Category: Reference

How to Choose the Best Property Manager

Whether you’re a new rental property investor or you have several properties in your portfolio, a savvy investor understands that enlisting a property manager makes good business sense. A property manager will care for your investment, making sure that it’s healthy and earning its potential. A great property manager will also defend you and your property against abusive tenant and their personal problems. If you are overwhelmed by the sheer number of property management companies you’ll need to research to find yours, we’re here to help. Below, we’ve outlined the most important criteria for evaluating property managers to hire the best one for you: experience, rates, and what informs their decisions.

According to a 2016 Buildium survey of property owners, 51% of rental property owners currently enlist a property manager, with a full 24% more looking to hire one.

Three Criteria to Help You Evaluate Property Managers

Years of Expertise in Property Management

How long the company has been in the property management industry is paramount. Did they just buy a franchise and set up shop in your city? Or, have they built their expertise with sweat equity with over a decade of experience? According to Malcolm Gladwell, author of Outliers, it takes about 10,000 hours to become an expert in a professional field. This has been upheld but a study at Princeton University. The last thing you want is to hire a property manager who plans to cut their teeth on the back of your investment.

A subset of this expertise, is, how well do they understand the Austin rental market? No two markets are alike, having a different set of economic factors, laws, demographics, and historical data. How much do they know about the Austin renter – your client? Do they know what the shifting trends are for the Millennials and how they are willing to interact in the marketplace. Marketing traditional methods to a new generation provide the best results.

Hire a company that has a cross-section of both property management and market expertise to get the best return on your investment.

Property Management Rates

Are their rates fair, and equitable? By fair and equitable, we don’t mean inexpensive. When property management companies charge property owners too little, they cut costs in ways that can have a detrimental effect on how they manage your property.

Take direct labor, your property management companies biggest expense. Direct labor covers the people part of your business that responds to tenant inquiries, handles maintenance, and answers your requests as an owner. Pretty important, right? Unfortunately, when companies have to cut corners, very often the human-centric part of your contract gets a trim first. You’ll notice this as less property oversight, slower response times to you and your tenant, and a lack of oversight and follow-through on maintenance. You’ll also notice a degradation in the quality of your property overtime as a result of the lack of oversight and attention to detail. This typically costs tens of thousands to remedy and far exceeds any potential savings from low cost providers.

Successful property managers know that having boots on the ground is the most critical part of managing properties well, and they will charge you for this service. Expect to pay between 8-12% for a percentage-based fee. Of course, you could always go with the least expensive option, but you may pay the price in the long term!

What Informs Their Policies and Practices

Why they do what they do is an essential criterion for evaluating property management companies. What is behind their practices, policies, and decisions? Do they use data to make decisions? Or intuition?  Consider tenant criteria. A company that knows how their tenant criteria works, proven over many years, and there are statistics to back up “the why” behind that list of tenant qualifications, will be much more successful at finding you a great tenant. Guessing or using unproven, non-quantifiable criteria will end up in an eviction.

Just as the practice of investing in rental properties is a business, so is property management. Companies that run their business off of industry best-practices and statistical outcomes will be much better partners for your venture overall.

We hope that these evaluation criteria will help get you closer to finding the right property manager for your Austin property. Learn more about this, and other property management topics, on our YouTube channel.

Should I sell or lease my home in Austin, Texas?

Should I sell or should I lease my home? We seem to get this call about once a day and wanted to answer this for all homeowners.

As you might suspect the answer isn’t super easy. But it’s not that hard either. There are a few key indicators to let you know whether selling or turning your home in Austin into a rental is the right answer for you.

What is the payment on the home compared to the rental income?

Let’s say you’ve got a monthly mortgage payment of $1500 per month. That includes your principal, interest, taxes and insurance or PITI. Some portion of that is going toward the principal monthly. Make a note of that amount, it’s only going to increase as you pay down the mortgage. Now let’s say you’ve got a monthly rental estimate of $1750 per month. Already you can see that you’re in positive territory but wait, you know there are going to be some expenses. The amount you’re paying down your principal every month is monthly you’re saving for the future. Even if you had to spend $250 per month to keep a property going but you’re paying down the mortgage $250 a month you’re breaking even.

What’s it going to cost to get the home leased?

Most property managers in the U.S. are subject to the market forces. In other words they don’t create the rules. They work within the framework of their geographic region, state or city. Some cities have an average cost of about 50% of one months rent to lease a property. Those same markets may not permit sharing of information about properties for lease through the MLS and thus make it hard to get the word out you’ve got a great home to lease. Others at this price point don’t provide enough financial incentive for agents to show rental properties. Keep in mind that if the commission is 50% of $1500 that’s about $750 in total. Then we divide that by the listing broker and the tenants broker/agent. Now we’re down to about $375. Now lets take 20% for the tenants broker and 30% for the tax man since the agents are 1099’s or self employed and thus paying their own taxes. Now we’re down to about $187.50 for the agent. Don’t forget they have to pay for continuing education, MLS and other membership dues, computers, phones, the car that they take tenants out in, drive time, the electronic key they use to get into the house, the drive time home, time on site meeting with the tenants and then they’ll get stood up about 50% of the time. Are you ready to get your real estate license now? Not many agents show rental properties and this is why. Others cities or areas may charge as much as one full months rent to list your property for lease and that may not even cover the fee for the tenants agent or it could include it. Either way the jest of the story is that paying more to get your property leased isn’t a bad thing all the time. If it helps get your property leased faster it’s probably worth the money. Don’t forget on a $1500/month rental your vacancy is costing you $65/day. Would you rather pay to have it leased or save money and have it vacant. Depending on how long tenants should stay for your property manager or for your city this can be spread out. Let’s say your tenants stay an average of 24 months and the leasing fee is 80% of one month’s rent or $1200. That works out to $50 per month in expense. Easy enough.

What is the average annual appreciation in your area?

This is where many people love to look at the math. Let’s say the average annual appreciation in your area is 3%. If you’re lucky enough to be in Austin, Texas some say it’s higher than this. Your home, worth approximately $225,000 is going up in value at the rate of 3% annually or $6750 per year or $562.50 per month! Now we’re talking.

What is it going to cost to have it managed?

This isn’t the article for all the great reasons you should have your property managed by a professional so we’ll leave that out. We’ll also leave out the fact that even as property managers we hire our friends to manage any rental properties in other cities that we can’t easily reach. Hiring an expert is simply the way to go but we’ll save that for another article and assume you’d rather pay for a professional to manage your property rather than pay an attorney to help you get out of trouble and a contractor to help clean up the mess left behind. 52% of property managers charge 10% of the collected rent to manage a property. Some may charge as low as 5%. I can’t say I recommend paying above 10% unless you’re wrapping in  some others services which is possible. Areas such as San Francisco may charge less because the rents are higher. Other areas may charge more because the rents are lower. Yet some managers may even charge less than the cost of managing your property monthly because they’re simply bad business people. [Believe it or not this is quite common.  If you’re interviewing property managers I dare you to ask them what they’re current cost to manage a unit is at this time. I’ll be willing to be more than 95% don’t know the answer.] For the sake of this article let’s stay it’s 8%. That’s our most popular plan although we do have others which wrap all the service into one monthly fee, including the leasing fees. That means that for a $1500 per month rental you’ll pay only about $120 per month for 24/7 service, accounting and experts who are receiving all the complaints your tenants and neighbors can dish out and shielding you from the drama.

What about depreciation?

For this I’ll say you can depreciate a rental property over 27.5 years. Beyond that I say speak with a licensed CPA for the best advice. Good news is that it’s all going to be positive when discussing this topic.

So what does all this mean?

It means that if your home leased for $1750 per month. Your payment was $1500 including PITI. Your leasing costs were about $50 per month and your management costs about $120 for a total of $170 averaged out. You’d be making about $80 per month. Now we factor in the appreciation, on the banks money, and you come out to about $642.50 per month in gains. Talk to your CPA about depreciation and you’re really in the green.

What about maintenance and make ready costs?

Don’t think we forgot about these. They are important. We tell clients with newer homes to take about 10% of the monthly rent and put it away in a saving account they control. For average homes about 20 years old we say 15%. For 1920 construction, IF you don’t want to sell it, we say put away about 20%. These numbers are very conservative and include not only HVAC replacements but also make readies between tenants. You’re going to need the money at some point. Don’t get caught with zero in savings. Remember, time is money so we’ve got to get the property turned and leased quickly. We can spend money on the make ready or burn it thinking about whether something needs to be repaired only to find out 30 days later we should have done it right in the first place. This puts us, on a very conservative basis, at $262.50/month for newer homes, all going into your saving account for a rainy day. What’s the worst things that can happen? You save too much? Now we’re down to a gain of $380 monthly and remember the rental rate was only $250 above the mortgage payment.

The takeaway

Real estate investing works. The math isn’t that hard and a professional can show you how to make it all work in your favor.

Choosing to sell the home in this example would cost about $18,000 in transaction costs alone. What if you took that same $18,000 and instead of spending it on fees invested it in your home, your future and a saving account for a rainy day. A make ready could cost $0 to $8,000 in most cases. Vacancy should be limited to 30-60 days maximum costing you about $3,000 max. This leaves you with about $7,000 to start a saving account. Even if the HVAC goes out the next day and costs $6,000 you’ll still have money left over and a new HVAC that will last 10 years.

The choice is yours. You’re going to spend the money one way or another. Do you want to spend it on paperwork or invest in your future? I can tell you that personally I get about $4 out of my personal rentals for every $1 I put in. I don’t hear the S&P making that kind of return for anyone. If we can help you with your rental property in Austin, Texas we hope you’ll give us a call. www.1836propertymanagement.com or 512-994-4323.

Note: In this scenario we had a property which rented for more than the payment. This does work on properties where the rental rate equals the payment. Speak to your professional property manager to run the numbers and see if leasing your home is right for you.

 

Tinder for Vendors?

Tinder for Vendors

Tinder for Vendors?

Think about it, how much easier would courting a new vendor be if they were able to briefly describe their characteristics as a company? Oh, you don’t do net 30? Swipe left. Can’t provide before and after photos? Swipe left. Waived trip charge if the work is approved? Well swipe right!

I’m sure we all wish it were that easy when it comes to developing a working relationship with vendors in property management. It requires a great deal of trust between both parties to commit towards quality work for our clients and their real estate investments. One way to establish this concept is to contractually agree with one another everyone’s expectations. This agreement can allow both businesses to expect and meet all expressed standards while allowing everyone to strive for success. While this may seem extreme for some, it does eliminate the possibility of confusion, assumption, and inevitably disappointment.

Until our society accepts the mobile speed dating for businesses, we find it best to lay all the cards out on the table before “getting into bed” with a vendor. Much like a relationship, you’d rather know ahead of time than invest your efforts over the long haul. After all, it’s business.

How much do property managers charge?

You’ve committed to purchase a rental property or rent your house. Congratulations! Panic and a looming question follow your short moment of elation.

“How will I manage my new rental?”

Correctly managing your property will take 40+ hours of your time every year, and that’s just one property. Do you know how much your time is worth? If you are one of many investors who hold more than one rental, the hours can quickly add up with the time it requires to promote your properties, find tenants, and manage the day-to-day maintenance and communication, not to mention counseling the tenants about their personal problems. Hiring a property manager can be an efficient way to both protect your time and maintain your property.

What will it cost to hire a property management company?

When you hire a property manager, you are paying for direct labor, marketing, and administrative services. Direct labor is your property management company’s most significant expense. It covers the people part of your business that responds to tenant inquiries, handles maintenance, and answers your requests as an owner. Shopping by price alone cost could mean fewer staff hours to look after your property and tenants.

Property managers fall into two monthly fee categories.

Flat-Rate Management Fees

In the flat-rate fee scenario, you pay a flat monthly fee. While this is a mass-marketed option, many times the actual property managers are located in an office out of state. When offering lower than market fees, the only way this type fee structure can remain profitable is to eliminate the local property managers. Management from afar will translate into a lower level of service, higher comprehensive costs due to a lack of local knowledge and availability and may turn into more work for you. The last thing you want is to go with the cheapest option, and then find out that the property managers have never actually seen your property in person, have not been responding to tenant’s requests or keeping up with the maintenance. It can cost you tens of thousands of dollars on the back-end to repair what should have been noted in person.

Flat-Rate Fee at-a-glance:

  • Less expensive monthly rate
  • Higher leasing and renewal fees
  • Save money on the front-end
  • Typically round numbers for marketing purposes only
  • Less collaboration and personalized service
  • Property managers are typically out-of-state
  • Plan to have a more hands-on approach to ensure preventative maintenance is done

Percentage-Based Management Fees

In the percentage-based fee scenario, you pay your property manager a percentage of your rental rate. The rate will depend on factors such as how competitive your local market is. A typical rate for Austin is 8 – 10%. While this can appear more expensive than a flat-rate fee, you are working in tandem with your property manager. Like the adage, “a rising tide lifts all boats,” the more you make, the more they make. A percentage-based fee enables a more collaborative relationship and overall better service. Local boots on the ground will give you peace of mind that they are managing your property well, from Austin.

Percentage-Based Fee at-a-glance

  • Could be a bigger monthly investment
  • Typically less expensive leasing and renewal fees
  • Collaborative approach raises the level of service for tenants and owners
  • Local property managers oversee the day-to-day management
  • The more you make, the more they make
  • Typical monthly rate for Austin is 8-10%

Which type of property manager is right for you?

Making the best decision on which type of property management company to hire, involves figuring out what level of service you need from your property manager. Be sure to look at all the details, not just the surface.

Owning investment properties should be an enjoyable, money-making venture! Enlisting a property manager is an excellent first step in ensuring you get a good ROI on your property investment.

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