How to Find a Good Property Manager
Before I go further into this post, I need to make a disclaimer that I no longer use outside property management firms, but I have used PMs to manage my remote rentals for over 9 years. I figured now may be a good time to write about how I went about researching them and choosing the right one when I was getting started.
Let's start with what NOT to do. You're not going to find a good property manager by reading the Yelp reviews. Most of those reviews are written by disgruntled tenants. A PM who only gets 5-star reviews on Yelp is either a pushover (like the substitute teacher that kids love but parents hate) or is faking their reviews. Feel free to read the Yelp reviews to note patterns in PM policies/approaches but do not take the ratings themselves seriously.
You want a PM who is strict but fair, a PM whom the tenants will respect, and one who will follow up promptly with tenant who's behind on rent, charge them late fees, and document habitual violators. That doesn't mean the PM should be completely uncompromising in tenant matters, there are legitimate cases when a good tenant needs a few more days to get rent, but a good tenant will typically notify you of this ahead of time, and from my experience it's the usual suspects who create problems month after month. That's why it's important for the PM to document tenant issues. This documentation can later be referenced both when renewing the lease, and starting the eviction, should the need arise. Which brings me to my next point.
You want a PM who understands local laws. I don't mean that he/she is simply aware of the city website stating official regulations. Understanding the laws actually requires dealing with them regularly. There are a lot of quirks that aren't well-documented.
For example, according to Massachusetts regulations, you can serve a problem tenant with a 30-day notice to quit, then file a hearing in Housing Court, explain your point of view to the judge and have them ordered to leave, a process that on paper should take around 2-3 months. In actuality, the court system is completely broken and can take a rookie landlord months, if not years. The court system requires an expert to navigate and understand when you're better off filing in District Court instead to expedite the hearing, and when you're simply better off giving the tenant cash-for-keys to leave on their own. Every state has its own quirks, and if your PM doesn't understand them, you can land in hot water.
You do want to check PM reviews, but as I already mentioned before, you probably don't want to do it on typical review websites. Instead, consider asking other landlords in a local landlord forum or an investor forum like BiggerPockets. Ask other investors whom they use and what their experience is. Sometimes their PM will not be able to manage for you, either because of the area your property is in, rent amount, or property type. On average it's harder to find a PM in C-class area than A-class or B-class. Very few property managers will take on a property in D-class neighborhood, unless it's actively gentrifying or they already do business there.
Understand PM Fees
Most property managers charge a percentage of gross rent as a monthly fee for the management service. That fee varies by area. In A-class area with high rents, the PM may charge 5% fee. In C-class area with lower rents and more tenant headaches, PM can charge 10% fee.
If you had a chance to play with the Napkin Analysis on our website, you probably noticed that in metropolitan areas a big chunk of your rent will go towards covering your expenses (mortgage, insurance, taxes, utilities, repairs, vacancy). Often this number is close to 80%, which means that the 10% PM fee is actually closer to 50% when you look at net income rather than gross income.
Additionally, there are property managers that will charge you a monthly PM fee even when they're unable to collect the actual rent from the tenant. This is, in my opinion, unethical, as the PM incentives should be aligned. You shouldn't be the only one taking on additional risk and losses for a tenant they placed. Similarly, you should not be paying PM fees when the unit is vacant.
The first step to understanding PM fees is to look at their website (if they have one). You want to note the following fees, and verify them during the phone screen (which is the next step of the process):
- monthly PM fee: typically 5-10% of gross rent.
- sign-on fees: some PMs charge a fee for placing the tenant, typically half-month to 1-month rent. This fee typically includes marketing, and showing the unit.
- service fees: you will always have to pay for major repairs yourself, but PM company will often have a handyman on staff who can take care of small fixes, sometimes at no charge. You don't want to be nickle-and-dimed for every service call, especially if you're already paying 10% PM fee.
- post-move out fees: when a tenant vacates the unit, the PM will need to do some sort of a walkthrough and get the unit rent-ready again. The cost of repairs and painting will come out of your pocket, but some PMs charge additional fee for "overseeing" the touch ups.
- eviction fees: PM company typically doesn't handle eviction themselves, but they often have an attorney they work with, and can quote you their prices ahead of time. Additionally, as I already mentioned, beware of PM companies that charge monthly PM fee during eviction, especially if they're the ones who placed the tenant there.
Phone Screen
Now that you've read the reviews, spoke to other investors, and looked through the fees documented on the PM website, it's time to give them a call. This call is an interview that tests PM knowledge of the area, their policies, and past experience. I have a list of questions I like to cover on the call.
Starting with the basics (fees and communication):
- Do you cover the area that my property is located in? If they don't cover your area at all, you won't be able to work with them anyway, so get this question answered first. If they don't cover the area, I would inquire why, as that would help you understand any potential issues with the area.
- Can you run me through your fee schedule? Be sure to ask them about the fees I noted in the previous section, especially if they're not mentioned on their website. Give them hypothetical situations to understand how you'd be charged for them. How am I charged for repairs? What happens if a tenant makes frequent repair calls? What happens in the event of eviction? What are the move-in fees?
- What are your business hours? What's your availability outside those hours? What's your preferred method of communication and how quickly can I expect a response? You want to make sure the PM has multiple ways of being contacted (text, phone, email), and can be contacted outside business hours in case of emergency.
- What regular communication can I expect to receive from you? Even with a PM, your investment is never completely passive. You should be kept in the loop regarding payment history, any ongoing tenant issues, and repairs.
- Do you have an in-house repair crew or do you hire one? What are the approval thresholds that require input from me for emergency and non-emergency repairs? Do you shop around if the cost seems too high? You don't want to be bugged for every minor repair, the PM should be reducing your work load. But you also don't want to be stuck with a surprise $20k bill for a job that could be done for half the cost if you had a chance to shop around. What I want to hear here is that PM has their own repairman for minor tasks and gets at least 3 quotes for any major work. In general I have my "contact me" thresholds set at $500 for regular repairs and $1000 for emergency. That means any repairs lower than those amounts the PM can make a decision on without asking for my approval.
Afterwards, I will ask specific questions to establish their knowledge of the area, expertise, experience, and honesty:
- What does the typical tenant base for the area look like? What are the typical rents, jobs, income, demographics? What percentage of tenants is Section 8? Remember that you can verify this information with Investomation, make sure there are no surprises from what you were expecting.
- How many properties do you manage? Which areas? How many years have you been in this business? You want to make sure that they have experience and that your neighborhood is similar to other areas they manage, otherwise they may not be familiar enough with the tenant base, and how to effectively market to them.
- Which vendors do you use? Contractors? Legal services? Part of the reason you're hiring an experienced PM is for their network, you want to make sure that network is actually there.
- What's your typical vacancy rate? What's your typical eviction rate? If they say zero for either one of those, they're being dishonest. No matter how good of a PM they are, if they've been in business long enough, they're not going to have a spotless record. If their vacancy/eviction numbers are significantly better than the averages for the area (remember that you can find those averages using Investomation), ask them what they're doing to achieve such performance.
- How does the evictions process work in this state? As a PM, they should know the eviction process well. If they don't, or if the process they describe seems inconsistent, that's a red flag.
- Tell me about a time when you've had to deal with a disruptive tenant. It's as important to understand what they perceive a disruptive tenant to be like as it is to understand how they handled the situation. If this question seems similar to the kind you'd encounter at a behavioral interview, that's because it is. Feel free to flip the job interview script on them. You are hiring them and you want to make sure they have the experience they claim to.
- What software do you use for support tickets? Expense tracking? Taxes? There are many options now for property management tools: Buildium, AppFolio, etc. The only choice you don't want to hear here is Excel. You want to make sure they have a system in place and are not going to create additional headaches for you because work orders are getting lost and they don't provide you with proper documentation for the tax season.
- How do you go about pricing rentals? You want to make sure the PM adjusts rents and refreshes leases on a regular basis.
Before you hang up the phone, ask them to send you a copy of their Operating Agreement. They should have one in place and the fees outlined there should be consistent with the ones they quoted on the phone. Additionally, this agreement should describe how frequently you will receive rent payments and whether they will be direct-deposited or mailed via check.
Conclusion
Remember to speak to several PMs, you want to compare notes. It's easier to see gaps in answers of one company when you speak to at least two others. Of course sometimes you have few options, especially in smaller towns and C/D-class areas that many PMs don't want to work in. For those members who're signed up to Investomation (remember, it's free), I'm also including an interview template you could use during the phone screen with the property manager (it's similar questions to the ones I outlined above, but in more convenient format).