Real Estate 038: Self Management vs. Hiring a Third-Party Property Manager

It’s been a while since I've written a blog post, mainly due to focusing more on acquisitions, managing the rehab, and stabilizing my portfolio. A question I receive often from my readers is whether or not they should hire a property manager (PM) or self-manager their properties. So I decided to reflect on my past two years of rental property ownership and share my thoughts below.

Should I self-manager or hire a property manager?

Investors understand the importance of buying below market in good locations with enough cash flow to pay its debts, expenses, and whether market cycles. However, all of these assumptions and proformas are only on paper, and a rental property is only good as its executed properly. Like Gary Keller describes in part 3 of his book "Millionaire Real Estate Investor", owning a million, landlords must keep the property in good condition (no slumlording) as well as find quality tenants to live in your rentals. A subset of those two functions is understanding the local markets (e.g. landlord laws, market rents, tenant demographics) as well as efficiencies of a sole proprietor vs leveraging a team (e.g. contractor discounts through volume, bookkeeping, and other administrative functions).

Hiring a Third-Party Property Manager

I have made a conscious decision on day one to hire a third party property manager to manage my rental properties and here are the reasons why:

  • Cost efficiency: Each property manager is different, but based on the number of doors they manager (e.g. 100 -> 1000), they may work with designated teams of handyman, or even have in-house contractors that save you time and money when dealing with rent ready repairs and/or maintenance calls.

  • Scalability: In addition to maintenance repairs, the process of searching for tenants, marketing, answering calls, collecting rents and bookkeeping takes time and effort. You may be able to handle the administrative functions easily when you are at a handful of single family properties, but as you scale up to 10, 20, 50 doors, you may end up finding yourself becoming overwhelmed with the tasks at hand.

  • Liability protection: With my properties, the leases are between the tenant and the property management company, and the property management companies carry legal liability insurance in case there are issues that arise during showings, open houses, and maintenance visits. Furthermore, experienced PMs should be able to advise their clients on understanding local laws and regulations that can be a potential liability.

  • Increased profit: You may have heard the advertisement "We've seen a thing or two, so we know how to deal with these claims". Its spoken from a large insurance company who have been in the industry for many years and have dealt with issues and challenges day in and day out. Unless you are fully confident in your ability to manage rental properties with maximum efficiencies, you may be leaving money on the table. For example, not pricing your rental rates appropriately, not using the right lease agreement, and understanding what type of rehab is needed for what tenant demographic and type of property. If you are paying your PM $100/door, but through reduced maintenance, longer term tenants, and increased rental rates you are able to recoup even half of that ($50/month), isn't it worth saving yourself hours of labor you can use to buy more cash flowing assets?

Self Managing your Rentals

Although I have made a personal choice to let a third party PM to manage my rental properties, there may be exceptions where others may choose to manage their own rental properties. Here are some of the scenarios I have found with other fellow investors who choose to self-manage their rentals:

  • Active Real Estate Investor: There are folks who choose to be a real estate investor full-time and have the bandwidth to screen tenants, handle maintenance calls/repairs, and maintain the bookkeeping.

  • Close proximity: If you invest locally in your backyard (generally <1 hour away), it may be easier for an investor to tour with prospective tenants, handle emergency issues, and keep a close eye on the property.

  • Low number of rentals: If you are not looking to scale to a large portfolio, it may be easier to self manage your properties from both a economic and time-commitment perspective.

  • Real World Education: It may not be a "cheap" education, but it may be worthwhile to see first hand how rental property management operates. Especially if you are a newbie investor just starting out, it may be possible to self-manage for a couple years (or months) and then hand it off to a third party PM if it does not work out. However, its important to note that sometimes bad PM work may be harder to unravel than starting from ground zero.

In summary, I plan to continue using my third party PMs for all of my rental properties for the aforementioned reasons above. I have rental properties in three different cities, mostly over 2,000 miles away, and do not have the bandwidth to find tenants, field maintenance calls, and do the bookkeeping. As it is with any professional services such as CPAs and Attorneys, my mantra is "you get what you pay for".

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!

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Real Estate 037: Home buying checklist

As I continue to scale my rental portfolio from one to over 20 units, I realized that having a system and process to perform all duties involved in a deal is crucial. Below is a home buying checklist that I personally using during the purchase of my rental properties. This is by no means an all exhaustive list, and some of these tasks may be done by other members of your team such as your agent or property manager, so please use it as a guide than a rule.

  • Get signed purchase & sale agreement from all parties.

  • Create physical and digital file folders for all documents.  

  • Contact title company to “open up escrow.” Our escrow agent’s name is: _________

  • Preliminary online tax research to verify tax amounts.

  • Check for hidden liens on the property at the courthouse.

  • Determine what names will be on title (LLC, partners, etc.)

  • Create lender presentation packet.

  • Talk to private lender about funding the deal. Present lender packet to them.

  • Get promissory note from private lender or prepare note and give to lender to review.

  • Send promissory note to title company.

  • Open new bookkeeping file in online bookkeeping software.

  • Call insurance agent and get quote. If it looks good – order insurance and get to Title/Escrow.

  • If tenanted, have all tenants sign Estoppel Agreement to verify rent & deposit amounts.

  • Hire 3rd party home inspector and schedule a time for them to inspect the home.  

  • Review home inspection report.

  • Call Title Company and verify we are set to close on the proposed closing date.

  • Call seller (if private seller) and reassure that we are still set to close on the proposed date.

  • Open bank account (if needed), order checks and debit card for that account.

  • Get Title Report from Lender, review (look for problems) and place in Property File.

  • Get wiring instructions from Title company and send to the private lender.

  • After wire was sent, verify wire was received by the Title Company.

  • If we are bringing cash to closing, call Title Company and get an exact amount.

  • Go to Bank and get any funds needed to close if we are bringing cash to closing.

  • Call Water, Garbage, and Electric company to get utilities turned on in our name.

  • Schedule time to sign papers at the Title Company. Sign papers at the Title Company.

  • Get keys for the property from Agent or homeowner.

  • If we are getting cash back at closing, pick up the check from Title Company.

  • Deposit repairs check into the checking account for this property.

  • Send handwritten thank-you notes to all parties involved (agents, escrow, seller, etc.).

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!

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Real Estate 036: "Subject to" creative financing

In most of my previous blog posts, I have discussed traditional ways of purchasing real estate whether it be through the MLS, buyers agents, wholesalers, turnkey providers, and for sale by owners (FSBO). I wanted to discuss a new creative financing strategy that I have recently discussed with an investor friend of mine called "Subject To". They are lessor known to newer investors, but nevertheless are powerful strategies to scale your portfolio and maximize returns.

"Subject To" is a shortened form of the phrase "subject to the existing finance" of a property. At first, this may seem too good to be true. Many times than not, this strategy allows you to buy real estate without cash or credit, and also take advantage of good terms (lower interest rate through owner occupant sellers). You may be asking yourself, "why would a seller allow someone to take title (deed transfer) of a property and still leave the original financing in place?"

This is where investors need to realize the difference between sellers who "want" to sell vs those who "need" to sell. Those who "need" to sell already have the motivation, whether it be financial distress, health issues, a death in the family, divorce, or a myriad of other reasons that is not our business. However, by working with a seller who is in distress, investors are able to apply these creative strategies for effectively (Refer to my post on negotiating real estate/seller financing for more tips on talking with a motivated seller).

There are two key concepts we must remember when applying this strategy:

  1. Full transparency: We need to disclose to the seller what we are trying to do (e.g. purchase the property through seller financing, rehab the property and sell it retail/or hold long term for cash flow, refinance with another lender, etc.)

  2. Due on sale clause: Most loan documents (if not all) have a clause that specifically states that the lender is able to accelerate the due date of the loan if there is transfer of title. Regardless of whether or not the lender decides to call the loan due, it is important to understand the risk involved. 

I recently attended a 3-day seminar hosted by Protect Wealth Academy, where Clint Coons and Anderson Advisors spoke about a loophole to bypass the "due on sale clause" for asset protection, which also happen to be applicable to this strategy.

Clint mentioned that the Garn-St. Germain Act of 1982 allows anyone to put real estate in their own "trust" without triggering the "due on sale clause". This appeared to be intended for the wealthy to be able to transfer their real estate assets down to future generations, however, savvy real estate investors quickly started using this for creative financing strategies.

In a nutshell, a land trust is simply an agreement where the trustee holds ownership of the belongings of the trust for the benefit of a third party (beneficiary). In this case, an investor wishing to use the Subject To strategy would create a trust whereby the buyer is the trustee and the seller is the beneficiary. The seller would transfer title to the buyer/trustee and further assign their beneficial interest to you. The assignment of interest is not publicly recorded and now you have control of the trust and its benefits. As long as you continue to make payments, the lender should not have issues with receiving payments from a newly formed trust.

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!

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