I may be moving from a house that I purchased 1 year ago and am very much interested in keeping it as an investment property. Since I will be relocating to another state I know I would need a property manager to oversee the property. What kind of resources are available to help me choose a property manager? The following is a list of some of the questions that I have:
- What are my responsibilities as the property owner?
- What are the responsibilities as the property manager?
- Approximately how much would it cost to have the property managed and maintained by a property manager?
- What kinds of questions do I need to ask when trying to choose a property manager?
- What expenses would be tax deductible? Is the interest paid on the mortgage (or any part there of) still deductible?
- If you can provide me with a list of available resources that can help me answer these questions and the many others that I have, I would greatly appreciate it.
Thank you in advance for your assistance.
Thanks for writing. Here are the answers to your questions.
What are my responsibilities as the property owner?
About the only responsibilities you’d have as a property owner once you hire a property manager are to make the mortgage, property tax and insurance payments. Even so, some property management companies would do that for you (for a price). But, of course, those payments would remain your responsibility. If the property manager didn’t make them, the excuse that “he was supposed to pay you but didn’t” wouldn’t work very well.
Of course, you always have the ultimate responsibility for the maintenance and repair of the property, even with a property manager. You certainly wouldn’t want to leave the responsibility totally in his or her hands. Two things could happen, neither good. One, he or she might not take as good care of the property as you would prefer, thus driving down your rents and creating deferred maintenance, both costing you more money in the future than they would if they had been taken care of in a timely manner. Two, your property manager might spend too much on repairs and maintenance, thus eating into your profits.
You could also undertake some responsibilities, depending on how much you wanted or were able to do. For example, you could approve tenants. And that is something you might definitely want to consider. I hear horror stories occasionally about property managers not being as careful as they should in selecting tenants, partly because of their fee structure (more about that later). One way to combat that is to create for the property manager a list of rental criteria (possibly even with his or her help and consultation on what is reasonable for the property and the area). Then you could make the final selection from those who met the criteria.
That involves a much longer and more complicated procedure than I am explaining here, and has many considerations regarding the Fair Housing Law. However, your property manager should be well versed in Fair Housing compliance. If he or she is not, find another property manager in a hurry: it could be a lawsuit waiting to happen
Your responsibilities would also include approving any repairs or capital improvements over an agreed-upon amount. Obviously the property manager should not have to call you to approve having someone fix a running toilet or broken window, but should get your approval for an exterior paint job, a new roof, new carpeting and such.
What are the responsibilities as the property manager?
- Collect the rent.
- Take the calls from the tenant.
- Arrange for repairs.
- See that the repairs are done properly.
- Send appropriate notices to the tenant for late or nonpayment of rent, violations of the rules, etc.
- Do or oversee evictions.
- Get your approval for major expenses.
- Inspect the property occasionally
- Provide you with an accounting of all money received and disbursed monthly or quarterly, as well as keep a client trust account for owner money. State law regulates property managers much as it does real estate agents. And every state is different.
- And whatever else you agree upon between you. In fact every responsibility of the property manager is agreed upon contractually.
Approximately how much would it cost to have the property managed and maintained by a property manager?
Starting point is about 5% of the gross rents and it goes up to a maximum of 10%. But that is just part of it. Some property managers will charge you a set-up fee, for advertising a vacant unit, for trips to the property. Find out what their fee schedule is before you use them. Call several property management companies to ask about their fees. Don’t suggest anything to them, let them try to sell you. They will tell you what is important to them, what they believe their best service is. Then compare that with the others you call.
One thing to be particularly concerned with is if the property manger gets paid when the house is vacant. If he or she does not, they could be in too much of a hurry to get the place rented to be as careful as they should about tenant selection. They just want somebody living there so they can get their 5%. You see, if they rent to a tenant who tears up the property, you get to pay for repairs, not them. Another good reason for you to approve all tenants.
The apparently cheapest may not be the best. A “teaser” rate of five percent could be hiding some much higher back end charges. For example, the five percent might only apply if they only have to collect the rent and send you an accounting. If they have to do anything else, such as arrange for repairs or check references, they might charge you by the hour, thus quickly eclipsing any higher rate another management company might charge. Another company might charge eight percent, but includes all other services in that eight percent.
What kinds of questions do I need to ask when trying to choose a property manager?
I think I covered that above. But ask for references, and check them. The most important point to remember is that you are turning your property over to someone you don’t know to manage for you, and you will be many miles away. You won’t be able to just drive by and see how it looks.
At least as important as asking the property manager questions would be asking the property manager’s clients questions. Get a list of references, and call them, just as you would landlord references.
What expenses would be tax deductible? Is the interest paid on the mortgage (or any part there of) still deductible?
All management expenses are deductible, as well as repairs and maintenance. Your mortgage interest is still deductible, as are your property taxes and insurance. In fact, all your expenses, including sales tax and going to inspect the property a few times a year, are business expenses. Plus, of course, you have depreciation to deduct, once it becomes rental property. Ask your accountant about any things to watch out for.
If you can provide me with a list of available resources that can help me answer these questions and the many others that I have, I would greatly appreciate it.
The National Association of Residential Property Managers (NARPM) – is an association of real estate professionals who know first-hand the unique problems and challenges of managing single-family and small residential properties. NARPM offers training and designations for the manager specializing in residential property management. These certified managers are designated RMP and MPM. In addition companies can be certified as CRMC. Only property management firms that are headed by an MPM® and that demonstrate the highest level of professionalism are eligible for the Certified Residential Management Company (CRMC®) designation.
The Institute of Real Estate Management (IREM) – is an organization of professional property managers. It is a subgroup of the Realtors and issues professional designations such as Certified Property Manager (CPM). So if you see a property manager with a “CPM,” you can figure that he or she has taken the time and spent considerable money to learn a good deal about the business. When you look in the yellow pages for property managers, you will see some of them advertise themselves as CPMs. Other designations to look for are ARM and AMO. These professionals have also spent considerable money and time to acquire the skills necessary to become an expert in their field.
All Property Management – is a national directory of property managers and resource designed to help landlords find and select the best property manager for their needs. Property owners can search by property type and zip code to find property managers that service their location. Then owners can compare and select managers to get more information about the company and even a free quote on the cost of managing the owners property.