When you sign an agreement with a management company, you will establish a management fee for running the property.
To manage or not to manage, that is one of the most difficult questions for a beginning investor to answer. On the one hand, learning the business and taking control of the asset is crucial for success in real estate.
On the other hand, hiring a management company to run day-to-day operations allows an investor to focus on growing the portfolio and developing into an asset manager, not a landlord. This article will focus on the “manage right” portion of our three-legged framework, and specifically on ten red flags when dealing with a property management company.
When you sign an agreement with a management company, you will establish a management fee for running the property. This fee is usually based on gross income generated from rents and may include other types of income, such as application fees, pet fees, and laundry income. Make certain that the company does not include security deposits when calculating gross income. Security deposits are not classified as income and belong to the tenant. Therefore, they should be held in a separate escrow account. Some management companies may try to lump in security deposits with gross income and charge you. Some management companies may also try to charge you for rent that has not been collected. Only allow them to bill you for rent that has been collected.
Lack of income growth
Most investors are content when their occupancy number is hovering around the market rate and rarely focus on driving the income. It is your duty as an investor to maintain your rents at current market levels to maximize the income and value of the asset. Request a market rent comparable from the management company to compare your rents to those of your competition. If your rents are below the market, devise a strategy to increase them to the market rate. Also, explore other options for an increase in revenue on your property.
Some management companies specify in their contract that they will be the exclusive agent if you try to sell your property. Be aware of this clause, and have them remove it if you do not want them listing your property if you decide to sell. Only allow them to list the property if you feel comfortable with their performance.
Getting negative feedback from tenants
A customer is much more inclined to tell you if you are doing a poor job as opposed to doing a good job. Tenant surveys will shed light on the management company’s customer service and overall performance. Using surveys is one way of being proactive and staying on top of your business.
Getting charged for fake repairs
Have the management company procure three bids for every job, and have them get your permission to perform the job if it is over a certain dollar amount (we ask for repairs over $200). You should call the other 2 losing bids just to make sure they are real companies that are in business and not fictitious ones that the management company created so he could secure his own bid. Have the company take pictures of the job before and after completion to have proof that the work was done.
If you notice on your rent roll the same apartment vacant for a few consecutive months, this may be a sign that the tenant is paying the management company cash under the table. Either make a surprise inspection or call the tenant who lives next door to see if the apartment is vacant. Also, check the utility bill to see if there has been usage for the month. Property management software is an excellent tool to use to see how long the apartment has been vacant, and if the property is being marketed.
No professional software
Your professional management company, along with the rest of your vendors, needs to enter the 21st century. The software they utilize needs to be cloud based so that you can review the performance of the property in real time.
There are many platforms in the market: Apfolio, Yardi, Quickbooks, Rent Post, Buildium and Real Page. The only way to analyze your performance is with accurate and up to date financials. You will be able to catch trends much quicker and be proactive, instead of “reactive”. If you decide to refinance or sell your property, sending out the financials is as easy as a click of the button. Software companies also offer discounts to their users. App Folio charges users $16 per application, and they offer renter’s insurance at a very competitive price. They also offer online payments for tenants. Explore what each platform can provide to you as benefits and savings.
Unaddressed maintenance requests
One of the benefits of utilizing property management software is that you will notice when maintenance requests are logged into the system, and how long it takes the management company to address the issue. You can track the new maintenance orders, the orders that are waiting to be addressed, and the orders completed. The number one reason why tenants do not renew their leases is poor customer service. Providing quality customer service to your tenant base will diminish one of your costliest expenses, tenant turnover.
Slow rent collection
Management companies should send owners a report weekly detailing rent collection and rent outstanding. 90 to 95% of rent should be collected by the second week of the month, and if the company continues to fall short of that target, then this may be a red flag. It may mean that the management company is renting to unqualified tenants or tenants may be disgruntled with customer service and are reluctant to pay the rent. In any event, owners need to react quickly and address the problem.
When an apartment is vacated, it should be a priority for the management company to get in there and “turn” the apartment. The average turn should take around a week to ten days if no major repairs are involved. You never want to show an unkempt apartment to a prospective tenant, so it is vital to get it rent ready as quickly as possible to show. Every day the apartment is vacant, you are losing revenue. For instance, if you are renting an apartment for $600 per month, it is costing you $20 per day or $140 per week vacant. You can see the value in having a management company focus on turning empty apartments.
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.