By James Knull
Property management is undoubtedly the most important element of a successful real estate portfolio. Don’t get me wrong, getting a good deal on a good property is essential—you won’t get anywhere without a property. However, once you own a property, you want it to cash flow. You want to see the asset appreciate in value over time and watch your net worth grow.
Good property management is the make-or-break factor here. It’s the difference between happily collecting rent cheques year after year and unhappily collecting them because you know you’ll have to spend all your gains repairing tenant damage and marketing for new tenants while covering holding costs during vacancy. That’s a big difference!
More often than not, sophisticated investors want to hire a professional property manager who will take care of the tenants and the property. Obviously, you want to choose a great PM, and I can tell you that asking the right questions and setting expectations early on is the key to hiring the right person and building a great working relationship with him or her. I’ll go over a few of the important questions to ask and some of the red flags to watch out for.
But first things first: Let’s talk about what a property manager generally does. They take care of all the tenant details. This means advertising vacancies, screening tenants, and doing the move-in report. From there, your PM should be collecting rent, covering maintenance costs, and disbursing the remainder to you. Any calls from tenants and any tenant issues should be handled by your PM and you should be receiving some kind of update or report on a monthly basis. Finally, your PM should handle move-outs (or, if necessary, evictions) and refreshing the suite for the next tenant.
Ultimately, you want to want to build a collaborative working relationship with your PM so that both parties are moving in the same direction to produce the best possible results. And, as I mentioned above, this starts with asking the right questions prior to hiring your property manager.
Interview Question 1: What is the property manager’s fee structure?
Typically, for their services most property managers charge 10% of the gross rent you receive[Symbol]sometimes a little less if you have a lot of properties that they’re managing. However, you really need to dig deep here, because often there can be other fees associated with their management. One of the most important hidden fees to identify is an override on repairs and maintenance. Some property managers will charge as much as a 20% overage on any contractors and handymen they hire on your behalf, for “managing” them. This can be a huge profit centre for the PM and can encourage him or her to create make-work projects on your property. Be aware of this and ask careful questions about it.
Further to repairs and maintenance, you want to know what the person’s minimum approval amount is. Most PMs will have a dollar limit such that, if the repair is less expensive than the limit, they will complete the repairs without checking with you for approval. You do not want this limit to be too high, or you may end up with a nasty surprise. Some PMs will also charge a fixed vacancy filling fee or a flat monthly advertising fee. Again, this cost can add up, and so it’s important to know what you are being billed to fill your vacancy. Some property managers charge hidden fees for “administration” tasks like photocopying, delivering notices, fielding tenant calls, and so on. The point of your interview in this regard is to dig deep and try to identify those types of hidden fees. The more hidden fees, the more you’re going to see on your bill, and some property managers will charge a lower monthly percentage to sign you up, and then their hidden fees end up eating your cash flow.
The biggest red flag of them all are when property managers charge their monthly fee even if your property is vacant. This provides no incentive whatsoever to get the vacancy filled and doesn’t create a mutual win-win for the PM and the client.
Question 2: What is the property manager’s screening process?
Tenant screening is a critical step that will either set you up for a great year or a rough year. A great tenant will pay the rent on time, take care of the property, get along with the neighbours, and report any necessary maintenance. A poor tenant can equate to tens of thousands of dollars of damage, lost rent, and wasted time. You should ask where the PM advertises, ask to view sample ads they currently have posted, and you should even do a secret shopper call on one of their vacancies to see what the experience is like.
Also, ask who shows the suites. This is very important because if the person doing showings isn’t experienced and doesn’t “sell” the suite, the vacancy could sit longer. You also want to know if the person will show vacancies at any time, or if they’re only available at certain times. If an ideal tenant calls on Monday and cannot book a showing until Thursday, you may lose a good opportunity. Finally, you want to ask about the screening process. This is critical. A good PM will check credit, previous landlord references, work references and character references, and then give you a full report so that you know who you’re letting live in your property.
Question 3: What is the property manager’s move-in/move-out process?
The best way to protect yourself against tenant damage is a solid and detailed move-in and move-out process. You are going to want to ask the PM to see a sample move-in and move-out report. He or she should be collecting photos before and after and have very specific accounting of every detail. If a damage issue goes to the Residential Tenancy Dispute Resolution Service (or whatever the equivalent is in your property’s jurisdiction), the hearing officer will lean toward the tenant unless there is indisputable evidence to show that the damage was done by the tenant.
Question 4: How is the rent collected and distributed?
Of course, you’re going to want to know what happens to your revenue. A licensed property manager can handle funds on your behalf and will take monies into their account and distribute the balance to you after expenses are paid. Some PMs refer to themselves as “property contractors” and are not licensed to handle funds on your behalf. It does add some complication to your experience if you need to deposit your own rent and then pay the PM an invoice for service every month after the fact. Overall, you want to know how you get paid and when.
Question 5: How does the property manager report to the owner?
You want to know what’s going on with your property. Depending on your personal style, you’re going to want to access this information more or less often. Some PMs only give a monthly report, and that’s it; they’re busy managing properties and don’t like fielding phone calls from owners for hours on end every day, whereas other PMs will happily take calls from you through the week to keep you updated. Some PMs have an online portal you can log into and review your properties at any time. Know your personal style and ask about communication and reporting expectations early. This can lead to a major friction point between you and your PM if not properly outlined.
Question 6: How does the property manager handle evictions?
Evictions are not a fun part of the ownership experience, but they are sometimes an essential one. A smooth eviction can save you thousands, while a poorly handled one can drag on for months and destroy your budget with missed rents. In many jurisdictions, an eviction notice posted to the door does not carry any legal weight and only a formal hearing at a tenant dispute service board with a hearing officer will result in an enforceable eviction. You want to ask how and when the PM serves notice and whether they go through the official channels to evict. You can lose months with an inexperienced PM who doesn’t use the proper channels and paperwork to begin an eviction; it will stretch out the process and cost you more money. You must educate yourself on how evictions happen in your area and then ask the PM whether they follow the correct procedure. Further, you need to ask what the cost of an eviction is. Many PMs charge huge sums of money to take a tenant through to a formal eviction.
Red flag: If a PM charges huge vacancy-filling fees, contractor fees, and eviction fees but has weak screening and tenant communication, this could be a recipe for disaster where the PM is making money filling, fixing, and evicting while your investment turns into a failure.
As you can see, choosing a property manager is serious business and not to be taken lightly. Ensure that you are patient and ask all the right questions. Explore the questions further with some of the follow-up questions I’ve outlined. Ultimately, you want to make sure you’re comfortable with your property manager because he or she is going to be the caretaker and protector of your investment. Good luck building your power team!
James Knull is an Edmonton realtor who specializes in investor clientele. He’s the REIN Realtor of the Year two years running and has been awarded the Player of the Year, Multifamily Investor of the Year, and the Diamond Pin. He leads the Mogul Realty Group team, specializing in all kinds of investment real estate. James is happy to share his vast experience. Reach out to him at James@MogulRG.com.