You've looked at all of the responsibilities that need to be handled to keep your real estate investment property running smoothly and effectively while generating a steady stream of revenue, and you've decided to hire a property management company.
You know real estate, but you don't want to manage every department. Having someone who specializes in property management to find and screen tenants, collect rent, market the property, manage vendors, and other day-to-day tasks seems like a good idea.
You've made a wise decision, but only if you take time to research the property management options available to you. The company or individual you hire will be your agent, meaning that he or she will be able to make binding legal agreements in your name, and that their actions carry the full force of any legal contract that is created.
Not only that, but you don't want to hire an ineffective management company that doesn't take care of your tenants, because turnover will be high and you won't be making as much money from your investment as you should.
Let's look at some of the important things to look for in a property management company.
Cost is not the most important issue, but it's probably what first comes to mind when a real estate investor decides to hire a property management agent --- "What will this cost?"
Cost is an important issue, to be sure. But it is really only an issue when you have decided that you are interested in hiring a particular property management agent. If one agent charges a higher management fee than another, there may be very good reasons why. It could be as simple as the cost of better property management service. Lower is not always better.
You should be aware of some of the general costs you will encounter:
- Management Fees
- Set-Up Fees
- Leasing Fees
- Advertising Fees
- Maintenance Fees
These are some of the larger fees and costs, but it is by no means a complete list. Pay special note if the company or agent charges a vacancy fee. This is a fee that is charged when the unit is vacant, prorated when a new tenant moves in. Sometimes it is a small fee, while at other times the full management fee is expected even though the unit is unoccupied. Your management contract should state that management fees are paid out of 'collected rent' not from 'rent due.' Many property managers don't require a vacancy fee, but be sure you know if yours does.
Property Management Services
Handling tenant funds and owner payments is one of the basic duties of a property manager and obviously where a large part of your revenue comes from. You need to know when they mail out monthly checks to owners, what tax documents they provide, does their accounting provide a clear audit trail for each property? How do they handle security deposits?
How do they handle rental payments? Do they thoroughly research local data to determine the optimal rent? How do they handle maintenance requests? Do they use outside contractors or their own staff? Do they have relationships with certain contractors and do those relationships help you save money?
Check out their rental ads. Do they stand out? Where do they advertise? What is their average vacancy rate? How do they show your property? Is the company or agent licensed?
Your Property Management Agreement
A contract is a legal document and it serves to protect both parties by spelling out, in clear legal terms, what each party to the contract must do to satisfy the contract. You need to understand the terms of this contract in a detailed manner.
- Services and Fees: Understand what property management services are provided and what the fees are. If one agent charges a 5 percent management fee while another charges 8 percent, be sure you are comparing apples to apples. The agent charging 5 percent may have other hidden fees that they charge for various services that may be included in the 8 percent fee agent. See what, if any, services are excluded. These are services that the property manager will not perform in any circumstance, and you need to be sure that you are OK with them.
- Responsibilities of the property owner (you): These will be spelled out, but include items such as maintaining a reserve fund for maintenance and other day-to-day operations, and what type and amount of insurance the owner must carry on the property.
- Liability: This is a clause that limits the property manager's liability or responsibility if, for example, they hire a contractor who damages the property. As long as they have not been negligent in their duties, they will be held harmless or such damage.
- Contract duration and termination clause: The duration of the contract should be spelled out, and don't sign a long-term contract until you have worked with the property manager and are happy with the results. You should be able to terminate the contract in a relatively short period of time, say 60 to 90 days. Some property managers charge a fee for early termination. You should also be able to terminate the contract if the manager does not find a tenant in a specified amount of time.
Understanding the costs, services provided, and the terms of your property management agreement will ensure that you can find a property manager that you will be happy with, allowing you to spend time researching new properties.