Whether you just bought your first investment property or own a large portfolio of homes across the country, knowing how to select a property management firm is critical for growing your business.
How to Select a Property Management Firm - Questions to Ask
Are they legally allowed to act as a property manager?
Before entrusting your property investment/s to an individual or firm of property managers, first find out if they can act as property managers in the state the property is in.
In most states, you have to be a registered property broker with a valid license to legally manage properties. The local state body that licenses property managers may have an online search function that will let you check if the company you’re looking at holds a valid license.
Alternatively, just ask. Every business that is legitimate should be able to show you a copy of their license. One important detail to note is that the name of the company on the license should match the management agreement. It is no use that some entity that they control has a license, but the one you are contracting with does not.
While you may be tempted to just ask a friend who lives near your rental property to manage it, most states won’t allow unlicensed agents to handle rental funds, or to be paid or otherwise rewarded for it. In some states, just showing a prospective tenant a property or being involved in advertising your rental property in any way is seen as a real estate activity – which could land you and them in legal trouble if they’re not licensed.
How do you research property management companies?
In the age of the Internet, it is almost second nature to go straight to online reviews – but remember that most reviews are posted by tenants. While it’s good to know a property management company will deal well with your tenants, you also need to know if they will look after your best interests as a professional investor.
That means it’s key to consider how they will handle your money.
Do they have a trust/escrow account? How do they hold their security deposits? How soon will you get your funds after the rent is paid? What online and offline payment methods do they offer tenants, to ensure smooth payment of rent and receiving it in the right account? Is their trust account audited monthly? How do they handle tenant arrears?
If a prospective company struggles to provide a good answer to any of these questions, it is a massive red flag.
You should also satisfy yourself that they have a proper management system. A management company that just uses spreadsheets or needs to juggle multiple bits of software to generate basic reports about your property could let important business obligations like tax reporting slip through the cracks, which could come back to frustrate you when you need to file your return.
Before you sign a management agreement, ask for sample statements. How do these look? When do you get them in the month? How are you notified that the tenant has paid? Does the company generate a breakdown of all expenses relating to the property? Do you get 1099 reports?
What fees should you look out for?
When looking at agency fees there are usually two to consider. The first is the 'finder's fee' involved in getting you a tenant (usually around 8% of the annual rental value, or the full first month's rent) and the second is the monthly management fee (usually around 10% of each month's rent). It’s key to understand what service your property management firm will provide for the fees they propose to charge. Ask the agent to outline and if necessary, itemize what they are going to do for you, and how much each service costs.
A fully managed service typically means that, as an owner, you can expect everything to be handled by the property management company. Advertising will be taken care of, all tenant screening will be properly done, a solid rental agreement will be drawn up, all rents will be collected and accounted for, all property-related bills will be settled, and you and the tenant will receive regular monthly statements. If you are being asked to pay for any of these services over and above the commission structure – you are paying double.
Also, get clarity about whether inspections and site visits will form part of the management fee—an initial, mid-term and departing inspection is usually included.
What are the warning signs of a bad property management company?
The biggest warning sign is if the statements they issue do not make sense. If the property management company cannot properly account for every cent and how it was spent, it is time to leave. The second warning sign is sloppy and irregular communication. If you have to ask a property management company for a statement or have surprise expenses on the property you have not been informed about, it shows that they lack diligence and care in dealing with your asset.
Finding the right investment partner
Ensuring that this aspect is managed correctly is key. Beyond the money, a good property manager should possess an array of other skills, of course. They must ensure your property remains in good condition through proper maintenance, that the tenants are happy, and that your property and the tenancy agreement comply with relevant local and state laws, while also advising you on future rental property investments.
But out of all these, managing income and expenditure is most central to their custodianship of the asset. While it may take time to find the right company to represent your interests in all these spheres, doing your research at this stage of the process will pay great dividends later on.
