Friday, May 31, 2019

Should You Hire a Property Management Company?

A property management company may make managing your rental properties "less hassle" but it does come at a steep cost.

A reader writes that he is having difficulty with a tenant.  He bought a rental unit and it came with a tenant already in the property.   I smell trouble from the get-go.  Whenever we bought a property, we always took it "vacant" of tenants.  Holdover tenants can be trouble, and often landlords will sell a property just to be rid of a problem tenant.

When we bought the office building on Duke Street, there was a tenant of sorts in there.  He made a list of demands on repairs and renovations he wanted, and told us how lucky we were to have him as a tenant.   I didn't like the guy - he was too slick.  Plus, he could not explain what his business was in ten words or less.  In fact, after he went on for a half-hour about his business, I still could not figure out what it was.   When I came by the property to inspect it, I saw a lot of mail piled up in the foyer, with his name on it - and several different business names - from the bankruptcy courts of three different States, as well as a litany of "past due" notices from creditors.

So we took the property vacant and forced the owner to evict him.  The owner took him into his own office, subletting him space.  I later found out the guy was a con artist and never paid the former owner a dime in rent - likely he never would have paid me, either.

When we bought our condos in Florida, the same deal went down.  Sketchy tenants were renting and they  wanted to "stay on" as full-time tenants.  But we had plans to rent the place seasonally as a vacation rental (complete with dock slips) and move away from where it had devolved into a full-time rental to "Florida Man".   So we took the property vacant, the tenants moved out, and only later on did I find out they were six months' arrears on the rent as it was - and had left a trail of destruction in their wake.   There are people like that, who go from landlord to landlord - usually seeking out amateur landlords who don't do background checks or can be sweet-talked into taking them on as tenants.   They never pay rent, and leave the day before the Sheriff shows up, usually taking the appliances with them, if not the copper plumbing.  I wrote about them before - modern-day gypsies.

Holdover tenants can be just plain trouble.  If you do decide to take on one, treat them as you would a new tenant - with a credit check, background check, and proof from the previous owner of regular payment of rent.  But ask yourself why a landlord would sell a property with a tenant in it, when properties are much easier to sell vacant, show better vacant, and are easier to show vacant.   With a tenant in place, it is hard to sell a property, so there must be a good reason the landlord is selling with a holdover tenant.

The same reader opined that maybe down the road someday they would use a property management company to manage their rental properties.   This seems attractive at first, but my experience has been that these companies basically siphon off all of the profits from owning real estate.  When we were in the business of renting properties, like our reader we kept everything nearby.  If something broke or a property needed to be repainted to lease it, we could manage these things ourselves, either by doing the repairs ourselves (usually for a fraction of the cost of hiring someone) or if we needed to hire someone, we could manage this directly and get someone reliable at a reasonable cost.   Being local to the properties and managing them ourselves meant the difference between positive and negative cash-flow.   Many folks think landlords are "making out like a bandit" when in fact they would be lucky to make a hundred or two a month on a property - at considerable risk to themselves and not without effort.   Oh, and the money you have to invest - that.

We still have one condo in Alexandria, Virginia.  The entire 22-acre complex, adjacent the yellow line train station in Huntington, is slated to be demolished and replaced with medium-rise condos and apartments.   It has taken years, but we voted to abolish the condominium, petition to re-zone the property, have a traffic study done, and then offer the property to developers.   The buildings are over 50 years old and ready to fall down.  The land is worth more than the buildings, much as my personal residence was (being on two deeded lots, five minutes from Old Town).   So it is time for renewal.

We can sell the property now, or hang on to the end.   Since we have no plans on what to do with the proceeds of the sale, it made sense to hang on to it, at least for now.  If we sold the property and pocketed the proceeds, we would have a huge tax bill.  We "fully depreciated" the property over the years, so our basis is zero, and thus the sales price - all of it - represents 100% capital gains.  This would knock us into a higher tax bracket, present us with a huge tax bill, and also mean we would lose our Obamacare subsidy, costing an additional $17,000 or so as well.

When the time is right, we will sell the unit and do a Starker Deferred Exchange and buy a rental property somewhere else.   We could then sell our current house (which would be tax-free) and then move to the rental property, eventually.    And yes, this is all perfectly legal.

Anyway, since we are no longer in Alexandria, we hired a property management company to manage the place.  And they do a good job, collecting rent, getting leases signed, dealing with tenant issues, and whatnot.  But their fee is one month's rent every time a new lease is signed as well as a small fee ($93) for every rent check collected.   In a unit with a $1300-a-month rent, this amounts to about two months' rent overall, in fees, every year. 

Compounding this is vacancy.  We've had three tenants under this management company, and many months of vacancy.    The rental company doesn't see the urgency in getting the place rented.  The also keep suggesting we raise the rent, which causes tenants to move out.  I think we finally have a stable tenant - and elderly woman - who seems to like the place.  Of course, she causes problems with the condo association, as she tries to feed the birds and trim the hedges. 

She also smokes in the unit, which is a violation of the lease.  Our property manager went berserk when he found out (or at least suspected it, from the smells).   He said we should begin eviction proceedings right away!   I calmed him down and pointed out that it would take months to do this, and that the tenant's daughter, who co-signed the lease, was a lawyer.  So we would spend months and months in court with no rental payments, and probably lose. Oh, and the legal expenses would run into the thousands of dollars.  After all, unless you have a photo of the tenant smoking, how do you prove this?

I felt this was a great way to keep the tenant - after all, not many other landlords would tolerate this, so she is comfortable there.   And besides she pays the rent on time and renewed the lease.   That's a good tenant.  And since the place is going to be torn down eventually anyway, why worry about damages from smoking?

The property manager also suggested, after we lost our second tenant, that we repaint the condo.  He hired someone and it cost a staggering $1800 or so.  We had a maintenance guy who worked for cheap, but our property manager hires "name brand" plumbers and whatnot, who charge a lot more.  So, for example, a simple faucet repair (that did NOT involve a new faucet) costs $300 when our handyman would have done it for $150.

As a result, we have had more tenant churn since we hired the property manager (our previous tenant, under our own management, was there 18 years) and higher maintenance costs, more vacancy, and a net loss for two of the four years he has managed the place. 

Bear in mind that the only expenses we have, in addition to the property management fees, are the condo fee (which includes utilities), property taxes, and  insurance.   We own this property outright, and still managed to lose money in two years out of four.  And by lose money, I am talking well over $1000 in a single year.  On a property that is paid for.

Am I unhappy with the property management company?  No.  They did exactly what they said they would, and other property managers would no doubt do about the same in terms of prices and action.   You can't blame them for using "name brand" maintenance staff (plumbers, electricians, painters, etc.) when they have a duty to their client (a low-cost provider might be cheaper, but if something goes wrong, the property management company is responsible, as they chose them!).   And trying to get the highest possible rents - again, something in the client interest.

In retrospect, I should have fought harder to keep the rent more reasonable, so we would not have as much tenant churn.   But overall, I would not recommend trying to manage remote properties at all, even with a property management company.  In this situation, it is a special case, as we are "parking" this property until we decide where to transfer the basis (or until the place is torn down).   Otherwise, we would have sold it long ago.

There is no such thing as free money.  And easy money is darn hard to come by as well.   Being a landlord is no swiss picnic.  As a tenant, one might believe it is all just fun - cashing those fat rent checks and then goofing off full-time.  But the reality is, you constantly have to be watching the bottom line, dealing with repairs, dealing with tenants, dealing with vacancy - and risking your credit rating, your capital, and your liability in owning properties with people living in them.

And of course, the real fun part is that the media and the politicians have painted a big target on your back - you are the mean, evil, money-grubbing landlord, worthy only of taxation and approbation.  When the revolution comes, and AOC is President, you'll be the first one she lines up against the wall!

Some fun.