Say Goodbye to Third Party Property Managers!

Full Disclosure… as I’m writing this on Thanksgiving we just got a call from a tenant. She told us that her toilet was spilling out into the bedroom with all kinds of nastiness. Joy. This call is stressful for us as the property managers especially on a holiday, but this rarely happens, so its worth it to us in the long run, but we want you to know it’s not always cash money raining down all the time while we idly watch.

Goodbye Property Manager!

We gave it a good run. We tried our hardest. We were kind. However, in the end, we decided to part ways with our third party property manager. If you remember, we started with a property manager in house #2 because D and I didn’t want to have to do all the work as we were splitting the houses with three other guys who weren’t as involved in the day-to-day operations. (Which was fine at the time) We also didn’t have the systems in place to fix or properly take care of our assets if something was to go wrong.

Becoming our Own Property Manager

We’ve become more efficient, and now understand a bit better what it takes to operate our small empire from an operations perspective. D and I divvy up the houses, and the tenants have our respective cell phone numbers and text/call if there are problems. This situation might sound like a nightmare to some, but  *The key to this relationship is the tenant not knowing we are the owners.*

Being Two People at Once

I can’t stress this enough. It can be hard talking with a tenant sometimes, imagine if they knew you were also the owner. When a tenant asks me now, “Can we get granite countertops?” I can defer and say things like, “Oh, I’ll ask the owner and see what he thinks…” It adds an important and necessary buffer between you and the tenant, even if it’s somewhat fabricated. This relationship becomes even more important when you have to chase rent or evict somebody. When tenants call me saying rent is going to be late, I can easily play good cop/bad cop with them putting the bad cop on the “owner.” When I play the good cop for the tenant and help them come up with a plan to make rent. They see me as an advocate and somebody who can help them. It makes the whole tenant/owner relationship very successful.

Our tenants, for the most part, communicate often and early about house problems and rent issues. I attribute it to our open lines of communication that we train up from the beginning. I can’t imagine how hard the conversation would be if they knew I was the owner. If I were to “go easy on them” for late rent one month, then they would quickly learn how much leniency the owner had and exploit it. Plus, there’s nothing worse than hearing a sob story about why rent is late and then having to lay down the hammer anyway. “Oh you got laid off, and your wife is eight months pregnant? So what, I want my rent, deadbeat!” That doesn’t go over very well… In this setup, you can blame it on the owner and proactively come up with a plan where both parties can win. Works every time. Maintaining this “distant” relationship with the owner affords us all kinds of options when dealing with tenants.

We now have the following tools at our disposal which make this all possible:

• HVAC guy (he’s so good)
• Plumber (so affordable and dependable, and not technically actually licensed which is a little scary, but he knows his stuff)
• Roofer
• Garage door guy
• General Handyman
• Painter ($1,000 to paint a house, we supply the paint)
• Yard guy
• Power washer
• Carpenter/General Contractor

All these people are one text away and can make appointments with tenants. They do great work and take pics of their work which they send to us. We can pay them electronically. This technology makes the whole property management administration possible from our offices. It takes very little work/time from us. We only go to houses for emergencies or if it’s not a routine repair. With these contractors who we consider partners, we felt we were ready to take on managing our own houses now.

Why We Ultimately Fired the Property Managers

One day we got a call from one of the tenants, he was confused why we were charging them $100 to sign a new lease. He already lived the home, and he had agreed to a modest rent increase and on top of all that the property manager was charging him $100 dollars to sign another year lease. Guess what? We as the owners saw none of that $100. It was all going to the property manager, and it was a hidden fee to us. We then found other “fees” like this built into all kinds of things that these poor tenants had to endure.

Incentives are Not Aligned

We quickly learned that property managers and owners have opposite incentives. This anomaly is what ultimately lead to our departure.

Property managers incentives:

• Our manager wanted to turn a property over as many times as possible because they earn extra income each time a tenant is replaced (agent commission on new tenants).
• They also want rent to be as high as possible, as they earn a percentage of gross rents. (You could argue this is good for the owner too, but see example below why it can be a problem)
• Repairs costs were not highly scrutinized as they passed all costs to the owner

Owner incentives:

• Keep a tenant as long as possible as owners know that turning over a property can cost a great deal. (rehabbing the house, make ready, long periods of vacancy, etc.)
• Repair costs should be shopped and negotiated to get the maximum value to the owner.
• Raise rents to maximize cash flow and return on investment but not always to the point that tenants move out, thus causing turnover costs to eat into precious returns.

For example, one time the property manager wanted to raise rent $120 on house #1, as the market had changed substantially and rents had gone up in the area. Immediately the tenant said, “We can’t afford that!” so they had to move. This change would’ve been our second vacancy in 2 years. It was alarming to us, so my partner and I decided to go by the house after hearing the news, and he talked to the tenants and instead of $120 of rent increase we decided together that $75 was doable and that they would stay.  Problem solved with a 5-minute conversation. We got the tenant to stay, and we raised rent a fair amount. Our property manager was not willing or was too busy to have this conversation. They were ready to move on to the next tenant, which would’ve cost us a great deal more than keeping the existing one.

I know there are probably ways you could structure compensation with your property managers where your incentives could be aligned better; however, we wanted to give it a go for a while. After five years, we still like it, I’m sure once we get to 100 properties we will find a way to outsource it, but we are still growing and loving every minute.

Money Breakdown

If anything else, we did it for the money. (Isn’t that usually the case!) When we quit the property manager, we were astounded by how much better our returns were. We were paying 8% each month which on five houses was about $464.00  a month. That ‘s $5,568 a year. It’s a significant chunk of change that now we could use somewhere else. That’s 8% off the top, not to mention the extra money for turn over and tenant acquisition for which we were paying. This change was a massive step in our evolution. Plus, as we continue to build our systems, we can manage other people’s properties if we so desire. (We don’t by the way.)

It’s Ultimately a People Business

Through our property management experience over the last five years, we have learned that most of what we do is managing people and their expectations. If you are good at working and communicating with people, you will turn out to be a fantastic manager of properties. Although once in a while there is a giant headache, the vast majority of time is just keeping the giant real estate machine humming along, one month at a time while getting such a kick out of watching the snowball of stealth wealth continue to grow.