Choosing a Propety Manager by the Utah Apartment Association

Utah Apartment Association Journal: Volume 76, No. 3 (July-August 2008)

Choosing a Property Management Company

(pages 12-13)

There are a certain percentage of people every year who find that their schedule or their

life is too hectic to continue managing rental property. If they don't want to get rid of

their investments by selling, a property management company can be a good option. It

can also be a good option that can allow you to own more real estate than you could find

time to manage yourself, and still experience the wealth-building power of real estate.

Jeremy Higginson, a real estate agent, mortgage broker and investor, says he is too busy

to manage his own property and it isn't really his niche, so he always hires a property

manager. "I find a good manager makes me more money in two ways," he says, "First,

since I don't spend time dealing with the tenants or the maintenance I can devote more

time to my primary businesses and make more money there. Second, I invest in property

for the long term. A good manager knows how to maintain that property and offset my

holding costs on that property so in five or ten years when I go to sell it, it will be worth a

whole lot more than it is today."

"My philosophy is set it and forget it," adds Higginson (about rental property).

Preparing to Hire a Manager

If you are a hands-on person who has managed your property for years, or if you tend to

micromanage, property management may not be for you. Owners who want to be

involved in every detail should probably not be using a property manager. There are great

companies out there, but the truth is you will probably not find anyone who would

manage your property exactly the way you would. Instead, you can find management

companies with good systems in place to manage and maintain your properties for the

long run.

Many conflicts between owners and managers arise over unrealistic expectations or

inability to let go and let someone manage. Before you pick a company, make sure you

are the kind of person who would not nag or interfere with your manager, and make sure

you give your manager enough authority and flexibility to be successful.

Be Realistic About Cash Flow

If the very most important component for you of owning property is cash flow, a property

manager may not be a good idea. Typically they will take a percentage of rent, and will

wish to spend a reasonable amount of money on proper maintenance and resident

retention. If you are so tight that you would stress about sitting empty for a month or two,

or that you would balk at making an appropriate repair, you may wish to reconsider.

Selecting a Company

When you begin to look for a company, remember to look first at companies that give

back to your industry by supporting your local apartment association and its government

affairs efforts. Next, you will want to look for someone who has a good track record and

can provide you with references of other owners they have worked with. Third, you will

want to find out their system for maintaining your property and retaining tenants. Lastly,

you will want to have a comprehensive understanding of how they make money, and

what charges you will pay for their services.

Systems and Service

Some owners make the mistake of thinking the most important service property managers

provide is to the owners themselves. While that is important, taking owners golfing or

providing amazing reports and updates means very little if the property itself is not being

well taken care of, or/and if there aren't good tenants receiving excellent service. So

while it would be nice to find someone who gives you good service, it is better that they

first provide good service to the property and the tenants.

Fees and Charges

To really understand how property management companies make you money, you need

to review how you make money off rentals. A very small portion of your return is your

cash flow. Other portions are your principle reduction and your tax savings. Probably the

biggest portion of your return comes in appreciation and your overall gain from owning

the property.

It has been said that good managers don't cost money, they make you money - and it

would be best to take this perspective when looking at a company's fees. Don't focus on

what they cost; focus on what value they provide. A low cost company that puts in

destructive tenants who beat up the property and lower its overall value actually costs you

more than a high cost company that puts in good tenants, properly maintains your

property so it appreciates ahead of market conditions, and keeps your tenants longer (so

you have less cost and down time).

Types of Charges:

 Setup fees - These are fees to set you up as a client.

 Management fee - This is usually a percentage of total revenue a management

company will take right off the top.

 Maintenance surcharges - A percentage of any bills paid or for handling

maintenance.

 Maintenance fees - Some companies have in-house maintenance, landscapers,

etc. which you are required to use that they may or may not have ownership

interest in.

 Leasing, marketing and advertizing fee - Many companies charge you a fee to

show or lease apartments.

 Service of notice/eviction fees - Some companies will charge you for serving

eviction notices.

 Tenant retention fees - These are incentives to a company to keep tenants longer

and therefore reduce your overall costs.

In addition to fees, management companies have other revenue sources - from tenants.

Many keep a portion of deposits renters pay, application fees, and service of notice fees.

Make sure you are clear on who gets what.

Avoiding Conflict

There are three things you can do to reduce the likelihood of conflict:

1. Make sure the company you use has a good management contract thatMost companies will want a specified initial term,

specifies charges and duties.

like a year, since they spend time and energy setting up and getting to know your

property. Many conflicts are created because there is not a good management

agreement up front.

2. Let the manager manage. Many owners think they know more than the manager

and insist on setting the rent and monitoring the tenants. A good manager is closer

to the front line and will have a better feel for rents. It is not uncommon for an

owner to insist upon a certain rent that is unrealistic, and then get mad at the

manager that the unit sat empty. Giving a manager the leeway to set rents at the

market rate and get good tenants is essential to success. Also, many owners refuse

to allow managers to spend the money necessary to keep and attract good tenants

by properly maintaining and improving the property. Make sure you allow the

manager enough money to make basic repairs, like fixing a furnace or A/C or

doing plumbing work, without having to get your authorization first. There have

been major problems when a manager can't get a hold of an owner and, say, a

furnace is out, something that can become a violation of Utah law. Don't allow

tenants to call you first. Require that they deal with the manager to resolve their

issues first.

3. Look to the long term. Don't panic if a manager can't rent a place immediately.

Sometimes it takes time to find the right tenant. Don't panic if a manager doesn't

pick perfect renters all the time. Sometimes even the best landlords get fooled and

have to evict. Make sure your manager is inspecting on a regular basis, and try to

attend one of those inspections at least once a year.

Picking a good manager may take time - time to conduct a thorough review of their

systems and management agreement, and check references. Allowing them the authority

and flexibility to effectively do the job is essential. Finally, having reasonable

expectations and recognizing that properties aren't always full, expenses happen, and not

all tenants are perfect will help you "set them and forget them," and ultimately be

successful in owning rental property.