Hiring the best property manager for your out-of-state rental is critical to your bottom line, but how do you know which PM is best? In this episode, we go through, step-by-step, our process for vetting a selection of property managers in a remote market.
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Transcript
So they said, Hey, I need your fee to be at this percentage of the rent collected. And this is what I can afford to pay you in a leasing fee. And I said, Okay, we'll take that. So he was like, Hey, everyone, what's going on? Welcome to another episode of the remote investor. I'm Michael Albaum. And today I'm joined by my co host, Tom Schneider, Pierre Carrillo. And today, we're going to be walking you through exactly what the step by step guide should be to interviewing and screening property management partners. So let's get into it. Alright, guys, so let's just jump straight into it here. So anybody? Well, not anybody, but a lot of people who are investing remotely are leveraging property managers, and property managers, kind of like real estate agents are a dime a dozen in most markets. So I'm curious to get your thoughts and to have you share with everybody, what things are you looking for when you're screening and interviewing a property manager? Tom, you want to kick us off?
Yeah, I'll start us off. I mean, I'll start by saying, you know, selection is important. And what I mean by that is talking to multiple. So I think in starting the conversation, I like the idea of kind of maybe sourcing, like potential candidates, and then going through a standardized process of like reviewing them based on a bunch of criteria. So I'll go ahead and riff a little bit on this and thinking about it as like three steps, right? Sourcing, identifying different ones, and then interviewing and kind of like put running them all through a process of picking the best one and a gauntlet, that's right, onboarding. So I'm going to start with just the idea of like sourcing and where to find. So I think there's a couple of different flavors, there are larger brands out there that manage properties in multiple different markets. And, you know, we'll talk a little about the pros and cons of that. But just like searching and sourcing, so you can say, hey, real estate property manager XYZ on Google is a way for that to come up. And I think the idea is, is it should be if you're in a reasonably sized market, like you should be able to find find at least like 10 different potential property managers to select from, and to kind of go through this like rubric of evaluation. But you know, what I like to do all search through Google or perhaps even like, look on a site like Yelp. As you know, BiggerPockets is also has like, a lot of people trying to sell you something. So like, you know, their their resources are, are great, but you know, a good kind of starting place to build that list. So other than lead the conversation with that, like, first sourcing identifying a bunch of them to run through this process. Yeah. Michael Pierre, any other kind of like thoughts around identification?
I think that's a great place to start a fan. Something that I like doing is also like joining a local group, like a Facebook group of investors in that market, and then asking for references like asking, Hey, who, who's using property managers in this market? Who would you all recommend? And then combining those two lists from the my own research that I'm finding online? And then what people are, are saying locally in the market? Love references? Love here. What about you? What did you do when when you bought your property?
So made the mistake of just kind of going with the most convenient property manager when we first bought it, and they were awful. And it's
so easy, just have the path of least resistance of like, Oh, if they say they do what I need them to do great, I'm not going to spend extra time it's like, especially the PM, like that is just such a long tail relationship where you don't want to like cut corners. And
it can be super costly. I mean, it ended up being costly for us, because they didn't even let us know that the tenants were out. And then we had this extended vacancy, because we didn't even know our property was vacant. And so one of the one of the things was just like how quickly people respond is a good indicator. You
know, it's so funny. We there's probably a whole nother episode on horror stories with property managers, I had the same situation where a property manager just told me how they wanted to treat the vacancy, and I'm like, What are you talking about? Like, there's like, a lot of time on the lease, like, I go, ya know, they've moved out. And it's like, what, like, you know, I get away, I get it, stuff happens. And it's like out of your control. But anyways, I think this is like a future episode, like digging into those kind of horror stories. So thinking about different variables that I think about when okay, I've sourced a bunch of them from either my agent or maybe a lender or online reviews, forums, all that good stuff. A couple of like, really important questions that I that you need to know and have kind of like written down is, how many properties do they have under management? Right? Like, how big is their portfolio? Does their footprint match up to like, where I am investing? How are they getting paid? And that you know, that seems like a very basic question, but it actually varies quite a bit from property manager to property managers. Some take a percentage of rent some take a flat rate, some take a percentage of kappa acts, you know, or construction. So, you know, not even those
little differences can change the incentives relationship to So, yeah,
it's it totally. So I'm gonna leave a little bit of a like leg rib for a Michael here to kind of add on. But those are some, like initial sort of like numbers like within a spreadsheet. Each row is represented by a property manager that I'm evaluating columns being, you know, their pay structure, how many investment how much inventory they manage, if their investor in managing their own inventory as well. And then sort of like, you know, check the box on like, what zips as well as like property characteristics they manage, like, are they a Class A type or a Class B, what properties am I investing in? Does that match up? Or leave a big pregnant pause to
take all the Yeah, no, this is so great. Tom, you said something that you glossed over that I want to come back to. And it's when we were talking about references before about where to find some of these property managers, agents can be a great, great resource for that, too. So if there's somebody listening to this, that is actively buying in a market, and so is working with an agent or wants to find an agent, and then we'll also need a property manager, those two can often play off each other and will often have good working relationships. Sometimes an agent will have a property management business or vice versa. So definitely chat with your agent or property manager about looking for one or the other. And then something else you said, Tom, is that like, asking them how many units they have under management? I think is a great question. So one thing that I talk a lot about in my education content at my Fire Academy is not only like what the questions we should be asking are, but what then the answers were being told, tell us about that person or that company. And so I think I want to dive into this a little bit more, because I love the questions that you pose. But I want everyone to come away from this episode with Okay, well, I go ask the question, and now I get an answer. And now what do I do? Is that a good answer? A bad answer. So, so curious what you guys think like someone says to you, Hey, I've got 1000 units under management. What does that mean? What what how does that information help us make a decision?
I think it's all contextual, on like, where they're managing, like, I think 1000 is a decent is like, quite a bit like, especially in like, a smaller, like, perhaps like tertiary or even like a major market. Like I think that's like pretty significant scale. As a property manager. You know, with that I'm, you know, kind of curious, also how many, like property managers, you know, they have like, as like a ratio to managing. But, I mean, I think that's really specific. So like, you know, if I'm in like, managing in North Pole, Alaska, like, I wouldn't, that would be crazy to have somebody have like, 1000 properties that are management, or whatever. Yeah, you know, city in Alaska. Yeah. Yeah, come check out Yeah. So I think it's very Michael, it's very kind of dependent on where they're managing. But if they're managing in Atlanta, and they're only managing, like, 20, or like, 40 homes, like, that's a little bit of a red flag to me, being in like such a big market. So, you know, kind of rule of thumb. I don't know, like, I typically only invest in places that have like a million, you know, population and like the greater like, Metro. And if a property manager is managing, like, less than 100, or maybe even less than 200 homes, I'm like, that's, that's, that's like kind of lien like, I don't want them to learn the craft of property management on my like, dime. I think I think you're kind of kind of go into where you're alluding at is like, how long have they been in business?
Yeah. Yeah. I love it. I think you I think you nailed that. And I think that it's so important to understand that real estate investing is so hyperlocal. And so market specific. And so it's really tough to take an umbrella approach and apply it uniformly across the board. So I agree, totally like, I think it all depends on the market size, do you think that bigger is better? Or smaller is better? Or like, the age old question? Does size matter? How do you how do you feel about that when it comes to your property management partners?
Oh, that's a good question. I mean, I think there's too small. And I don't think there's too big, like, as long as like, the other sort of criteria is good. And that like, Oh, they're collections is pretty good. Oh, they're like average turn is like, like pretty reasonable. Oh, you know, the, the customer and residents seem pretty happy with the services that they you know, with a with a grain of salt, because that relationship is always can be a little bit tenuous at times, a land, you know, a rent manager and a resident. But I mean, there are like major red flags. I digress a little bit. So anyways, I'd say there is a floor Michael, but like, not really like a ceiling of like, if they manage townhomes. Great. I've got it like an efficient business. Like, you know, I, I want to be a part of that, you know,
totally. PR. I'm curious to get your thoughts because I know that the property manager that you ended up going with did have a really significant footprint. And it was really,
and yeah, so there were a huge tech enabled company, and that's kind of one of the red flags that I'd say it's like if they're a tech heavy Property management firms kind of like one of these property management light services that they're using technology to solve their problems. They use Bitcoin.
Like synergy I'm all
about all about like making your systems robust and tech heavy and using all the latest technology. But if you're replacing people with technology in property management, I'd say that's a real problem. Getting someone out like one of the big problems we had with that first company was getting someone to get out to the property. And it was just week after week, no one would give us any new photos. And that's how we ended up with an empty property and not even knowing about it. And the property manager that we ended up going with was much, much smaller. But they were out there right away, they sent us photos of our property that day, we got in contact with them. They weren't bragging about being the most sophisticated technology driven company, but they were people who did their job, right, and responded in a timely manner.
So yeah, it's interesting. So like, we obviously can't take one off experiences and apply them across the board. And to say that every large tech enabled property management company is going to is going to operate poor for you. Conversely, every small mom and pop operator might not be a great fit. So this is why I love this is why I love that we're having this conversation is just to give people some ammo and some takeaways to then go investigate for themselves. Yeah, there he is. It's funny, I go ahead, Tom.
I think there's like there's sometimes this like inverse relationship of efficiency, and resiliency, where if you know, the build something so efficient, like if things go off the rails a little bit like it can kind of hit a standstill, like, you know, pure, like, there's probably a non standard thing, I don't know, maybe non standard or whatever. But you can, you know, very easily throw the baby out with the bathwater of trying to look, we have one employee for every 10,000 homes. It's like, Oh, that's great. But you know, you're in a business that is as kind of dynamic and like kind of a moving target as like managing real estate, managing tangible property, like you need to have some resiliency and some, you know, not over efficiency it.
Yeah, and when I say red flag, I'm not saying stop sign, I'm saying just notice for inquiry here, make sure that they're not replacing the things that should be done by a human with some app or automated response.
That's great. That's great. Tom, you touched on this point a little bit ago, and we're talking about property managers per property, kind of on a ratio basis. And so if someone is new to the investment, real estate space, they might be a little bit confused by that, because I'm talking to the property manager, what do you mean, there's like a different one, so maybe you could go elaborate a little bit on on what that means and what that looks like, across the different companies.
I think it's, you know, so I, you know, work in, like, real estate and like, as like a team, that is like managing property, like, you want to have a fairly high ratio of like, employees to number of units that you manage, like, you know, one 200 Or one, two, whatever I you know, whatever that number be, I think probably as an outside investor, it's a little bit less important to, like, have that as a ratio. So like, as long as they're responsive, you know, able to take care of the home, able to provide a safe, habitable, all that good stuff, you know, with a resident and least a home with good people. I think that's probably like, less important, like, what that ratio is. Yeah, I think sometimes, like, you know, for better or worse, kind of, I like, apply a little bit of a lens of like, just institutional experience of like, oh, you know, if our systems and technology is running well, like, you know, we have a good ratio, obviously, not the awful ratio that results in like, no flexibility and not being able to handle like stuff outside the lines. But, you know, I think that's probably less important, but still, like an interesting data point, at least for me. You know, having totally,
totally, and I think it's something that because I know your background, because we have history, I know that you asked the question and had experience with the person that you were speaking to on the phone, as you were interviewing this property manager wasn't the same person that you were going to be dealing with on a day to day basis. So how do you screen for that type of thing? And is that important?
You know, you you gave a good example on how to do this, because so like, a lot of companies like they've got a salesperson, the sales man or woman that's, you know, sweet talk you. And I think,
oh, yeah, we've got that we can do that. No problem. Yeah.
I mean, it's something that I think I think you taught is around this sort of, like secret shopper, you know, like, find one of their listings, like kind of go through the process. And like, that's gonna give you a much better insight on the there as like an operation. Doing that, you know, not coming in as a potential customer, as you know, someone who's having to manage but as on the other sight as like a as a tenant?
Totally No, yeah, I love that. And what what Tom's referring to is, basically, if you're interviewing property manager, screening property managers, just go on their website, find one of their listings, and call the phone number as, as a prospective tenant, and see what that process is like, as a prospective tenant, if they are great to work with, if they take really good care of you, if they're responsive, that's a great sign, versus if they're giving you the dog and pony show as an owner. And they can do everything and they answer all the right questions, but you have no idea how they're treating your prospective clients who are your tenants, that could spell trouble down the road. So I always like to see how the tenant is treated. It's funny, I posted about this a while back on Twitter, and someone was like, you're starting the relationship off with with a lie under false pretenses. And I'm like, No, man, I'm trying to understand what the customer experience is like for the clients who they're serving. Yeah, and I'm like, Get out of here. I don't need that. I think there might have been a property manager too.
I think another way, I like to kind of get under the hood. And, again, this is would probably the like more extreme heavy, like, interviewing process of a property manager. And I think there's a spectrum of level of diligence. And I think it's a good exercise to do to apply more diligence into this process. But another question you can ask is a more kind of like, open ended question like, Hey, what's your process of managing a renewal or managing a turn, and a property manager who's like, on their game is going to be like, alright, well, first, we look up at local comps at what the rental amount is going to be, then we review with the owner what they want to do with the actual resident that's living there, then we approach the resident with XYZ and present this to them. And you know, it's not to say that every single property manager has the same process, but it's like, they can like succinctly like, tell you or share with you what their processes and like they have a plan, you know, and I think also like, in going through those questions, like you're just gonna get, like naturally more kind of educated, like, you don't have to know exactly what the right or wrong answer is. But it's almost like you, you out you, you throw a question out there like that, like, Hey, what's your renewal process? What's your turn process? And just like turn on your BS meter and turn on your like, learning, you know, ears and hear what two different companies say? Like, it's, I think there's very little to lose of coming in with a beginner's mindset, no matter where you are in your investor journey, and asking these these really important questions, like the process of a turn or an initial lease, or, you know, you know, how you deal with someone who's late a couple times, or whatever, you know? Yeah,
no, I think that's great. And I love the open ended style questions. Guys, I'm curious to get your thoughts and it's something I've heard through, through the folks that I've worked with in the past is, you know, I'm too new an investor, I'm nervous to call these property management companies that are gonna take me seriously, why would anybody talk to me? I'm not, you know, I'm not a client of theirs yet. What do you have to say to that?
Stop being a little bitch.
Yeah, like, yeah,
get your ego out of the way. Because you're, like, it's just such like, a no brainer of, like, it's okay to be a little bit vulnerable. And like, and, like, ultimately, like, every single cycle of going through, like asking these types of questions, like, you're gonna learn more, you're gonna get a little bit like less concerned about asking questions. And like, ultimately, like, who cares how much you know, looking like, not smart, like they're trying to sell to you like, they're trying to get you the business. And I think there's like, very list in very little risk and going about it in a very, you know,
you're gonna be paying them good money. You just, yeah, you just gotta get the information. However you can. And that's the best way.
Yeah. And I think to on top of that, if, if you call and if a property manager makes you feel silly for asking these seemingly, maybe trivial questions, then that's maybe it's not something you want to work with anyhow, like, someone, someone on the other end of the phone should be willing to help educate you and hold your hand and walk you through what the process is, like, if they truly understand the business, and if they want new business, if they're interested in growing, you know, you've heard of contractors throwing a few quotes, you know, it's ridiculous price for something. So like, they don't want the business anyhow. So we see that in the property management world, too. And that's, that should be assigned to you as what their relationship might look like going forward.
I'm gonna flip the question or not. So on that same topic real quick. More often than not these property managers. You can't get them to shut up about their business. And you call them and they're like, Oh, we do this. And we do that. And we're going to, like, just like, Dude, I had a 30 minute call with you. We're going 45 minutes like dude, and he's like, let me off. You're good. I
know. Like, it could be some regional cultural stuff, like a very long call. How y'all do for sure.
I've never I've all the property managers that we've called like, never are they like, you know, why are you calling me?
Tell me we won't take your money. Hey, Michael, I got a question for you, you've been throwing off these. I love to hear from yours yourself as well, Pierre, what are some red flags? So, you know, we go through a process, we identify a bunch of people, we're asking them, you know, discrete kind of quantitative questions, as well as some qualitative questions, getting some processes that they have, what are some red flags?
I think Pierre touched on it at the beginning here, and that's timeliness and responsiveness. So if I ask a question, and I don't hear back from them for a week, or two weeks, or or at all, major red flag, and Tom, you brought up the point to which I want to touch on the cultural differences in a lot of other parts of the country to like, we are a massive country with a diverse cultural background, and customs and norms. And so here in California, Silicon Valley, I mean, if someone doesn't get back to you, by the end of the day, to an email, you're kind of like what's going on? In a lot of other parts of the country, two days, three days, four days might be the cultural norm in terms of that's being really responsive. So I think it's important to set expectations to around just asking the question and having conversation of, hey, if I email you, how soon can I expect to hear back from you, is really important. But in for that initial call for that initial interaction, if I'm emailing you, especially if I'm a brand new lead for you, I expect to hear back. And if I don't, that's a major red flag. And it's funny, I interviewed a bunch of property managers, or tried to interview a bunch of different property managers and a couple of the markets they operate in. And the ones I work with today are the only ones that called me back. And I'm like, you know, we make the joke about contractors, if you pick up your phone, you'll get business like if you call people back, you'll get business. So I think communication is huge for me, in terms of red flags, but right up here,
that was the main main one for us is we couldn't get eyes on our property. And to have someone that was like one of the biggest selling points we interviewed, I think three or four when we were trying to fire the previous one. And the one we ended up going with was the person who was quick to respond quick to go to the property quick to send us photos give us like, they just provide an opener, like this person's on it. They know what they're doing. They're local, they definitely live there. We're going with them. And they were the same price as the the first awful company. Yeah,
I think another red flag. Okay.
And that reminds me of this did not happen to me. But I've heard Tom tell the story before and maybe I'll prompt it for you, Tom. But the hidden clause inside of the property management contract? Oh, yeah,
that's a good one. So on to stage three, sourcing, then looking at specific questions, and then having a request of things to review. And one of those being like their property management agreement. So I've had to fire Property Management before kind of similar things where it's like, I feel like they, the property was in a satellite region, which wasn't their main region. So they didn't have like a great team, they're managing anyways, when I fired them, they like, like, in the Property Management Agreement, which I did not read, which now I do, all the time. Whenever I add a new property manager is like, they were like, collecting a bunch of money on like, on in firing them, like within the pm agreement. I don't remember like the specific details about it. But you know, it was like taking an extra month rent that they just like took, there's a cancellation clause, cancellation clause after it there was within a certain number of years. And, you know, I think like on the onset, like if I had read the property management agreement before signing it and said, like, Hey, I'm not signing it, do you include that? Take it out, like, I probably would have saved myself 1000 bucks or 2000 bucks on some like, crazy, you know, cancellation clause. So you know, that other to that point, right? Red flag is, it might take a little bit of time, and just skimming and reading through that property management agreement. But that's a good use of time, like it would have saved me 1000 bucks, 2000 bucks and going through that.
And it would have taken you two hours, three hours to read it. So that's like some lawyer money right there. That's pretty good ROI. That's correct. Yeah. Yeah. I think I think also to like, in HR, I think it's so important to read, like, read the stuff that they send you. It's legal, it's binding, you need to be aware of what you're signing. The other thing that I always look out for, and it's it's kind of a personal preference and pet peeve of mine, but when I asked the property manager, how do they get paid? How do they make money, and they start listing off all these things, and well, we charge $50 for an inspection and this, this $20 to return email and $20 to answer the phone. And like, I hate getting nickeled and dimed for all these different line item charges. And I and I, you know, from a property managers perspective, I get it because it takes time to do these things and so they need to make money and they need to charge for their services and the time they spend doing things, but me personally, I like I want a flat fee, I want like a flat percentage of the rent that they collect is how much is how I pay them. And I think it's also important to set expectations out there for everybody who isn't maybe familiar with property management, property managers, and how they charge, there's a couple different models. One is Tom, like you mentioned, a flat fixed rate, they charge 50 bucks per door, whatever independent of the rent, some property managers will charge a percentage of the rent, and some will have it that includes everything. And then some might have this kind of ala carte menu style of services and costs. I'm a big fan of kind of that middle tier of the percentage of the rent. And however much you collect how much you're able to charge, that's how much you get paid on a percentage basis. Because I think that aligns incentives and real really well, in that if they're able to collect more rent, they win too, they get to share in the upside. So I just wanted to put that out there for everybody listening, that it's just a personal preference, you'll figure out what works well for you do what do you guys like? Which style works well in for you guys portfolio?
Percentage of the rent, I feel like makes the most makes the most sense. But it depends. Yeah, it depends on if you're going with one of the lighter services out there, there are, like some of these tech platforms that offer you per door, which can come out to a bit less,
yeah, I do the math, you know, and, you know, a lot of stuff we're saying, you know, market kind of specific. So, you know, I have a few units up in the north, east in Pennsylvania, and there's not as many property managers as there are another like big markets, and, you know, they have this like, tech fee, like $1 a month or something, and I cringe so much when I see it, but it's like, they're, they're good. They, you know, they have good relationships, they collect rent, they keep the house in good shape, they're like on responses and stuff. So I think on that, like, you know, format of getting paid. It's, you know, do do the math, like, if it's a per dollar per door, or percentage of friends, like along with your within when you're doing your underwriting and making assumptions about repairs and maintenance, like how much would that work out to be in property manager that they're charging an upcharge? Or a daily amount or whatever, you know, on? So I think it's, it's worth within your actual model itself, you know, applying the different property managers, things. However, they're they're collecting, collecting money.
Yeah. Have you seen property management fees go up over the last four years at all? Have you recognized any changes in your portfolio? Or is it safe? Pretty static?
Good question, Pierre.
You know, it's, it's a really good question. It stayed static. But so the percentage as a number has stayed static, but the rent has, of course, increased over the last four years. Now, what I have seen increase our labor material costs. So the the repair costs are more expensive, those projects are more expensive, but the property managers know, which is I think, kind of the beauty of real estate investing in general is that it's a great hedge against inflation, because as the rent goes, as your expenses go up with inflation, your your dollars are bringing in also go up over time. So and the property manager gets to participate in that upside,
final two little recommendations on property manager. So one of them is I'm sure I'll talk about this again, in a future episode, but like, bring them into your acquisition process. So like, kind of like bonus questions, which is honestly my favorite thing to do, like evaluating a property manager and say, Hey, I'm looking at buying 123 Main Street, like, what do you think, and like, you can almost leave it kind of open ended and see how detailed they come back, like, I've had a wonderful experience is actually it was that property manager that in Pittsburgh, they're like, oh, this great, this house is really great. There's a lot of three bedrooms, this one's a four bedrooms, we'd lease it right away, I think we'd get this kind of rent amount. And like, man, that's thoughtful, that's knowing the market. And there's like, such a double whammy when with that, and that you're kind of like, de masking that property manager about how well they know the market, and how it's conscientious, conscientious, the right word, or, you know, thoughtful they are in the way in thinking about real estate, but you're also adding them on your acquisition team. Like, that's fantastic, you know, you know, and there's been other folks that says, like, ah, you know, we don't really manage a lot of properties in that area, you know, XYZ, so that's one pro tip, the other one and the other one is get a reference, like, that's like an awkward call or communication but like, such a high ROI, so say, Hey, do you have any like customers, you use that like I can talk to? And like actually just like emailing people and say, Hey, I'm thinking about using ABC property manager, and they said, you know, to get your feedback, like, what do you think about them? What I do well, what could they improve upon blah, blah, and it really good use of time? You know, that's sort of like a little bit of an introvert. It's a kid That's a
much more robust data point than their online rating. Because on property managers get rated by people who have to deal with them on a day to day basis, the tenants and tenants hate property managers. Totally.
Yep. I think that's a great point. My last pro tip that I'll leave everybody with is, everything is negotiable. So I've heard from students I've coached with in the past that they're like, oh, you know, I found this great property manager, but I ran their fees through my model, and it's like, it doesn't work. And I'm not hitting my cash flow targets. And I said, Okay, ask them to lower their fee. See what they say, like, you can do that. I'm like, Yeah, everything's negotiable. So it's like, okay, so they said, Hey, I need your fee to be at this percentage of the rent collected, and this is what I can afford to pay you in a leasing fee. And I said, Okay, we'll take that. So he was like, I got to have my cake and eat it too. So I would encourage everyone not to be shy about asking for the things that work for you. By that same token, you can't get mad at somebody for saying no. So their fees are their fees, and everybody's got to make money. But I would encourage everyone to ask the question, because all too often people say up, the numbers don't work for me. I gotta move on, when in reality, there are things that we have within our control or question that we can ask to help make the situation better. Sweet. Well, thanks so much for hanging out with us, everybody. Really appreciate it. We look forward to seeing you on the next one. Happy investing
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