So, you’ve made the decision to purchase an investment property, or to turn your existing condo or loft into an investment property. A decision needs to be made soon and you’re beginning to think about renting it out as a luxury furnished apartment. The first decision you will be faced with is whether to manage it yourself or hire a professional property manager. Here are two important things to consider when making this decision:
1. Does managing a furnished apartment fit with your lifestyle? Managing a furnished apartment can require a lot of time and attention. From marketing to dealing with prospects to finalizing paperwork and handling turnovers and tenant requests, it can easily feel like a part-time job.
2. The financial trade-off: obviously, manager fees will reduce the income generated by your property. However, a competent property manager will be able to market your property for higher rents than you would otherwise be able to obtain on your own. This difference should at least partially (and sometimes entirely) offset the manager’s fees.
Once you’ve decided you’re going to explore the idea of hiring a professional manager, the next step is choosing one. You should start off by talking to at least 3-4 different companies and get a feel for their management philosophies. Ideally, you want a manager who is willing to take a vested interest in your property, for example, someone willing to structure their fees as a percentage of each monthly rent amount – that way if the unit is empty they don’t get paid either. The main point here is that you should be wary of managers or real-estate agents who are looking for a “finders’ fee” arrangement, where they find you a tenant, take their fee up-front, and have no further financial interests in your unit for the duration of the tenant’s stay.
Once you have spoken to a few companies, the next thing you will be comparing, of course, are their fees. There are three very important things to keep in mind when comparing fees:
1. Service levels vary widely across companies. The words “full-service” might mean completely different things to various managers. Later on, we outline some tips on how to make sure you are comparing apples to apples.
2. The big picture. Management fees are only part of the financial picture. Before making a decision, consider that the bottom line for you is what you can expect to receive, net of all expenses. This means taking into account not only management fees, but what kind of rents the manager expects to charge and what kind of occupancy rates they are expecting to see. For example, manager A charges 10% and expects to rent out your property for an average of $2,500 per month and keep it occupied about 80% of the time. Using these estimates, over the next year, you can expect $2,500 X 12 X 0.80 = $24,000 in gross rent, which after fees becomes $21,600 in your pocket. On the other hand, manager B is charging double the fees (20%), but they have invested a lot of resources into marketing their company with higher-paying clientele and feel that they can rent out your property for an average of $2,750 per month and keep it occupied about 90% of the time. Using these estimates and the same arithmetic as above, it turns out that manager B is actually the better option (resulting in $23,760 in your pocket, after one year).
3. As always, if it sounds too good to be true, it usually is. If you have spoken to a few managers and one of them is promising everything under the sun at half the price of the next guy, that’s usually a good indication that you should remove that manager from your list of candidates.
Here is a list of 10 other important things to consider when comparing managers:
– Can they back up the estimates of monthly rent and occupancy rates they have given you? For example, do they have a documented track record of their occupancy rates over the last few years, and/or can they provide references from other owners of similar properties?
– How accessible and responsive are they in their dealings with you? This will give you a good indication of how they handle tenants and prospects.
– Do they have a professional website that would attract the types of clients and prospects you are looking for?
– Are they expecting a long-term commitment from you or are you free to cancel if you are not happy with the way things are going?
– Do they have a toll-free number that prospective tenants from out of town can call?
– Do they offer special services such as airport pick-up and pre-check in grocery service?
– What type of reporting do they provide? As an owner, it is in your best interest to receive transparent financial reports (ideally on a monthly basis) as well as information about the status of your unit, such as whether or not it is currently occupied and the current monthly rate being charged.
– How do they plan to make sure your unit is kept in good condition (for example, are there regular cleanings, how often do they go in to look at the unit, will they allow smoking in the unit, etc.)?
– How involved will you need to be with respect to screening and qualifying tenants, collecting damage deposits, checking for damages when tenants leave, dealing with tenant requests, etc.?
– Are they willing to help you with any leg-work that might be required to prepare your unit for the furnished market?
At this point, you’ve started working with a competent property manager and you are starting to see some good returns on your investment property. Here are two important “do’s and don’t” to keep in mind as you’re working with your property manager:
– Do monitor their performance. For example, after one year, tally up the actual net income you have received and compare it to what was expected. If there is a large difference, discuss it with your manager.
– Don’t micro-manage them. Remember, you hired them for a reason. Trying to stay involved with the day to day issues of your property defeats the purpose of paying someone to manage it.