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For Those That Invest in Real Estate: Do You Use a Property Manager?


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For Those That Invest in Real Estate: Do You Use a Property Manager?  

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  1. 1. For Those That Invest in Real Estate: Do You Use a Property Manager?

    • Yes, I use a property manager.
      6
    • No, I look after my properties myself.
      14
    • Other
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14 hours ago, Morgan said:

 

My goal was to grow at least 50% a year so that helped narrow down what I would be willing to buy. It takes a bit of time to do a deal, so each deal needed to be worth my time and also have the correct financing set up and rent potential. I looked at hundred of properties and only did ~10 deals. The last deal was in 2019 for 88 units. That helped growth. 

It was from cash flow, appreciation, but most importantly seller financing. Basically I would convince the seller of the property to lend me the money for the 20% down payment. For example, we bought property for 245k. We got a bank loan for the 80% and are paying the seller the last 20% over ten years. I think our total cost at closing was like 3-4k. This left us cash to renovate so we could raise the rents and get better tenants. This building has more than doubled in value since our purchase. With 100% leverage, the mortgage payments are 25-35% of the rents. Rinse and repeat. 

 

Could you tell me some more details about this 245k property? For example, how many units are there and what the total sqft is? I am surprised how different prices are in various locations. In the Seattle area, I can't even get a 400 sqft condo with 245k. 

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6 hours ago, muscleman said:

 

Could you tell me some more details about this 245k property? For example, how many units are there and what the total sqft is? I am surprised how different prices are in various locations. In the Seattle area, I can't even get a 400 sqft condo with 245k. 

 

It's 11 units with space to add two more in the basement. The building is built on a hill so the basement apartments have windows. ~8400 sqft total. Studios are ~600sqft and the one bedrooms are ~700 sqft. $545 and $595 respectively. Tenants pay electric. I pay gas (including heat), water, sewage and trash. 

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38 minutes ago, Morgan said:

 

It's 11 units with space to add two more in the basement. The building is built on a hill so the basement apartments have windows. ~8400 sqft total. Studios are ~600sqft and the one bedrooms are ~700 sqft. $545 and $595 respectively. Tenants pay electric. I pay gas (including heat), water, sewage and trash. 

 

Wow! 245k for 8400 sqft? That's incredible. 

Not sure if it is ok to ask which market it is.. Can I ask which state it is in?

That seems like an incredible deal anywhere in the US. In today's market, no one can build houses for this price......

Since you for the gas, water and trash, do you have any clauses to make sure your tenants use a reasonable amount instead of intentionally turning on all faucets all day just to get you a crazy high bill in the end of the month?

Edited by muscleman
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Yea Im guessing you are on a meter(not well) and cant break out individual usage for the water. Sucks. Ive had tenant readings range from $200-$600 per quarter for water. Quite the variance. Would not be fun getting stuck with that. 

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4 hours ago, muscleman said:

 

Wow! 245k for 8400 sqft? That's incredible. 

Not sure if it is ok to ask which market it is.. Can I ask which state it is in?

That seems like an incredible deal anywhere in the US. In today's market, no one can build houses for this price......

Since you for the gas, water and trash, do you have any clauses to make sure your tenants use a reasonable amount instead of intentionally turning on all faucets all day just to get you a crazy high bill in the end of the month?

 

Both towns are in WV about an hour south/south west of Pittsburgh. There are lots and lots of small towns everywhere around here. (But do you really want to live in these regions? Far away from any good Indian restaurants and good big city activities??)

 

I purchased the building in 2014. It's worth 500-600k now. Still cheap relative to most of the US. Many of the small towns in appalachia have unbelievably well built historic buildings at insanely cheap prices. Way, way, way below below replacement cost. Most other towns have similar buildings, but not at these prices and quantity per capita. 

 

We have been separating the utilities in the buildings, but those are fairly sizable projects. It creates a ton of value though. Many of the utilities have already been separated. 

 

@Gregmal we have installed low-flow faucets, toilets, etc over the years so that helps. It's almost never someone being malicious, but a toilet runs constantly and the tenant doesn't say anything or understand what's happening. We keep an eye out within reason though. Usually it's not a huge problem. 

 

Edited by Morgan
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My experience with managers(Ive never had one personally but hired a few for HOAs) is since they dont really do anything high level or capital intensive their rates are always negotiable. Best rate Ive seen if you have scale(IE 50-100+ units) is about $26 a unit per month. 

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43 minutes ago, fareastwarriors said:

 

@musclemanWhat do you pay out in WA state? What are the terms?

 

I have two property managers for two different areas. One charges 50% of first month rent as placement fee plus 8% of each month after. The other charges 10% each month plus $350 a year but no placement fee.

 

I bet the management fees will be much lower per unit for multifamily houses.

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3 hours ago, muscleman said:

@Morgan Sorry I forgot to ask you the question that's most relevant to this thread. How much do you pay for a property manager? Are they on site?


We don’t have an outside hired property manager. 

 

I’ve been the property manager for all the properties since I graduated college. I spent a number of years doing all the maintenance and renovations myself until we reached about 50 units and could afford to hire someone to help me (I needed the help as well.) 

 

The property management companies around here charge 10% of the rent. So if the rent is $500/mo, they would get $50/mo. They coordinate repairs and bill you for them. They do evictions and showings etc, but that is the easy part in my opinion. The hard part, at least in my experience, is having a high quality and responsible crew that gets stuff done effectively the first time. I don’t think repair guys hired by a third party management company really care about the quality of work. Not to mention they’re probably 2-3x more expensive. At least if I’m out with my own crew I can make sure things are done to my standard. I want to spend extra money on higher quality parts now, install them correctly, and not touch it again for at least 20 years. Many people want to do bandaid repairs and that kills your buildings over time. 

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9 minutes ago, Morgan said:


We don’t have an outside hired property manager. 

 

I’ve been the property manager for all the properties since I graduated college. I spent a number of years doing all the maintenance and renovations myself until we reached about 50 units and could afford to hire someone to help me (I needed the help as well.) 

 

The property management companies around here charge 10% of the rent. So if the rent is $500/mo, they would get $50/mo. They coordinate repairs and bill you for them. They do evictions and showings etc, but that is the easy part in my opinion. The hard part, at least in my experience, is having a high quality and responsible crew that gets stuff done effectively the first time. I don’t think repair guys hired by a third party management company really care about the quality of work. Not to mention they’re probably 2-3x more expensive. At least if I’m out with my own crew I can make sure things are done to my standard. I want to spend extra money on higher quality parts now, install them correctly, and not touch it again for at least 20 years. Many people want to do bandaid repairs and that kills your buildings over time. 

Not that you need advice, but a good alternative may be searching for an HOA focused property manager. At least where I am, most have in house handymen and the rates are typically known ahead of time...IE $30-50 an hour labor plus cost. I have a contractor friend who Ive known since middle school. Total life saver. 

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9 hours ago, muscleman said:

 

I have two property managers for two different areas. One charges 50% of first month rent as placement fee plus 8% of each month after. The other charges 10% each month plus $350 a year but no placement fee.

 

I bet the management fees will be much lower per unit for multifamily houses.

 

One issue I have with property managers is the incentive structure. I think charging an up front cost incentivises tenant churn. It doesn't cost the outside property manager very much money if a tenant moves out, but now they have an opportunity to make 50% of the first months rent from the new tenant. I think that is destructive. It does incentivise filling units quickly, but could encourage choosing low quality tenants just to get paid. 

 

I think setting up a good incentive system for this is hard. Managers need to be incentivised to keep good tenants for the long term. Maybe some kind of sliding scale. The longer a tenant stays, the more the PM gets paid up to a certain point, but so that it's not too expensive for the owner and still incentivises getting units filled quickly with good tenants. Another issue is keeping a quality manager employed for a long time. If you need to hire a new property manager every 12 months, the long term incentives don't work. 

 

Another option, or incentive to combine with the above, could be to incentivise hitting specific dollar amounts for the rent roll. That way it encourages renting out the units to good people at market rates.

 

Another important issue is timely and polite service for the tenants. It would need to be tracked to be able to incentivise high quality service. Making sure repairs are made in a timely manner and properly is important. 

 

Anyways, I'm just spitballing, but I think it's a problem that needs a better solution than the current status quo. 

 

 

10 hours ago, Gregmal said:

My experience with managers(Ive never had one personally but hired a few for HOAs) is since they dont really do anything high level or capital intensive their rates are always negotiable. Best rate Ive seen if you have scale(IE 50-100+ units) is about $26 a unit per month. 

 

Damn that seems like a pretty good deal. If I was pretty sure they were competent for $26/mo/unit, I'd consider signing up. I think you'd still need a very well trusted person there to confirm repairs are done properly. 
 

 

PS - @Gregmal I could always use advice and another opinion. Still lots of stuff to learn! : )

Edited by Morgan
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On 8/31/2021 at 12:09 PM, BG2008 said:

 

I love hustle stories like this.  Someone out there is using elbow grease to get wealthy.  Too bad that in my neck of the woods, $245k gets you about 400 sqft and the HOA fee is $500/month.  

 

The Side Hustle Show just had an episode (460) about buying a business vs investing in RE, I thought it was quite interesting. They go over some actionable ideas for financing RE, or how to invest in businesses starting with 25k to 100k.

 

Here, wife coordinates everything because that's her thing.

 

 

Edited by meiroy
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21 hours ago, Morgan said:

I think setting up a good incentive system for this is hard. Managers need to be incentivised to keep good tenants for the long term. Maybe some kind of sliding scale. The longer a tenant stays, the more the PM gets paid up to a certain point, but so that it's not too expensive for the owner and still incentivises getting units filled quickly with good tenants. Another issue is keeping a quality manager employed for a long time. If you need to hire a new property manager every 12 months, the long term incentives don't work. 

 

I've thought about using sliding scale. Instead of flat rate, the % would increase as the tenancy increase. 

 

Something like this:

1st year - 6%, 2nd year, 7%, 3rd year, 8%, 4th - 9%, and 5 years and beyond 10% (cap)

AND Rent has be X% of a Benchmark/rent index.

 

If a 1b/1b place rents for $1,000 in a rent index for that area, the PM has to be within 10% of that or whatever %. 

 

This way the PM would be incentivized to hold on to long term tenants but continue to raise rent as well. 

 

Might be too complicated to hire someone for this but it's a rough idea

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5 hours ago, fareastwarriors said:

 

I've thought about using sliding scale. Instead of flat rate, the % would increase as the tenancy increase. 

 

Something like this:

1st year - 6%, 2nd year, 7%, 3rd year, 8%, 4th - 9%, and 5 years and beyond 10% (cap)

AND Rent has be X% of a Benchmark/rent index.

 

If a 1b/1b place rents for $1,000 in a rent index for that area, the PM has to be within 10% of that or whatever %. 

 

This way the PM would be incentivized to hold on to long term tenants but continue to raise rent as well. 

 

Might be too complicated to hire someone for this but it's a rough idea

 

Hmm. That's not a bad idea. I'd need to come up with a way calculate the pay easily for each PM each pay period. I suppose excel would be able to do it, but a complete software specifically for this would be easier. It's a manageable task though. 

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On 9/2/2021 at 7:28 PM, Morgan said:

 

Hmm. That's not a bad idea. I'd need to come up with a way calculate the pay easily for each PM each pay period. I suppose excel would be able to do it, but a complete software specifically for this would be easier. It's a manageable task though. 

A compensation like this would encourage property managers to keep the rent below market. Nothing keeps the tenants longer than offering them below market rents.

Do you pay a placement fee? I think that sucks because that encourages turnover.

One of the two property managers I use has the compensation scheme of $350 a year plus 10% rent a month. No placement fee. I think this is a great plan because it will not encourage them to turnover the tenants to get the juicy placement fee. It will also encourage them to keep the rent at market rate so they can get the max out of that 10%.

 

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I think a placement fee is reasonable because the amount of work required to get a new tenant is typically much more than would be required in a given month. It obviously depends how strong the market is, but I've spent 20 hours filling a place before in a bad market.

 

I've done property management before for others (not at scale, more of a "friends and family" who needed someone type deal) and charged 10% of gross rents.

 

I quit, because it was a pain in the ass not being able to just do what I wanted. With my properties I make a decision, get the work done (or often do it myself) and its done.

 

For the managed properties it was always get 3 quotes, supervise people,  etc. It was way less efficient than managing my own places and I didn't enjoy it (and it wasn't nearly lucrative enough to make me put up with something I didn't enjoy)

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11 hours ago, muscleman said:

A compensation like this would encourage property managers to keep the rent below market. Nothing keeps the tenants longer than offering them below market rents.

 

Right, that's why I included:

1st year - 6%, 2nd year, 7%, 3rd year, 8%, 4th - 9%, and 5 years and beyond 10% (cap)

AND Rent has be X% of a Benchmark/rent index.

 

For the placement fee, you structure it to have it vest over a certain period or paid on the back end.

 

I'm just throwing ideas and trying to force the incentives to be aligned with the long term rather than yearly turnover. 

 

But of course the tough part is finding  a good PM to work like that.  

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1 hour ago, bizaro86 said:

 

 

I've done property management before for others (not at scale, more of a "friends and family" who needed someone type deal) and charged 10% of gross rents.

 

 

 

You charged your friends and family a full price of 10%. Wow, good for you.

 

I help manage a 4-unit place for family for $500 a year. Now that's a family deal... f me. 

She did loan me money so I don't mind working for peanuts and do so with a smile. 

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2 minutes ago, fareastwarriors said:

 

You charged your friends and family a full price of 10%. Wow, good for you.

 

I help manage a 4-unit place for family for $500 a year. Now that's a family deal... f me. 

She did loan me money so I don't mind working for peanuts and do so with a smile. 

 

Shrug. It isn't the business I'm in, and the market here at the time was such that they literally couldn't find anyone willing to do it. I didn't really want to do it and probably shouldn't have in retrospect. 

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Just now, bizaro86 said:

 

Shrug. It isn't the business I'm in, and the market here at the time was such that they literally couldn't find anyone willing to do it. I didn't really want to do it and probably shouldn't have in retrospect. 

 

I hear you. PMing for others is no fun and really not that lucrative. 

But live and learn right!

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Really awesome success story there Morgan! I did a similar set up on a much smaller scale. I purchased my primary residence in late 2008 and it had a granny unit, after I moved in and found out renting it to a friend at not even top of the market pricing it paid over half the mortgage. I realized I should rinse and repeat this pattern and purchased a few more in my area of Northern CA from 2009-2014. I self-manage these. In 2014 prices in the bay area had recovered to about 80-90 percent of 2009 levels and the debt cover ratio's weren't as attractive and started purchasing duplex's in Indianapolis from 2014-2019 until prices there got to rich for my blood. I found a really great property manager over there but he recently retired and now I'm dealing with the guy who bought his company and its a completely different experience.

 

Real estate getting less and less attractive from 2014 on is what drove me into looking at equities, and that has been a really fun journey! 

 

Side note - the granny unit at my house is rented by a buddy of mine and now covers 400 dollars MORE than my entire mortgage, and I live rent free in the bay area. Makes saving for all this other stuff a lot easier! 

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On 9/14/2021 at 8:48 PM, Fitz said:

Really awesome success story there Morgan! I did a similar set up on a much smaller scale. I purchased my primary residence in late 2008 and it had a granny unit, after I moved in and found out renting it to a friend at not even top of the market pricing it paid over half the mortgage. I realized I should rinse and repeat this pattern and purchased a few more in my area of Northern CA from 2009-2014. I self-manage these. In 2014 prices in the bay area had recovered to about 80-90 percent of 2009 levels and the debt cover ratio's weren't as attractive and started purchasing duplex's in Indianapolis from 2014-2019 until prices there got to rich for my blood. I found a really great property manager over there but he recently retired and now I'm dealing with the guy who bought his company and its a completely different experience.

 

Real estate getting less and less attractive from 2014 on is what drove me into looking at equities, and that has been a really fun journey! 

 

Side note - the granny unit at my house is rented by a buddy of mine and now covers 400 dollars MORE than my entire mortgage, and I live rent free in the bay area. Makes saving for all this other stuff a lot easier! 

 

Congrats to your success as well! Buying a duplex or triplex is a great way to get "free" housing and I recommend it to a lot of people who are interested in this kind of stuff. I suggest the duplex/triplex route or to get to at least 50 units asap so there is money to hire people. 

 

Cheers! 

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