Being A Landlord: Do It Yourself Or Hire A Property Management Company?
I find myself writing a lot about real estate lately. My first real estate post on this topic analyzed the pros and cons of this investment vehicle from the standpoint of being a landlord. From there, I delved into what is the best legal structure to hold real estate in. In my third real estate post, I assume that the rental property has been purchased. Now comes the crucial question. Do you handle the property yourself or do you hire a property management company? Each option has its pros and cons, and that’s exactly what we’re going to be looking into.
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Being a Hands-On Landlord (Managing Your Property Yourself)
Availability and handiness. Are you going to be there every time a problem arises? Are you handy with tools? As a hands-on landlord you will be responsible for repairing anything that’s broken. This is important because this helps build a good relationship between you and your tenants. Sometimes for example you might be asked to fix a small thing when you are collecting the rent. If you are not available you will jeopardize the relationship between you and your tenants, and that’s never a good thing for your bottom line.
People Skills. The real estate business is a people business. You will have to interact with all kinds of people, tenants and situations, and handle everything in a friendly but professional way. Complaints, rent collecting, and property trashing problems (and the ensuing repairs) will often arise. You will want to make sure that you can handle different situations effectively and find the right way to take care of the different needs for everyone involved.
Organizational Skills. Besides the “people” aspect of the situations you’ll be faced with, there’s the “nuts and bolts” aspect. Your responsibilities are essentially collecting rent, handling the upkeep of the property, and evicting tenants when necessary. At any given time, successfully carrying out one of these activities will call for professional help.
Tenant Screening. You should check prospective tenants’ credit reports before approving them for your rental property in order to reduce your risks of accepting troublesome tenants. You might also spot potential problems before an applicant signs a lease. You will need the applicant to complete a written application with an area for his/her Social Security number, which is necessary to run a credit report check. You will also need your applicant to sign a release authorizing you to perform the credit check. Here’s a list of resources for tenant screening services
Property Laws. There are laws, rules, and regulations that directly apply to you and that you should be in compliance with in order to avoid lawsuits. Examples: the Americans with Disabilities Act and Federal Fair Housing regulations.
Evictions. If you have to evict a tenant, you must follow proper eviction procedures for removing the tenant and the tenant’s possessions from the rental property. Landlords who know their legal rights and comply with local landlord-tenant laws stand the best chance of successfully evicting a tenant. Although tenant eviction procedure is beyond the scope of this article, it’s worth pointing out that the landlord-tenant laws in most states are designed to benefit and protect the weaker (in the court’s eyes that is the tenants) and regulate the powerful (the landlords). Tread carefully and hire professionals.
Clearly, being a hands-on landlord is not for everyone, because this option takes the most time and the most work. Proximity is also a clear factor. But the main advantages are:
1) You will make the most profit in day to day operations.
2) You are able to handle problems quickly because you don’t have to rely on a third party.
3) It provides a great way to keep track of your property.
4) You can develop a personal relationship with your tenant (just remember to keep it business-like)
The drawbacks?
1) It can be time-consuming.
2) You’re limited to investing within certain geographical limits
3) You’re limited in the number of units you can handle
4) The “personal” relationship with your tenant can turn out to be a double-edged sword if you let yourself be taken advantage of.
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Hiring a Property Management Company
If what you read above is not your cup of tea, the good news is that it’s totally feasible being a landlord without ever having to hire a plumber, painter or janitor, nor ever having to talk to tenant. The way to avoid common property management headaches is to hire a property management company. In exchange for a fee (from 4% to 10%, depending on the type of property), they essentially run the place and you don’t even have to actually collect from them, they direct deposit the money into your account.
Targeted advertising. They advertise for landlords (in print, on TV, and online) in order to shorten vacancy periods. Many property management companies now have websites where prospective tenants can apply.
Perform tenant screening and handle leases. When a potential tenant submits an application for housing, a decision has to be made. One of the reasons homeowners use a property manager is to benefit from their expertise in screening potential tenants and handling leases, ensuring a smooth rental experience for both the property owner and the tenant.
Handle upkeep and repairs. These companies are specialists in this business. They have more experience and also already have access to dependable contractors, leasing agents and maintenance people. They make sure that whatever repair work is needed will be done in quickly at a reasonable cost. They negotiate the best prices for services performed to keep the property well maintained.
Run the Property. They use management software to help them to keep a record of aspects such as property details (room sizes, property condition, home furnishings, fire safety, etc). Accounting software is used to enter and keep track of rents, repair costs and billing..
Ensure Property Law Compliance. Do you know if your property has to have a wheelchair ramp or safety rails? What about the rules pertaining to wiring? There are hundreds of laws, rules, and regulations that directly apply to you and you’re expected to be in compliance with all of them at all times. A property management company can provide the knowledge and expertise to decipher and sort out all of these rules and regulations and keep you in regulatory compliance.
Handle Evictions. If a bad tenant selection has been made and they have to be evicted, a property management company knows they have to follow the letter of the law or face having the tenant remain on the property even longer, costing money in court fees and lost rent, and possibly facing some criminal charges themselves if they eve slightly deviate from the letter of the law. Since local laws regarding eviction all vary, it’s best to leave the whole thing to professionals.
The primary advantages of hiring a property management company are:
1) These companies are specialists in this business. They have more experience and also already have access to dependable contractors, leasing agents and maintenance people.
2) The management company will be the people who deal with the tenants.
3) You are not limited to investing in your immediate geographic area. Real estate is a highly localized investment. You can now scope out profitable deals anywhere in the country.
4) The property management company you hire will have a better knowledge of the rules and laws governing the real estate industry.
5) You gain an edge in financing because banks and commercial lenders prefer that you hire a professional management company.
A few of the disadvantages of a hiring a property management company are:
1) They reduce your profits
2) They have access to your money
3) They won’t treat the property as if they owned it.
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Property Management or Not? Deciding factors
Your Availability. If you have a demanding job or otherwise can’t free up your time, a property management company is probably your only choice.
Your Personal Expertise. If you’re handy, have the right connections, and have good organizational skills, you can definitely be successful as a hands-on landlord.
Type and Location of the Unit(s). Some types of units (like multi-unit residential or commercial complexes) are better suited for property management companies, while others (like single family homes) are ideal for the hands-on landlord.
Number of Units. The more properties you have, the harder it will be to go it alone.
Quality of Service and Fees. As with all services, you have to do due diligence before using a property management firm. Most states require that property managers be registered real estate brokers, so that they can legally accept rent and take care of other monetary matters. Other states do not require this - but in all states there must be some sort of registration for property managers. Additionally, signing a contract for property management makes sure that you as the real estate owner are protected in case of any problems with their management company, as well as outlines what the property management company is and isn’t responsible for.
It is recommended that you interview at least two or three property management companies before making a decision. Look for the following:
1) High tenant retention
2) Attentive customer service
3) Good lines of communication with owners
4) Budget planning
5) An attention to keeping costs low
6) Preventative maintenance
7) Inspection of units and property on a routine basis
8.) Good contractor supervision
9) Maintenance of tenant records
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The decision on whether to manage your own rental property or to outsource it to a professional residential property management company is highly personal. I have done my best to provide you with what you need to make an informed decision.
Personally, I don’t want to have to deal with tenants, or backed up toilets in the middle of the night. I’d much rather hand the whole thing over to professionals who do just that for a living. My time (the most precious resource of all) will still be free to look for other lucrative opportunities. I’m not saying that being a hands-on landlord is bad, it’s in fact much better than holding a job. My main problem with it is that it would tie up my time and in the end I’d feel like I bought myself a job.
As they say, to each his/her own! I’d love to hear other points of view on this topic, though 
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