The Tough Questions You Need To Be Asking Your Property Manager
By Jared Hope
Once the real estate transaction is done, the toughest part of real estate investing is managing the property. Some investors decide to start out by managing their first few properties, while others invest outside of their city of residence, making it undesirable or difficult. Advanced investors know that their time is better spent finding new deals than managing day to day operations. Regardless, for people targeting a larger portfolio, all roads lead to the professional Property Manager. The REIN Report spoke with Jared Hope, Managing Partner of the Landlord Resource Centre and asked him some frequently considered questions.
Q: “What is the best way to work with a Property Manager (PM)? “
A: Leaving your business to be run by a third party who has no financial stake in the game might be risky. I have known many people who start out self-managing just to learn the ins and outs and then pass the property management onto a PM once they get a few properties under their belts. However, I have also seen people self-manage and get too emotionally attached to their tenants, which in many cases leads to poor business decisions.
The key to having a successful property manager is to have a great relationship with him or her. Lots of people feel they need to manage the manager, but this is fraught with difficulty, as the manager may have systems that the client is not aware of or does not understand. Managers have different timelines than owners, as they manage many more units of more than one client. Have your prospective property manager explain these systems, procedures, policies and reporting. If that doesn ‘t work with your expected outcomes, find someone else.
It is not difficult to have your property manager provide detailed information on a weekly basis. The key is not to micro-manage their systems but to build a relationship with the PM so they want to work with you. Information is the key in this process and clients need to have this in order to make macro decisions.
Q: “How should you estimate the potential rent of the property? “
A: Often, buyers take the word of their Realtor ® on what the rents will be on a rental unit, but buyers need to understand that a real estate agent can and may show the rents as whatever they need to be in order to make the house look like it is a good investment. At the end of the day, an agent ‘s job is to sell a house, not manage it or rent it. In most cases, the agent is not even an investor himself. So, it is very important to determine the rents on your own. A few ways to do this are:
1. Research the internet for similar units
2. View other listings in the area that are for rent
3. Run ads with a high rent amount to see how many hits and calls you get. You may be surprised. If you don ‘t get many, lower it until you get enough of an interest; this is probably the rent you would fetch for the prospective unit
Determining the worst case scenario for rents is what might be the best course of action to take. If you feel the main floor of the house can rent for $1,400 but it only gets $1,200, does this house still cash-flow well enough? If so, then there is less risk, which makes the purchase a good one.
Q: “What type of cashflow (average percentage) should one expect per investment before it is deemed a good investment? Does the age of the building matter as long as it is in good condition? “
A: I encourage people to buy real estate for two reasons: mortgage buy down (by the tenants) and cashflow (not to be used to live off of for 10-15 years).
A mistake people make is they buy for appreciation and/or to live off the cashflow immediately. The mistake with banking on appreciation (although it is fantastic to have), is that it is primarily driven by market economics, a factor that is out of the investor ‘s control. Although, everyone is certain that real estate, in the long game, will continue to go up, in the short term guesswork is involved as real estate fluctuates year to year. Living off of cashflow can be risky as well. Take it from me as I know firsthand….. When the market was great in 2005-2007 I had tremendous cashflow from all of my properties. In 2008-2011 when rents dropped by half, I felt the pinch to say the least! Knowing the cost of living is one of the things that can aid in these situations. For example, if you’re considering purchasing a home in Pasadena (to know more, check https://sgvlistings.com/pasadena-cost-of-living), California, knowing your living expenses can help you keep track of your cash flow and determine whether or not this is something you can afford. The same applies to any place in the world, be it, Canada or the US.
And to answer the second part of the question, while cashflow is indeed king, it is relative to the repairs and maintenance of the property. Far too often people will buy a house that will cash flow $100-$300 a month and feel this is a great return per month. This can be short-sighted; if you have a broken furnace, hot water tank, and need a roof tile replacement, then this cashflow is weak. A new furnace can be $5,000-$6,000 to replace, which alone would be the cashflow for two years. That is a lot of money. Although, at the same time, if the furnace is only slightly damaged, and can be repaired to work almost as new (head to airmakers.ca to learn more), then you might notice that the hit to the cashflow is not much. These are some of the many things you have to bear in mind when it comes to houses. Of course, it is always possible for things to go wrong so looking online at sites like RoofRepairInsider can really help you keep on top of things like roof maintenance. This way, you can avoid big issues that will cost a lot to deal with.
My suggestion is to build your portfolio to retire off of and keep your job to live off of!
Jared Hope is an Operating Partner and General Manager of Landlord Resource Centre. Over the past nine years, Jared has successfully managed all aspects of a dynamic and growing real estate portfolio including direct and contractor based maintenance programs. His experience has been gained through his ‘in the trenches, hands on ‘ work and provides Jared a very real perspective and scope of the work necessary to successfully, and profitably manage a portfolio.