by Paul D’Abruzzo
Take it from someone who knows from firsthand experience: Choosing the right property manager can make or break your real estate investment. Property managers abound in every real estate market, and new companies are hanging out their sign every day. How can you tell them apart when most make the same claims and provide the same services? To really understand how they operate, you need to ask the right questions and receive the right answers.’
1. Do you have any references from other investors and property owners?
Do not move forward if the company is unable or unwilling to provide you with real and verifiable references from other property owners, even if they have a good reason for doing so. There are simply too many management companies out there to forgo the important and necessary step of verifying that they are a legitimate operation.
A simple Google search will reveal any reviews, good or bad, that are online. It’s a good idea to read as many as you can and do your best to verify that the reviews are from real people. I highly suggest interacting with local real estate investment groups, or at least attending local events, to ask if anyone there has any reviews about a specific company and ask for referrals to other local management companies that are trusted by the group.
Always ask for references from tenants they manage, too. It’s important that tenants are treated with respect and receive regular communication.
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2. How is the management company compensated?
As a baseline, you can expect to pay a residential property management fee of between 5% and 10% of the gross monthly rent collected. These fees vary dramatically depending on the type of property that is being managed. A student rental property will normally carry a higher fee because of the extra work involved versus a standard single-family home or condo unit. If you have very large or multiple properties with the same property manager, you should be able to negotiate a volume discount – a winwin for both parties involved. Other fees to consider include:
TENANT-OCCUPIED UNITS. The best property managers only charge fees on the rent collected, not on a vacant unit or nonpaying tenant.
NEW TENANT PLACEMENT. Fees for placing a new tenant usually range from 50% to 100% of the value of the rent for that unit – so if the rent you’re charging is $1,000, the fee could be between $500 and $1,000. Negotiate the fees ahead of time and make sure the manager gives you a ‘tenant guarantee,’ where if the tenant only stays for a short time or stops paying their rent within a few months, the manager will refill the unit at no cost to you.
MAINTENANCE. Some companies retain their own full-time maintenance crews. If this is the case, you will have to negotiate what routine maintenance services are included with your monthly percentage and what they might pass on to you in extras. You could see labour charges of $40 to $80 per hour per person, plus any materials.
EVICTIONS. Some tenants just don’t work out. Some lose their jobs and become unable to pay their rent, while others prove to be irresponsible and a disturbance or nuisance. In most cases, the property manager will charge a fee to go through the tedious process and paperwork of evicting a tenant, plus any applicable court costs.
You should never be blindsided by maintenance costs. Your agreement should set a limit for how much your property manager can charge you. Always ask for detailed quotes before any work begins, both on labour and materials for the specific job. If the manager is hiring outside contractors for certain jobs, ask if they are retaining a fee for setup over and above the contractor’s fee.
3. Who is responsible for what and when?
When establishing responsibilities, my personal guideline begins and ends with property management versus asset management. The term ‘asset management’ is usually reserved for large institutional investors, but I believe the concept can also easily apply to the humblest of portfolios.
Both property and asset management are very necessary responsibilities when investing in real estate. The box on the opposite page outlines some key distinctions between each responsibility from an investor’s perspective. If you’re managing your own properties, you would be responsible for everything listed there – and more. But when engaging a professional property manager, you become the asset manager, and clear lines between each role need to be defined.
Many investors fall into the trap of assigning the asset manager role to the property manager or relying solely on their opinion. This can be a dangerous scenario. When trouble arises at your property, you are ultimately responsible. Having an ongoing active role is the best way to prevent most issues before they arise and ensure your PM is doing the job properly.
By internalizing these guidelines and remembering that in the end, you – as the investor and asset manager – are ultimately responsible for your results, your relationship with your property manager will thrive. In my experience, your PM will appreciate this, too.
PAUL D’ABRUZZO is a real estate investment advisor, industry-leading Realtor, speaker and private performance coach. He and his team specialize in the acquisition, purchase and sale of investment grade property in southern Ontario. Get free, instant access to real estate deals in southern Ontario before the general public and learn how to analyse them quickly and easily, just like the pros do, at investmentpropertyanalyzertool.com
This article originally appeared in Canadian Real Estate Wealth magazine. For your special discounted magazine subscription, click here
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