Monday, 28 May 2012

Investing in Real Estate - Picking your Property Manager

This is the eleventh post in my Investing in Real Estate series and will deal with how to choose a property manager and how to negotiate the fees you pay them. 

In my last post I covered the decision to either use a property manager or to self manage a property.  I personally use a property manager so will be blogging about them.  I will not blog about self managing your investment property because I have no experience in it.

Choosing a good property manager is one of the most important things you can do.  Property managers will often either make or break your investment property (quite literally and also from a financial point of view).  If you decide to appoint them there is a level of trust that is involved because they will be looking after what will probably be your single largest investment.

When appointing a property manager word of mouth is the best way of finding a quality manager.  There are certain things you should and should not do when searching for a property manager:
  • Word of mouth is the best way of finding a quality property manager.  The best way to do this is to speak to other landlords and find out what they think of their property managers.  I love my property manager and would tell anyone that asked me that - a relative of mine told me how good they were so I felt more comfortable using them
  • If you can find tenants ask them what they think of their property manager.  You want to find someone that keeps on top of the issues.  A property manager who bends and does whatever the tenant wants however is probably not someone you want
  • Don't just use the agency that sold you the property  It may turn out that these are the best property managers as well but more often than not they aren't.  The fact is that they will try and pressure you into a property management agreement if you buy off them - resist this temptation and see several property managers before you appoint one.
  • This is not a 'set and forget' type of arrangement  You want the property manager to constantly be on top of the issues.  A couple of slip ups is normal (especially over the course of a few years) but if anything major happens do not be afraid to switch.
Negotiating a property management agreement
I was surprised at how much was up for negotiation in a property management agreement.  When I went in with the property manager that I liked and that had a good reputation I was given a standard form contract but I wanted a lot of it changed which they were more than happy to do.  Things you can and should negotiate include
  • The property management fee:  Find out what the standard fee is in your area and then ask for a discount.  I did this and now pay 5.5% of my gross rental (instead of the 6.5% they were asking for).  If you suggest that you may be a long term customer and will bring other property investments to them as well they will be more likely to drop this fee (not this costs you nothing)
  • Other ancillary fees:  Watch these fees!  There are often fees for things like sending out statements, advertising, renting the property for the first time, contract negotiations.  Most of them can be eliminated or brought down substantially.  For example the standard form I was given had both advertising fees for the property and an initial fee of 2 weeks rent when they got a tenant.  I reduced this to no advertising fees and 1 weeks rent when they got a tenant and they did this with no argument.
  • Exit conditions:  You want to be able to exit this contract at any time.  A lot of property management agreement have minimum notice periods of like 1 - 3 months.  You can (and should negotiate this down to nil).  If they are not performing you should be able to move unilaterally.
Setting initial expectations with your property manager
The initial expectations you set with your property manager are all important.  You need to come to an understanding about what you want them to do and what you expect to be informed of
  • Some landlords like to be very involved in their property and know every small thing that is happening
  • Other landlords (like myself) prefer only to be informed of the big things.  I let my property manger know that I did not want to be called in most situations and that I wanted them to deal with most of the minor issues that arise.
Also set parameters and expectations around things like repairs.  If you're a handy type of person and want to do any repairs yourself then make sure your property manager knows this.  As I am rather time poor I let my property manager know that if the repairs are going to cost less than $500, to just do it and send me the bill (I always check the bill to make sure I'm not getting ripped off).

These initial discussions about what you want and the level of communication you desire make a big difference in how effective your arrangement with your property manager will be.

Expect a few teething problems
For the first couple of weeks and months expect teething problems.  No one is perfect so if your funds don't hit your bank account the first time don't stress and look for another property manager.  Just contact your one and tell them you expect it to be sorted out. 

If these sort of 'administration problems' continue beyond two months then you need to sit down and make sure your initial expectations were understood.  If things then do not improve consider changing property managers.

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