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How To Profit Through Good Property Management

 June 11, 2010 11:33 AM

In recent weeks, I have had several Tycoon reader comments, as well as questions from Master Real Estate Investor students, asking how to secure good property management for rental homes.

I believe there are three reasons for these requests:

First, people are intrigued by a recent article in which I wrote that there is a window of opportunity today for rental properties to be bought with 15 year loans and turned over to property management, with the possibility of still obtaining a monthly positive cash flow.

Second, there are many investors who would love to diversify their portfolios with rental properties, but lack either the time or skills to devote to active management of real estate.  Many are busy professionals with hectic work schedules, or business owners who regularly work 60 or more hours a week.

Third, there are still some areas of the United States in which it is difficult to either obtain, or to cash flow, good rental properties.  So when I write that it can be done, readers from those areas are apt to disagree with me.

They say that real estate conditions can vary across the country, and what works for me may not work for them.
But just because your local conditions are not currently favorable for cash flowing real estate doesn't mean that three counties over, or even two states over, you can't find a great deal.

But to buy real estate in another area means that you may have to hire a property management company to perform the various tasks that are necessary to manage the property efficiently.

So how do you find a good property manager?

Your search should begin with the website of the Institute of Real Estate Management, www.irem.org.  They have a nationwide list of Certified Property Managers (CPM), a professional designation for property managers that is recognized by the National Association of Realtors (NAR). 

To achieve the CPM designation, one must pass 10 separate courses given by IREM on all different aspects of property and asset management.  It is also somewhat expensive to maintain one's membership in IREM, so you know that anyone with a CPM takes their profession seriously.

After you have compiled a list of CPM's in your desired area, check with Realtors in that area to see whom they would recommend. 

One simple way to do this is by posting the question, "How do I find a good property manager" on www.trulia.com, which is a national real estate website. 

After you log onto the site, simply click on "Advice", then "Ask a Question".  After you type in your question, there is a place to enter your specific city of interest.

You will probably get several responses from the local Realtors in the area.  However, I would tend to discount recommendations that are simply "axe to grind" referrals to a property manager from the Realtor's own company. 

You can also click on "Find a Pro", then go to the link for Property Managers, to see who is listed there, and read their profiles.

I would stay away from any websites whose "recommended list" consists simply of companies who have paid to list their services on the site.

You may also want to check with the Better Business Bureau and local Realtor board in that area, to see if they have had complaints filed against any of the property managers on your short list.

Once you have narrowed down your search to just a handful of candidates, you might ask each one for a list of the properties they now manage.  Then drive by their properties, and if you want to go a step further, you can even ask a few tenants how they feel about the property management of their residence. 

That may tell you a great deal about how a future purchase of yours will be managed.

After that, a personal interview of each property manager you are considering will probably help you make your final decision.

When interviewing a potential property manager, be sure to ask for references of satisfied owners, and call them as soon as the interview ends.

Questions to ask during the interview should include:

How long have you been in business as a property manager and management company?
How much errors and omissions (E&O) insurance does your company carry?
Is your company bonded?
Are you accredited by a national organization?
How do you collect the rents?
How will you select and screen tenants for my property?
What is the monthly fee, and what other fees do you charge?
What type of reports will I receive?
How often do you visit each property that you manage?
How do you handle property maintenance?
How do you handle escrow money from security deposits?
What sets you apart from your competition?

Duties of the property manager:

A good property manager should reduce your time involvement in the property by about 90 percent.  The manager's responsibilities will typically include:

Advertising and all showings of the property
Background checks and screening of the tenant
Collection of rents, security deposits, and other fees
All correspondence with the tenants
Meeting with service providers who need interior access to the property
Property inspections at move in and out
Return of or withholding of security deposits when applicable
Inspections for maintenance and ensuring that proper repair work is done
Issuing monthly and annual statements to property owners
Issuing the proper tax forms to owners once a year

One mistake that landlords often make is selecting a property management company by which one has the cheapest monthly rate. 

You may be getting a manager who has dozens of properties on his account and has very little time to devote to yours.  We don't want to save a few bucks, but end up with the proverbial pig in a poke!

"Hey, don't poke fun at me!"

Another possibility -- some management companies may low ball you on their monthly rate, but then add in additional fees to make up for it.

There is no standard fee in the industry, and company charges vary by state and location.  The most common monthly charge is 10% of the rent, but companies often charge anywhere from 5% to 13%.

The most common fees charged include:

Lease or procurement fee -- This is the fee to find a new tenant.

Lease renewal fee
-- This is the fee to renew the lease with the current tenant, and should include a property inspection, consultation with the owner about rent increases, and sending out the renewal forms to the tenant prior to the lease termination date.

Advertising/marketing fee -- A fee paid to the company to list the property for rent in the Multiple Listing Service, create fliers, put a sign on the property, add the property to one or more websites, etc.

Beware of companies who have additional fees beyond these.  Also, ask the potential manager what happens if a tenant moves out early.  If a tenant procured by the management company abandons the property after only a few months, you don't want to have to pay for another full lease fee to find a new tenant!

I would also ask for a specific description of how the management company screens potential tenants.  You don't want a company who is so desperate for business that they accept almost anyone, or fail to do proper background checks.

I know a landlord who listed his rental home on craigslist.  A Realtor called and said that for a modest fee, she had a tenant she could bring him who would be perfect for his property.

Among the questions the landlord asked was, "did you screen the tenant", to which the Realtor answered "Yes".

After the landlord met with the Realtor and the tenant to show the home, he decided to go to a local website that lists all the judgments and arrest records for individuals in that county.

Imagine his shock and dismay when he discovered that the prospective tenant not only had a long arrest record, but had only been released from jail the previous week!

You don't want this guy for your next tenant...

The landlord called the Realtor, informed her of his discovery, and demanded a refund of the fee he had given her, because he was not going to rent to this tenant.  

The Realtor apologized, agreed to refund the money, and admitted that while she had checked the man's credit, she had not screened him for criminal background.

Less Pain, More Gain

An alternative to either a landlord actively managing their own property, or a property management company handling everything, is for the landlord to assume partial duties. 

For example, the landlord may find and screen the tenant first, then have the property manager assume all of the duties thereafter.  This would save the landlord some money on the advertising and lease procurement fees.

One of the best things about property management is that they handle all of the tenant complaints and telephone calls about repairs.  One of the most common statements that I hear from people who shun real estate investing is, "I don't want the midnight phone calls, with tenants screaming at me about leaking pipes!"

"Get over here and fix this #$%^$%! toilet now!"

I have to laugh when I hear this, because in 15 years of renting homes, I don't think I have had more than one of those calls, and the one I did receive was at 8 PM.

However, if even one call in 15 years is one more than you care to take, then property management is your answer! 

Still, there is one caveat that I want to share with you.

Once or twice, I have heard stories about property managers who were in cahoots with dishonest repairmen.  The property manager would call the out of state owner, claiming there were some repairs needed. 

However, in reality, the repairs were bogus, and the manager would split the money with the handyman, who would write up a phony invoice for the owner.

If you are being billed for a lot of repairs and are suspicious, one way to check on this is to call the tenant and ask them about the repairs. 

However, I want to make it clear that the vast majority of property managers do a great job, are ethical, and follow the laws.  I do not want to suggest in any way that this type of scam is prevalent in most management companies.

My final suggestion is that you make sure you get a copy of your property management agreement, and read all of the fine print before you sign. 

If there is anything in that agreement that you really don't like, including the fees, let the manager know that you will only sign if the bothersome clauses are crossed out of the contract.

If the manager says it is not possible to change anything in the agreement, then tell him or her that you will have to think about it a few days before you sign.

Remember, there are no state laws or rules that dictate that a management agreement must have a certain fee.  I would try to negotiate a better deal if you think any of the charges are excessive.

You can also ask the management company to procure tenants on a 24 month lease, even if you have to lower the rent a few dollars a month, and thus save on renewal lease fees.

The bottom line is to be able to buy a property, have it managed by someone else to spare you the headaches or time element, and still have a positive cash flow every month.  

In my Master Real Estate Investor Course, I cover everything you need to know about how to find properties at bargain prices that will generate a positive rental cash flow and principal pay down every month, even if you utilize a property management company.

There is no greater feeling than to have a monthly income stream, build your wealth over time through real estate equity, and have someone else handle all of the landlord's responsibilities!

See you next week!


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