Property Management Companies: Is it Smart to Hire One for Your Rentals?

By Markets Fool.com

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If you're serious about building a profitable portfolio of rental properties, you will inevitably be faced with a critical decision about your future.

Make no mistake about it,this is a huge decisionabout how you're going to spend your most valuable asset (aka your time).

As with any big decision, there isn't necessarily "one right answer" that applies to everyone.We all have different reasons for pursuing rental properties, so it's important for you to understandingwhy you're in this business in the first place.

What is it you want out of your rental properties anyway? Whatever your verdict is, the path you choose for your property management will have a major effect on what your future looks like so to the extent that you can, it's important to get this right from the start.

I'd like you to stop and think about which of these statements best describes you:

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"I want tocreate a jobfor myself as the manager of my rental properties."

"I want toretire earlywith a solid portfolio of passive income from my rental properties."

Before you choose your fate, I should warn you:you cannot do both.

Why? Because these paths work in direct opposition to each other -- they lead to two entirely different places.If you want to be a property manager,you'll never be free from a job.If you want to retire early and be truly free from the daily grind,you can't be your own property manager.

Just speaking for myself, I started buying rental properties because I wanted the freedom that comes with passive income. I knew this would only be possible if I put someone else in the driver's seat (someone with WAY more competence and experience at the job than I have). If I didn't have access to a good, competent property manager, it would've been irresponsible for me to own rental propertiesbecause I knew I could pull it off on my own. That's the honest truth.

In my mind, paying 10% of my gross rental income to a skilledproperty manager was a bargain(and since I factored this into the cost of each rental property, their services were automatically paid for right out of the gate).

Not all property managers are created equal
Unfortunately, finding a great property manager isn't always an easy, carefree process.

Similar to attorneys, accountants, title companies and general contractors, some property managers are worth their weight in gold, and others are worth their weight in garbage. As I explainedinthis blog post, there are a number of vetting criteria you can use to make sure you're working with a competent professional BEFORE you sign on the dotted line of their management agreement.

I was fortunate enough to find an awesome property manager when I bought my first rental property, and I've continued to do business with them ever since.

What makes them so good? There are a few qualifying criteria that come to mind:

  • They know how to find great tenants.
  • They know how to get rid of bad tenants (quickly, legally, and before things get out of control).
  • They have connections with all the right people (contractors, inspectors, service providers, and more), which saves me thousands every year on property maintenance, renovations, utilities and more.
  • They are responsive and helpful when I have questions.
  • They are timely, helpful and informative with monthly accounting statements and cash distributions on each property I own.
  • They handle all of the tedious, mundane, miserable, and skilled labor that I either don't want to do, or I have no idea how to do myself. In short, they are FAR more competent at property management than I'll ever ever be.

When does it make sense to hirea property manager?
Perhaps you're reading this, and you just aren't sure whether it makes sense for you to outsource your property management to a professional. What factors should you be looking at in order to make this decision?

As a starting point, you cantake a look atoutsourcing experts likeChris Duckerand do what he does:

1. Make a list of jobs that you hate to do.

2. Make a list of jobs you can't do.

3. Make a list of jobs that you shouldn't be doing.

If property management falls into one or more of these lists for you, there's a good chance that you should be looking to outsource this job to someone else.

For me, there wereseveralreasons why I chose to work with a property management company, so as a way of helping you process your own thoughts, I wanted to lay out my reasoning below.

Of course, my rationale might not apply to your situation exactly (i.e. if you have different goals and objectives with your rental properties, you might not have the same perspective and motivations that I do), but at the very least, perhaps you'll find some similarities and/or disagreements that you can contrast with your own situation.

1. I hate dealing with problems and complaints from tenants
I've always loved the idea of passive income from rental properties, but that doesn'tmean I want to deal with a constant stream of headaches and annoyances from the people who arerenting from me. The beauty of allowing a property manager to handle this aspect of mybusiness is that most of the time,I don't even need to know who my tenants are!

Why am I OK with this? Because I know that my property manager uses a time-tested tenant screening process that is proven to keep most of society's riffraff OUT of my properties, while keepingtheresponsible, trustworthy renters IN them. My property manager handles all of the time-consuming aspectsoffinding the best tenants, and they automatically deposit thenet rent proceeds into my bank account each month.

On average, I spend an average oftwo minutes per monthlooking at the activity from each of my rental properties. Everything else (showings, screenings, site visits, evictions and much more) is handled by my property manager, while I'm out minding my own business, living my life and not worrying about it.

2. I wanted to focus on growing my business
Take a look at any real estate mogul who has built up a vast investment empire of income-producing properties. How do you think they did it?

Related:How to Choose the Right Rental Property Manager

Do you think Donald Trump maintains hisbillionaire statusby unclogging every toilet in theTrump Tower? Do you thinkKen McElroyearned his financial freedom by personally responding to every tenant complaint that came up along the way? Do you think Robert Kiyosaki tends to every mundane detailout of his sheer need for perfection? Of course not!

These power players reached their level of success becausethey knew what to spend their time on,and my goal is to look at my business the same way.

If Iwant my business to grow, I need to spend my time looking for the right opportunities, not spinning my wheels managing them. If growing the business is part of my long-term strategy, it makes a lot more more sense for me to leave the most time-consuming tasks for someone who knows how to do the job a lot better, faster, cheaper and more effectively than I ever could on my own.

3. Icouldn't afford to be an expert ateverything
Being a business owner means you need to wear a lot of hats.

Of all the things I've learned to do as a real estate investor, one of my biggest areas of incompetence is my complete inability to fix, build, renovate or repair almost anythingin my rental properties.I can't do it to save my life.

I also don't particularly enjoy accounting work and keeping track of petty little expenses and numbers (I can do it, but I still hate it).

The problem is,I'm only human,and I can't afford to be an expert at everything. It's just not humanly possible!The ONLY way to scale a business is to start offloading some of these tasks to other people in a cost-effective way -- and my property manager provided an excellent opportunityforme to do this.

My property management company has access to every kind of expert in the business. For the truckload of things that I'd be terrible at on my own, they know how to do these things quickly and inexpensivelybecause they do these jobsevery single day. When you think about it, it's not all that different from the other things we're willing to pay for:

  • Ever bring your car to a mechanic when it needs fixing?
  • Ever go to a doctor when you're sick?
  • Ever hire an accountant to handle your taxes?
  • Ever work with a builder when you're doing home renovations?
  • Have you ever hired a professional to help you with anything?

I work with these people without thinking twice about itbecauseI don't need to be the expert when somebody else already is.Is there a cost to working with these people? Of course! But I'm happy to pay it, because I know that in the end:

  • They'll save me tons of time.
  • They'll save me a lot money.
  • They'll allow me to scale get more accomplished.
  • They'll do the job far better than I could ever do it myself.
  • In the end, I'll sleep much better at night.

Remember, just because you CAN be your own property manager doesn't necessarily mean you SHOULD. Check out this video for another quick illustration:

4.I wanted the ability to invest anywhere
A lot of real estate investors give themselves a self-imposed barrier to investing in other markets. It's not always a bad mentality, but at the same time, your geography (relative to your properties) doesn't necessarily need to hold you back from growing your business.

If you're able to find good property management companies to handle your property, there's no reason (logistically speaking) you can't live in Boston and own a rental property in Phoenix. Your inability to drive by and physically see your property doesn't need to be a significant limitation on which properties you're willing to invest in.

Related:The Landlord's Ultimate 34-Step Property Management Checklist

Of course, I'm not saying you have toinvest in other markets to be successful, but there's also no reason you should feel limited by the opportunities that are available in your own backyard.A good property manager willallow you to live your life without having to worry about the hands-on issues of managing your rental properties.

5.I wanted to make the best possible investment decisions
Any property manager who is worth their salt will havea vested interest inyour success(because if you're doing well, they're going to do well, too).

Whenever I'm looking at buying a new investment property, I have MANYongoing conversations with my property manager. I ask them all kinds of questions about:

  • The neighborhood I'm looking in.
  • What kind of vacancy rates they're seeing in the area.
  • The good, bad & ugly about the local market.
  • If they think my property will be easy or difficult to work with.
  • How much I can realistically expect to make in rent.
  • Whether they think I'm getting the property for a good price.
  • Their review and opinions about of my property inspection report.
  • What kinds of issues and costs I can expect to deal with immediately after closing.
  • Any hidden issues I might not have thought about.

My property manager is basically a free consultant,and theiradvice is worth a lot.They know a lot more about these things than I do (and I'll pay muchcloser attention to their opinions thanthose ofmy realtor's because I know which of them actually has the benefit for firsthand experience). This kind of credible information is a HUGE benefit thatI wouldn't have access toif I was trying to manage this whole operation on my own.

6. Their services are already paid for
Whenever I'manalyzing a new property as a potential investment opportunity, the deal MUST be designed to support the cost of a property manager (because let's be honest, someone will have to do the job,even if it's me).

I will never buy any property unless I know I can deduct 10% of its gross revenue to pay my property managerand still show solid cash flow.My property management company is such a vital part of the equation I would probably pay even more if I had to, because they're worth it!They provide a service that allowsme to live a life of freedom and that makes all the difference in the world.

The article Property Management Companies: Is it Smart to Hire One for Your Rentals? originally appeared on Fool.com.

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