Investment Property Management: What It Is & How It Works
Property management is a service performed for investors to maintain, lease, and oversee investment properties. Learn more about residential property management history, costs, terms, procedures, and more.
Property management is a service with a long history and an approach as varied as the rental properties these companies oversee. The simple definition is in the name, property management is foremost the act of managing a property for someone else. While this usually means leasing, maintaining, and operating the property, there are differences between property managers both across geographies and even within specific markets.
To pull the curtain back on the inner workings of property management companies, we’ve done our research. We learned everything we could about property management, interviewed over a dozen property managers with portfolios ranging from a few dozen properties to 10s of thousands. Spoke to investors that loved what property management companies offered them and those that thought it was a waste of their time. We combed through statements, contracts, and reviews to come up with what we know is the most in-depth, insightful, and comprehensive guide to professional property management for investors.
In this article on property management you'll find answers to:
- What is property management?
- What is the history of property management?
- What does a property manager do?
- How do property management companies work?
- What are property management costs, terms, and procedures?
- How do you work with property managers as an investor?
- What are the pros and cons of property management?
What Property Management Is
A property manager is a person or company that oversees the day-to-day operations of maintaining an investment property on behalf of the owner, for a fee. Commercial and industrial properties are more likely to be overseen by a property manager, since some residential investors choose to manage their properties themselves.
Notably, the cost of hiring a property manager is tax deductible. If someone manages the property themselves, they can keep track of any expenses incurred from maintaining the property and write those off at the end of the year. Similarly, if you hire a property manager to do the work for you, you can take a deduction for those fees.
Brief History of Property Management in America
In one form or another, people have been hiring and paying other people to manage their property for as long as property has existed. Formalized property management in the United States really kicked off during the great depression. When we talk about formalized property management, we’re talking about a property manager that has the accounting, personnel management, marketing, and leasing skills to care for a property.
The evolution of the property manager happened in a few distinct stages. While the industry has transformed, each of the property manager types continues to operate today, providing some of the variability in cost and services that you may have heard about or noticed.
Emerged in the 1930s during a period of relatively low vacancy rates and an unregulated rental housing market. These property managers collected rent, handled the minimal required repairs, and oversaw occasional tenant placement.
While this kind of property manager is much more rare today, some investors that own rent stabilized housing that stays occupied for extended periods opt for a similar level of service.
Emerging Professional Manager
Emerged during the 1960s as expenses for properties outpaced the growth of rental income. Compared to the caretaker, the emerging professional manager needed to be well-versed in marketing and leasing a property, as well as managing expenses in an increasingly complex regulatory environment.
Today, we can find the emerging professional managers overseeing a smaller number of local properties, often for themselves and clients. This manager is best for investors with a small and local portfolio that doesn’t require a large amount of communication or technical infrastructure for their properties.
Sales and Marketing Manager
Emerged during the 1980s as deregulation spurred production and rental demand softened. The sales and marketing manager focused on marketing large apartment buildings, extensive developments, and communities of new single-family homes. As lenders got regulated and the number of foreclosures jumped, institutions came to possess numerous properties that required management and upkeep.
The sales and marketing manager is the first one that’s equipped for scale and still makes up a significant part of the current landscape. This is especially true for the management of single-family homes, since the inventory is so variable and the geographic variation even within a few blocks can be huge. Most single-family investors with multiple properties opt for the sales and marketing manager.
Income Maximization Manager
Emerged during the 1990s as tax reform, institutional investors, and individual investors with large portfolios sought professional management. The income maximization manager was needed not only for property management, but also for asset management. This means finding and developing new sources of income like pet deposits and laundry machines for properties.
While this form of property management has become more common, it continues to be used most at the institutional level. Most of these companies are very well equipped for managing many properties but are more focused on communicating with a few key stakeholders rather than 100’s of different landlords. Single-family investors will find that this service is usually available to them in cities with high property values and at a premium compared to other property managers.
Today, property managers offer an array of service levels and cater to very different landlords, even in a small geographic area. That’s for a good reason. Different homes require different types of management and different investors have certain expectations that only some managers can meet.
What a Property Manager Does
While every property manager and property management company is unique, most will work to keep your property rented and ensure that the property is well-maintained. They’ll also handle all the billing and communications on your behalf.
Property managers will:
- Marketing the property: Property managers work to keep your property occupied. That means making sure it gets listed on relevant websites and shared across different mediums when the property is vacant.
- Vetting tenants: Once the property manager has a pool of interested applicants, they will vet them for you, likely by running a credit check and a background check. They will use those methods to zero in on the best tenant for the property.
- Negotiating leases: After they find a tenant, the property manager will be in charge of conducting the lease negotiations and overseeing the signing of all the paperwork. This includes keeping track of signed documents and enforcing deadlines.
- Managing unit turnover: The property manager will be in charge of making sure that the unit or property is ready for the tenant to move in. This includes making sure that the property is empty, clean, and habitable.
- Overseeing move-ins and move-outs: The property manager will also coordinate with the tenant when they move in or out of the property. Inspecting the property for any damage, returning security deposits, and otherwise ensuring that the home is treated with care.
- Conducting routine inspections: While the property is leased, the property manager will routinely inspect the property to ensure that it’s in good standing and that it’s being used by the tenant appropriately.
- Handling maintenance tasks: If any maintenance needs to be done on the property, that is also the responsibility of the property manager. Some property managers will also have a proactive maintenance plan that keeps the property well taken care of and reduces surprise costs.
- Collecting rents: When rent becomes due, the property manager makes sure that it gets paid. Whether that means processing a check or sending a notice for past due payment, property managers handle the actual transaction of renting.
In some regards, property managers act as advisors. Usually your property manager will be well-versed in local regulations, will know any relevant local procedures, and will have a list of contractors available on-demand in case of repairs. An individual landlord can do everything listed here, however, the learning curve, time burden, and stress are often deterrents for landlords.
What a Property Manager Does Not Do
In a broad sense, property managers will do almost everything required for your property. However, they draw the line at getting involved with your finances, crossing into any legal gray areas, and doing any personal favors or other work that is difficult to scale.
Property managers won’t:
- Go outside of budgets without permission: You’ll set a budget for repairs. Below that budget, on an individual item or over the course of a specified time-period like a month, you’ll have to grant specific permission to allow for spending that goes over.
- Start major repairs and programs on their own: Property managers make recommendations but still require consent for any major programs. Now, if a burst pipe is flooding the property, doing the repair quickly can be in your best interest as a landlord, but you shouldn’t expect extensive renovations or maintenance without giving your permission.
- Do one-off favors: Property managers operate at scale and try their best to treat each investor with the same respect. Unfortunately, that means they can’t handle some non-routine tasks that you could ask a friend to handle, like dropping by and looking at the home.
- Regularly visit the property: Property managers won’t drop by the property or even regularly drive by to make sure it’s in good condition. In fact, this category of one-off favors extends with property managers trying to avoid anything they can’t do at scale.
- Manage the property your way: Property managers thrive on routine and process. Not only does it ensure an equal level of service, these routines help prevent the landlord and the property manager from being exposed to lawsuits. Property managers don’t deviate from these routines often, especially if they are going to jeopardize the long-term viability of the property management company.
- Execute everything with extreme urgency: Property managers have a schedule and a timeline that they follow. If a request is not urgent from a tenant's satisfaction or legal standpoint, they will not rush to do it. This isn’t the case of poor property management. In fact, it’s good. This ensures that when there is an emergency, and from the perspective of the property management company, there always is, the resources to resolve the issue are available.
- Violate housing laws and regulations: It should be obvious that property management companies won’t break the law or even enter gray areas at your request. It’s more common for a landlord to ask for something that seems like it should be legal, but really isn’t. In these cases, the property management company won’t make exceptions.
- Pay your mortgage or property taxes: While these payments are directly related to managing the property, the property manager doesn’t want the responsibility or liability of paying your mortgage. With your taxes, the property manager simply can’t pay them on your behalf.
- File your taxes: On taxes, property managers will provide you with statements at the end of the year that will make tax preparations more simple. However, property managers won’t be preparing taxes on your behalf. That is a task best left to a licensed CPA.
- Submit insurance claims: If something occurs on your property and an insurance claim needs to be filed, most property managers won’t do this. The reason this is at the bottom of the list is, there are some cases when a property manager will handle filing the claim on your behalf, but this is rare.
- Outperform the local market: This one needs to be mentioned. Unfortunately, if all the homes in an area are renting for $2,000 a month, a property manager can’t get $2,500 for the same property. A property management company is never the way to turn a poor investment into a great one.
When you work with a property management company, you should be upfront and ask about any specific work you are interested in having done for you. Most times, you’ll find that property managers have policies set up to help guide the work that they do for their clients. Be wary if a property manager promises to do anything that you ask for. Usually that’s not a good sign.
How Property Management Companies Work
You cannot simply imagine that a property manager is doing the same work that a self-managing investor would be doing. Property management requires scale and scale requires you to give preference to process and structure over spontaneity and freedom. Property management, like compliance, is thankless work. You only hear about the problems, since a property manager that has done a perfect job and has gotten lucky has absolutely nothing to report.
You already have a good understanding of what property managers do. Below, we’ll explore how property managers interface with the different stakeholders that are needed to manage a property. In doing so, we’ll take a deeper dive and get a better understanding of the priorities and responsibilities of a property manager.
There is one item that we’ve notably left out of the next few sections and chosen to highlight it here: communicating. Regardless of who a property manager is working with, the burden of communicating thoroughly, regularly, and in an easy-to-understand way is on the property manager. Communication can take many forms, but regardless of how it’s delivered and to whom, it’s almost impossible to separate the quality of property manager communication from the outcomes they can achieve.
Property Management Companies and Investors
When you first work with a property management company, the property manager in charge will need to set expectations about:
- Who carries legal liability for what: Renting a home is a heavily regulated business. Everything, including marketing, evaluating applicants, tenant relations, and move-out/eviction procedures, are subject to federal, state, and local regulations.
- What spending limits will require your individual approval: You’ll be setting spending limits with the property manager, so that you can individually approve any expenses over a certain budget. The lowest possible threshold varies, but expect something between $100 to $500.
- What situations they will handle regardless of approval: If a property is flooding from a burst pipe, it needs to be fixed immediately. The extra 2-3 hours to get your approval over email can cause thousands of dollars in additional damage and lost revenue. There are also laws protecting tenants from long-term disrepair of certain home features.
- When maintenance will be done: Routine maintenance plans are a staple of great property managers and will keep your property operating longer and with fewer interruptions and major expenses. You should know what the maintenance plan is.
- When they will collect and deposit payments: Property managers may collect tenant payments on the first of the month, but not deposit it in your account for 30 days after collection. Understanding this schedule is important to planning your finances and cash flows.
- When and where routine communication will take place: This includes things like statements, quarterly review calls, annual income reports, and emergency notifications.
- How they will market the property: This should include information about the photos, listing locations, description, rent amounts and any other ways that the property management company will promote the property.
- How much you can expect to spend: No property manager can give you an exact estimate, that’s simply the nature of the business. However, you should have a good understanding of a range for spending under normal circumstances.
- How much money should be available in escrow: The property manager will pay minor repairs and some emergency repairs out of escrow. This means you’ll need to have some money deposited for them to use in these situations. You should know the amount and how the escrow account will be refilled after spending.
- How they will select tenants: Tenant selection is not a process that you’ll take part in as a landlord. Not only would you rather stay out of the process, but there are good legal reasons for the procedures a management company has put in place. Usually they’ll have a minimum income, credit score, and other qualifications a tenant needs to meet with a first applied and passed - first approved rule.
- How both of you will handle disputes: Inevitably, you’re going to disagree with your property manager. When these disagreements arise, it’s good to have a process outlined for handling these disputes. The better defined the process is, the more likely the disagreement is to be resolved quickly.
Once your property is leased, the property manager will need to:
- Request permission for over-budget items: This could be a quick text or a notification via email, but in most cases, your property manager will need to describe the expense and why it’s necessary. If you believe that a request is incoherent or over-solves the problem, request alternatives.
- Collect, deposit and report income: Collecting, depositing and reporting rental income is partially automated but still requires the oversight of a property manager to go smoothly.
- Provide routine updates: Property managers must still prepare any reporting, log and understand any work or tenant issues happening on a property, and otherwise keep you up to date while the property is leased.
- Communicate plans for leasing and maintenance: Your property manager is a local expert and that can be an enormous advantage for your property. Prepare to lease it before school starts, to get the best price or consider updating the kitchen and bath to stay competitive with other local properties. Either way, your property manager should craft and share a strategy that will help your property perform.
- Bill you for services and maintain escrow: While this item is last on the list, it is one of the most important things for the property manager and management company. Staying on top of collections, escrow balances, and investor payments is the foundation that keeps all the other services running smoothly.
If you decide to self-manage, sell, or work with a different property manager, your property management company will be required for transferring the home. While the home doesn’t move, all the paperwork, work in progress, and other context about the tenant, lease, and maintenance will need to be communicated.
Property Management Companies and Contractors
Contractors of all kinds are another party that property managers spend a significant amount of time interfacing with. For most people, a contractor relationship can be long term but the frequency of contact is relatively low, that’s because for any one homeowner or investor problems are infrequent.
- Hiring: If you’ve ever needed to quickly find a specialist or a contractor, the first thing you’ve probably realized is that there are many contractors, no easy way to select for skill, and almost no one is available right away. This challenge is even greater for property managers since they are handling the repairs for multiple properties on any day.
- Scheduling: Coordinating the best time that works for the contractor and the renter with the actual repair in mind requires some great time management. For self-managing investors, the frustration is often when one or the other party starts changing times or takes a long time to respond to potential scheduling.
- Negotiating: Contractors like to work with property management companies since they often offer a high volume of work. However, this doesn’t automatically result in lower prices. The three inputs from contractors’ time, materials, and expertise aren’t particularly scalable. So while property managers may negotiate to get better rates, it’s often not much lower than traditional homeowners would pay for the same work.
A note on accountability. There are two advantages that property managers have, they hold contractors accountable on your behalf and they represent a large amount of leverage in case something is disputed. Since a property manager can represent significant stable future work for the contractor, the contractor is less likely to do a poor job or cut corners when completing work.
Property Management Companies and Renters
Renters are the only non-professionals in the list of property management connections. In fact, it’s also the connection that causes landlords and property managers the most issues. Renters are dealing with their own circumstances: losing and finding jobs, buying pets, inviting over friends, noticing leaky faucets, and more every day on the property.
- Finding: Knowing where tenants are looking and what they are looking for is the key to finding them quickly. Property managers photograph, list, and advertise the rental property to potential tenants on behalf of the investor. The quantity and quality of applicants is directly influenced by the method of advertising the property.
- Screening: Property managers are also responsible for screening tenants. This means running a credit report, getting income statements, evaluating past rental history and otherwise evaluating the tenant. They structure this process to find the best tenants and reduce any exposure to liability related to fair housing laws.
- Selecting: Property managers will place the first tenant that meets all the qualification criteria set for the property. This means that if five tenants apply and the first one passes, even if the rest are better tenants on paper, they will place the first one in the property. This protects both the owner and the property manager from any compliance issues.
- Contracts and billing: Putting a leasing agreement in place is one of the best ways to protect an investor from tenant related liabilities. Property managers handle putting the leasing agreement in place and bill the tenant every month for rent. While this seems simple, having a process in place can mean the difference between collecting and not collecting rent in a month.
- Addressing complaints: Tenants rarely get in touch with landlords or property managers just to catch up and say thank you. Most conversations revolve around issues with the property, necessary repairs, and other requests. Taking care of those requests and setting expectations with the tenant is a core responsibility of a property management company.
- Warning: It isn’t pleasant when a tenant violates a policy or cannot make a payment. However, providing warning can be a key part of a future legal process, property managers handle the required warnings when some violation occurs.
- Evicting: Even less pleasant than sending a warning is the eviction process. Laws at the local and sometimes even the national level surrounding eviction proceedings change. Property managers handle the eviction process in a way that protects the owner from liability and the investment property from damage.
There is an often repeated saying in property management and residential real estate investing, that happy renters are long-term renters. The effort that a property management company makes to keep renters happy has a direct financial impact on the performance of your investment property. The bad news is that some people, renters included, can’t be pleased. The good news is that your interests and the interests of the property manager are most aligned.
Property Management Companies and Regulators
Property managers are regulated at the local, city, county, state, and national level.
At the national level property management companies are regulated by:
- HUD Fair Housing and Equal Opportunity Office
- General Real Estate Law
- NARPM, if they participate
At the state level property management companies are regulated by:
- State-specific real estate laws
- State Real Estate Commission (ie. Texas Real Estate Commission)
At the county level property managers are regulated by:
- County-specific real estate laws, like routine mandated rental housing inspections
- Regional MLS, if they participate
At the city level property managers are regulated by:
- City-specific code and ordinance, like routine inspections, rent control, and specific forms
With regulations at multiple levels, property managers need to be familiar with an ever developing set of laws and procedures. They also need to deal with any audits that take place during operations. Finally, when some violation is found at the local level, the property manager needs to take the necessary steps to resolve it. All of this requires significant resources and planning to execute.
- Researching: Property management companies invest considerable resources into understanding all the relevant laws for their local properties. Individual investors would need to pay a real estate attorney to get the same level of information. Given the rapid changes to these laws, this cost would quickly add up and exceed the total cost of property management.
- Adhering: Putting a process in place is one thing that property managers do best. Following the process may sometimes produce slower or less than stellar results, but both the owner and property manager are protected by following this process. This is also part of the reason that property managers have earned a reputation of being inflexible.
- Correcting: Even with an expert knowledge of the law and strict adherence to a process, human error, oversight, and a rapidly developing regulatory environment result in violations. Correcting those violations, disputing them, submitting proof, and ultimately ensuring that the property can continue to operate and generate revenue represents a significant portion of a property manager’s responsibilities.
Lawsuits are more likely for property investors that choose to self manage. The risk exposure of self-managing owners is much higher than those that use a property manager. While nothing can completely protect an owner from assuming some liability, property management companies have delivered significant results by working closely with regulators to ensure compliance.
Property Management Costs, Contracts & Procedures
The business model of property managers is straightforward. Manage investment properties at scale and earn a portion of the rental income from that process. As such, the interests and incentives of a property management company are directly aligned with the investor.
To increase its revenues, a property manager can raise rates, add investment properties, increase rental income, or reduce its operating expenses. These forces, along with the high level of local competition that property management companies face, have produced a homogenous structure for property management companies.
Property management companies have few employees, many properties, and comparable pricing at the local level. They work diligently to maintain and, when possible, increase the revenue of the rental properties they manage. To protect themselves and retain investors, property management companies invest in communication and aggressively manage any outside risks they can control.
Property Manager Costs & Value
Property managers have a simple and effective pricing model that takes one of two forms:
Percentage of the rent (more common)
Property managers charge a percentage of the rent - between 5% and 15% - that they collect. This creates an incentive for the property manager to seek higher rents, since higher rents result in higher fees. This also creates an incentive for property managers to devote more time and resources to properties that are already more expensive, since vacancies in those properties are more expensive than in others. For a residential investor, this could also result in more difficult to model costs upfront but a higher amount of portfolio resilience to declining rent environments, since fees would decrease and disappear during periods of vacancy.
Fixed fee (less common)
With a fixed fee model, property managers charge a flat fee regardless of the property rental income. In fact, with this model, property managers may charge even when a property is sitting vacant. This kind of arrangement is more beneficial for its predictability and can end up saving some owners’ money, especially compared to percentage based competitors in a growing market. It also means that all properties are treated more equally, at least from the perspective of incentives.
Escrow & Additional Expenses
The property management fee only covers services, every other expense will be the responsibility of the owner. Property managers don’t like to front the money for those expenses, so they require investors to keep an escrow balance with the management company. This can range from $300 to 1-month rent and may vary from property to property depending on the company’s assessment of potential repair costs and property condition.
Some expenses will be routine, for items like regular property upkeep and maintenance. Others occur at the start of a lease and are charged once a tenant is found and put under contract. Finally, expenses sometimes arise related to non-routine repairs and maintenance of the property, which the management company can cover out of an escrow account.
Some additional expenses investors should expect when working with a property management company include:
- Leasing fees: Most property management companies charge a fee for finding you a tenant. It’s common to charge this fee when an acceptable tenant is found. However, in less competitive markets, property managers may charge the fee just to look.
- Routine maintenance plans: Performing routine maintenance can extend the life of your investment and prevent costly repairs and replacements. Some property managers offer the service for an additional monthly fee.
- Repairs: While routine maintenance can reduce the frequency of repairs, they still happen. Property management companies pass on any repair costs directly to you, if they happen.
Repair costs are often cited as the source of investor and property manager conflict. Many investors believe they could get a better price, fix it for less, or replace whatever is damaged more quickly. They are right.
However, the property manager can’t devote that much time and effort to getting something like a repair for 10% less. They face the challenge of handling repairs across hundreds of properties and while it would be nice to save customers a few dollars, it would mean much higher monthly costs to cover staff and overhead.
Any industry has its collection of companies that take advantage of naïve customers with hidden fees. There are two ways to reduce the likelihood that you end up with a property manager that charges significant hidden fees: scrutinize your contract and get referrals. If there is a fee, it will be written into the contract and if charging hidden fees is common, you’ll likely hear about it from current customers.
If there are hidden fees, they’ll likely appear as maintenance markups. These fees are usually the difference between the market rate for the repair and the negotiated lower rate that the property manager gets, which doesn’t really affect the bottom line for investors.
Lucky for most investors, this practice is considerably less common now that online reviews are readily available. Property managers are also less likely to charge hidden fees or otherwise disappoint their customers if they are in competitive markets. Since investors have choices and reputation is key in the property management business, property managers that charge hidden fees are usually smaller, newer, and less likely to survive and thrive.
Negotiability & Bulk Pricing
Property managers don’t negotiate for lower rates with investors. Margins in that industry are already very low and competition for investors is high, so there is little wiggle room in the price point. So is it likely that you’ll get a discounted rate? No. But is it worth a shot? Why not!
There are two situations in which an investor can receive a favorable rate from a property manager:
- Bulk pricing: It should come as no surprise that an investor bringing four or more homes to a management company can negotiate pricing.
- Price matching: If you started working with a property management company some time ago, you may get them to match current rates or competitor rates. This requires some legwork from you as an investor, namely requesting current pricing and comparison shopping property managers.
As an investor, it’s important to also understand that property managers that offer significant fee discounts are also cutting back on the services that they provide. That’s why it’s important to compare the value (service per dollar) that a property manager offers rather than just the price they charge.
The only upfront costs investors encounter when they work with a property manager are for any maintenance that needs to be done to the property upfront. Escrow accounts, leasing fees, and ongoing fees are all deducted from incoming rent by the property management company. This means that the first 1-2 months of payments will be lower, but you don’t need to reserve cash for another expense, so you can invest more with confidence.
But when do you get paid?
Your property manager will collect rent from your tenant on the 1st or the 5th of the month. Once they receive the rent, it will take some time for that money to make it to you. 10-15 days is most common for the delay, but some property managers wait as long as 30 days before paying out your rent.
When considering the cost of property management, investors should evaluate the potential tax benefits of employing a property manager. Fees paid to property managers can be deducted from rental income, allowing investors to reduce their overall tax burden. It’s best to consult your tax advisor or CPA on the matter, but the tax implications should be factored into your cost assessments.
Property Management Contracts & Terms
A property management contract will outline all the information related to managing your property, including the terms, costs, and expectations of each party. Every property management company will have a slightly different contract, but in general, you can expect the following three sections:
- Manager obligations: This covers the responsibilities and rights of the property manager in connection to the property and its care.
- Owner obligations: This covers the responsibility of the owner, such as making payments, maintaining adequate insurance, and responding to requests.
- Mutual obligations: This section expands on the previous two by outlining the intersection of responsibilities, in other words, how the property manager and owner will work together before, during, and after the property management relationship.
It can be a good investment to have an attorney review the contract, however, contract changes are very rare. This is mostly because property managers try to avoid as many exceptions to procedure as possible, since they take away from the economies of scale of managing 1,000’s of individual properties. Besides the above outlined information, the contract is also your first opportunity to disclose key personal and property information and to purchase any additional services provided by the property manager.
Property Manager Obligations
Responsibilities of a property manager include:
- Accessing and marketing property: The property manager will need permission to access the property for a variety of reasons, including inspection and repair. They will also need full access to marketing the property online and through other means to place a tenant.
- Acting as an intermediary: The property manager will act in your best interests within the confines of the law. For example, if instructed not to disclose something about the property to tenants, the property manager must comply, unless the disclosure is required by law.
- Leasing the property: The property manager may lease the property, sign on behalf of the property, institute any legal actions, and collect rents on behalf of the investor. The property manager can also settle, compromise, or release claims on past due rent, but will probably involve the owner in such decisions.
- Securing rents and deposits: This protects the property manager from the default of the tenant or the depository institutions that are being used to manage the rents and security deposits related to the property.
- Coordinating professional maintenance, repairs, and service contracts: Property managers rely on a network of contractors to maintain the property. This section of the contract gives them the right to select and use contractors of their choosing and outlines that the property manager relies on the contractor to determine what work is and isn’t necessary.
- Providing clear periodic statements: To enhance transparency and accountability, property managers will provide regular statements detailing the works, costs, and rent collected for a property.
Property Owner Obligations
Responsibilities of property owners include:
- Paying professional management fees: Investors are required to pay the property manager in a timely manner. This is relatively straightforward since they deducted fees from collected rent. In some rare cases, major repairs may exceed both the escrow and rent collected balance and require additional payment.
- Paying utilities and rental fees for leasing: This applies to the property while it’s vacant, ensuring that they can show the property with all the utilities working to tenants. It also gives the property manager a means to hold the owner liable for any costs that it incurs in leasing the property.
- Maintaining adequate insurance: Most banks won’t lend to owners without adequate insurance, so this should not be an immediate concern. If something about the property changes or there are new insurance requirements based on zoning, investors will need to get adequate insurance coverage.
- Providing access to data and records: At the request of the property managers, owners will need to provide information related to the property. This is usually required in a legal context, as property managers seek to make the property compliant with local laws and requirements.
- Affirming ownership: The investor must be the owner of the property and prove that ownership at the request of the property manager.
Mutual Property Manager and Owner Obligations
Mutual responsibilities of property owners and property managers include:
- Reducing individual liability: Property managers are careful to avoid liability and this contract is no different. This section reduces the individual liability of the property manager for various events that can happen because of property management. The best case is to consult a lawyer for any situation related to this.
- Agreeing on assignability: The property can be assigned to another property manager and the owner and property manager agree on minimum notice and the procedure by which the property will be assigned.
- Maintaining contract terms: This outlines the length of the contract and how/when it can be renewed and canceled. Most contracts will match the lease agreement of the tenant and will automatically renew for periods of one year. To cancel during the contract, most property managers charge an early cancellation fee and require at least 30 days notice.
- Dealing with foreclosure: The contract terminates in the event of foreclosure, but does not relieve the owner of payment obligations to the owner.
- Remaining compliant with property codes: This is a general requirement that protects both the property manager and the owner from any fines associated with the property being not up to code.
- Handling taxes and licensing: Taxes are the responsibility of the owner and the property manager will not be responsible for any tax collection, remittance, or other tax obligations related to national and international property ownership.
- Responding to communications: The owner agrees to respond within a certain time frame (usually 24 hours) or forfeit the opportunity to decide about certain matters. This is most often used with high urgency repairs that need to be done, such as water shut off, heat in the winter, or other issues. This protects the owner because there are laws in place protecting tenants in the event of certain property issues.
Optional Property Management Services
Optional property management services include:
- Maintenance and remodeling: Services including repairs and cleaning intended to make the property rent ready. For most properties, this will be required to get it leased quickly and at a good rate.
- Landscape and lawn care: Lawn care can be handled by the owner or the property manager, but it must be taken care of in most cases. This applies specifically while the property is sitting vacant.
- Seasonal services: These are intended to help tenants, especially when the lawn is about to grow by trimming the grass and preparing it for spring.
- Preventative care and property assessment: This enables the manager to regularly check the property for maintenance items that need to be handled. This is intended to keep the property in good working order and to reduce the tenant turnover. They usually execute programs at an annual or semi-annual cadence.
- AC & Heater preventative care: Air conditioning and heating can represent costly repairs for owners, especially in the seasons they are most used. A maintenance program helps to manage and reduce these issues every season.
- Carpet cleaning: Investors that own homes with a significant amount of carpeting can consider regular carpet cleaning to extend the life of the carpet in the house.
- Eviction protection: This is a unique program that shifts the responsibility and cost of evictions from the owner to the property manager. It does not apply to tenants that were not placed by the property manager and does not completely absolve the owner of liability and responsibility. It helps reduce some of the legal costs associated with evictions.
Personal and Property Information Disclosures
Personal and property information that needs to be disclosed includes:
- Owner information: Basic contact information to be used for mail, communications, and contract purposes. It will be your responsibility to update the property manager if your name or address changes.
- Payment information: This is the routing and account number of the bank account where deposits and withdrawals will happen. Consult a financial planner about the best way to manage accounts to make tax preparation easier.
- Rental property and leasing information: Address and basic details of the property being placed under management. This can include target rent, any required repairs, and other details a property manager might need to get to work.
- Insurance information: Basic information to be used for any insurance verification for the property. Remember that most property managers will not handle insurance claims on your behalf.
- Home warranty information: If you’ve purchased a home warranty or the seller of the property provided one with the deal, include the information. The property manager will then attempt to use it if various repairs arise.
- Property details: Provide property details that will be used to market your property, including the year it was built, any additional on-site amenities like a pool, fireplace, or alarm. You’ll also need to disclose some details, such as whether pets are allowed on the property.
- Lease information and history: If the property is currently leased or was leased in the recent past before being transferred. You’ll need to provide the property manager with the information related to the lease and the current tenant information. If the property is leased but there is no lease in place, the property manager will need to get a lease signed.
- Disclosures: You’ll need to provide any disclosures related to mold, lead paint, carbon monoxide alarms, and anything else required by local laws and regulations.
Working With Property Managers
Working with property managers is relatively straightforward. In most property manager and owner relationships, the fewer interactions there are, the better. That’s because most property managers will only get in touch if there is a problem to resolve. The most important things to prepare for before working with a property manager are:
- Finding a property manager
- Evaluating a property manager
- Hiring a property manager
- Managing a property manager
- Firing a property manager
Like every business relationship, there will be more exceptions than rules we can detail, and you’ll need to make decisions as problems and opportunities arise. Do some upfront work to get to know the property manager and understand their track record. If things seem wrong, pay attention to red flags, and if the situation deteriorates, move your property to another manager.
Most property owners receive regular statements and rarely need to deal with troublesome issues from a property manager. The highest amount of friction is usually early in a property manager’s tenure as investors and property managers work to align expectations with reality. That’s why getting educated on the topic is so important.
How to Find a Property Management Company
There are a couple of ways to find a great local property manager. You can get a recommendation from your agent, google around for local property managers, or speak to other local investors about their experiences. All of these methods are valid and you’ll likely end up with a mixed list of small and large property management companies at various rates.
How to Choose a Property Management Company
Regardless of the source of the property management company, you’ll need to take some steps to evaluate a potential property manager. Since you’ll likely be working directly with them on the property for the foreseeable future, some early legwork can save you an enormous amount of future effort.
In your evaluation, you’ll want to determine:
- Track record: If past clients of the property manager are satisfied with services.
- Property fit: If the property manager currently manages similar properties in the area where your investment is located.
- Personal fit: If the property manager’s communication and general approach to management matches your expectations.
- Service fit: If the property manager provides the services necessary to manage your home in the long run.
- Budget fit: If the expected cost of property management is viable for your investment property and fits your budget and goals.
You’ll need to pick your battles for this process. If you find a property manager that fits all of your criteria, that’s amazing. However, in most cases, you’ll need to compromise based on what is locally available. Remember to also adjust your initial expectations. Every investor would like exceptional service and fit for the lowest possible price, but usually services are priced accurately in competitive markets and you’ll need to pay more for better service.
Hiring a Property Manager
Hiring a property manager is straightforward, you’ll complete the contract, agree on some rates and dates and you’re done. Usually you won’t have to pay anything upfront, but expect that the first month of rent receipts will have a significant number of initial deductions. After that, you should see relatively similar receipts hit your bank account every month with some repairs and occasional service costs.
Managing a Property Manager
This is a source of significant friction between property managers and clients because property managers don’t want to be managed and investors sometimes want to get involved in decision making. Make sure you clearly understand the roles and responsibilities outlined in your contract. Here, the best approach is to work with your property manager. They are not employees and usually have few opportunities to go outside of their routine tasks. If it feels like there is a significant gulf between yourself and the property manager, it may be time to consider a different option.
Firing a Property Manager
Eventually, you may need to fire your property manager. This is an important step to be prepared for so that you know your options. This also may be required if you choose to sell your property with the representation of an agent other than your property manager. The three steps to firing your property manager are:
- Provide the contractually required notice: Usually 30 days with written notice required.
- Coordinate with another property manager: Having one ready is always best, since it avoids having the property sit in limbo without management.
- Oversee the transfer of the property and responsibilities: Make sure that everything is properly transferred and that the property is now being fully handled by the new property manager.
Most property management contracts renew annually and track the lease of the current tenant. If you are canceling while the property is vacant or as the current tenant is preparing to move out, there are usually no additional fees to pay. However, if you are canceling during the contract, you’ll usually be required to pay an early termination fee. The size of the fee varies, but expect to pay three months of property management fees upon cancellation.
Pros and Cons of Property Management
By now, it should be clear that a property manager is there to handle all the mundane tasks of keeping an investment property up and running. That said, like any financial decision, the decision to hire a property manager has its pros and cons. Considering that, we’ve laid them out for your consideration.
Pros of Using Property Management
- Your investment becomes passive income: The biggest benefit to hiring a property manager is that you get to outsource all the hard work in keeping your investment up and running. You essentially get to sit back, relax, and enjoy collecting passive income.
- You get your time back: Becoming a landlord basically means taking on a second job. The average landlord spends 48 hours per year managing each property in their portfolio. You can spend that time doing something else instead.
Cons of Using Property Management
- You will have to pay a fee: Property managers collect a fee for their services. This is usually a monthly fee that is a percentage of the property’s rent.
- Less control of the day-to-day: Property managers assume control of the property and manage it. That means you’ll have less input as the owner than if you were managing it yourself.
Property Management Alternatives
The primary alternative to property management is self-managing a property. The exact process for doing this is outside the scope of this article and would require some significant work for a new investor to learn and understand.
New tech-enabled property management companies provide investors with a middle ground solution. These companies arm the investor with the software solutions that professional property managers use, but leave all the day-to-day management up to the investor. They also centralize communications, billing, and help you leverage a network of agents for leasing. The cost of using these property managers can be significantly lower than traditional solutions.
Managing a property can be a surprise full-time job for real estate investors. That’s why investors that have other priorities rely on professional property managers. Property managers are usually responsible for leasing, maintaining, and operating the property on behalf of an investor for a fee.
Keep in mind that in most cases, while an individual property manager may be assigned to your property, you are usually dealing with a larger property management company.
While hiring a property manager may not be the right choice for everyone, if you don’t want to worry about getting calls in the middle of the night from tenants or worrying about paperwork, it may be a good option for you. Property managers are there to ensure that investing in real estate is accessible to everyone, even those who are too busy to handle maintaining an investment property.
At Awning, we set you up with a trusted local property manager who can take care of your property for you. If you want to learn more about how we can help you invest with confidence, no matter where you are in the world, call us today to get started.