A couple years ago, Berkshire Hathaway’s Warren Buffet said on a CNBC interview: “If I had a way of buying a couple hundred thousand single-family homes and had a way of managing— but the management is enormous. It’s really the problem because they’re one by one. They’re not like apartment houses. I would load up on them”.
The Sage of Omaha is frequently cited by single-family rental advocates but his cautionary words about the challenge of management are often ignored.
For investors who are counting on long term rental income to make their return on investment work, nothing is more important than good management—not purchase price, mortgage rates, the local economy, or even appreciation of the property’s value. Frequent vacancies, expensive repairs, litigious tenants, missed rental payments, botched evictions—these are only a taste of the nightmares that can turn your real estate dreams into a nightmare with poor management.
Buffet was right. There’s a world of difference between managing 100 tenants in an apartment building and 100 single-family rentals spread across town. Besides the obvious problem of distance, the maintenance and repair issues in stand-alone structures are vastly more difficult than those of a one building property with single mechanical systems serving all its units. Security, tenant relations, neighborhood issues, snow and ice removal, and dealing with problem tenants all become more challenging in the single-family environment.
Whether you live in the same town or hundreds of miles away from your rental property, it is imperative that you find the right property manager. Here are five things all investors should do when looking for a trustworthy property manager:
1. Insist on a SFR specialist
Insist on working only with a management firm that specializes in Single-Family Rentals. With the boom in single-family rentals, a mini-industry of management companies specializing in single-family rental developed. A few apartment management companies have ventured into the single-family arena, but since it is such a different business, it’s best not to work with those companies. Most management firms are local in nature, but several large franchises have grown to cover the major rental markets, providing their members national websites to market rental vacancies, as well as training and management systems. Your priority should be to find the best local company regardless of whether it’s a national brand, or some small mom-and-pop shop.
2. Ask other owners
A good place to start looking for information on good management companies is from other owners in your local market. One place many of them gather is a local real estate investment club or association. Most have a web site and some have blogs where you can ask about management companies. They also hold monthly meetings where you can make contacts.
3. Look for credentials
Property managers are not licensed by any governmental body, but the National Association of Residential Property Managers has an extensive educational and credentialing program designed to improve service, promote ethical practices and create national standards of excellence. It focuses on single-family rentals and small multifamily and it has a tool on its site to help you locate members in your market.
The Better Business Bureau and review web sites like Yelp can also provide insights into how credible the business is. Property management companies generally have fewer reviews on sites like Yelp or Google Reviews than other types of business. If there are only a few negative reviews there’s no need to worry – these might simply be the complaints of a few disgruntled people. If however, a company has hundreds of negative reviews, it is worth doing a more comprehensive analysis of those reviews to find out if you should avoid engaging their services.
4. Ask tough questions
Once you establish that a firm has the experience and expertise in your local marketplace, you need to ask some questions that will separate the best from the rest. Ask about
- Their current vacancy rates
- How they conduct maintenance and how much they spend
- How many tenants are late payers and how do they handle them
- What the average tenure is of their tenants
- How often they actually have a face-to-face conversation with each tenant
5. Ask for proposals
Ask the three top candidate firms to provide you proposals that include their estimates of your maintenance costs, and any other costs that they might incur. Ask them to discuss maintenance policies, late payment policies and their track record filling vacant properties. Ask for an analysis of rent ranges, and prospects for increases.
Finally, ask them for their management fee. Traditionally multifamily management firms charged 8 percent of the rent but the new class of single family rental managers charge up that to 10 percent, based on the higher costs involved in SFR management. Carefully review what each company covers—and doesn’t cover – in the fee. Don’t make your decision to hire a firm on the fee alone. By being pound-foolish you could end up with the wrong company and end up paying much more than you save.
Having good management is key to stress-free ownership of rental properties. Following these five steps will make investing in rental properties significantly more enjoyable, and protect you from the day-to-day management of your property.