Rental properties come with a slew of advantages for investors, from ongoing income to inflation protection to leveraging other people’s money to tax advantages.
They also come with labor and headaches, unlike true sources of passive income.
Many landlords look to delegate that labor to a property management company. But property managers charge stiff fees, and come with other quirks and risks to boot. Before hiring a property manager, make sure you understand all the pros, cons, and risks completely.
What Do Property Managers Do?
Before deciding whether a property manager is worth the cost, you first have to understand exactly what they do — and don’t — do.
Lease Vacant Units
The overwhelming majority of the labor and hassles involved in being a landlord come from turnovers.
Property managers oversee everything from the old tenant’s move out and security deposit to cleaning up the unit and advertising it to tenant screening and signing a new lease agreement. It involves far more work than the average person thinks.
In fact, so much of the labor of landlording comes in this phase that some landlords simply hire out this portion to property managers, while continuing to the manage their rented units on a monthly basis.
Collect Rents and Interface with Tenants
Property managers serve as the front line for all customer service and communications with tenants.
They collect and deposit rents of course. But they also field phone calls and emails, answer questions, and collect tenant feedback — positive and negative. Like everyone else in customer service, they plaster a smile on their faces while rude customers — usually tenants, but sometimes landlords — yell and scream at them.
And, of course, they get plenty of phone calls about maintenance issues.
Oversee Maintenance and Repairs
The initial report from the tenant about a maintenance issue is only the beginning. From there, property managers must send someone to look at the problem, collect price quotes, and discuss repair options with the landlord.
Once the landlord makes a decision about how to address the problem, the property manager coordinates with the contractor and communicates with the tenant. In short, they manage the process from start to finish, even if they never lift a hammer or nails themselves.
Inspect Rental Units
All responsible landlords inspect their rental units at least once or twice per year. Or at least they send a property manager to inspect their rental units.
The property manager looks for maintenance issues or needed repairs, as tenants often fail to report them. They also double check that the tenant is maintaining the unit as agreed in the lease contract, and treating it with respect.
Further, they confirm that the tenant hasn’t violated the lease in any other ways. That could mean sneaking in new occupants or pets, criminal behavior, or any other prohibited behaviors outlined in the lease.
If they discover a breach of lease, they then serve an eviction warning notice on the tenant.
The eviction process is long and tedious in most jurisdictions. It starts with serving the eviction warning notice, which demands that the tenant either cure the violation or vacate the premises. Which many renters don’t do, necessitating the prolonged eviction process.
After a prescribed waiting period, the property manager then files in court for eviction, waits for a hearing date, presents evidence to the judge at the hearing, and then waits even longer for a lockout date. Then they show up at the lockout with a contractor to change the locks and possibly haul a bunch of abandoned junk out of the property.
Keep Clean Books
Finally, property management companies maintain orderly bookkeeping records. They document all income and expenses, properly labeling each.
Come tax season, they provide the landlord with profit and loss statements along with a tax form (such as a 1099) for their net rental income.
While the least obvious of the services that property managers provide, it’s a useful one, as most mom-and-pop landlords don’t keep meticulous accounting records.
What Do Property Managers Charge?
Ask 10 property managers that question and you’ll get 10 different answers. Still, all property managers charge at least two types of fees: new tenant placement fees and ongoing rent collection fees. From there, fees get less transparent and less justifiable.
New Tenant Placement Fees
As outlined above, turnovers represent the most time-consuming work in managing rentals. Property management firms charge accordingly.
Most charge a fee of one month’s rent when they fill a vacant unit by signing a new lease. They earn every penny of this leasing fee, so don’t get aggressive in negotiating it.
However some property managers get sneaky and also charge a fee simply for renewing existing leases. There’s virtually no work involved, so property owners should negotiate this fee away entirely.
Ongoing Rent Collection Fees
To compensate property managers not just for the work of filling vacant units but also the ongoing work of managing rentals, they also charge a percent of rent collected.
This fee usually ranges from 6% to 10% of all rent collected. For higher-end units, expect to pay on the lower end of that spectrum, and vice versa. While negotiable, first make sure the property manager doesn’t charge any less-obvious fees before trying to play hardball on this legitimate fee.
As a landlord myself, I deeply object to other types of property management fees beyond the two outlined above.
Unscrupulous property managers bury many other nickel-and-dime fees in the fine print of their property management contracts. For example, some charge a fee every time they visit the property. Visiting the property periodically is part of their job! It’s precisely what you pay them to do.
Others charge a fee whenever they send a contractor to do work. Again, this represents core work in their job description and you shouldn’t pay separately for it.
On the really sketchy side, some property managers arrange kickbacks with contractors and handymen. Unfortunately, this is difficult for you to spot as a landlord because it appears nowhere in the contract you sign or your monthly P&L statements.
Advantages of Hiring a Property Manager
Property managers offer a valuable service when performed well and honestly. Keep the following pros in mind as you explore hiring one.
Delegated Labor for (Nearly) Passive Income
Rental properties aren’t a completely passive source of income. They require work to manage, unlike owning stocks, bonds, or real estate investment trusts (REITs).
As a landlord, you can delegate all the labor outlined above to a professional — one who may well do it far better than you would.
Local Market Knowledge
Property managers know their local rental markets inside and out.
They can glance through your rental unit in three minutes and tell you the precise market rent. They can write a rental listing and photograph the unit in a way that attracts more attention than competing units. If it fails to move quickly, they can tell you what incentives will help it rent pronto.
Or at least they should be able to do all of the above.
Network of Local Personnel
Real estate investing is a team sport. You need support personnel ranging from real estate agents to home inspectors to lenders and most of all contractors. Lots and lots of contractors.
That goes from the cheapest handyman to the most niche specialist. Electricians, plumbers, HVAC specialists, carpenters, roofers — you name it, you’ll need it sooner or later.
Good property managers maintain a network of these home improvement pros, and can get work done for you quickly and affordably.
Freedom From Being “On Call”
Most of us hate the feeling of being on call 24/7. No one likes 3am phone calls, whether for a serious problem (the roof just caved in) or a trivial one (a light bulb went out).
When you hire a property manager, they take that responsibility on your behalf.
Some people take their privacy more seriously than others. Even so, do you really want to give all your tenants your personal cellphone number? Your home number? Your home address?
When I first started dating my wife, I invited her over to watch a movie. Halfway through the film at 9pm, a knock sounded at the door. Irritated, I opened it to find two of my tenants standing there asking to come inside.
You don’t want that.
Fortunately, they were there to pay back rent that they owed, rather than chop me into pieces with a chainsaw. But there are some unhinged people in the world, and just because you’re willing to rent someone a unit doesn’t mean you want them knowing all your personal details, like where you live.
When you hire a property manager, you don’t need to give out any personal information to your tenants.
Downsides and Risks of Hiring a Property Manager
Despite all the reasons to hire a property management company, they still come with plenty of disadvantages and risks. Understand them and mitigate them before proceeding.
Most obviously, property managers cost money.
Some real estate investors look at property management fees as “eating into their returns” on rental properties. I actually disagree with that outlook — all real estate investors should price in property management costs when they calculate a property’s cash flow before buying.
As stressed above, rental properties require labor to manage. Whether you take on that labor yourself or you outsource it, it’s still a labor expense. You still need to account for it when forecasting an investment property’s returns, because otherwise it would skew the numbers when you compare it to completely passive investments like index funds.
Pay yourself for this labor or pay someone else, but someone has to do it.
Loss of Control Over Management Practices
When you manage a rental property yourself, you control everything. You can screen the tenants thoroughly, negotiate lower bills with contractors, inspect all units semiannually, retain good tenants by treating them attentively, and serve eviction warning notices on the day the monthly rent becomes late.
In short, you can ensure you earn the best possible returns from your units by engaging in best practices.
The moment you outsource work to someone else, you surrender much of that control. You can ask a property manager to do every best practice in the industry, you can write it into your contract, you can constantly check in with them. But you can never fully know how well they carry out these best practices.
The Need to Manage the Manager
Likewise, when you outsource work to someone else, you need to manage them. You need to check up on them regularly, verify their work, and check their performance record. When they mess up, you need to make sure they know what they did wrong, and know that you know about it.
Otherwise they’ll slip into their baseline habits, which are probably not the pinnacle of industry practices.
But all that work raises a question: if you still need to do all this managerial work, is it worth hiring a property manager in the first place? You delegate some tasks only to have to take on different work.
The federal government and state and local governments heavily regulate residential real estate. You break any landlord-tenant laws and you become liable for lawsuits, fines, and penalties.
As your representative, the property manager could break a law and leave you liable for it. Sure, you could potentially sue them after the fact, but that requires money in itself, and even if you win, you then have to go about collecting the judgment.
While uncommon, it does happen, and it is a risk.
When you delegate the work of managing your properties, you surrender not only control but knowledge and information.
I’ve had property managers commit every worst practice in the book, and when I finally got wise to it and fired them, they left me with an enormous mess. I didn’t have copies of lease agreements or updated contact information for my tenants. Properties went uninspected for years, and maintenance problems had accumulated. Some tenants were paying absurdly under-market rents, which left me in the lose-lose position of either dramatically hiking rents (and losing good tenants) or gradually lifting rents to market rates over the course of years.
Handing over management of your properties isn’t like retaking control of your brokerage accounts. You don’t just reset a password. You’re working with physical assets worth hundreds of thousands of dollars, and with living human beings whose interests don’t necessarily align with yours. Expect hiccups in the best of cases, and tangled nightmares in the worst.
How to Hire the Right Property Manager
If and when you decide to hire a property manager, do it right the first time. Don’t do it in passing, as one of a dozen items on your to-do list to scratch out that morning. Set aside a significant amount of time for due diligence, and expect it to take a significant amount of work.
1. Research Local Property Management Companies
Start with some simple online searches for local property management agencies.
In fact, one of the best places to find prescreened property managers is Roofstock. Because they include a guarantee for their approved property managers, they have a vested interest in vetting them thoroughly. Check to see if Roofstock operates in your area, and view their preferred managers.
But don’t end there. Check online user reviews from platforms like Google, Sitejabber, and Facebook. As always, more reviews mean more credibility among ratings.
Also consider asking for referrals on local real estate investing and landlord Facebook groups. Existing clients can give you frank, unbiased impressions about a property manager.
2. Interview Them
Reach out and talk to the property managers who look promising. Ask about their credentials, such as a real estate license, or certifications from the National Association of Residential Property Managers or the Institute of Real Estate Managers.
But also ask probing questions. Do they charge any fees beyond new tenant placement and ongoing rent collection? What’s the average rent of the units they manage? How often do turnovers take on average? How often do they inspect rental units? How do they field tenant communications outside business hours?
The more questions you ask, the more you can get a sense for what kind of manager they are.
3. Review Their Legal Contracts
Ask for a copy of their property management contract. Yes, it makes for an exceptionally dry read, but read it cover to cover. In particular, look for every single fee, no matter how deeply buried. Do they charge a fee for simply renewing an existing lease? Do they charge fees for visiting the property, or sending a contractor to the unit?
Also check whether they commit in writing to best practices such as regular inspections.
Next, review a copy of their standard lease agreement. How exhaustive is it? Is it a boilerplate lease or does it include landlord-protective language and state-specific clauses and disclosures?
If you don’t know anything about legal contracts, find someone who does and show them both the property management contract and the lease agreement to get their opinion.
To be frank, I’ve had more than my fair share of bad experiences with property managers. It’s an industry rife with unprofessional or unscrupulous people who never received much formal training in their work.
That said, many landlords (myself included) simply don’t have the time or inclination to manage their own rentals. Plan on investing a significant amount of time researching, interviewing, and hiring a property manager, and never settle for one that doesn’t have your utmost confidence and respect. You are quite literally handing over assets worth hundreds of thousands of dollars.
As a compromise option, consider hiring a property management service solely for advertising and screening tenants, and handling new leases and move-in. Pay them their flat fee of one month’s rent and then manage the occupied unit on your own.
With or without a property manager, rental properties require some work on your part. If you want a 100% passive investment, look into indirect real estate investments like Streitwise or GroundFloor instead.