Investment property manager Jason Cox and professional real estate investor David Campbell share their thoughts in part four of this four part interview series.
David: When people are interviewing a residential investment property manager, it’s kind of like interviewing for a business partner or a date. You’re deciding, on the first date, which is your interview, is this someone you want to jump into a long-term committed relationship with? You’re not quite getting married, but you’re deciding if it’s a good idea to move into together and start sharing toothbrushes. It’s that kind of a personal relationship. What are some of the key questions that would be important for people to ask an investment property manager?
Jason: You definitely want to meet the broker. That is the person that is ultimately responsible for the property management company and how they perform. Being a member of National Association of Residential Property Managers (NARPM) is important. That will tell you how legitimate the company is. Being on the MLS—it’s not inexpensive, but that’s going to let you know that your property is being marketed in the most effective way possible, at least in our area in Texas.
David: If the broker is not a member of the MLS, then your property is not going to be exposed on the MLS, and in some areas that’s a really big deal for rentals. If you go to realtor.com, the only way to get a property there is to have it in the MLS. And that’s not cheap. So if your property manager doesn’t pay for that service, you’re not going to get that benefit. So here are some great questions to ask your manager. These days technology is such an important part of the management experience. I would focus a lot of my questions around how the manager is implementing technology to make his job easier, which makes my job easier as well. Some of the key points to ask, how many units do you have under management, and what is the vacancy in their overall portfolio, and the types of units that make up their portfolio. I want my units to be consistent with the makeup of that investment property manager portfolio. For example, let’s say the manager says, “I’m very experienced, I have 150 units under management.” That’s enough to create a full-time income for an investment property manager. But what kinds of units are they? “Well, they’re all C-class ghetto properties.” I’ve got a brand-new luxury house on the other side of town. That’s a different type of customer service experience and vendor expectation. I want to make sure that I’m going to ask the manager leading questions, like “If you were going to buy a property in this area, what kind of property would you like to manage?” How many times have people asked that question?
Jason: You’re the only person that’s ever asked me that. But that’s a great question to ask your potential residential investment property manager.
David: The answer that comes out could be all over the map. They might say, “I really enjoy cleaning human hair out of toilets so give me the ugliest, dirtiest property possible.” Or they might say “I really like four-bedroom homes because families live there, and I like working with families because they tend to be longer term.” And as a investment property manager, there’s an interesting paradigm shift to break. Do you make more money spending a lot of time leasing a property and making 50-60% of the first month’s rent, or doing nothing, and getting 8-10% of the month’s rent?
Jason: Doing nothing and getting 8-10%.
David: Your investment property manager does a lot of work finding the right tenant for you, and once that tenant’s in the property, the manager’s goal is that the tenant pays their rent on time and they don’t call and ask for repairs. Your manager basically does not do a whole lot and they get paid 8-10% of the rent. The reason you have the manager is because when your tenant does call, your manager puts in so much more work than what that 8-10% pays. Maybe you’ve got a $500/month rental, and the manager’s fee is $50/month, or 10%. You’re hoping that tenant doesn’t call, but when they do call, it’s probably going to take you 3 or 4 hours to fix that problem, and then you’re only making $12 or $15 an hour, and the property manager wants to make more than that, so they want to set you up for success, by getting that residual income for both of you. Talk about what your company does to ensure that your clients have a good management experience. What kinds of questions would you want people to ask you so you can show off what a good job you do?
Jason: We definitely want the proper expectations set up front so everyone understands what’s expected from each other. I would definitely want potential clients to ask me what steps we take to find their tenant and make sure that we’re doing everything possible to place a good tenant in that property. It’s very important to put tenants through a screening process, to look at their background and their income. Put them under a microscope. It’s your property manager’s job to treat your investment as if it were their own. That’s our policy, and that should be every property manager’s policy. If you start out with a tenant on the right foot, you’re more likely to be set up for success with that tenant. Nobody has a crystal ball, but there are things that you can do, or ask of your property manager, to put yourself in the best possible position for success with any particular tenant.
David: The questions we have on the slide seem like they should obvious but they aren’t. Not all residential investment property managers have after-hours emergency response. Not all managers have a privacy policy for your essential documents. Your property manager has your social security number, because they have to file a tax form for you, and they have tax-reporting obligations. They’ve also got your tenants’ personal information. They have copies of your keys. Do they have a good policy to separate the keys from the address that goes with those keys? So if someone were to break into the property manager’s office and steal their box of keys would that thief have instant access to your property? There are a lot of best practices that go into property management, and I think that it’s the hardest job in real estate. I will look at investing heavier into a market when I find a good manager that I want to expand my relationship with. Unfortunately, not all property managers do a good job. Some property managers are unethical, and it’s really unfortunate that in business there are people who do it ethically and people who don’t. When you’re new at investing, it’s easy to be taken advantage of by your tenant and your property manager. Sometimes your property manager takes advantage of you ethically by not meeting your expectations. If the manager doesn’t know what your investment goals are, and you haven’t had a conversation about what your metrics of success are, sometimes the manager could very innocently think they’re helping, but simultaneously hurting. My A/C broke down, and my manager spent $100 fixing it, and that was good, but what I didn’t communicate to my manager was, “This A/C is on its last legs anyway. The next time it breaks down, I want you to replace it. Don’t patch it.” It was my error that I hadn’t communicated that to the manager. The manager’s error was not understanding what my objectives were with that property, not understanding what I wanted from that property and what my policy on expenses were. That was not necessarily an unethical situation, but it was a mismatch and a bad residential investment property management relationship. The manager didn’t do a bad job, but the relationship wasn’t working because we hadn’t gone through those questions and answers.
But sometimes, I’ve had a manager that was not doing a good job, just a terrible manager. These are big red flags that you need to get some help or dig into your manager to see what’s going on. Some ways that managers steal from you, they can give a rent credit to the tenant for fixing a repair, and then bill the owner for that same repair. It’s one bill and two payments, and people who are not good at accounting aren’t going to necessarily recognize that the rent was debited and there was an expense as well.
The manager can duplicate expenses on multiple months. Here’s a legitimate invoice for an expense in September, and then in November, here’s that same invoice again, taking it out of your rent for two different months. It could be that’s an innocent mistake, or it could be a way for a manager to steal money from you and you not knowing it. The manager could be collecting a management fee on a tenant’s security deposit. This has happened to me and I pitched a fit. Their accounting department saw revenue, and they put a management fee on that entire revenue, but it’s not all the same. The security deposit is not income, and there’s no management fee on that deposit because I have an obligation to pay it back to the tenant.
In my position as a real estate investment counselor, I get people telling me all the horror stories about investing. Not all investing has to be horrible. Some people have stamina for this, they just laugh. Some people, it affects them emotionally, and I steer them towards more commercial tenants or triple-net tenants, or real estate syndications, or having a partnership where one person deals with the money and the other deals with the management of the asset. I’ve heard stories where the manager collects rent and they tell the owner it’s vacant, or they fudge the move-out date. They moved out on the first, but the manager says they moved out a week earlier, and the manager gets to pocket that extra rent.
Here’s a really big one that is straight up illegal that a lot of brokers don’t actually know: co-mingling funds in a broker’s trust account. Your money that comes from the tenant, but it belongs to you, goes into the broker’s trust account. If the broker makes some money in his own portfolio, or he gets a commission, they’re not legally allowed to put those funds in the same bank account, because they’re mixing their personal funds with your funds. I would ask what their policy is on maintaining their broker trust account. If they just look at you glassy-eyed, that’s a clue they might not have the experience you want.
Sometimes a broker will collect the deposit at move-in, and then when the tenant moves out, the broker says to the owner, “You have the deposit, because we gave it to you when the tenant moved in, and now we’re going to deduct it from your rent.” That’s a sneaky one, because sometimes people forget, because the lease sometimes doesn’t say. The lease might say the deposit is $1000, but the lease doesn’t say who’s holding it. This is a sneaky one and sometimes it can be innocent and sometimes it can be malicious. You want to know very clearly who’s holding the deposit. I like when I see the security deposit on my management statements, on a monthly basis, just remind everyone whether the broker is holding the deposit on that tenant. And if the broker is balancing their trust account, then it’s going to be obvious who’s holding the deposit.
I just showed you the dishonest tricks that a residential investment property manager could use. Here are some red flags that those tricks are being used against you. Sometimes property managers bill owners for repairs that didn’t happen. If the manager’s using the same service company for every repair, that’s a red flag. The same company that does your HVAC should not also do plumbing, painting, carpeting, window repair, and landscaping. Those are different skills. You want an invoice from each of those companies. If you’re not getting those invoices, that’s a red flag. Your property manager should be giving you those invoices, or maybe having an online drop-box where they put those invoices so you can go look at them when you want.
If the income and expense statements are vague or illegible. If you don’t understand your income/expense statement, call your manager and have them explain it to you. If they can’t explain it to you, it’s a big red flag. Sometimes, when your property is vacant, you’re going to have utility and landscaping expenses. If you’ve got 30 days’ vacancy, and you never see the utility bill or the landscaping bill, that’s an interesting red flag because maybe your property isn’t really vacant. Maybe there’s a tenant paying rent there, and your manager’s just pocketing the rent, because if the tenant’s still in the property, the utility’s going to be in their name, and they’re going to be paying for the landscaping.
It’s a big red flag if you’re getting notices from neighbors, city, HOA, etc. Sometimes when I own a property, I’ll communicate with the neighbors and say, “I’m the property owner, here’s the business card for my manager. If you have a problem, call my manager. If you can’t reach my manager, I’ve written my number on the back of the card” as a courtesy to the neighbor so they feel empowered that if there’s a problem there’s someone they can talk to. Talk about best practices. Do you think that’s a good idea to be in communication with your neighbors or not?
Jason: I think that’s great. The neighbors, especially if they’re owners or if they have a mortgage, tend to feel higher up in the hierarchy, when in reality we’re all running from somebody unless you’ve completely paid for your house. They’re going to watch your property like a hawk if you give them that sense of empowerment. And they’re there 24/7. That is a great tool, having two or three neighbors watching that property at any given time and calling you. Sometimes it could be bothersome because you could get that nosy neighbor, but it’s better to have too much information than none at all.
David: For example, one time I had a water leak in one of my properties and the tenant was out of town, and the water was running down the street. And the neighbor called me, and said, “I just wanted to let you know there’s water coming out of your front door.” Thank you very much for calling! Then I could call my property manager, and say “The neighbor called me and let me know this is a problem,” and the manager went out and fixed the problem. That kind of eyes on the property can be very helpful.
Your investment property manager should be giving you before and after photos of the property. And if they tell me that it’s inconvenient for them to do so, they are not the right manager for me. It’s so easy today with smart phones for the manager to take their smart phone, take a picture and email or text it to me. It doesn’t have to be a big fancy presentation; it can literally be a text message with a photo of the property. I’ve been very impressed when a manager had a service person go take care of the HVAC at the property, the cooling condenser unit needed some servicing, and when they went into the property, they just took a few pictures, not of the air conditioner, but just of the general condition of the property. Then they provided those to me as the owner. That was really above and beyond service; that was really awesome. I got a look into my property just as a baseline.
You are entitled to have a signed copy of the lease agreement and any kind of renewals or extensions. If you don’t have those, I really encourage you to get them. In most states, the tenant signs the lease, and the property manager counter-signs. And that’s a scary thought, because your property manager has entered into a binding legal contract on your behalf as the owner. And I want to know what my residential investment property manager committed me to, because they literally committed me to do something, and that thing that they’ve committed me to is in the lease. I want a written management agreement and a copy of their lease template, because that spells out what the manager is authorized to do on my behalf.
The broker license thing is really interesting. In every state that I’m aware of, to manage real estate for other people for a fee, you need to have a real estate broker’s license—not just a salesperson’s license, not a real estate agent’s license, but a real estate broker’s license. And the difference between a broker and a nurse is like the difference between a doctor and a nurse. A nurse can practice medicine under the supervision of a doctor. But if the nurse wants to just open their own medical practice and start doing their own things, that’s not usually allowed, and it’s the same idea with a real estate license.
Whenever your tenants move in or out of the property, there’s an inspection form, or there should be, and your manager should be giving you a copy of it. I make sure that I keep my copy of that inspection report in case I need it in the future. I wish my manager, Jason, a very long and happy healthy life, but if for some reason he had an unexpected departure from planet earth, I want to know where all my documents are so I can transition smoothly to a new residential investment property manager.
When there are irregular distribution dates of your money, that means your manager doesn’t really have organizational procedures, they don’t know what they’re doing on certain days of the month or how to run their business. That’s a red flag to me, if one day I get my money on the 10th, the next it’s the 20th, the next it’s the 15th, the next it’s the 12th. It should be fairly regular when you get your money. If your tenants pay late, your manager should let you know. Usually an email is sufficient for me. “Hey, your tenant’s running late.” I want my manager to recognize that there’s a problem and that they’re on top.
Fair housing practices: this is such a big one. The laws change from state to state, and one of the reasons I really like investing in Texas, is Texas is a much more landlord-friendly state than California, where I live. California’s very landlord-unfriendly. How as a manager do you comply with fair housing in the state of Texas?
Jason: Here in Texas—it’s like this in other places as well—we cannot discriminate against race, religion, familial status, things like that. If we did, that could bring about liability not only to us but to our owners. We take continuing education just to stay up on the fair housing laws so that our owners don’t have to worry about that. It’s a very big deal and can potentially cause a lot of problems. Fair housing can come in and shut our entire company down, pull the broker’s license, and then everybody’s without a manager. Compliance with fair housing law is a huge deal.
David: Let me give you some very innocent examples of why fair housing is so tricky and why it’s so important to have a professional managing your property. I’m going to be the bad landlord/manager and you get to be the innocent tenant who’s out to sue me. “Jason, would you like to live here because it’s right next door to the Catholic church?” That’s a problem! “Jason, are you going to be living here with your wife and kids?”
Jason: You can’t say that. That’s a no-no.
David: How about, “Oh, you’re going to love living here because you’re Hispanic and this is a really Hispanic neighborhood.”
Jason: You’re going to lose your company. Those are big no-nos.
David: Very innocently, you can violate fair housing and not know it. A residential investment property manager takes continuing education and they’re very hypersensitive to frame their words in such a way as to comply with fair housing.
Other signs that your investment property manager is not a good one, they stretch the truth when it doesn’t matter. If I said, “Hey, is my property rent-ready? Is it ready to go, is it marketed?” and if the manager says yes, and they really meant it’s going to be ready tomorrow, that’s a problem with me. I wouldn’t care if they said it’s going to be done today or it’s going to be done tomorrow, but if they tell me it’s done today, I expect it to be done today. I fired a manager because I said, “A week ago I asked you to remove some debris from the front yard, is it done?” and they said, “Yeah, it’s done.” And I said, “I’m standing in the yard right now and I see the debris that you were supposed to remove. Are you still going to tell me you’ve removed it?” And they said “Yes, I’ve removed it.” Well, I’m looking at the debris. Not that the debris was a problem, but it was an honesty problem, they couldn’t just say “I was about to get to it” or “I forgot.” Residential investment property managers aren’t perfect. Don’t expect your manager to be perfect. I just want them to have personal accountability when there’s an error. And if your manager never gives you bad news, that’s problematic. Every property will eventually have bad news and you want your manager to be honest with you when it happens.
Do’s and Don’ts of firing your property manager: the big one is find a new manager first! You don’t want to fire your manager without having a plan for who is taking over. Give your manager written notice that you’re leaving and check your management agreement to see how you handle that transition—sometimes there’s a fee for departing, sometimes there isn’t. Take responsibility that the person you’re firing is the person you hired, so you as an owner can’t put all the blame on the manager. It’s partly your fault for hiring a bad manager in the first place.
Things that you don’t want to do: don’t badmouth your old manager to your new manager, because your new manager’s going to think that you’re a pain to work with. One thing that you could do is to say, “One thing that really didn’t work in my last property management relationship was that my statement never came on the tenth of the month, and I’m looking for a manager who can deliver their payment and the statements on the tenth of the month. Is that something that you can do?” So in that context, I shared what I didn’t like about the old manager, but by spinning it into a positive saying, “I’ve got an expectation that I’d like you to meet.” Whatever you tell your tenant, your tenant’s going to tell your old manager and your new manager, so be mindful what you tell your tenant.
We’ve got four property management secrets: Be a good owner so that your manager will go the extra mile for you. Jason, I know you’d love to say that you treat all your owners exactly the same, but I’m guessing that’s impossible.
Jason: I would love to say that I don’t have favorites, but I do, and it’s because of how they treat me.
David: The cheapest brain surgeon, the cheapest residential investment property manager doesn’t save you money. When I’m looking for a manager, I want to make sure they are very good and that they are earning enough money that they’re going to take care of their property. And when they have to choose how to allocate their time, are they going to put time into my portfolio, or someone else’s portfolio? It comes down to how well do I treat them? Do I respect them? Do I treat them like a peer rather than a servant? A lot of people look at their property managers as servants because sometimes they do very hands-on work, and that’s a bad attitude towards your team member who is your number one asset. Treat your manager like gold and they’ll treat you well.
Whatever market you choose to buy a property in, make sure it has a lot of management choices. When I was a new investor, I bought a property in a very small town and there were only two property management firms. One of them I didn’t like. The second one I hired and had a conflict and I fired them, and then I was stuck. There were only two managers, and I didn’t like them both, and what do I do now? That’s one reason I gravitate toward larger towns. A town like Dallas-Fort Worth has thousands and thousands of quality property managers. Jason’s the best, but if for some reason we ever got into a disagreement, I’m sure that within a number of days I could find another super high quality manager. That keeps me honest and it keeps Jason honest. He’s going to do a great job for me because he knows I have several management choices.
I like to use residential investment property managers to help me find property to buy. Whenever I’m looking at a new property in Dallas, or when I’m going to try to develop something, I’ll send my manager the address and say, “What do you think of this property? Tell me what kind of rent you think you could get. Do you think this is a good property area that would attract a lot of tenants? Would you like to own this property? Can you get me access to off-market deals?”
Jason: We have several property owners with our company. There’s a misconception that every investor is a bazillionaire, and they’re not, they’re normal Joes, most of them. Sometimes they get over their head in a property, and we had one particular client who is in that situation, and she reached out to me and said “Here’s my property. We have a tenant in it, and if I could just get what I owe on this property, I’d get rid of it.” So here we have a property that the owner’s willing to sell well below market. Those come along all the time, because our owners aren’t all wealthy people; they just made an investment that got the best of them.
David: Sometimes the problem isn’t the property, it’s the owner. I had one client who was telling me their property was such a problem. I said, “It’s positive cash flow every month, what’s the problem?” “Well, I lost my job, so I take all the rent money and I spend it to live on.” The problem isn’t the property, the problem is you! If you paid the mortgage, you’d have money left over. People make mistakes and the first person to know about it is usually the residential investment property manager. It’s a great secret: work with your property management to help you find and evaluate deals.
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Here is a link to the video version of this investment property manager interview.