How To Select And Use Property Management Companies by Garrett Sutton

How To Select And Use Property Management Companies

Save time and money by selecting the right company the first time

My first foray into real estate investing began by accident. Although I was licensed as a California real estate broker for many years, I personally had never held property for investment purposes. I did own a small starter house in a pleasant Reno neighborhood, but soon after my marriage and the birth of our first child, we decided we would need something bigger. We realized that after all the broker’s fees and transfer fees that we were going to lose money if we sold the house. So we decided to rent the place out.

Some might be asking why I’m writing about real estate and not leaving that up to my good friend, Ken McElroy. Some people enjoy the one-on-one interaction and maintenance of a rental property and feel a sense of pride about doing it themselves. Certainly, some will save a great deal of money by managing their own real estate. But for others, for whom a management company will actually save money and headaches, there are some guidelines to follow when selecting a company.

The following are key elements to consider when selecting a management company:

  • Local Reputation and References: Since the company you choose will be handling your money, it is important that they be trustworthy and well respected around town.
  • Vendor and Service Contracts: Many management companies have strong relationships with vendors and service providers. This may result in lower costs for maintenance and upkeep than you would be able to find on your own.
  • Market Knowledge: You want your management company to know what the local market will bear in terms of rents.
  • With the field narrowed by using the recommendations above, now you can do more in-depth investigation into their management contracts. Items to consider include:
  • Compensation for services: Management companies usually charge a percentage of the gross rental receipts, ranging from 5 percent to 10 percent. If they receive a percentage, this gives them extra incentive to keep all the units full.
  • Duties and Responsibilities: Make sure the contract clearly defines who is responsible for what. What do you, as an owner, want to be involved in and what do you want to leave to the managers exclusively?
  • The Term and Termination Clauses: You will want the option to give thirty days’ notice to the company and be able to move on if you are not satisfied with their management of your property.
  • Spending Issues: This will define how much the managers can spend without consulting with the owner. For example, you will want to approve any large repairs and improvements.
  • Special Contract Issues: Read the contract for any catches or small print. If a management company asks for a percentage of the brokerage commission if you decide to sell the building, either get the clause removed or use a different company.
  • Reports: As an owner, you will want to receive regular reports detailing income, expenses and reserves.

After contracting with a management company, give them a few months to get settled. Then you will need to craft a system to analyze their performance. You can measure their success by the following:

  • A lower vacancy rate
  • Greater return to the owner
  • Better collections
  • Lower turnover
  • Fewer complaints
  • Better condition

If you take the time to choose the management company that works best for you and your property, it can benefit everyone involved. To learn more about the secrets of successful real estate investing, check out my book, Loopholes of Real Estate Investing.

Original publish date: July 17, 2019

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