Hello my friends. Welcome back to Passive Real Estate Investing where we dive into the world of real estate investing among other related topics. To help you with your real estate investing journey, today we’re doing something a little different. We’re going to take a trip down memory lane and showcase an important episode from the past on what we call our throwback Thursday episode. Now, whether you’ve been with us since the beginning, which goes back to 2015, or you’re tuning in for the first time, this episode is a must listen, we are revisiting one of our more popular episodes from the past, and believe me, what we discussed back then, whether it’s six months ago or six years ago, is just as relevant today. So sit back, relax, and let’s rewind the clock for this great episode. Enjoy.
Today’s question comes from Henry and he says, hello, Marco. Your podcast is the best. And I look forward to new episodes every week! Henry. You are awesome. Thank you so much. I appreciate it. So Henry’s question is he says, my question is in regards to choosing a property management company to work with in a given market while choosing a market to invest in being teamed up with a great property management company is imperative. What are the sort of questions that you would ask a property management company when considering to team up with them? What sort of information is the most important to receive from them?
Thank you very much – Henry.
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Throwback Thursday Episode (The episode originally took place in the year 2021)
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Henry, I appreciate the question. A great question, because your property management team is critically important. In fact, I have said many times that you live and die by your property manager and they really play into your success pretty darn heavily. So you want to make the right choice. So if it’s not a company that you are familiar with or working with or someone that you know is working with and they come highly, highly recommended, then essentially you are on your own to do your own due diligence in the market that you’re investing in. There’s literally a laundry list, a long list of questions that you could potentially ask. Now here’s the problem with a lot of the lists that you can find online that may be anywhere from 25, 30 questions on the low end to I’ve seen lists of a hundred questions or more, well, guess what, if you were to get on the phone and try to ask a property manager a hundred questions that will take an hour to two hours long, that may be no bueno. In other words, you’re probably not going to have that much time from somebody.
Not that they don’t want to answer your questions. It’s just, that is a pretty big investment of time. So what you want to do is pair it down to some core questions and then do some research online to just look into their reputation. And what do you want to see is that they are mostly good or clean? Not that they have tons and tons of bad reviews and more specifically bad reviews from landlords. Not so much from tenants because when tenants get upset, they tend to go online. They tend to complain and if they have something bad to say, yeah, they want the world to know if they have something good to say, they’re not going to take the time to bother and, you know, go online and put a five-star review. In most cases, whether it be Yelp or any other website, bigger pockets, um, you know, there’s probably many others that are more focused on tenants or, or management or whatever the case is.
But let me give you some questions that you can ask them. If you are doing an interview in no particular order, you can ask questions like, you know, how long have you been in business? In other words, have they just started three months ago? Or have they been doing full-service management for the last three years or 10 years or whatever it may be. It’s about the length of their track record, not about the quality of their track record. I guess what you want to find out is just, are they new or have they been around for a number of years and have an established business? The other question I would ask is which property management services do they offer you? And in other words, are they truly a complete end to end full-service management company? Or are they just focused on the management?
And maybe the lease-up itself, maybe they’ll do the evictions. Maybe they outsource the evictions to an attorney. And, you know, that might change from state to state. I think ideally like to have as a property management company that provides you a complete spectrum of services. So it’s all essentially inhouse. The more, the better I do like the idea of full-service property management. I don’t want it to be piecemealed with a bunch of outsiders, third party outsourced functions. Another question is how many rentals do you currently manage again, it’s kind of like the first question, you know, are you managing like five properties or do you have 50, a hundred, 200, 500 under management that will just tell you the depth of their business? And that leads to the breadth of experience that they will have some buddy or a company that’s managing 20 units have a different experience and be a little different operationally than a company that’s managing 200 units.
It doesn’t necessarily mean you have to have the biggest company. It’s not so much about the size as it is about the depth of experience that they have and the number of units they have under management plays into that. So you don’t want a company that’s stretched too thin or a company that’s so thin and lean that they really don’t have the experience that you’re looking for. So you can ask them what areas do they actually service if especially if it’s in a very big market in a metropolitan area, making sure that they cover the areas that you are focused on. And that kind of leads to another question is if you’re looking at particular areas within a metropolitan area or neighborhoods specifically ask them, do you manage other properties in these areas or neighborhoods? So you want them to be familiar with the area for two reasons, one is they’ll have a better grasp of the rental rates that they can get.
So that way, you know, that you’re going to get the amount of rent for that property that you can because they are dialed into what is renting in that area and for how much, and also these property management companies do some of the marketing. They don’t always market the property specifically, although they do that, they’ll post it on websites like Zillow and whatnot, and that is property specific. But if they are doing more general or broad advertising, whether it be print or online, they might be targeting an area or a zipcode. And if you’re in that zip code, you’re going to benefit from the advertising and marketing that they are already doing. So that’s kind of a good question to ask, or just at least understand where they work and where they don’t work, that you don’t want them going into areas that they just simply don’t manage properties in.
And related to that is what types of properties do they manage. If you are a person that is solely focused on fourplexes, and you’re talking to a management company that only manages single-family homes, there’s not a lot of difference between those two. They can handle them just the same, but it’s just a little bit foreign for them if they don’t manage any fourplexes whatsoever, that I don’t think is a big problem by the way, but it never hurts to ask. Especially if you know, you’re focused on one product type, I guess, to give you an extreme example, don’t work with a management company that only manages apartment buildings. If you are investing in single-family homes, ask them about their rental rates, how do they price their services? Most of the time management companies will charge eight to 12% that have collected rents. And that’s kind of the going rate.
So you’ll often find that it floats around 10%, maybe averages 10%, but it’s not uncommon to find management companies that are at nine or 8%. Maybe not out of the gate. It’s certainly negotiable. It’s not set in stone, but if you have a larger portfolio with one company, let’s say you have three or five properties under management with them or more, they’re certainly going to be willing to negotiate down and give you a better rate or a break on that. I don’t believe that you should nickel and dime your property manager. I think it is money very well spent. It is a cost of doing business and an expense that is just part of the business of investment real estate. You have to remember, they’re managing your properties, they’re managing your assets and they’re managing the people that are in those properties. And so those monies are well spent.
It’s a good investment to have the right people managing your assets, because it’s all about those properties paying for themselves, providing cashflow appreciating over time, being well managed well-kept with the right people in place. So I’m not going to lose sleep. If I don’t save one or 2% on my monthly management fee, other questions you can ask is what they do for marketing or strategies to fill vacant units. This is not that big of a deal because most people who are going to be asking this question are not actually marketing experts. Odds are, you’re probably not the expert in terms of the marketing and tactics and strategies that go into it. But if you’re curious, you can ask the question again. You know, if you keep asking too many questions, it’s going to end up taking a long time to quote-unquote, interview your property manager.
Here’s a question I do like ask them if they have team members on their staff that specialize in different roles or departments, or are they all generalists? Everybody’s doing everything. So one of the management companies I work within Missouri, they have one or two people in each of different departments that specialize in specific things. So there are people who are there to handle maintenance and repairs. There are people there specifically to turn over the properties when tenants move in and out to make sure that things are cleaned, inspected, and properly turned over. They have leasing agents, people who are specifically there to market advertise and show the properties to prospective tenants. And they’re all very good at what they do. That’s because they specialize in those particular areas and that’s all they do each and every day that they work. So they’re not all over the place.
Everything is well organized and things are handed off from one department to another or one individual to another seamlessly. And everybody knows what their area of specialization is. So I think that actually lends well to a well-run management company. So that specialization is good. Ask them if they carry insurance. If so, what and how much as a general rule of thumb, you want them to have at least $1 million worth of general liability. And if they have errors and emissions, that would be good too. I don’t know if that’s really necessary. Maybe some States require that again, management fees, we’ve talked about that. Do you collect management fees? When the units are vacant, that would be a good question. Most management companies don’t do this. So this is rarely an issue, but you don’t want a management company that is collecting on vacant units. You want their interests to be aligned with yours.
So if you’re making money, they’re making money, you don’t want them to be a fee-based service. You want them to be a pay for performance service. So if you’re making money, they’re making money, ask them if you can cancel your contract without a penalty, this is pretty rare. But if for whatever reason, things go really wrong and you just want to change management companies just find out if there’s a penalty for canceling your contract with them. Also ask them about miscellaneous fees. Again, this doesn’t happen very often, but there are sometimes fees that well often there are fees that are outside of the monthly collection of rents collected. And that may be a fee for turning over the unit. What you will often find though, is there’s a fee for leasing up the unit. And that could be anywhere from a flat dollar fee to a half months rent to a full month’s rent.
So that first month with that new tenant being placed that first-month rent is really that placement fee. Again, not hard and fast rule here, you can negotiate these fees. I’m comfortable with a half months rent. I don’t think that is too common, but I do like that. There are management companies out there as well, that will have a flat rate, whether it’s 250 or $500 for that lease-up. And I think that’s fair to, you know, these other questions that I kind of jotted down for myself here, probably don’t need to be asked, but you can ask if they have procedures in place for qualifying tenants, they probably do. And it often involves doing background checks, employment checks, credit checks, a landlord reference checks. It’s basically the screening and qualifying process. Again, they’re the experts at this. You just want to make sure that they have a process and procedure and that they are covering their basis.
You can ask them about the process they have in handling service requests. So if a tenant has an issue or a question they call in, how was that processed? But the other part of this, the other end of it, if you will, is if there is a repair item that is legitimate and it’s over a certain dollar amount, be it $250, 300, 400, $500. At what point do they call you? Usually, this is in the management agreement it’s specified and you or they put the dollar amount. So if it’s below that amount, they go ahead and make the maintenance and repair request without consulting you. If it’s over that dollar amount, then they are required to contact you with authorization. Unless it’s an emergency. If it’s an emergency where you have like flooding because a water valve or pipe broke, or there’s a fire that, you know, a small fire, but a fire nonetheless, or something like that, then that is an emergency.
And they have to deal with it right away to protect the property and or the people. So they’re not going to contact you and wait to hear back from you. That is something that they just need to do and do now and optional question, but you can ask them, you know, do you or your staff invest in real estate? Are they investors themselves? That’s not critically important, but if they are, yeah, that’s a good sign. You know, it, they have that investor’s mindset and they understand you and the shoes that you feel as a property owner and landlord and business owner. So I think a lot of property managers or management companies have investors within because they just deal with it every day. They see it. And a lot of people actually start there and grow into, you know, being pretty large, successful real estate investors just because that is what they were doing as a career choice.
All right. Well, those are the questions I would ask. So, Henry, I hope that helps you out. And I appreciate the question.
So for everyone else, if you have a question about real estate investing or finance, shoot it over to me, go to AskMarco.com or just go to the website for our podcast, passiverealestateinvesting.com. If you haven’t subscribed, smash that subscribe button, that way you never missed a show, help us share it with other likeminded people. So leave us a rating and review. I greatly appreciate it. iTunes is my favorite place because it is the 900-pound gorilla out there as far as podcasting, but others are catching up
And that’s it for today. So thanks for listening. I will see you all on our next episode.
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