In 2016, my wife and I decided to invest in rental property as part of our long-term plan for retirement and also as a way to help our children learn about, and get a head-start for, their own future financial independence. The process of learning how to manage our own rentals was a long one, but it was also very exciting and fulfilling. This article is intended to help you decide whether you should manage your own rentals, like we did, or hire a property management company to manage them for you.
Should you manage your own rental property? The answer is yes if you:
• have the time and motivation to learn your local laws and regulations
• can obtain or create applications and leases that comply with those laws
• have the ability to find tenants and deal with problems when they arise
• cannot find, or afford to hire, a reliable property manager
Our decision to self-manage our properties was the result of us saying ‘Yes’ to the above mentioned points. However, that’s not the end of the story, let’s delve deeper into these points down below. And be sure to pay close attention to the last point, as it was one that I found quite surprising, and one which ultimately was the deciding factor for choosing to manage our properties myself.
How To Learn About Your Local Laws And Regulations.
One great way to become informed is to find a local real estate investment group (REIG) and either join their online community or even better, go to their meetings. By joining an investment group, you will have access to many other property owners who not only know and understand your local laws, they’ll probably have inside information on how the system works too, which could prove to be quite invaluable.
Finding and Selecting Tenants
Arguably, one of the single most important factors in being successful as a landlord is the ability to find and retain great tenants. I believe that the tenant selection process begins even before you buy your first rental property. What do I mean by that? I mean, that when you are looking to buy a property with the intent of renting it out to tenants, you should start by thinking about who your prospective tenants should be and what type of tenant profile you want to work with.
If you buy a single family home, you will attract, and ultimately rent to, a different type of tenant than if you bought a triplex (house or building with three separate units). You will then need to think about the needs and interests of each different tenant type. Usually, for single family homes, you may want a 3-bedroom house with a fenced-in back yard that’s near parks and schools, for example.
The actual process of advertising your rental unit, showing the place, processing the application, and selecting the right tenant is so very crucial. In my opinion, there’s nothing worse than allowing a bad-fit tenant in your home. What do I mean a bad-fit? There are people who may have been deceptive on the application. Or there may be people who take it upon themselves to violate some of the terms of the lease agreement. It can be very difficult to get bad-fit tenants out of your unit once they’re in, depending on your region’s laws.
When I’m processing applications, I will spend the vast majority of my research time on simply looking for inconsistencies on their application. For example, on my application, I ask for contact for employment verification. Once I receive the application, I’ll check Google, LinkedIn, or Facebook to make sure I can find that contact person and verify that they indeed hold that position. Only then will I call them up and do a quick employment verification. Why? Because I if the applicant didn’t fill out the application honestly, I may end up calling the applicant’s friend instead of the employment contact person. It’s these small, but important steps that will help you focus in on the best-fit tenant for your rental unit.
One thing that you should always remember though, and this applies even if you have a bad-fit tenant living in your property, and that is that your tenants are human beings. I truly believe that each person, deep inside their soul, wants to feel respected and important and wants to do the right thing. I make it my mission, no matter what issues I may be dealing with, to do my best to allow them to do the right thing, by making them feel respected and important.
If the rent is late, allow them to share their story and realize that 99.9% of the time this isn’t a personal attack on you. You can still send them the eviction notice, if that is part of your usual business practice, you have a business to run after all , but you can, and should, always, always treat your tenants well, even when you don’t think they deserve it that day.
Repairs And Maintenance, And Your Work/Life Balance
It’s pretty common to hear about property owners who have thrown in the towel on rental property ownership due to the time and frustration associated with managing their properties. No one is interested in the dreaded, early-morning-emergency-phone-call because something broke in one of your rentals !
In fact, a few years ago, I received this email at 7:30 a.m., just three days before Christmas, “Hi Warren, woke up this morning to the furnace not working. Have it set to 75 and it’s blowing cold air. Currently 68. Not something we can have obviously with the kids. Thank you !” If this was your tenant then imagine what you would do now? Well, I’d say it’s time to set aside your plans for the morning and take care of this, it is your responsibility, and they are counting on you. This definitely qualifies as an emergency!
It’s these kinds of issues that can really be stressful and can ultimately sour the appeal of real estate investing if you’re not prepared for them. However, if this is something that you can plan ahead for, such as having the contact information of qualified contractors available for when these issues come up, then you’ll save a ton of time and stress because you won’t have to start searching for help in the middle of the emergency.
One thing that has been very helpful for us is to get consent from the tenant to pass on their contact information to the contractor. Why? Because you can create a situation that would unfold like this, when my tenant, James *, emailed me about the furnace not working. I emailed him back right away letting him know that I was on it, but also asked him if he was going to be home that day, and also asked for his consent to give the contractor his phone number so that, James, and the contractor, can arrange a time to inspect the furnace. This step has been so helpful so many times because it means that I don’t have to drive to Hamilton to let the contractor in (I live in Mississauga – about 30 minutes away).
Now, obviously if James couldn’t stay home that day, I would have had to meet the contractor myself. But as the landlord, you’ll come across these issues, and you’ll be responsible for them. If that works for you and you are good at putting systems in place, or you are good with working things out with people, then you should be able to maintain a suitable work/life/landlord balance. (*not his real name.)
Property Management Fees
So what would it cost to hire a property management company to handle your properties? Well, unfortunately, the short answer is, it depends.
Some factors that affect the management fees are:
• the type of property to be managed
• the age of the building
• the condition of the property
• the location
Each management company is different, however, it seems that the usual property management fees for residential purposes are between 8 and 12% of monthly rents, plus expenses and taxes. For example, if you own a duplex that is collecting $3000 in rent per month and the management company is charging you 10%. Your fee will be $300 + Taxes (Ontario has ‘HST’ @ 13%) = $339.00 per month.
Also, be prepared to pay for their involvement regarding maintenance and repairs at your property. It’s not uncommon for management companies to add on a surcharge of up to 15% of the invoice total to the property owner (e.g., an invoice totaling $100 may receive an additional $15 fee from the management company). They’ll add this fee because they are the ones who received notice of, and prioritized, your repair, scheduled the contractor, approved the repairs needed, verified the repair was done properly, and paid the invoice on your behalf. This takes extra time and labour hours that the management company wants to recoup.
Typically, most management companies will ask you to authorize them to automatically approve certain repair and maintenance requests up to a certain dollar amount without consulting you first. The property managers will want to have some autonomy when it comes to getting things done around your place, it would be quite hard to get anything done if they had to wait for written confirmation on every last dollar spent, unless you like being called while you are on vacation. If the company is experienced and has a good track record, it should be fine to authorize them to spend up to $500 + tax for any single occurrence. They will likely call this a ‘Reserve Fund’ and you will need to replenish it from time to time.
Finally, it’s quite common to be charged for the work and effort that a management company puts in to finding and placing a new tenant for your rental unit. As discussed above, it can take quite a long time to find the right tenant, and there will always be a certain amount of labor involved in the selection process. As usual, here too you will find a wide range of fees ranging from a flat fee (e.g., $500 + tax) or a percentage of the monthly rent (e.g., 50%, 100%). Find out what their tenant selection process entails and make sure you are comfortable with them.
Trust And The Surprise Result
The biggest issue I had with finding a property management company to hire was becoming comfortable with letting go of control. We have so much riding on these investments that it was hard to maintain an objective prospective and to trust somebody else’s processes and capabilities. I believe though, that it is also the property management company’s responsibility to find ways to create a sense of trust and confidence for their customer. It can be so hard these days to sort through all the clutter and noise when it comes to making a hiring choice. I did get a couple referrals from other people I know who are in the real estate investing business, and after doing my research, I realized I wouldn’t be able to trust them to do what I thought was best. So I decided to manage our own rental properties myself.
The most surprising result was that over the past few years since we’ve bought our rentals, I’ve really enjoyed managing the properties! I love reaching out to my tenants, sending them Christmas gifts, and helping them with their problems. I enjoy searching for new tenants, doing the background checks, and giving people the good news when they’ve been approved. I ended up liking it so much, that I have begun to switch my current business model (my company, Bonnar Properties Inc., has been in the landscaping business since 2007) to property management. Our goal is to be managing other people’s properties as our sole service offering. Who knows, maybe you’ll end up managing your own properties, and maybe you end up liking it so much that you’ll become a property manager too!
Disclaimer: The information provided in this website is not intended to be construed as legal advice, nor should it be considered a substitute for obtaining individual legal counsel or consulting your local, provincial, or federal legal authorities.