By Jared Hope
Buying an investment property in your hometown can have some challenges, but buying a property in a different town can add a whole other layer of challenges—something my wife, Krista, and I learned first-hand. By sharing our story and the lessons we learned along the way, I hope the insight will be helpful to anyone just starting out managing a property remotely or looking to hire a property management company.
When Krista and I began buying real estate in 2003, we bought in our hometown of Edmonton. We wanted to be able to drive by the properties whenever we wanted to—we wanted to be close to them, as we thought this is what landlords do. That first year we bought three rental properties. None was more than a 10-to-15 minute drive from our home. We placed our tenants, collected our rents, and were able to go by the houses and check up on our tenants any time of the day.
In 2004 we bought another eight properties. Of the eight, five were once again in Edmonton and the other three were in Grande Prairie, Alberta, which is about a five-hour drive north of Edmonton. We thought our systems were sophisticated enough for us to expand our portfolio into another city and manage those units just as we were managing our properties nearby. In 2005 we purchased another 64 properties in Grande Prairie. At this point we continued to manage the properties in Edmonton on our own but decided to hire a management company for the properties in Grande Prairie.
By investing in two cities, my wife and I learned a couple of things. First, being close to our investments led to unexpected stress. Most of the tenants weren’t treating the properties as we would treat them ourselves. When we drove by, we would see a lawn in need of cutting or snow in need of clearing. This put Krista and me into a panic. We always felt we had to jump in right away and fix something; cut the lawn or shovel the snow. The second thing we realized was that we needed to start treating our real estate company as a real business.
In 2005, when we hired our first property managementcompany, we very nervous about handing our portfolio over. We didn’t know much about the process of onboarding a property manager, so we spent very little time screening this individual. He was referred to us from a member of a group to which we belonged, and we assumed that this organization must have vetted him if they had him on their list of approved vendors. The next eight months were terrible: the property manager’s tenant-screening systems were awful, our vacancy rates increased, and the rents we were charging were too low. Suffice it to say, we dropped that management company and moved on to another. We spent a little more time getting to know this new company, especially how it was different from the last one we’d hired. The story we got was good enough for us to sign up the new company and move our 100-plus units over to their care. And all was great—at first.
From 2005 to 2008, the market in Alberta was pretty hot. Over that timeframe, we saw increases in our portfolio of 30%, 50%, and 25% respectively. Our rents were rising too, and we were earning more money month over month. Our vacancy rate was close to zero. Our manager was amazing—or so we thought. What we came to realize is that in a hot market anyone and everyone looks good and can rent stuff out. We also realized that in a hot market mistakes can be hidden or corrected quickly without anyone really seeing that a mistake had been made. A poor system can succeed in spite of itself in a hot economy.
In 2008 the global recession hit and the economy began to trend downward. By the end of that year, our vacancy rate was climbing, our rents were dropping, and the errors happening within the management company of our out-of-town properties were out of control. My wife and I had always been taught to “manage the manager,” so we tried to find ways to do this. We had meeting after meeting with the property manager, and meeting after meeting with the owner of the property management company. We tried paying them less as a form of a penalty for not performing. We tried paying them bonuses for getting things done properly. Nothing was working. The only thing that was growing was our frustration due to living a five-hour drive away from those properties.
In August 2008 we fired our management company and took on the management of the Grande Prairie properties ourselves. Krista and I were both working full-time jobs then and our systems at the time were only good for our hometown properties. Plus, we were at the start of the global meltdown that would last for two years. From 2008 to 2010 we managed our portfolio in Grande Prairie from Edmonton. We would both work 40 hours a week at our jobs then put in another 30 to 50 hours a week in our management company. It was hard work. Lots of mistakes were made but, more importantly, a lot of lessons were learned and solutions were found and applied. Our systems were tightening up and getting better and better over time.
Mistakes happen all the time, so the key is to learn from your mistakes as quickly as possible in order to prevent them from happening again. This is exactly what Krista and I were doing—we were getting an education in property management. When we started out in the game of real estate, we never once wanted to run our own property management company. It’s hard work and there is very little reward in it. But the things we learned from 2008 to 2010 were invaluable, and those lessons continue to serve us well today.
In the past 13-plus years of owning rental properties, I have come to realize two key things about property management:
- It’s a very tough business, and
- It’s impossible to manage the manager.
When the phone rings and it’s a tenant on the line, it’s for one of two reasons: the tenant is calling to complain about something that needs repair or to tell us they can’t make the rent. It is rare that a tenant will call and thank us for something we’ve done for them. Then there are the calls from people who want to see a unit.
As for the second thing, managing the manager really is impossible. The key to success is managing the relationship with your manager. In 2010 my wife and I opened our own property management company called Landlord Resource Center, and since the day we opened I have watched some clients try to manage us.
Let me give you an example. If a client drives by their investment property and sees that the lawn needs cutting, they call the office and tell us to cut the lawn. Three days go by. The same client drives by the investment property again and sees the lawn is not cut. This time when they call, they are upset or even angry and demand that the lawn be cut right away. They typically say that they could have had the lawn cut within 24 hours. Here’s the thing though: that client has only one lawn, or maybe a couple, to cut. We are cutting hundreds of lawns for clients. What the client doesn’t understand is that we have our systems and we have to follow them to ensure every client is served well.
The key to success when using a property management company falls to the relationship you create with them. The people working in the management company are human, and every human I know makes mistakes; most of us make them often. Therefore, yelling at someone may not be the best approach to getting something done. I’m not saying to let mistakes go unnoticed, but instead of picking up the phone as a way to vent, I suggest sending an e-mail explaining the situation and then following up with a polite call to get an update. The key to success is to always treat people like you want to be treated. Remember, property management is a tough business.
Where we made mistakes was in not properly screening the first two management companies we hired. We taught ourselves some really great lessons there. I feel there are three key questions to ask when deciding on a management company:
- How many units does the company manage?
- How many clients does the company have?
- How many full-time staff does the company have?
Once you ask these three questions, add the numbers from the responses given to questions 1 and 2, and then divide this number by the number in the response given to question 3. Then ask yourself if you would be able to manage this many people (not tenants). For example, if the property management company manages five hundred units and has a hundred clients, that is a total of six hundred people to manage. If the company has five full-time staff, this means that each staff member is managing 120 people. If you are able to manage 120 people a month, then it stands to reason that they can as well. If you don’t feel you could manage that may people, then there’s a good chance the management company don’t be able to either.
I would go as far as asking a fourth question. I believe there are two ways to run a management company: one is from the theory of how to do it, and the other is from practical experience. A theory-based model is one whereby the owner of the company has lots of experience (and perhaps education, too) in management. A practical-based model is one whereby the owner of the company has lots of investment properties in their portfolio and they manage from experience, including the lessons they learned and the systems they set up. And so, the fourth question I would recommend asking is how many rental properties does the owner of the company own? The higher the number of properties, the better it is for you, for a couple of reasons:
- The more properties the owner has, the more real-life experience and pain they have dealt with. This is a good thing. It means that when you have an issue in your unit and the owner calls you with advice on how to resolve it, that advice is based on tried-and-true experience.
- A higher number of properties is better because it creates a lower chance of the property management company closing its doors. If the company is heavily invested in the rental business, there is a lesser chance of the company exiting the business and a higher chance your investments will be protected.
Owning rental properties is a lot of fun and it can be very rewarding if the right people are on your team. To make sure you get the right property management company on your team, treat the hiring process the same as if you were hiring a new staff member. Interview them. Ask them a lot of questions. Build a relationship with them. Understand who they are and how they were taught. I am willing to bet that you would never hire an employee who would be managing your bank accounts and signing cheques without checking them out first, so why would you hire a property management company to handle your $500,000 asset without knowing who they are and what accomplishments they have made for themselves? Once you’ve hired a company, be sure to manage the relationship with the manager and ask the right questions.
Jared Hope is a veteran REIN Member, real estate investor, dynamic speaker, educator and owner of Landlord Resource Center. Jared has gained invaluable experience by transacting over 200 investment properties representing over $50,000,000. This experience has led Jared to continue to grow his real estate portfolio, as well as his business. His property management company Landlord Resource Center manages well over $100,000,000 in single-family properties.