Finding a good property manager is like finding a needle in a haystack. Yet, an investor’s property manager can make or break your profitability. Let’s face it…property management is tough. What with finding good residents, maintaining units, making them ready for rent, rehabs and accounting, property managers have their hands full. Here are a few, but important, questions to ask when interviewing a property manager:
Property Management juggles lots of responsibilities.
What is your vacancy rate? – Every good property manager should know his or her vacancy rate. This number is calculated by dividing the total number of vacant units by the total number of units under management. Anything in the 5% to 10% range is good; the lower the % the better. Nothing kills your profitability faster than vacant units. Leasing is a super important skill for property managers. Good leasing typically comes at a price. Some property managers charge a flat fee while others charge first month’s rent.
What is your average time to lease? – Not only is the vacancy rate important, but how long does it take for a property manager to lease a property. This would be the number of days from the date vacant – days to make ready plus the days to the next resident’s move in date. We think that 30 days or less is awesome, 45 days is average and anything over 60 is too long. Of course, this assumes that you have followed your property manager’s recommendations on maintenance and finishes along with pricing.
What is your rent collection rate? – Having residents adds to your profits if they pay their rent. If residents are not paying their rent, your units are technically vacant. Their tenancy represents an economic vacancy. Considering the cost of eviction, they are worse than a true vacancy. Some property managers understand that “Job One” is collecting the rent. Why have a property manager if he or she can’t collect the rent.
What are the property management fees? – Fees fall into four categories; management fees, maintenance fees, leasing fees and rehabs.
Property management fees can be a straight % of rental income or a flat fee plus a % of rents. Typical property management fees should range from 8% to 10%. Some site 12%, but that only makes sense if the rents are too low to make it financially feasible to manage at 10%.
Maintenance fees can make or break you. There are two approaches to maintenance fees – flat fee pricing for defined tasks and hourly rates. Determining which is best depends on the efficiency of the people doing the work. Lots can be hidden in per task pricing. It looks good on the surface until you think about how long it should take to perform the task. How many times should a contractor have to go to Home Depot to do a job? Granted, you discover things along the way that require more trips to the supply store, but absent a surprise, most jobs should only require one trip to the store…if you are doing it right. Alternatively, you don’t want “Slow Joe” working on your job, unsupervised and taking his sweet time at an hourly rate. There is no magic pixie dust here. You just have to stay on top of this a “manage” the manager.
Leasing fees are part and parcel of property management. A property manager needs to pay someone to get your unit leased and you want all of his attention on this task the speed with which this task is completed drives your profitability. We typically assume 10% vacancy when analyzing our deals and then we shoot for 5% vacancy when we have deals under management. While you don’t want your property manager to lease to the first person that walks across the entrance, you want them to move forward with haste. Make sure your property manager uses professional photos of your unit. Nothing sells to good residents like professional photos.
Rehabs sometimes you buy a place that needs work before it can be rented. Perhaps it is all new finishes or a “gut” rehab taking the unit down to the studs and starting over. In any event, you need a property manager that, a) has a crew or two that they can put to work or b) has subcontractors that they can enlist to get the job done. Understand how these jobs will be priced and managed. It may be cheaper to use the property management company’s crew, but that might take longer since they are also managing maintenance issues. Ask what the override is on contractor jobs. Your property manager should make some money for managing the outside contractor, but this should be a small percentage up charge like 10% and certainly no more than 20%.
What is your resident retention rate after the first year’s lease? Long term tenants save us the cost of make ready’s which can run a few hundred dollars to a few thousand dollars. Retaining residents depends on resident selection so that you accomplish the following:
Considerate residents that take others into consideration. Nothing causes a resident to move out faster than not getting a good night’s sleep or having to confront some unwelcome chatter each time they return to their home.
Financially qualified residents that can manage the rent payment tend to stay longer. If it is a struggle every month to pay the rent they may be looking for a cheaper place sooner rather than later. They typical rule of thumb is that they must earn 3X the monthly rent each month; however, if they have a boatload of credit card bills or other obligations they may struggle even with 3X monthly rent income.
Other considerations impact your cost like smoking. If a resident smokes in your unit, you will have to paint prior to the next resident moving in. Additionally, your other residents may not appreciate tobacco smoke wafting into their unit. Tidiness is an indication of the manner in which a resident will maintain and care for your property.
Pets…love em or leave em. I love my pets and if I were renting, pets would be a requirement for me. The truth is that allowing pets may get your unit rented faster and it may improve your retention. Also true is pets can cause damage that is expensive to repair. Case in point, one of my residents left her dog locked in the home without access to relieve itself outside. Several thousand dollars later, I have a new resident. No reasonable deposit would cover the expense to replace the flooring, paint and deodorize the basement. You can charge pet rent…just be careful on this one.
Even well intentioned property managers often times struggle to strike on all cylinders and no provider is perfect. Start with the expectation that you will monitor the above stated metrics as a means of measuring success. An ideal property manager monitors metrics and measures his or her success by the numbers. Your success as an investor is measured by your cash flow and the value of your building. Higher net income and lower costs increase the value of your building by increasing the cap rate.