Intro to Property Management: What You Need to Know
Generally, landlords have two options when it comes to managing their rentals. They can hire a property manager or manage the property themselves.
According to a survey by the U.S. Department of Housing and Urban Development (HUD), properties with one-to-four units comprise almost 46 percent of the 49.5 million rentals. Individuals own about 70 percent of these smaller properties. And only 22 percent are managed professionally.
So, in most cases, landlords with smaller properties act as the property management firm. Let's explore what this means to landlords and tenants and how to manage your property effectively.
What is property management?
Efficient property management determines your success as a landlord. It ensures you're optimizing your rental and managing your investment wisely. While the responsibilities may seem endless, there are four key elements.
Finding and screening tenants
Finding reliable tenants can save you an incredible amount of time and money. Part of a thorough screening process includes credit and background checks, employment verification, rental history and references.
Finding these reliable tenants may involve marketing and numerous property showings. You'll also need to perform a move-in inspection.
Retaining tenants and keeping your rentals occupied is critical to your cash flow and peace of mind. You can minimize vacancies by fostering a strong relationship with your tenants, performing maintenance requests promptly and offering incentives to desirable tenants considering a move.
Drafting a lease agreement
Because lease agreements are legally binding, many landlords turn to lawyers for this document. Local, experienced property managers are also well-versed in lease agreements.
Performing maintenance
Regular maintenance retains the value and appeal of your property. By conducting inspections, you can keep minor repairs from turning into major emergencies. Unless you're skillful in home repair, develop a reliable network of contractors to handle any maintenance and repairs, including emergencies.
Managing finances
Property management includes handling the financial end of owning and renting property. Some responsibilities include maintaining and staying within budget, accurate forecasting and understanding tax implications.
Why is property management a popular passive income strategy for new landlords?
Earning income from rental properties has long been a popular choice as a passive income strategy. As long as your rental price is competitive and your operating costs don't put you in the red, you can earn additional income. In a good market, you can also build equity.
Managing a rental unit, however, is anything but passive. It requires marketing, managing, coordinating repairs and preparing financial reports. For this reason, new landlords may turn to a property management firm.
Is now a good time to be a landlord?
That's an excellent question. The answer depends on the market you're considering and your unique situation. Then, you'll need a crystal ball.
A few numbers to consider:
- The third quarter of 2023 saw national vacancy rates for rental housing at 6.6 percent. While higher than last year, it's lower than 7.28%, the long-term average. According to Fit Small Business, most investors in metropolitan areas consider between 2 percent and 4 percent a good vacancy level.
- The rental vacancy rate was higher in cities than in the suburbs. These rates were also higher in the South and Midwest and lower in the West and Northeast.
- The median asking rent for vacant units during this same time frame was $1,462. Of course, the average rent in Kansas City is miles away from the average rent in San Francisco.
- As of January 4, 2024, the average interest rate for a 30-year fixed mortgage was 7.05%. In some areas of the U.S., the rate is below 6.75%.
What do these numbers tell us? Location plays a key role in costs and demand. And, in many areas, low affordability is still fueling demand. Unfortunately, knowing exactly where the economy is headed is still up for debate.
The pros of property management
Working with a property management firm takes the brunt of the day-to-day responsibilities off your plate. They now perform the previous list of tasks. Landlords particularly appreciate handing off the following responsibilities:
- Collecting rent: Collecting rent is fairly easy until it's not. If a tenant stops paying, an eviction may be inevitable. Property management companies know the local laws and eviction process if this unfortunate circumstance occurs.
- Performing maintenance: Plumbing issues can occur at any time, which means you'll need to answer calls and handle emergencies 24/7. A property management firm performs this task for you. Make sure to check if they charge maintenance markup fees.
- Responding to complaints: Dealing with difficult tenants is one of the most challenging aspects of being a landlord. Hence, the importance of effective tenant screening. And, of course, there are those times when they look great on paper but happen to be on the louder side after 10 p.m. or play racquetball indoors. A property management company assumes responsibility for working with these residents.
As you can imagine, managing a property can take up a significant amount of time. For landlords with a full schedule, hiring a property manager may make sense.
The cons of property management
While a property management firm reduces your workload, it also comes at a cost. As you probably guessed, this is the number one drawback.
- Additional costs: Property management firms may charge a percentage of the monthly rent or a straight fee. According to Stessa, a financial tracking app for property management, most companies charge between 8 and 12 percent of the monthly rent. So, if you rent out your property for $1,500 per month, you'd pay the management firm about $150 per month, on average.
Be sure to read the contract carefully, as additional fees may apply. For instance, they may add fees for marketing and finding new tenants, renewing leases, maintenance and set-up. Keep in mind that these fees may also be tax-deductible.
- Loss of control: Some property owners want to maintain total control over their rentals. They want to make decisions regarding their tenants, marketing and maintenance strategies. They enjoy fostering relationships, excel at communication and want to ensure their tenants are in good hands.
If you're looking to gain experience and turn your investments into a full-time career, learning the ropes through effective property management may provide the experience you're looking for.
Property management from a tenant's perspective
As a possible resident, you may wonder if renting from a landlord or a property manager is better. Both carry benefits, and the right answer depends on your situation.
Some tenants prefer living in larger communities that offer numerous amenities, such as dog parks, pools and community spaces. According to HUD, 84% of rental properties with 150 units or more are professionally managed. On the other hand, you may prefer renting a single home or duplex, which may translate to renting directly from the property owner.
Should you hire a professional property management firm?
That decision is uniquely your own. Consider your cash flow, including your monthly income versus monthly expenses. These expenses include insurance, maintenance and repairs and property taxes.
Do you want a true passive income and little responsibility, or do you want hands-on experience in property management? If your goal is to become a real estate investor with multiple properties, chances are there'll come a time when a property management firm takes the reigns.
