A Process for Selecting the Right Property Manager

The property manager is the critical member of any real estate investment team. The problem is finding a good one out of a hundred or more property managers likely to be available in any major metro area. This article outlines a process for selecting the property manager that will best match your investment needs.

What You Should NOT Expect From Any Property Manager

A good property manager can tell you the probable rent and time to rent (more details later) for a property but they cannot tell you the rate of return. Property managers do not think that way. A property manager may even recommend a property that rents well, but loses money. You, and no one else, has to determine whether you can make money. Do NOT look to the property manager for investment advice. That is not something that they know how to do.

What You Should Expect From a Good Property Manager

What should you expect from a good property manager? If you only expect the property manager to collect the rent, you have the wrong expectations. The property managers we've worked with provided value at all phases of the investment lifecycle including:

  • Market Research
  • Property Evaluation
  • Rehab Management
  • Property Management

Each of these phases will be described below.

Market Research

The knowledge you gain from seminars, books, podcasts and similar channels is by nature, general information. Little of this applies to any specific property. To select suitable properties you need detailed local information on a variety of topics. The best source of such investment information is a local property manager. We look to the property manager for specific information such as:

  • What property type rents well in a given area? Condo, high rise, single family, duplex, single story, two stories, etc.
  • What configuration rents best? Two bedrooms, three car garage, large lot, etc.
  • What locations are likely to do well today and into the foreseeable future.
  • What rent range best matches the pool of tenants most likely to be good, long-term tenants?
  • What are the legislative issues (including eviction cost and time) that are likely to impact profitability or management of properties?

Property Evaluation

How can you be confident that the property you are considering is a good investment? A good property manager will be able to provide the following information for any property:

  • General opinion about the property as a rental
  • Estimated rent
  • Estimated time-to-rent
  • Based on photos or video, the primary rehab items and a ball-park estimate of the cost. Note that the rehab items a property manager will note are primarily cosmetic (paint, carpet, etc.). Cosmetic items are what motivate tenants to come and see the property. Tenants just assume that the water heater, HVAC, etc. all work.

Rehab Management

The property manager should save you a great deal of time, money and risk by contributing to a successful and efficient rehab process. The goal of rehabbing a property is to make the property market ready in the least time at the lowest cost. The list below represents a few ways the property manager can contribute to the rehab process. 

  • Referrals to trusted handymen and other needed sources.
  • Tell you what to rehab and what to leave alone.
  • Review quotes, so you know you are not overpaying for items.
  • Before you make the final payment to the workers, the property manager will do a walkthrough of the property ensuring that all necessary work is complete.
  • Advise what colors, window treatments and such will appeal to the broadest range of potential renters.
  • Guide you in selecting optional rehab items that will either increase rent or reduce time-to-rent and avoid those that will not have any impact on rent or time-to-rent.

Property Management

When rehab is complete, it is time to get the property rented. The essential duties of the property manager in this phase include:

  • Generating appropriate marketing materials (photos, flyers, etc.) and getting them to the right locations so your tenant pool will see them.
  • Proper screening of prospective tenants is critical. 
  • Collecting all the rent on schedule and depositing it into your account in a timely and consistent manner.
  • Controlling costs, which includes doing only the work that is required in the most cost-effective manner. Periodic inspections and proactive maintenance will save you a lot of money in the long run.
  • If necessary, evicting the non-paying tenant as fast as the law allows.
  • Quickly preparing the property when a tenant vacates so it can be rented again as soon as possible. Turn time represents lost income.

The Process

This section covers the process we would follow to narrow the number of property managers to reasonably short list.

The First Step

If you don't know precisely what you are looking for, almost any property manager will do. So, the first step is to make a list of what is required and characteristics that are desirable. For example, suppose you are planning to purchase one or more single-family properties in the south-west and south-east side of the city. The properties will be residential, not commercial properties. Just knowing this much enables you to eliminate many property management companies. For example, there is no point in spending time evaluating a property management company that does not cover your geography or primarily handles commercial properties.

Search Engine

If you Google something like "Las Vegas Nevada property management companies" you will get a large number of hits. Too many to be practical. With Google or any other search engine ranking is more of a popularity/marketing contest as opposed to any measure of quality or service. In short, we 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, in a smaller city, a search engine might be a great starting point. All you can do is to try it and see.

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 target area. The property management companies you will hear of should be a reasonable starting point. You might also get recommendations from Realtors you meet. Important: just because someone tells you they have the most excellent property manager in the world does not mean they will be a good property manager for you.

Websites

Once you have candidates, check their websites. You may be able to eliminate many of them due to their service area, their focus on different types of properties, etc. Spend some time on a search engine and select the best 5 or 10 property managers for further consideration. Now it's time to make some phone calls.

Initial Phone Screen

The primary goal of the initial phone screen is to get a feel for the person you're speaking with; are you hearing the "ring of truth" and is this someone with whom you can work? The second goal is to understand the company and the investment market in general through their eyes. So, before you make the first call, you need to have your questions (no more than 10) written on a piece of paper, one sheet for each property manager. As you talk to each property manager, note down their response to each question. As you compare responses from the different property managers, you will be able to eliminate most of them. In many cases, you won't even need to go as far as a phone call. Each time I was looking for a property manager I left a message stating that I was a new investor, looking for a property manager to work with and would like to schedule a short phone meeting. Many never called back and were thus eliminated.

Below are the types of questions we suggest for 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 end up replacing the Realtor who works in the property manager's office, your relationship with the property manager is going to suffer. You don't need this sort of problem.

Some Key Characteristics

Below are a few of the characteristics we consider when screening a prospective property manager. Note that there is no perfect property manager. Your job is to select the one that best matches your needs.

  • Does not have an in-house maintenance department. An in-house repair staff is just another profit center for the property manager. This creates an inherent conflict of interest because to "make the numbers," the repair people will be pressured to make repairs, even if they are not needed.
  • Does not charge an annual "renewal" fee.
  • Does not include costs like utilities, sewer, etc. in the rent. These service fees should be separate line items, which are paid by the tenant. If they are all grouped, you are paying the management fee on top of the service fees. The other reason these should be separate is that such fees are tax deductible while rent is income.
  • Does not mark up repair costs. Many of the property managers I know add 10% to 20% on top of any repair charge as a "service fee." The only way you will know if the property manager is marking up invoices is if you receive the original invoice from the service provider. If the property manager has an in-house service department, you will never know what the actual cost was.
  • Does have the software systems and processes in place to enable efficient screening of prospective tenants. Note, you can only screen credit based tenants. Cash-based tenants are almost impossible to effectively screen. Cash-based tenants typically have no bank accounts, no credit cards, no credit of any kind, so evictions, skips and damage judgments have little or no effect on them. About all the screening you can do with cash based tenants is to check that they have two months rent and a heartbeat. I would be cautious buying any property that targets cash based tenants.
  • Reasonable startup and management fees.
  • A website, email or other traceable methods for tenants to turn in repair requests. One symptom of a poor property manager is a long time between a repair request and performing the request. I know of a tenant who did not renew their lease because "nothing gets fixed." The only way this can be investigated is if there is a paper trail you can see.
  • Has a 24 x 7 emergency response line which is answered by someone on the property manager's staff, not to a voice mail or answering service. For example, the water heater bursts Friday evening. Do you want the water flowing through your property until someone checks voicemails on Monday?
  • Has the processes in place to detect and manage tenants who call for unnecessary repairs.
  • Handles the entire eviction process including going to court (if necessary) for a reasonable fee. (In Las Vegas, the cost should be about $500 and take less than 30 days.)
  • A sufficient number of properties under management to have a few full-time staff members. One man, property management companies, are not what you need. However, I would avoid the large property management companies. In my experience, the big property managers are indifferent to all but their top 20 clients. You need personal attention that most large companies are unwilling to provide.

Interview Questions

There is no way you can ask all the questions listed below. The purpose of all these questions is to provide a starting point for developing the questions that are most important to you.

General Questions

  • How long have you been exclusively managing properties? (No part-timers)
  • Do you have a staff? Please tell me about them. How many are full time?
  • How many properties are you currently managing?
  • What is your mix of properties (single family, condos, commercial, etc.)?
  • What geographical area do you service?
  • Who are your typical tenants and where are they employed? (What industries?)
  • Do you handle payment of property taxes and utility fees?
  • Do you handle payment of HOA dues and HOA violation notices?
  • When the property is vacant, do you turn the utilities on in your name until the property is rented?
  • How do you handle security deposits? (First and last months rent is scary to me because there is no damage deposit.)
  • What is the average length of time your tenants stay in a property?
  • What is your typical time-to-rent?
  • How do you keep owners informed? (monthly statements, website, etc.)

Fees

  • What is your startup fee?
  • What percentage of collected rent do you charge?
  • Is there an annual fee?
  • Do you charge a lease renewal fee?
  • Are there other fees?
  • Do you expect any increase in your fees?

Maintenance

  • How do tenants contact you for maintenance issues?
  • Do you have a 24 x 7 emergency phone number? Does a member of your staff answer this line?
  • How do you handle tenants that request multiple frivolous repairs?
  • Do you have an in-house maintenance staff?
  • Do you markup repair costs?
  • Do I receive a copy of the actual bill from the contractor who performed the work?
  • Under what conditions do you contact me for prior approval before you make the repair?

Rehab

  • Will you manage the initial rehab?
  • Can you provide a list of trusted vendors?
  • Do I pay you or do I pay the vendors directly? (Beware of invoice markups.)
  • How long should I expect a typical rehab to take?
  • Typically, what is the cost to turn a property between tenants and how long does it take?
  • What is your policy on using a portion of the security deposit for damages above and beyond reasonable wear and tear?

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?
  • Are rents increasing, decreasing, or staying the same?
  • How do you collect the rent and on what day of the month? (Is 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 at the first of each month.)
  • How do you deliver the rent to me?
  • On what day of the month do you send out rent to owners?

Eviction

  • Tell me about the eviction process.
  • How long does the entire process take?
  • How much does an eviction cost?
  • Do you have to go to court often? Is there an additional charge if you have to go to court?
  • How many evictions have you had to initiate in the last 12 months? (A good property manager will proactively work with the tenant to get them to surrender the keys and avoid an eviction on the credit report. With cash based tenants this rarely works.)
  • How many went all the way to eviction?

How Do You Find Prospective Tenants?

  • Who takes the marketing photos?
  • Where/how do you market properties?
  • Do you pay agents who refer tenants a finder's fee?
  • DO you have an in-house leasing agent?

Tenant Screening

The most important duty of any property manager is to keep your property filled by a good tenant. I define a good tenant as someone who:

  • Pays all of the rent on schedule
  • Takes care of the property
  • Does not cause problems with neighbors
  • Does not engage in illegal activities while on the property
  • Stays for multiple years

In our experience, good tenants are the exception, not the average. And, good tenants are the result of effective screening by the property manager. (Note that this only applies to credit based tenants.) I would start this discussion by asking the property manager, "Tell me about your tenant screening process".

Below are some points that the property manager's answer should address.

  • Credit check - You are not looking for prospective tenants with 800 FICO scores. At best, such tenants are likely to stay one year and then buy a property and move out. You want long-term tenants, who are typically people who can not buy a property due to credit, income or other issues. So, if the property manager has a prospective tenant that looks good in all other aspects except for the bad credit, they must look into the reason for the bad credit. For example, a prospective tenant had a credit score in the mid 500's. However, all the negative items were due to medical collections. (They ran up a massive bill because they did not have insurance.) If you took away the medical collections, their credit would have been excellent. Such people can be great long term tenants.
  • Court orders - Does the prospective tenant have back child support or alimony? If so don't consider them. If it comes down to them paying the rent or complying with a court order, you lose.
  • Criminal record - The property manager must check whether the applicant has a criminal record at the federal, state, county and city levels. Also, check the sex offender database. Except under unusual circumstances, I would not consider renting to a person with a criminal history.
  • Prior and current landlord references. Even if the current landlord has excellent things to say about the applicant, they may be just trying to get rid of a bad tenant. The prior landlord is the one who will tell the truth, but the property manager must personally call them. What the property manager should be asking is, "Would you like them back?" If they would like them back, then you probably have a good candidate.

Physical Visit

The following only applies if you physically visit the property manager's office (which you should).

  • Is the office neat and orderly?
  • Is the staff busy or sitting around doing little?
  • Count the staff and match it to what the property manager told you on the phone.
  • Ask for a demo of the software they use to track maintenance requests, rent receipts and generate monthly statements.
  • Get copies of at least the following documents:

  • Property management agreement

  • Rental agreement
  • Sample monthly statement

Summary

Without a suitable property manager, the odds are low that your investment will be the success you intended.