This article is an excerpt from the Shortform book guide to "Buy, Rehab, Rent, Refinance, Repeat" by David Greene. Shortform has the world's best summaries and analyses of books you should be reading.
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Are you considering managing your own rental properties? What are the pros and cons of being a self-manager?
If you’re looking into renting your properties, you’ll need to decide if you want to manage them yourself or hire someone else to do it. In Buy, Rehab, Rent, Refinance, Repeat, real estate agent David M. Greene states the pros and cons of each option, plus the responsibilities you’ll face if you decide to manage rental properties yourself.
Continue reading to get a better sense of what it’s like managing rental properties.
The Pros and Cons of Managing Rental Properties
When it comes to managing a rental property—from responding to maintenance requests to handling lease renewals and evictions—you can do it yourself or hire a property manager (PM). Although Greene recommends having a PM on your Dream Team, you don’t have to use them to manage your property (they can still be a valuable member of your team, for example, by offering advice about the best neighborhoods to buy investment properties).
He lists the pros and cons of each option:
|Pros||Experience and skill set Familiarity with the area||No cost and control over every aspect of management|
|Cons||Higher cost Time and effort to find a high-quality, compatible PM||Lack of skills and experience, along with consistent time and effort (that could be better spent finding, buying, and rehabbing new properties)|
Greene writes that this choice depends in part on your personality: Some investors may enjoy the work or value the control more than others. However, as you build your portfolio of investment properties, managing them yourself becomes less feasible, and you may reach a tipping point where you have no choice but to hire a PM.
Weighing the Pros and Cons
The pros and cons listed above can be summed up as three key differences:
- Time and effort
- Skills and experience (this encompasses knowledge)
While each investor has a different tolerance for the time and effort required to find a property manager or self-manage a rental property, let’s examine the other differences.
- Cost: Property management costs average 8% to 12% of the rental value, which is the total potential rent the property will bring in when fully occupied. Since this price does not reflect additional PM fees, property expenses, or vacancies, it can take a large chunk out of your cash flow.
- Skills and experience: If you opt for self-management, especially as a new landlord, you’ll need to be aware of your legal responsibilities and liabilities. Get familiar with local landlord and tenant laws to ensure the property meets building codes and that outdoor maintenance (including landscaping and snow removal) complies with the warranty of habitability. Additionally, hire a landlord-tenant attorney to review leases and help you deal with evictions and other tenant issues.
The Reality of Managing Rental Properties
Now that you have a sense of the pros and cons of self-managing rental properties and hiring a manager, let’s take a look at the responsibilities you’ll face if you choose to do the work yourself. This will include minimizing the vacancy rate of your property and screening tenants for background checks.
You Need to Minimize Vacancy
Greene states that you can minimize vacancy by strategically setting your rent prices and lease periods and by keeping tenants happy.
You should have consulted local investors, PMs, and rent calculators on websites like Rentometer.com and Biggerpockets.com to estimate your rent prices before buying your property. Greene recommends you set rent prices at the lower end of your estimate initially to attract tenants and fill vacancies quickly. Then raise rents to the higher end of that range during lease renewals—at that point, most tenants are willing to pay more to avoid moving.
Additionally, set your lease periods to expire during the spring or summer, when most renters are looking for homes. If your tenants move out, you’ll have more interest from prospective tenants and reduce the “turn time,” of how long the unit sits vacant between renters.
Finally, don’t give your tenants reason to leave: Be accessible, responsive, and prompt with maintenance requests. (Shortform note: The implied warranty of habitability requires residential landlords to keep properties in “habitable” conditions throughout the lease period. Although the definition of habitability varies by state and jurisdiction, it broadly includes electricity, heat and hot water, drinkable water, a functional bathroom and toilet, and a smoke detector.)
Greene also suggests rewarding tenants (those who pay on time, maintain landscaping, and keep the property in good condition) by discounting their rent raises during lease renewals. Although you lose some money in the lost rent, these tenants save you money in maintenance costs and city code violations.
You Need to Screen Your Tenants
The tenants who will contribute most to your income are those who cause minimal property damage and stay for many years (and rent increases), saving you lost earnings during vacancies and the time and money required to advertise and fill vacancies. Increase your chances of finding a good tenant by screening interested candidates.
- Require references from past landlords and employers. Ask landlords if the renter paid on time and kept their property in good condition. Ask employers if the renter is reliable and verify that they’re still employed.
- Run a credit check to find out if the tenant has filed for bankruptcy or faced prior evictions
- Ask for current pay stubs to ensure that the renter makes enough to cover rent.
- Complete a background check of local, state, and federal records.
While screening applicants, avoid violating Fair Housing Laws by maintaining consistent screening requirements (ideally posting them with the advertisement for the rental) and steering clear of questions about the renter’s age, sex, race, religion, disability, native language, or familial status.
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- An explanation of the BRRRR real estate investment method
- How to use the BRRRR method to produce consistent, passive income
- Why you should assemble a "Core Four" team rather than working alone