Owning an investment property can be an excellent way to generate income and build wealth for yourself and your family. But when that source of passive income requires that you play a much more active role in marketing and management than you’re willing or able to do, a property management company can be a valuable asset. Take the example of owning a vacation rental home: While a recent study by vacation rental marketplace HomeAway (now part of VRBO) reports that vacation rental income comprises about a quarter of the average rental owner’s income from investing just under 10 hours per week managing their rental, this type of hands-on involvement may not be possible for owners who live out of state or in another region, or own larger, multi-family vacation properties. Professional property managers can assist with one or more tasks, such as cleanings and check-ins, or they can provide comprehensive management services to ensure that the property is generating revenue year-round. Whether the property in question is a beach condo you use for a week-long vacation once a year and rent out the rest of the time, or a long-term-lease duplex you purchased in a scruffy but up-and-coming suburb in another state, or a multi-family apartment building with daily or weekly maintenance needs, the right property manager can help alleviate your stress, and maximize your financial gain.
Determine what you need from a property manager—and what you don’t.
Professional property managers perform critical tasks throughout the leasing life cycle, from preparing a rental property, through tenant move-ins and move-outs. They can also provide referrals for legal advice, home repairs, and services that aren’t covered by the management agreement. To get the most out of your investment not just in your property, but the management team that handles it, decide what property management tasks are most valuable to you, and focus on these. They may include:
- Marketing and listing vacant units
- Processing applications and screening tenants
- Conducting quarterly and annual inspections
- Orchestrating move-in procedures
- Coordinating maintenance and repairs
- Collecting rent and applying penalties
- Conducting move-out inspections and returning deposits
- Handling evictions and posting quit notices
- Complying with fair housing regulations
- Compiling monthly expense reports
- Preparing annual tax documents
ExperTip: Don’t buy more management mojo than you need. If you own a long-term-lease property in another state, for instance, you may not require regular assistance with marketing your property and vetting short-term renters. So negotiate to pay less for that service, while allocating more budget to having your property manager quickly coordinate any needed repairs through reliable companies that are local to your property.
Start your search, and ask the important questions.
Property managers differ significantly in their approach and level of expertise. It’s important for owners to screen potential candidates to ensure that they’re choosing the most qualified professional for their type of property and specific management needs. These are questions to ask a property management company during your initial interview:
- How many units do you manage?
- How big is your staff?
- Is your staff licensed?
- What types of properties do you manage?
- Do you have a maintenance crew?
- How long does it typically take to fill vacant units?
- What happens if my tenant doesn’t pay on time?
- Have you ever filed an eviction?
- How long does it take you to respond to owners and renters, and via what means do you communicate?
- What is the typical length of your leases (for long-term-lease properties)?
- Can I see examples of your leases/rental agreements?
- How long is your minimum contract?
- What happens if I cancel my contract early?
Get a clear picture of what you'll pay for property management services, including add-ons and potential "hidden" fees.
Most property management companies charge a percentage of the property's monthly rental value as their fee--usually about 10%. This fee typically covers day-to-day management tasks, including collecting and processing rent, arranging repairs, and responding to tenant questions. A small number of property management firms charge a flat fee instead, which may be preferable to some property owners who own property in areas where rental markets are more volatile, or in lower-income communities with a higher volume of distressed or low-cost properties. Whether percentage-based or flat fee, it is important for you to understand exactly what is covered by the company's monthly charge, and what is not. Add-on fees may include:
- Initial Setup Fee - Usually under $500, this fee typically covers a property inspection, and setup of a new account, including transfer of information from a previous property manager, if necessary.
- Tenant Placement Fee - This is the fee some property management companies charge to market a vacant property or unit, screen potential tenants, prepare a lease or rental agreement, and initiate move-in procedures. This fee usually is half a month's rent to a full month's rent.
- Repair Fees - While regular property maintenance is usually covered by the monthly property management fee, repairs generally are not. Many property management companies require the owner to maintain a separate fund that the property management company can draw upon if a repair is needed.
- Eviction Fee - Most property management companies charge an extra fee for conducting tenant evictions (which may be justified for, among other violations, non-payment of rent, damage to the property, or disruption or threat to other tenants). In addition to this fee, the owner will be liable for any eviction-related court costs or expenses.
ExperTip: If your monthly property management fee arrangement is percentage-based, make sure your contract stipulates that the fee is a percentage of rent collected rather than rent due. This will ensure that you don't pay management fees for properties or units where tenants aren't paying their rent (which should be your property management company's problem, not yours).
Ensure that the property management company's staff is properly licensed.
Different states have different license requirements for property managers depending on whether they are working with rental real estate or community associations (for example: condominiums, co-ops, or resort communities). In some cases, an on-site property manager or office administrator may not be required to be licensed, but any manager dealing with leasing activities will be. These are the most common kinds of licenses and certifications required, and the property management tasks they typically cover:
Real Estate Broker's License
This is the most commonly required license for rental real estate property managers. To attain this type of license, an individual must complete broker training classes and pass the state's broker's exam. They may also have to demonstrate a level of experience, and prove that they are not under indictment for any felony that might indicate they are not trustworthy (fraud or forgery, for example). A real estate broker's license allows a property manager to:
- Show the property to prospective tenants
- Process applications and screen tenants
- Negotiate lease terms
- Collect rent
Property Management Certification
As with a Real Estate Broker's License, to obtain a property management certification from a recognized organization, a manager must complete coursework, pass an exam and undergo a criminal background check. These certifications are among the most widely recognized and valued in the field of property management, and can help you verify a prospective manager's experience, education, and integrity :
- Certified Property Manager (CPM) - Though not a state requirement, this certification, administered by the Institute of Real Estate Management (IREM) is a good one to look for in a property manager. To receive this certification, a property manger must hold a real estate broker's license and show extensive experience managing a portfolio of properties. They must also complete significant coursework (including a course in management ethics) and pass exams.
- Residential Management Professional (RMP) - As with CPM certification, RMP certification, awarded by the National Association of Residential Property Managers (NARPM) requires a real estate broker's license, significant management experience (a comprehensive portfolio of properties for at least two years), and coursework. The RMP is a prerequisite to apply for the NARPM's Master Property Manager certification, which requires the candidate to have managed at least 500 units over a five-year period.
- Certified Manager of Community Associations (CMCA) - This certification is awarded by the Community Associations Institute and is common for managers working with condominium and homeowner associations, housing cooperatives, resort communities, and commercial tenant associations. Once certified, a CMCA must participate in continuing education to maintain this certification.