(Photo: Stefan Baudy)
If you want to make passive income as a real estate investor, it’s time to get yourself a property manager. You really do need a property manager unless you plan on working full time on your real estate business. Read this great article on the 5 Reasons You Need a Property Manager Now!
Are you convinced yet? Good!
Once you decide you want a property manager and you go out on the hunt for one, you’ll find a few key players in a small to mid sized cities and hundreds in large metro areas. Most seem good on paper and they will have brochures gleaming with testimonials, competitive rates, and low vacancy claims. How will you tell them all apart and weed out the poor performers? Schedule a meeting with the property management companies you are interested in and interview them as seriously as you would a day care provider, a housekeeper, or a financial advisor. Here are 10 questions to ask your property manager to make sure you can sift through the good vs. the bad!
“I don’t think people spend enough time evaluating who they’re going to use for their management, and have a negative result because they didn’t spend the time that they should have. Really get to know the person who is going to be in charge of what is a sizable investment.” said Andy Petzold, broker and co-owner of EPIC Property Management, a property management firm in Cedar Rapids, Iowa.
1) What qualifications do you have?
The first step to selecting a property manager is knowing if they are qualified or not. In most states, a property manager must have a broker’s license to manage your property. Be wary of individuals who offer to manage your property for you without having the credentials. It is illegal and could put your investment at risk. This site provides a great index of the requirements in each state. As with any information on the internet, be sure to validate these facts with the state government where you are investing.
2) What are your property management fees?
The fee can be anywhere from 5-15% of your monthly gross income, but it is more commonly 10-12%. More expensive is not always better, and vice versa. A 5% fee might be a red flag, along with a fee higher than 12%. Find a good middle ground.
3) Do you offer other services such as posting the property for rent, finding tenants, and handling leases, evictions, etc.? What advertising fees are included vs. extra cost vs. not possible?
A full service property manager should provide standard services such as finding tenants and handling leases, evictions, etc. but it’s important to know what’s included with your monthly fee and what costs extra. Just because the service is offered doesn’t mean there isn’t a one time non-recurring fee for finding a tenant, renewing a lease, etc. Make sure you inquire on the cost and fee structures that the property manager has set up.
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4) Do you have a dedicated maintenance team or do you hire contractors and outside handymen? If you do have dedicated maintenance, how much do they charge per hour?
This is going to have an impact on the repair fees you pay when something goes wrong. A property management firm with on-site maintenance personnel can do service calls cheaply and quickly. Minor repairs to your property can be handled with these general handymen and the “big boys” are only called when there are serious problems. This saves you a great deal of money since on-site maintenance is often priced lower than house calls and fees from outside contractors. The price can vary, so it’s important to ask about the fees ahead of time so there are no surprises down the road.
5) What process do you use to screen potential tenants?
Have the property manager walk you through the process. A property manager should ask the tenant questions about their needs and make sure the rental application is filled out truthfully and completely. Credit and background screening is a must since you want quality tenants who won’t trash your rental!
“I think it’s important that you spend that time getting to know property managers so you know what their philosophy is. They’re going to be representing your properties to potential tenants and it’s important that they look at investing the same way you do.”
– Andy Petzold, EPIC Property Management
6) What kind of property management software and accounting systems do you use?
You may think this is not something you should care about, but you’ll likely be pulling financial statements and getting automatic payments from this software. Another good reason to ask this question is to weed out property managers who use NO software. This isn’t necessarily a deal breaker, but we are well into the 21st century and property managers who have not embraced the many tools out there are at a major disadvantage and could become disorganized quickly.
7) How many properties do you manage? Is there a point where you are overloaded?
This can help you determine the size of the management firm. If they have a couple hundred properties, your single rental could be easily managed and given priority. If they have thousands or more and often deal with massive apartment complexes, you may want to build your portfolio to avoid being a small fish in way too big of a pond. It’s also important to make sure a property manager doesn’t overextend themselves and manage more properties than their current business model can handle.
8) What financial services do you provide? Do they pay the mortgage or handle the insurance tax escrow?
In the advent of automatic bank payments and online bill pay, this may not be a huge issue for you. Still, it’s a good idea to know what they do and don’t cover so they can grow and scale with your operations as you get a hold of more properties.
9) Does your company offer collection services? How are delinquent balances after move out handled and what is your success rate in collecting them?
Although a property manager should be collecting a refundable deposit from the tenant (usually one month’s rent), it’s important to know if the property management company will handle collections for delinquent accounts. This is not something you want to take to chance. If you don’t ask, you may find out that you are chasing the tenant for money on your own, and that sure doesn’t make your investment very passive now, does it?
10) How about evictions? How are they handled? What’s covered as part of the PM fees and what legal fees will I be responsible for?
Evictions can obviously be expensive due to legal fees. We have a few different blogs on evictions if you want to read about Tenant Problems, Preparing for Eviction, and Pulling the Eviction Trigger. You will want to know if an eviction is a flat rate fee, is billed to you hourly based on the PM’s own attorney costs, or is handed over to you for your own lawyer to fight.
So remember, we love the idea of a property manager to take care of your property so you can focus on growing your real estate business. Despite all of the benefits of a property manager, not all of them are dependable, competent, or qualified, so ask plenty of questions, do your homework, and put your property manager to the test!