Should I Hire a Property Management Company For My California Property?
By Nancy Chillag
Are you a landlord tired of dealing with your tenants?
Do you own a lot of rental properties and managing them is just taking up too much of your time?
Maybe you are overwhelmed with being a landlord and are thinking about hiring a property management company.
Although hiring a property management company has many advantages, using one can be expensive. And, even apart from the cost, relying on a property management company is not for everyone. Consider the following factors to determine if hiring a property management company would be a good decision for you.
Why You Should Hire a Property Management Company
You should consider hiring a property management company if:
- You have a lot of properties or rental units. The more rental properties you own and the more units they contain, the more you're likely to benefit from a management company. They have the infrastructure to handle leasing, repairs, maintenance, complaints, accounting, etc.
- You don't live near your rental property. If your rental property is located far from where you live, hiring a property management company can be invaluable in dealing with the many issues that are difficult to handle from a distance. As a real estate investor, I owned out of state property. I hired a property manager who was familiar with the local markets and had access to local vendors, i.e. handmen, plumbers, painters.
- You're not interested in hands-on management. Many landlords look forward to the challenge of finding good tenants and the rewards of maintaining a safe and attractive property on their own. But if you view rental property ownership strictly as an investment and want little or nothing to do with the day-to-day management of your properties, consider hiring help to manage your property. I always managed my own local properties. Finding competent vendors was always a challenge.
- Your time is limited. Even if you enjoy hands-on management, you may not have much time to devote to your business, especially if property management isn't your day job. And if you prefer to spend your time growing your real estate holdings, including searching for new properties, arranging financing for renovations, or changing your business structure, then a management company may be a good way to spend your money.
- You can afford the cost. Hiring a property management company is an attractive option if you can afford the fees. When interviewing companies, expect to hear quotes ranging between 4% (large multifamily building) and 10% (more typical for single family homes) of what you collect in rent revenue. If you have multiple rental houses, you can probably negotiate a more favorable rate. I had 10 rental houses in one area and was able to negotiate an 7% management fee.
- https://www.propertymanagement.com/cost-of-hiring-a-property-manager/
- https://www.rentspree.com/blog/how-much-do-property-management-companies-charge
- https://homeguide.com/costs/property-management-fees.
- You’ve already tried a resident manager or other employees and that’s just not enough to free up your time.
- You're suddenly inundated with management tasks. If your business is growing, at some point you may find that you need a substantial amount of help to manage everything properly. At that point, it might make sense to hire a management company. At a minimum, you might want to put a team in place to handle different aspects of the management – a leasing agent, a bookkeeper, a handyman, etc.
- You don't want to be an employer. If you hire a resident manager or other employees to help with your property, you become an employer. You'll have to handle payroll and deal with a host of other legal requirements and considerations. But, because a property management company isn't your employee (it's an independent contractor), and neither are the people who work for the company, by using one you avoid the hassles of being an employer.
- Your property is part of an affordable housing program. If you participate in an affordable housing program, things can get complicated. Usually, in these programs the landlord receives financial assistance (which may be in the form of a grant, low-interest loan, or tax credits) in return for agreeing to rent at least part of the property to tenants earning below a certain income level. To continue receiving the assistance, the landlord must comply with a complicated set of rules. With so much at stake, it's often worth hiring a property management company that has expertise and experience with the housing program in question.
If you do not want to hire a management company, you might look to sources like www.rentalrealestate.com for tools and advice on managing your own property.
How to Find a Good Property Management Company
If you decide to hire a property management company, use caution in selecting one. Here's how to start the process:
- Get recommendations from colleagues and your local apartment association.
- Search professional directories on the Internet. Visit the website of the Institute of Real Estate Management (IREM) at www.irem.org and click "Find a Member." Or visit the National Association of Residential Property Managers' (NARPM) website at www.narpm.org and click "Connect With Property Managers."
- Interview several companies to find the right fit. And get all your questions answered before handing over the reins.
- Make sure they handle similar properties in the area where your property is located.
- Have them give you a tour of the properties they manage. They way these look will be the way your properties will look.
See www.propertymanagement.com/resources to learn more about property management.
If you find a management company you want to work with, it is important to have their agreement reviewed by your attorney. And make sure you are using an attorney with a specialty in real estate law.
Things To Think About When Contracting With A Management Company
Once you’ve found a management company you want to work with, it is important to have the paperwork in order. By paperwork, I mean your contract with them.
Watch out for the following contract items that could become very expensive for you:
- Excessive lease up fees – some companies will charge the equivalent of ½ to 1 month’s rent as a lease up fee. Leasing is what they are supposed to do and they should work to keep tenants in the property. If your property has substantial turnover, the management company is making a lot of money for not doing their job. Put limits on lease up fees.
- Termination fees – this is usually based on the remaining term of the contract and it’s usually a monthly fee amount. If you have a 30-day contract, not a problem. If you have a yearlong contract and you terminate after 6 months and the fee is $1000/month, you will owe $6000 to get out of the contract. Try to eliminate or reduce these as much as possible.
- Hold Harmless clause - a hold harmless clause, also known as a liability waiver, disclaimer, or release of liability, is a contract agreement that protects one party from being held responsible for damages or injuries. For example, if the management company discriminates against a potential tenant and the potential tenant sues, the management company would not have liability. But you would since you hired them! Make sure a hold harmless clause does not include gross negligent or intentional acts. The management company should be responsible for their actions.
- Contract Duration – you should be able to terminate for any reason with 30-day notice. Sometimes property owners don’t like using a management company and want to go back to self-management.
- Additional fees – don’t let the management company charge you for things that should be included in their basic fee, such as accounting services, banking fees, eviction notices (of course, legal fees would be additional), employment fees, tenant screening fees, etc.
- Accounting – make sure you get monthly accounting reports with receipts for all expenses paid.
- Affiliate fees – make sure you know whether your management company has an ownership interest in any company that they will use on your property – contractors, eviction services, etc. They will be making money from these companies as well as the management fee you will pay them.
- Insurance – your management company should have error and omission insurance and name you as an additional insured.
Good Practices After Hiring Your California Property Manager
And here are some “good practices” for after you are in contract, and they have taken over management:
Reports: Review your monthly reports to make sure all the bills associated with the property are being paid. There have been horror stories of management companies not paying bills, and water or electricity getting turned off at a property.
Banking: The management company should have a bank account that is exclusively for your properties. They should give you access to this account.
Inspections: The manager should walk each unit at least every 3 months for new tenants and once a year for seasoned tenants to make sure the property is being cared for by the tenant, that there are no leaks or damages, and that the right number of people are occupying the unit. Request pictures of the units for each walk-through. Many times, the manager will tell you that they do bi-annual inspections, but then they never do.
Rent Increases: Rent increases should occur annually, even if it is a small increase. The income will determine the value of the property for future investors if you want to sell. Since the cost of moving is so high, tenants will usually not move out because of a small rent increase. Calendar when a tenant’s lease is expiring and ask the management company how much they intend to raise the rent. Have them give you a comparable rent schedule for neighboring properties so you know you are charging market rent. If you are not charging market rent, find out why. Maybe you need to make some improvements to the unit to be competitive. See https://www.payrent.com/articles/how-often-should-you-raise-rent/ for additional information on how often you should raise the rent.
Meetings: Meet with your manager regularly to ask questions and get their feedback. The more properties you have, the more often you should meet.
Conclusion
You might be eager to sign with a property management company since it means you will have more freedom and less stress managing your rental property. But, in the confusion and excitement, you might skip over essential clauses and details. Always make it a point to review your property management agreement carefully, preferably with the help of your attorney.
Also, just because you have a management company doesn’t mean you can sit back and do nothing. You need to manage the manager. No one is going to care about your property as much as you do. Don’t get complacent. Things can go wrong very quickly, and it can take a long time to get things back in order once they do.
And keep in mind, if you are really tired of being a landlord and a management company just isn’t the fix you are looking for, you can always sell your property. At Primary Home Solutions we buy properties for cash, can close quickly and you won’t pay any commissions. If you are ready to get out of the real estate ownership game, we can help!
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About the Author:
Nancy Chillag is a real estate investor and has been buying and renovating homes for more than 30 years. She has purchased real estate all over the San Francisco Bay Area, Greater Sacramento, Central Valley and even out of state. She has worked with numerous homeowners dealing with foreclosures, inherited property, massive repairs, relocation, and bad tenants, to name a few. She is the president of Primary Home Solutions Inc.
