How to Select the Right Property Manager

May 6

Photo by Tierra Mallorca on Unsplash

Many people believe the only value of a property manager is just collecting the rent. A good property manager provides far more value. Below are examples of what a good property manager provides.

Property Manager Contributions

Local knowledge - Real estate is local, not national. Databases and websites provide general information on a location but not the hyper-local knowledge you need to evaluate the location. The property manager is your one-stop source for the local information you need, such as:

Regulations including time and cost to evict
Tenant pool demographics and recommendations.
Best rental areas for a given tenant pool.
Major employers.
Rental trends.
Best tenant pools for reliable income. The right tenant pool is critical.
Upcoming events.
Referrals such as an investment Realtor, handyman, contractors, etc.

Property Selection and Evaluation - Once you find a potential property, you need to know things such as:

Property selection - The property manager should be part of the property selection team. WhThe property manager should be part of the property selection team. Unless the property manager approves each property, we drop it from further consideration. We do this for two reasons. A good property manager knows what will rent and what will not rent. The property manager we work with rejects about one out of ten properties, saving us from selecting bad properties. Also, when the property manager is part of the property selection team, they are committed to getting the predicted rent. Asking for a higher rent than the property manager predicted usually results in the property sitting on the market for a long time. When this occurs, people will think that there is something “wrong” with the property and reject it from consideration. To rent the property, you may need to drop the rent below market value to get prospective tenants to view the property. The takeaway is to listen to your property manager.
Rent - What is the after-renovation rent range for a given property? Your offer and initial return are dependent on getting this right. Property managers estimate the rent range based on competition, not just what was recently rented. And, the competition could be across town. No website or software can match the skills of a good property manager.
Time to rent - A property might generate an excellent rate of return, but what if it takes six months to rent the property and the average tenant stay is only two years? There is no database with this sort of tenant pool specific information.
Renovation items - Renovation is tenant pool specific. For example, bars on the first-floor windows might be important to one tenant pool, while granite kitchen counters might be important to another. There is no source other than the property manager for this knowledge. Without the right renovations, your property will take longer to rent, rent for less than full market value, or may not even target the right tenant pool.

Execution - This is another phase where the property manager provides value. Below are some examples:

Marketing - You cannot just post a listing on Craigs List and hope to find the right tenant. You must know where to post the property to reach the right tenant pool. In some places, it might be the MLS or maybe apartment.com. In another location, it could be a local military base newspaper. Only an experienced property manager will know the best channel(s).
Showing the property - Prospective tenants will want to see the property. The property manager is the person to meet this need. Also, the property manager evaluates the potential tenant as they show the property.
Tenant selection - Tenant selection is the most important skill the property manager provides. You only make money if the property is continuously occupied by someone that pays all the rent on schedule, takes care of the property, and stays for many years. Tenants that meet these requirements are the exception, not the norm. Only the right property with the right renovation and a skilled property manager will have such tenants. The right tenant is the difference between profit and loss. I’ve met over one hundred property managers in Las Vegas, and I only know one or two skilled at selecting good tenants.
Compliance - There are multiple federal, state, county, and city ordinances concerning rental properties. A violation of any of these regulations can result in fines and legal costs.
Lease agreement - The lease agreement is the number one tool for controlling tenant behavior, protecting the property, collecting the rent, and protecting you from litigation. Property managers use regulation-compliant lease agreements, not a generic form from a stationery store. They also know how and when to enforce the lease terms with the tenant.
Rent collection - Collecting all the rent on schedule is critical. And, if the tenant does not pay on schedule, the property manager knows the process for enforcing the lease agreement, up to and including eviction.
Control maintenance costs - A good property manager will control your maintenance costs. They know which vendors to use and sources to buy from. Also, they know how to control tenants who turn in excessive repair requests.

I could continue, but I trust you see the value that a good property manager provides is well beyond just collecting the rent. In the next section, I will describe the process for finding a good property manager. Before I continue, I want to discuss the value of Yelp (and similar) reviews.

What About Yelp Reviews?

To provide what Yelp considers honest reviews, Yelp filters out posts from people who it has decided have an interest in the business's success instead of the "patrons" of the business. This works well with restaurants and such, but not with property management. With property management, Yelp filters out reviews by the property owners and publishes tenant reviews. Tenants are not the property manager's clients; the property owners are the clients. Thus, Yelp reviews for property managers can be misleading if you do not keep the source in mind.

Below are some Yelp reviews that would make me very unhappy if I were the owner.

"The property manager agreed to replace all the faucets with better looking ones!" Faucets cost about $145/ea installed, so in my mind, the property manager took several hundred dollars from the owner.
"They let us stay an extra two weeks at no charge." If the property is rented for $1,200/Mo., the property manager took ($1200/2) $600 from the owner.
"They gave us back our entire security deposit despite our dog's damage to the carpet." This is another example where the property manager took money from the owner. If the tenant damaged the rug, the tenant should pay for the repairs.

All the above said, you can learn much about a property manager from their Yelp reviews, but you need to view them through the owner's eyes, not the tenant. Below is considered a bad review (if you are a tenant.) This is a great review if you are the owner.

"I lost my job, and I asked the property manager for a couple of free months to find another job. They said no! XXX is a terrible property management company."

Refusing to give away free months was the right decision. This is a business. Either the tenant pays all the rent on schedule or they need to be replaced with a performing tenant.

In summary, do not blindly trust Yelp-type reviews.

Selecting a Good Property Manager

Below are the steps I follow when I am evaluating potential property managers.

Make a List of What You Need

The first step is to list what characteristics the property manager must have. For example, suppose you plan to purchase one or more single-family properties on the southwest and southeast side of the city. Knowing this much enables you to eliminate property management companies with few properties in this area. Also, most property managers focus on certain types of properties. A property manager with many B and A Class properties under management may not know how to manage C Class properties. For example, most B and A Class tenants have bank accounts and pay the rent electronically. Many C Class tenants have no bank account and pay the rent in cash through 7-11 stores.

Searching for Prospective Property Managers

There are many potential sources, and each has pros and cons. Below are a few.

Search Engines

If you Google something like "Las Vegas Nevada property management," you will get many hits. Too many to be practical. With Google or any other search engine, ranking is more of a popularity/marketing contest than any measure of quality or service. In short, I do not believe a search engine will enable you to narrow the number of property managers to a reasonable level in larger metro areas. However, a search engine might be a great starting point in a smaller city. All you can do is try it.

Contacts

Read message boards on sites like BiggerPockets or other real estate investment sites and connect with people who already have properties under management in your area. The recommendation you receive should be a reasonable starting point. Important: just because someone tells you that XXX is a great management company does not mean they will be a great management company for you.

Property Manager Websites

Once you have property manager candidates, check their website. You may be able to eliminate many due to their service area, their focus on different types of properties, etc. Select the best 5 or 10 property managers for further evaluation. Next, it's time to make some phone calls.

Initial Phone Screen and Questions

The primary goal of the initial phone screen is to get a feel for the property manager and their company. Before you make the first call, have your questions (no more than 10) ready. As you talk to each property manager, note down their response to each question. As you compare responses from different property managers, you will better understand the market and general property management practices. As you talk to different property managers, you will also discover questions you want to ask the next property manager.

In many cases, you won't even need to go as far as a phone call. When I am looking for a property manager, I leave a message stating, "I am a new investor looking for a property manager to work with and would like to schedule a short phone meeting."

Even though I am an experienced investor, I still leave this message. If they are unwilling to call back a new investor, they're probably not people I want to deal with. This is because many of my clients are new investors, and I need someone willing to work with them.

Below are the types of questions I would ask during the initial phone screen:

How long have you been exclusively managing properties?
How many properties are you currently managing?
What is your mix of properties (single-family, condos, commercial, etc.)?
What geographical area do you service?
Do you have a staff? Please tell me about them. How many are full-time?
What advice would you give a new investor buying their first property?
If you were buying your first property, what type would you buy? How much should I expect to pay? Where should I look for these properties?

Note: The property manager will likely recommend a Realtor friend or one associated with their office. There is an inherent conflict of interest due to such relationships. As you build your investment team, you want the best people you can find. And, if any team member is not performing, you must replace them. If you replace the Realtor who works in the property manager's office, your relationship with the property manager will suffer. You don't need this sort of problem.

Second Interview Questions

Once you narrow your list to 2-3 choices, make a list of questions that will enable you to determine if there is a good match between your needs and their services and skills. Below are some example questions grouped by topic. Contact me if you'd like a complete list of property manager interview questions we've built up over the years.

General Questions

“How long have you been managing properties full time?” (No part-timers)
“How many properties are you currently managing?” “What is your mix of properties?” You want a property manager who primarily manages the same type of properties you are buying.
“Who are your typical tenants, and where are they employed?” You want to know which industries to determine how stable their jobs are and their market segment. For example, the primary occupants of C and -B Class properties in Las Vegas are low-skilled, low-paid workers. They are the first to be laid off in times of economic turbulence and the last to be rehired. If you buy C and -B Class properties, you may not have any rental income during turbulent times.
“What is the average length of time your tenants stay in a property?”
“What is your typical time-to-rent?”

Contracts

The contract is your protection and can help keep costs low. Get a copy and read the contracts.

Property management agreement
Rental agreement

Fees

“What is your startup fee?”
“What percentage of collected rent do you charge?”
“Do you charge a lease renewal fee?”
“Are there other fees?”

Maintenance

“How do tenants contact you for maintenance issues?” They should have a 24-hour answering service and a member of the property managers team on call. If there is a pipe burst on Friday night, you do not want it to wait until Monday morning. Normal repairs should be turned in via a web page, which ensures a record of all repair requests.
“How do you handle tenants that request multiple frivolous repairs?”
“Do you have an in-house maintenance staff?” If they answer yes, I would probably end the call. You can not afford an in-house maintenance staff. For most property managers, maintenance is where they make the most money, not collecting rent. I never want my maintenance expenses to be to their financial advantage. The property managers we’ve worked with all outsource repairs to independent companies. Some may charge a service fee per repair ($15 to $25 is common) but never a percentage of the repair cost. Drop them from your list of candidates if they charge a percentage of the repair cost (10% to 20% of the maintenance fee is common).
Ask, “Under what conditions do you contact me for prior approval before you make the repair?” Usually, this will be $200 to $300. Above this amount, I would become cautious.

Renovation

“Will you manage the initial renovation?” Very few will do this.
“Typically, what is the cost to turn a property between tenants, and how long does it take?”

Rent/Rentals

“How do you estimate the rental rate for properties?”
“How do you estimate time-to-rent?”
“If I am considering a property, will you provide estimated rent and time-to-rent based on the MLS data plus a video or photos?”
“How do you collect the rent, and on what day of the month?” (s the property manager set up to handle automatic payments, credit cards, and checks? With cash-based tenants, property managers frequently have to go collect the rent on the first of each month our they have an account for collecting the funds through 7-11 stores.

Eviction

“Tell me about the eviction process.”
“How long does it take if the tenant fights the eviction and how much does an eviction cost?”
“How many evictions have you had to initiate in the last 12 months?”

How Do You Market to Find Prospective Tenants?

“Where/how do you market properties?” Where they market your property depends on the tenant pool, the default tenant pool for each property. For example, if the property targets the military, the best place to market may be the base paper. If your property is C or -B Class, posters at mass transit stops near your property may be the best approach.

Tenant Screening

The most important duty of any property manager is to keep your property filled with good tenants. In my experience, good tenants are the exception, not the norm.

“What is your process for screening tenants?”
“Where can I find your leasing criteria?”
“What are the top 5 things you look for in an application?”
“What regulations govern tenant screening.”

Physical Visit

If you cannot visit the property manager's office in person, ask them to give you a video tour of their office.

Is the office neat and orderly?
Is the staff busy or sitting around doing little?
Ask for a demo of the software they use to track maintenance requests, and rent receipts and generate monthly statements.

In Conclusion

Most property managers I've met are mediocre rent collectors and service dispatchers. You must find the (very) few that can provide the services and skills essential to your success. These are not easy to find. Hopefully, the process I described in this article will help you find a good one.

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