You have worked hard to select a market, choose the submarket, find a deal, underwrite it, submit a letter of intent (LOI) and get awarded your next income-producing asset. One of the quickest ways to kill your asset and turn it into a liability is by hiring the wrong property management company.
If you want to retain tenants, optimize operations and ultimately grow your bottom line, look to use these best practices before selecting your next property management company.
A Seasoned Company
When you are on the hunt to select a property management company, you want to look for one that is already well-versed in that region and ideally in that submarket. This not only helps once you own the property, but if you select a company prior to making a purchase, they will be able to help you a lot in your search. If they already manage in that market, they will have a good idea of the amenities local residents like, how much units should be renting for and what upgrades will bring you the highest return on investment. It is likely that they know more than you do about the market, due to their many years of already managing in it.
Investment Position
As you begin vetting management companies, you will want to find out if they are also investors. You might initially think it’s a good thing if they are investors; however, if they are, that means you could also be competing on the same deals to buy. When units are vacant, whose do you think will be filled first? There are pros and cons to working with an investment firm that offers property management, but ideally, it is best if you can hire a strictly property management company that doesn’t own any assets.
Software
Software nowadays is streamlined and accessible around the clock. The days of manual entry and spreadsheets are over. You want to choose a company that has an automated process already in place. Ask for a sample report that they would send out to owners. The software they are using should have a component that allows you to access all of your own data remotely at any time.
Maintenance Process
Handling maintenance requests is inevitable, so it is important to ask companies about their approach. Response time is of the utmost importance because residents like to know their request has been heard. You will always want to ask if they firm applies any additional fees for handling maintenance requests. I have seen anywhere from 5-10% added to the invoice for handling the maintenance. Try to negotiate if possible.
Data Reporting
At the end of every month you should be getting a financials and status report from your property management company. You should receive this no later than the fifth or sixth of the following month. This is extremely important if you have additional investors that you need to report back to in the deal, so be sure to ask about their procedures for compiling and sharing this report.
Contracts
No one hires a management company with the thought process of firing them a year later. However, terminating your contract is something that needs to be discussed. Normally when hiring a company you can begin with a 6- to 12-month contract with a 60-day cancellation notice if you need to relieve them of their duties. If they have a two-year minimum for a contract, try to negotiate that — or if you can’t, try to find another management company. If you plan to hold an asset for five years and have a contract for two years with an underperforming management company, that is 40% of your project’s timeline. That would not leave you enough time to get your asset back on track to meet your cash flow projections.
Do The Work Upfront
Hiring the right management company can take a month or two if you explore all of the above, but it is best to do the work prior to entering a new market. If a firm meets your initial criteria, don’t be afraid to ask for three to five testimonials or client references. You will be happy you took the time to hire the right company because, after all, a property management company can make or break your investment.