When you buy your first investment property, one important decision you need to make is whether to hire a property manager to find tenants and run the day-to-day operations, or to self-manage your property.
Obviously, self-managing is the more economical way to go. Paying a property manager is one of the largest ongoing expenses of owning a rental property. And there are some obvious situations where a property manager can be the only logical choice -- like if your rental property is far away from where you live. But if you are buying a rental property in your local market, how should you decide?
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How much does a property manager cost?
For long-term-rental properties, the industry-standard management fee seems to be 10% of collected rent. This can vary based on market conditions and levels of service, but you should expect to pay somewhere between 8% and 12% of rent to your property manager. Some charge a setup fee initially, and others charge a larger amount of the first month's rent of a new lease, but these aren't terribly common.
So if you own an investment property that brings in $2,000 per month, you should plan on a property manager taking about $200 of that. This isn't exactly a small expense, considering everything else you need to pay for: taxes, insurance, repairs, maintenance, mortgage, and so on.
Does the value outweigh the cost?
The most obvious part of a property manager's job is to find tenants for you. This generally includes marketing the property, screening tenants (doing credit checks and the like), and collecting security deposits. But this is just one part of the job.
In addition to finding tenants, here's what you can expect your property manager to do:
- Handle money Property managers collect rent from tenants, and can coordinate things like utilities, homeowners association fees, and mortgage payments on your behalf.
- Know your market A property manager should have a good knowledge of your market and know how much rent a property should generate. This goes along with finding tenants, but is worth mentioning separately, as knowing what the market's rent is can easily justify the property management fee all by itself.
- Deal with tenant issues Do you want your phone to ring whenever there is a leaky faucet, or if a tenant has a noise complaint? Your property manager will deal with these things for you.
- Coordinate repairs and maintenance A property manager can coordinate maintenance and repairs of the property for you. You'll typically give them an amount they can spend without your involvement (for example, my property manager needs my authorization for any expense over $500). Great property managers will have their own preferred repair services (or even an in-house employee) who can attend to issues quickly and cheaply.
- Deal with problem tenants A property manager knows exactly how to handle situations like late rent, noise issues, and other problems. And if a tenant needs to be evicted, your property manager can get the process moving.
What should you do?
As you can probably imagine, there's no perfect answer. Some rental-property owners love managing their own properties, while others find their property managers to be worth their fees and more. And in full disclosure, I've used a property manager with all but one of my rentals, and that was a duplex where I lived in one half.
The bottom line is that you need to decide how much time you want to spend on your real estate investments, and whether the value that a property manager brings to the table makes sense for you.
