenants, complete paperwork, collect rents, handle maintenance, inspect the property, or handle any of the details yourself. Instead, while another property manager handles them, you can make more financial gains by managing your money instead of managing details connected to your rental.

Current Market Knowledge

A knowledgeable property management company evaluates market conditions every day so that information is available when they need to rent their next property. Remember when you completed your market research to establish the rental rate on your property? How long ago was that? Have you updated that market research every month since, or are you going to start from scratch when your property becomes available to rent again?

A property management company won’t start from scratch because that information is what it lives and breathes every day. It knows what the savvy tenant is looking for and suggests specific property upgrades that get you higher rents.

REAL ESTATE ESSENTIAL

Property managers have the knowledge to get you volume discounts on services and products they can pass on to you.

Current Law Knowledge

If you regularly read, watch, or listen to the news, you may notice that state and federal legislature, as well as court systems, are frequently adding and changing laws that affect you as a landlord. Regulations, rental laws, and tax laws can make you money or cost you money if you don’t know about and understand them.

Property managers watch real estate trends and belong to trade organizations that subscribe to extensive legislature-monitoring systems. This monitoring enables them to learn about new laws being passed. As a result, they become active in lobbying to prevent new laws from getting passed that could negatively affect an investor’s ability to make money on a rental.

Tenant Connections and Knowledge

Property managers have personal connections within the community that enable them to find potential tenants. For example, one manager might have a long-standing relationship with the human resources director of a local Fortune 500 company. Every time this company hires a new executive, he or she is given a relocation package that includes neighborhood orientation tours and contact information for this property management company. As a result, these executives may never even look for a rental property on the open market.

In addition to having access to tenants, the fact that the property manager regularly qualifies tenants means he or she has a streamlined application process and has a heads-up on the newest tenant frauds. These systems protect you from renting to a wrong tenant. Other services such as electronic rent collections can get your rent collected sooner.

Full-service property managers do everything possible to provide you with a hassle-free investment when it comes to tenants.

REAL ESTATE ESSENTIAL

A superintendent is not the same as a property manager. A superintendent is someone you hire to work for you, either as an employee or as an independent contractor to do minor repairs. A superintendent does not need to be licensed as long as he or she stays within the scope of minor repairs. A superintendent does not handle any money or rent the property.

Finding the Right Company

Each property management company approaches management very differently. One company could be automated with online reporting, accounting, and communication technologies. And another can be old school and do everything through the mail. You need to decide which setup works best for you.

In general, property managers offer the following services:

Let’s take a closer look at a few of these so you understand what you’re getting.

A Note on Maintenance

There are three aspects of maintenance and how property management companies charge you for it:

All these fees should be properly itemized in your property management agreement so be sure there’s no confusion. For example, if your property needs a bathroom upgrade, the manager provides the general oversight of the project, picks new fixtures, and paints the room, but he or she might hire a specific vendor to tile the floor.

If the contract stated $32 an hour for labor plus a 25 percent markup for all the work done by an employee of the property management company, you’d be charged $32 an hour. For the fixtures and the services provided by the outside vendor, you’d be charged cost plus 25 percent. If the bill came to $1,000, you’d see $1,250 on your monthly statement.

When hiring a property management company, ask how they handle different maintenance requests. If they don’t have anyone on staff who does basic property maintenance, you could be paying too much for minor repairs.

REAL ESTATE ESSENTIAL

Property management fees are usually a percentage of the rental rate, a leasing bonus, and specific fees associated with repairs or tasks. Property managers legally cannot meet with other managers to set the rates that apply to the entire market. However, all real estate fees follow the same pattern. A standard property management rate is between 10 and 50 percent of the rent collected. Longer-term unfurnished rentals are charged the lowest fees, while vacation rentals that turn over every few days are charged the highest management fees. Monthly corporate housing management companies fall somewhere in the middle.

A Note on Accounting

Accounting is all about the money, and because your goal is to make money, don’t skip over understanding how a property management company handles your money.

Know how they collect rent, what to do if they can’t collect, and when they pay it to you. Know where they bank and how they handle escrow accounts. Know what accounting statements they send to you and when.

DEFINITION

An escrow account is an account in which money is held in trust until a transaction is completed. For example, the property manager collects rent from the tenant that’s then due to you. The property manager is required by law to hold your money in escrow until he or she pay it to you.

Will you get a monthly statement or an annual statement, or will you log in to their online management program and get real-time accounting statements? How will they report your rental income to the IRS, and when can you expect your annual 1099 tax statement from them?

A Few More Questions to Ask

Before you sign any property management agreement, ask for references from other property owners in their system.

Then ask other important questions, such as these:

You’re asking for a lot of details, but when finding the right property manager, it’s worth it. You’ll realize the truth to this when you start to have more time, money, and quality renters. Property management isn’t rocket science, but there many details to keep track of, so having the right manager with knowledge and experience gets you the results you expect and deserve from your investment.

What About a Resident Manager?

You can choose not to go with a full-service property management company and instead have a tenant take on the role of resident manager. This often is done as a trade with the tenant, who receives a lower rental rate and a set fee for their service.

A resident manager can handle a wide range of tasks, from basic maintenance needs to leasing. Before hiring a resident manager, be sure they’re qualified and understand what their duties are. Work out some details, too:

Licensing

No special license is required for you to buy and rent your own property. However, a license is required if you plan to manage property for someone else. The same is true for a manager you want to take care of your property. Before you hire a manager, be sure the company or individual is licensed in your state through the Secretary of State and holds the correct real estate licensing required by your state’s Department of Real Estate and any applicable tax licenses. The state license is called a real-estate brokers license.

REAL ESTATE ESSENTIAL

A property manager doesn’t need to be a member of the Board of Realtors.

If the property management firm has leasing agents who quote rates on your property and execute a lease agreement, these individuals need to have the required real estate licenses. Someone employed by the property management company who does not have a real estate license can give a property tour to a prospective tenant and hand out a flyer with the rates on it, but this person cannot discuss rates or lease details with the prospective tenant.

Most states require that anyone engaging in property management have a real estate broker’s license. This can be confusing because many state real estate statutes don’t mention property management. However, they describe activities that are typically undertaken by property managers as activities that require a real estate broker license.

Property management is described by the following activities:

As always, there are exceptions. Individual states regulate real estate activities, and they’re not uniform in their treatment of property management. Some states don’t even require a real estate license to engage in property management, and other states allow property managers to work under a property management license rather than a broker’s license. The vast majority of states, however, require a property manager who is engaging in renting and leasing activities to have a real estate broker’s license or be a real estate salesperson working for a real estate broker.

Most states also require that a property manager take additional continuing education courses every few years to stay licensed, certified, and current. Maintaining a real estate license can take some time. Check with your state to find out exactly what courses are needed and what your property manager needs to take.

When looking for a property manager, you’ll likely come across some designations. Here’s what they stand for:

Certified Property Manager (CPM): A CPM is a personal designation available to members of the National Association of Realtors (NAR) who specialize in property management and have met the strict requirements in the areas of education, examination, management planning, ethics, and experience.

Accredited Resident Manager (ARM) for individuals and Accredited Management Organization (AMO) for businesses: These are professional designations for a person trained to manage residential properties earned by fulfilling the requirements of the Institute of Real Estate Management (IREM), an affiliate of the National Association of Realtors.

Certified Manager of Community Associations (CMCA): This designation from the National Board of Certification of Community Association Managers (NBC-CAM) signifies that a manager has passed a national exam and met the requirements for managing condominium, cooperative, and homeowner’s associations.

Residential Management Professional (RPM) or Master Property Manager (MPM): These designations from the National Association of Residential Property Managers (NARPM) are for individuals to certify proficiency in property management and specific experience.

Certified Residential Property Management Company (CRPMC): This designation, also from NARPM, is awarded to professional property management companies that demonstrate a high standard in both procedures and customer service.

Certified Corporate Housing Professional (CCHP): This designation from the Corporate Housing Providers Association (CHPA) exemplifies competence and professionalism in the corporate housing industry and has practical application and operational knowledge in operations, financial management, and sales and marketing.

These accreditations are offered by the Building Owners and Managers Institute International (BOMI):

Real Property Administrator (RPA): This designation is earned through a strict program focused on budgeting, accounting, real estate investment, finance, environmental health and safety issues, law and risk management, design, operation, maintenance of building systems, and ethics.

Facilities Management Administrator (FMA): This designation is for those responsible for ensuring that a facility runs smoothly by creating a safe and productive workplace (for a company) and by taking care of tenant issues such as comfort, safety, daily operations, and maintenance (for rental properties).

Systems Maintenance Administrator (SMA): This designation is for a person in charge of a team of technicians who run the day-to-day operation of a building. SMAs learn how to streamline the operations of a building and manage energy-efficient, environmentally sound, and cost-effective building systems.

Systems Maintenance Technician (SMT): This designation is for a person who maintains major building systems such as heating, refrigeration, electricity, and plumbing. SMTs learn about the technologies and trends in the maintenance industry and are able to maximize the efficiency and safety of building systems. Trained SMTs possess a broad spectrum of the overall mechanical requirements of the commercial real estate industry.

Setting Expectations

A good property management company works with you to set and communicate your goals and objectives for your property. Your goals could be, for example, increased profits, lower vacancies, lower tenant delinquencies, happier tenants and lower turnover, positive tenant relations, quality and appropriate property improvements, and fewer complaints and repairs.

REAL ESTATE ESSENTIAL

If a property manager is not meeting your goals or is otherwise not working out, you can fire him or her in accordance to the management contract you have. If you have a fixed-term management contract, you might need to pay a fee or wait until the current tenant departs before removing your property from the management program. However, you can terminate a contract any time for just cause. If the manager performs poorly, does not follow instructions, violates the law, or endangers and threatens the safety of the tenants, you may release him or her from the contract.

Your agreement with the property manager can include several duties.

The property manager assumes the management and operations of the property. To begin, the manager should thoroughly inspect the property to gauge the present condition and recommend changes to you. After getting your approval, the property manager then gets started making the necessary improvements.

The property manager also makes reasonable efforts to lease the property, and he or she is responsible for all negotiations with prospective tenants. The property manager also has the right to execute and enter into, on your behalf, leases and rentals of the property, as well as lease extensions and renewals.

The property manager will use good faith, due diligence, and all reasonable efforts to achieve the highest rental income for you, consistent with managing the property in the long term. Accordingly, the manager can set rental rates, deposit requirements, and discounts, and otherwise manage the business aspects of the rental. The property manager also deposits all rent into an escrow account until he or she pays you.

He or she also provides or coordinates all managerial and housekeeping services for the property.

Specifying duties gets you only so far. The key is to never assume the property manager does certain tasks, such as tenant checks, and similar matters. Instead, always ask these questions:

These types of questions save you money and frustration so you don’t get caught with a large repair bill that should have been covered by an extended warranty.

Just as you developed a checklist of priorities prior to purchasing the right rental property, you need to understand what makes a qualified property management company and how to find the right match for you.

Many great property managers are out there, but don’t just assume anyone with a real estate license is the best person to manage your rental property. Do some research, interview candidates, and be comfortable with the manager you choose.

The Least You Need to Know