It has been said often around here that real estate can be an excellent way to diversify investments, create additional income streams, and grow your net worth.
Many folks choose single- and multi-family rentals as a place for their real estate investment dollar, but of course with those types of active investments, management is required.
Of course, paying someone to take on the task of actively managing a property comes at a cost, and that cost is one that many investors may be tempted to at least try to avoid.
Passive Income MD, in today’s guest post, discusses why you should resist the siren song of self-managing your rental properties and instead put your trust in, and spend the money for, a professional property management company.
Or, you could go the route I did and invest solely in passive real estate via funds, REITS, and syndications, bypassing the need for a property manager.
It’s no secret that I think that real estate is a great way to create passive income, build my net worth, and achieve financial freedom.
What other investment lets you use leverage and put down a fraction of the value of the assets? It’s no wonder that so many of us on the FIRE path turn to real estate as a part of our wealth creation strategy.
How to Define “Luxury”
One aspect of real estate that causes analysis paralysis is property management. People get stuck thinking about saving 8% to 12% in management fees by self-managing their properties. This percent is even higher for short-term rental management companies that also take care of bookings and customer service.
On a rental that brings in $1,500 in rent, that’s $150 that you’re giving to a property manager for collecting rent and handling repairs. But when you achieve your goal of having 20 rentals. Assuming they bring in a collective 30,000 a month, now you’re paying your property manager $3,000. That’s a decent chunk of change to be handing over each and every month.
While it’s not going to go far in any major city in the United States, it may be enough to fund a couple of months’ worth of living expenses traveling in countries with a lower cost of living.
Before you start seeing your bank account growing by an impressive amount each month, consider these five things that the property management fee gives you in return.
Your time spent working at your 9-5 job is worth more than you’ll pay contractors.
In a good month, when there are no clogged drains or issues with the HVAC, the only extra expense you’ll have is the property management fee. Some may feel that $150 for a few minutes’ worth of bookkeeping is too much.
But there’s a lot that goes on behind the scenes that you aren’t aware of. Maybe there was a discussion with the tenants and landscapers about changing the bi-weekly lawn cutting. This could add another 30 minutes of work that the property manager is handling for you.
Sure these are all things you can do yourself but remember: this is an easy month, and your hourly pay works out to $250. It’s pretty easy to see that $150 is a bargain.
An experienced property manager will save you time and money.
Investing time in finding and interviewing multiple property managers before hiring one is a must. You can leverage their industry knowledge and professional connections when you have a rockstar property manager.
They have existing relationships with not one but three different HVAC companies so that when their preferred one is fully booked (because, of course, the AC goes out during the hottest week of the summer), they can call another one and get it fixed the same day.
They can also give you tips on what you can do to make your rental more appealing, and they’ll tell you when another investor is retiring so you can add to your portfolio. Yes, a good property management company is worth every cent.
You don’t have to deal with 3 am emergencies.
The early-morning clogged toilet call is the nightmare of every landlord, and it’s also a “what-if” that keeps many would-be investors from ever jumping into real estate.
But there’s a near 0% chance of getting a call outside of regular waking hours when you have a property manager. They, or someone on their team, will take the call and handle it. Typically you’ll pre-authorize them to do emergency repairs that are less than $300, so you may not even know about the situation until you’re reviewing the monthly statement.
You can focus on finding your next investment.
As medical professionals, our days are long and exhausting. In the hours that we’re not at work or with family, we want to do something that we enjoy. I can’t speak for everyone, but I’d much rather be scouring the MLS for investment opportunities than changing out lightbulbs and smoke detectors.
You will have genuine, passive income.
Although owning a rental isn’t 100% hands-off, it’s pretty darn close when you have a property manager. Aside from the occasional communication with the property manager about a tenant issue or large-ticket expense, you may spend less than 15 minutes a month. You may even forget about the rental until you see the monthly income deposited in your bank account. Now that’s passive!
Spend your time on your terms—don’t self-manage rentals
When it comes down to the numbers, it doesn’t make sense to try to manage my rentals by myself. My skill sets and earning power are in a totally different field, and it’s best to keep it that way as long as I’m practicing medicine.
But more importantly, because I don’t self-manage, I have more time to do what I want. For me, that means spending time with my family, enjoying my hobbies, researching new investment opportunities, hanging out with all of you in the Facebook group.
If shopping for one or two units at a time is not your thing, here’s a list of companies offering truly passive real estate investments.
4 thoughts on “5 Reasons You Should Not Self-Manage Rental Properties”
The advantage of direct ownership is leverage. I would never do RE without property management. Otherwise, it becomes another job. Neither my spouse nor myself would want to deal with tenants, directly. We take the hybrid approach and have both direct ownership of properties and REITS.
Do you think active real estate investing is more worth it if you have a partner who is not in medicine and/or a stay at home parent? In my situation, I would be accumulating the capital as a physician and my partner would be actively managing the properties.
I’m not sure. Do you or your spouse want to deal with tenants, directly? As the article says, it’s better to leverage the property manager’s expertise. In the grand scheme of things, it’s better to give up that 10% of rental income in return for a better quality of life.
I mostly disagree with this.
My wife and I own five duplexes worth about $2.2 million. I’ve managed them myself for about 20 years. The total amount of time it takes me per year is probably in the range of 40 to 60 hours. I do almost everything by email, and I’ve never once received a call about a clogged toilet. I have a handyman who takes care of simple things for $35/hour, and I have an array of plumbers, carpenters and electricians for more complicated things. I receive all of my rent payments by Venmo, so it literally takes me seconds to collect and deposit the rents.
My estimation is that for me to hire a property manager would work out to at least $250 an hour. That’s a lot to pay for a very low-skill job.
There are at least as many reasons not to hire a property manager. One, they are very expensive.
Two, you have to rely on them to fix things, and you have almost no control over the costs of those improvements or fixes.
Three, they have very little incentive to be aggressive about increasing your rents. Similar to real estate agents, they’re happy to take a lower price in order to minimize their effort. In addition, they usually make more when the unit turns over, so their incentives are mostly misaligned with yours.
Four, it can take quite a bit of time to manage your manager. In conversations over at Millionaire Money Mentors, I’ve heard many real estate investors who spend almost as much time dealing with their manager as I spend just doing it myself.
I will say I’m a good administrator. I was the founder and CEO of a $30 million nonprofit with 400 employees, so I’m used to managing people, projects and budgets. So my experience may not apply to all.
But I would probably not invest in real estate if I had to deal with a manager. The returns would be low enough, I’d probably just stick with low cost index funds.