Why is this important? Many managers simply charge the percentage of rents as their fee regardless of whether or not they have to secure new tenants during the term of their management agreement. Many other managers are willing to charge a lower percentage of collected rents but will add a leasing fee to their agreements. Leasing fees can add up to a substantial amount of money, effectively more than the difference between 8% with a leasing fee and 10% without a leasing fee, so it must be considered in any financially-based decision to hire a manager. Some leasing fees are charged with every new lease written while others are charged once in the same calendar year for the same property. Don’t assume you are getting a great deal because a property manager has agreed to manage your properties for a lower percentage than others you have spoken to. Ask about the leasing fee.
11. Do you require that I give you a deposit to hold for property repairs?
Why is this important? Some property managers require that you allow them to hold additional monies for “future” repairs as they may arise. This repair deposit is generally between $200 and $500 dollars (often more for a high-end property) and will be used by the manager to pay repair people who perform general wear and tear repairs on the property during the tenancy of the tenant. This provides some funds for the property manager to pay repair bills on your behalf if the collected rents will not cover them completely, or if there is a delay between when the rents are collected and repair invoices are due to be paid. If you have more than a single rental property, or if that single property has a high income rental rate, then it is generally unnecessary for you to provide a repair deposit to the property manager.
Remember, also that it is generally considered fair and reasonable to ask that a tenant pay a deposit that is equivalent to a month’s rent. Often a smaller additional deposit is required if the tenant has a pet, in the event that the pet causes additional damage to the property. Your property manager will generally hold these deposits in trust for you and will act according to local law and regulation to deduct repair and damage costs from it upon the tenant vacating the property. Carefully consider the reasons why a property manager says that a repair deposit from you is necessary because that will be income that will be unavailable to you for the duration of the property management contract.
12. Will you please send me a copy of your typical property management agreement?
Why is this important? Even my list of tips is not exhaustive. There may be clauses in the property management agreement that you don’t like. Never hire a manager without first looking at the type of agreement you will be required to sign. Also, and people forget this constantly, if the property manager (or the property manager’s legal advisor) wrote the agreement, it is definitely going to be written in a way that fully protects the property manager, not you. You can ask that clauses be added to protect your interests as well. So secure a copy of the contract and get some legal input on where your risks are and how to guard against them by adding additional language to the contract. Getting a copy of the property management agreement in the interview stage allows you to compare the contracts of the managers on your short list and can help you make your decision.
Why landlords should consider hiring property managers.
By: Eveline H. Brownstein (c)
In a previous article I wrote about how to decide what rental homes to buy, I said:
Don’t be afraid to buy in affordable areas outside of the state you live in. Conventional wisdom has always been that if you are going to buy property for rental income, you should live nearby. This does not take into account the fact that the best places to buy may not be in your neighborhood, or even in your county. They may indeed be in another state. Of course it is unrealistic to expect you to manage a property from a distance, but that’s where really good property managers can be your best tool for getting the most out of your rental.
Despite the sound advice in this writing, problems can arise when those who buy rental income real estate elect to follow the first piece of this advice and dismiss the second. It is important that anyone who follows the advice to look for lucrative rental income opportunities outside of the area in which they live, also follows my advice to hire a local property manager to manage the property.
The first critical part is, that if you are considering an out-of-area rental income property and after running the numbers you realize that you will not have sufficient income from it to hire a property manager, then I believe it is unwise to purchase the property. Property managers typically charge around 10% of the rental income as a management fee, though there are areas of the country where a flat fee is charged after a certain maximum rental is reached, and others where managers will work with you to give you a “bulk break” if you have more than one property. In a prior writing I emphasized the need to carefully calculate what your costs will be. Factoring in the cost of property management for a property when it is unwise for you to manage it yourself, such as in the case of an out of area property, is an essential part of those calculations.
There are significant risks to a property owner if that property is not carefully managed and the greatest is with those properties where the landlord is absent. Here are some of the more common risks:
Never meeting the prospective tenant. Despite all of the best background checks that might be done, there are risks when a landlord is unable to meet a prospective tenant face-to-face. Many people can look great on paper, but how do you know for certain that the paperwork they give you indeed belongs to them? Being able to check some things in person, like drivers’ licenses or other identity documents, is a more reliable way to know that the person who is renting your property is who they say they are. Landlords who manage from a distance risk not knowing the veracity of the person who has applied for tenancy and is more limited in their ability to verify the information presented. Additionally, it is more difficult for landlords who are absent from the area to conduct in-person tours of the property, or do a move-in checklist of the property’s condition, so that damages to which the security deposit can be applied are noted. A landlord will not know that damages were done by a tenant, if the landlord is not certain of the condition of the property when the tenant moved in.
Lawsuits. A poorly managed property that does not meet the legal standards of being fit for tenancy, or one that is managed without careful regard for the legal rights of the tenant, can cause the property owner to be sued. A lawsuit such as the one filed by Montrose, Texas tenant, Mark Kaufman against Harvey Horowitz of California can have devastating financial consequences for a property owner and could easily equal more than the sum total of any property management fees that the landlord would have had to pay to have the property managed by a local, competent management company.
Destruction of property. Some comfort resides in tenants who know an owner is not going to just drive by and check on their property. In one case in Asia, the “trusted” tenants removed the entire house, brick-by-brick and the landlord was left with nothing but an empty lot. The neighbors were apparently not concerned, figuring that the tenant had the landlord’s permission to remove the house. This is clearly an extreme case of property destruction, but nevertheless, a landlord cannot rely on the vigilance of neighbors to ensure that a property is being properly cared for by a tenant.
Failure to maintain the home. Those areas of the home that are the tenants’ responsibility to maintain could be neglected if a landlord is not present to ensure that they are undertaken responsibly. Simple matters like mowing the lawn or removing snow, which are designated in the lease as responsibilities of the tenant, may be neglected or not undertaken properly. An absentee landlord will not know that these issues are not being taken care of, if the landlord is unaware of them because the landlord is not able to inspect the property.
Failure to hire competent repair professionals. Absentee landlords are less likely to know who might be the best local professionals to handle repairs and maintenance on their properties. Local managers, who are diligent about how they conduct their business on your behalf, make it their business to know who to hire for repairs and who can be trusted to make proper and guaranteed repairs to your rental home, so that your investment in it is secure.
Delays in making repairs or taking care of maintenance. Landlords who are not nearby the property they own may necessarily delay needed repairs or maintenance as they investigate who they might hire, get referrals and quotes, and make arrangements for the repair person to meet the tenant at the property. Successful property management companies make sure they keep copies of the keys to the property and make legal arrangements to enter it so that the repairs can be made, even if the tenant is not available to facilitate access to the property.
Lease Violations. Landlords who are not able to regularly inspect or drive by the properties that they own will likely not become aware of some rather serious lease violations, for example: if the tenant acquires a pet that is not permitted in the terms of the lease; if the tenant moves additional people into the home or sublets it without permission; or, if the tenant engages in a business out of the premises which is not permitted under the terms of the lease.
Delayed necessary evictions. A landlord who manages from a distance will find it difficult, if not impossible, to evict a tenant who is not in legal compliance with the lease. Finding a local attorney to take care of the situation will likely cost more than if a local manager handled the process, because the attorney will be required to hire people to undertake the more simple tasks, like serving the paperwork and monitoring the eviction. While an attorney is generally necessary for the filing of the paperwork and for making sure that all aspects of the eviction are in compliance with applicable law, there are, nevertheless, certain aspects of the eviction process that a manager can handle. These aspects vary from state-to-state, but may include: serving the initial paperwork to let the tenant know that the tenant is not in compliance with the lease; ensuring that all deadlines for compliance are met, and in some cases even taking care of removing an evicted tenants belongings from the property timely, so that it can be rented out promptly. It is usually financially impractical for an absentee landlord to make the many trips that may be required to complete the eviction process timely and with minimal delay. Delayed necessary evictions not only cost money as a result of the process involved, but generally also come with a loss of rents that could have been minimized had they been carried out timely.
These represent just a few of the risks that landlords who choose to manage properties from a distance may be confronted with, and why it makes sense for any out-of-area landlord to rather spend the time more wisely, that is: in pursuit of a competent property manager who is properly qualified to manage residential properties, and who diligently monitors the actions of any tenants who are permitted to rent the property.