Real estate might not be that passive
One of the biggest differences between stock market investments and owning real estate is that real estate is much more work. With the stock market, one of the best strategies is to keep regularly buying more shares of a diversified fund, and that’s it. You don’t need to sell (and you shouldn’t really!) and there is no need to spend a lot of time researching if you found the right diversified fund (e.g. VWCE)
With real estate, the buying itself is a lot of work and that is usually just a beginning.
Unless you buy the place rent ready, it needs to be renovated. You need to find the right tenant, which includes advertisements, tenant verification, showings and so on. Once you have a tenant, things sometimes break and you are the one responsible for fixing them. When the tenant leaves you need to check the state of the place, clean it and do any necessary repairs and find a new tenant again.
It’s a lot of work and small things add up. Especially if you don’t leave next door. Just commuting one way in the city can easily take 40 minutes.
I am working hard at my job where I earn a very good salary and I don’t find dealing with property particularly fun. My time is limited and I’m investing for financial freedom to get more time freedom in the future. Additionally, all those small things would add significant mental overhead. Outsourcing this makes a lot of sense.
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How much does it cost?
Typical rate is about 10% of the monthly rent. However it can also be 8%, 12%, flat fee and there could be additional charges or discounts.
A common additional charge is 50% of the month of rent for finding the tenant. If you have lots of turn over (new tenant every year), that quickly adds up and can make your effective fee 14% instead of 10% you thought it was.
For example a property renting for 1600 a month with 10% property management fees without any additional costs will cost you 160 a month in property management and 1920 a year. Almost 2k per year is not a small sum. However if you are a high earner and get taxed at the highest rate (52% in Ireland) then more than half of it is “reclaimed” through taxes. Because you are able to deduct this cost from your taxable rental income. On the other hand you can’t deduct your own sweat equity. Assuming that you are taxed at the highest rate - 52%, 1920 expense will make the following impact to your bottom line:
What you spent - tax deduction = 1920 - (1920 * 0.52) = 1920 - 922 = 998 ~= 1k
If you were to do the work on your own, it would cut into your working hours that you would have to compensate for later. You would need to pay for transport too. My employer offers an opportunity to buy additional vacation days. In return your paycheck gets proportionally reduced. Believe me, it made me value my vacation days so much more.
How much time do you think all the activities the property manager does take? 1h within a year, 100 hours within a year?
Let’s assume 2 big issues per year 2 * 8h. 2 inspections 2 * 2h, tenant questions + tenant bothering 4h. For viewings and tenant verification, 2h advertising, 6 * 2h for viewings, 3h for tenant verification and paperwork, 4h overhead (invoicing, responding to your emails, etc)
In this ballpark estimate it adds up to about 45h a year, with the big part being finding new tenants. It’s not a huge amount, and ideally it could be even less.
If you are very lucky and have long term happy tenants they could literally never call and all your property manager would do is invoice you. On the other hand if things get complicated and there are serious problems, they can save you a huge amount of trouble and time. In my mind it’s similar to having insurance. You pay for a piece of mind and downside protection. And the piece of mind for me is close to priceless.
Could you do it better yourself?
You could invest your time to learn property management and since you have the skin in the game I’m sure you would be trying to do your best, but even then it would be likely that you would make many mistakes.
So, unless you pick a really bad company, I would assume that they will do a better job than you would do. A good property management company is up to date on all the regulations, has more experience and tried and tested contractors. They likely also have professionally drafted contracts and strict tenant vetting procedures.
Probably the worst choice for outsourcing the property management responsibilities is to give it to a family member or a friend who is new to this and doesn’t have a skin in the game. They are inexperienced and probably bad at it and they are not “you” - so they are less invested and you don’t have much control over them.
Finding the right company
My approach for finding the right company is:
- getting a short list based on recommendations and reviews
- phone interviews / email exchange to determine if we are good match
If you ask on a local investor facebook group they are likely to throw some recommendations. You can find local companies by searching for letting agency or property management in google maps. To get a good company based on reviews I would look for companies with a good number of reviews (e.g. 20+), high score and good written reviews (no red flags).
Before you interview a company you should figure out what you expect. Even if you are not planning to do property management yourself it's a good idea to learn about it, e.g from a book.
This will help you think about good questions to ask during the interview.
Some open ended questions that will help you verify the caliber for the company:
- How do they verify the tenant
- What is their process if the tenant is not paying (follow up if they have a experience with eviction)
- How do they deal with things breaking in the property
Some of my criteria are that:
- The company has more than one employee / contractor (so that I don’t have to worry about them being on vacation or sick)
- There weren’t any red flags during the interview that would worry me (ideally they should seem knowledgeable and even passionate about the topic of the rental property management)
- They are ok with my requirements (e.g. that part of town, this type of a rental)
- They are not overly expensive and basic service covers all standard things
- They are easy to reach (they should pick up the phone/respond to the email quickly). If I can’t reach the company that is a red flag
Smaller companies are likely more flexible which might be necessary if you have specific requirements.
But on the other hand they might be less standardized than a bigger place. On the other hand, bigger places can have more staff turnover and the person handling your properties might be less experienced than someone from a smaller company. There are always some tradeoffs and there isn’t a clear right or wrong. As long as everything sounds good and they fit your criteria, you should be good to go.
And if something is not right, you can always communicate it and hopefully change it or change a company in the future.
I am currently using two property management companies because I have rental properties in two locations (in Ireland and in Poland). No major problems so far and they have saved me a lot of time. The services they provided:
- Dealing with apartment block management companies (e.g. getting parking permits, reading meters, going to meetings)
- Advertising and finding tenants, dealing with tenants moving out, collecting rents
- Supervising and getting contractors
- Dealing with problems:
- Fixing water heater problems, lost keys, stuck locks, insect invasion, etc
- Getting a place renovated (cheaply and quickly with minimal hassle for me with in house contractors)
The experience hasn’t been 100% perfect, there were some times when there was some confusion over email and in one case (a difficult rent by the room) some vacancy for longer than I would like, but overall I would describe my experience as pretty great. I can't imagine doing all this work by myself especially with my demanding full time job.
Especially handling the renovation after we bought a property was a fantastic service that I didn’t expect, but saved us a lot of time and trouble.
So my advice would be to outsource your property management and include the cost of that in your property deal analysis numbers.