Just Say NO To Property Management!

Why? Because it sucks big time. Call me Captain Obvious, but I just recently came to this conclusion.

Let’s look at how it works.

You hire a company to “manage” your rental house. They’re supposed to collect rent, pay expenses like insurance and property taxes, and make sure that the necessary repairs and maintenance, including preventative maintenance gets done.

And for single family houses in my market, the going rate for this type of property management is 10% of gross collected rents. Most of the bastards will even keep the late fees all to themselves. Don’t get me started on the up front, the exit, and all the junk “fees” that they charge. It’s like working with a damn bank.

From my perspective, 10% is highway robbery.

My houses turn over on average once about every three years. They’re all also in spectacular condition, such that I rarely have maintenance issues. In fact the last time I had anything significant happen at one of my houses was three winters ago when an ice dam formed and pulled a portion of a gutter off of a house. So their work every month amounts to getting a check in the mail, depositing it, then sending me a check in the mail.

For that I would have the pleasure of paying them 10%, or around $100 per month per house. I’m shaking my head even as I’m writing this.

Then when you add to this the fact that the true impact to me is FAR greater than the 10% they quote, my blood boils. Let me show you two scenarios.

The first scenario shows the numbers from one of my houses with no property management. I generally put aside $50 per month for Repairs and Maintenance and about a half-month’s rent per year as a Vacancy Reserve. (You ought to do the same thing unless you own one of those magic turn key rental houses in Detroit that never turn over or need maintenance. I hear they come with a free unicorn as well.)

You can see that it throws off about $350 per month in net income or net cash flow. Not great but it’s at the lower end of what I’ll accept.

The second scenario shows the same house, but it includes a fee for property management of 10% of gross rent collected. Or in this case, $100. 

Notice the difference?

The net income is exactly $100 less in the second scenario because of the fee for property management. Exactly as expected.

But while the cost of property management is claimed to be only 10% “off the top”, when you do the math like I did above, you see that the $100 fee actually amounts to a staggering 27.9% of the Net Income.

The fact is, you don’t eat gross income. You can’t feed your family on gross income. No. You do all that with NET income. And the impact of property management on Net Income is far more significant than you think.

A 27.9% reduction in Net Income. For doing what?

I guess I’m still scratching my head trying to figure that out.

To be honest though, I don’t think that property management completely sucks. I think it’s more that the model is outdated and broken.

These days rents can be paid online. Marketing is done primarily online, and a lot of tenant screening is done via phone and email. A lot has changed with property management in the last decade. It can take a whole lot less time, effort, and energy to execute. But the way that property managers are paid has not changed at all.

I’ve been kicking this idea around quite lately with a couple of colleagues of mine, all together we have 44 houses. We’d all like nothing better to outsource property management so we could sit home and drink mai tais and play yathzee, but we’re all of the same mind that you’d have to be smoking crack to willingly give up 27.9% of your net income to someone for not doing much of anything for you.

As a group we’ve even started seriously talking about starting our own property management company that specializes in houses like our that rarely turn over and that on balance don’t need a lot of attention.

But we’re still trying to get our arms around a payment model for property management that works. We’re thinking along the lines of an a la carte type model, where there’s a low base fee every month for rent collection, then the property owner pays something additional for each other service that the property manager performs that month.

But we still don’t have it right. We will though.

What are your thoughts on it? How could the property management model be restructured? How can property management companies be incentive based rather than fee based? What’s the right arrangement?

To be blunt I have no desire to hear from property managers about how they earn the money they make. They probably do in crappy areas with crappy houses. What I’m looking for is a new model that fits with the times. Not a new way to use a buggy whip.

Let me know what you think.