property management: self versus hiring out

In short

A friend of mine once drove forty minutes at nine at night to fix a toilet that had been running for three days. If you own a rental, you have probably had a night like that, or you fear one. Managing it yourself costs time and nerves. Hiring a manager costs money, usually a share of the rent. Neither road is the right one for every owner. The honest question is what an hour of your life is worth, and what a missed problem could cost. Add up both sides with your own numbers, and read the management contract before you sign it.

The whole of it

What it is

I once sat on a porch with a retired schoolteacher who owned two small rental houses. She told me she never thought of herself as a business owner until the day a tenant called about a burst pipe. Then she knew. A rental property is a small business, whether you meant it to be or not. Property management is the work of running it day to day. That work includes finding tenants, collecting rent, handling repairs, answering calls, and keeping the paperwork in order.

You can do all of it yourself. This is called self management. You can also pay a company to do it for you. This is called hiring a property manager, and the company is paid either a percentage of the rent or a flat fee. Some owners split the difference. They handle the tenants but hire a plumber and an accountant. Others hand over only the first step, finding a tenant, and take back the rest.

Both choices are honorable. Plenty of careful owners do each one well.

How it works

If you are holding a rental, or thinking of buying one, you already know the work never fully stops. Let me lay it out plainly.

The first piece is finding a tenant. That means advertising the unit, showing it, and checking applications. A careful owner or manager runs a background check and a credit check, and confirms income and past rental history. The law here is strict. The federal Fair Housing Act, which the Department of Housing and Urban Development enforces, bars discrimination in renting based on race, color, religion, sex, national origin, familial status, and disability. A manager carries that duty for the owner, and an owner who manages alone carries it personally. Many states and cities add their own protected groups on top.

The second piece is the lease and the money. The landlord must follow the state rules on security deposits, late fees, and notice before entering the unit. Those rules differ a great deal from one state to the next. Rent has to be collected on time and chased when it is late. If a tenant stops paying, the landlord has to follow the eviction process in that state, and a mistake there can set the case back by weeks.

The third piece is repairs. A leaking roof does not care about your calendar. Someone has to pick up the phone, judge how serious it is, find a trusted repair person, and pay the bill. Many owners find this part the hardest to keep up with a full time job.

A manager takes these pieces on in exchange for a fee. A typical contract names the fee, the services, the length of the agreement, and how either side can end it. The manager must follow what the contract says. The owner has to pay what the contract says. Some contracts charge extra for things like leasing a vacant unit, handling a renewal, or managing a large repair. Those add ons can change the true cost, so they matter.

The numbers, and where to find yours

I have learned that a decision feels clearer once the numbers sit on paper. Start with your rent. If the monthly rent is $1,800, the year brings in $21,600.

Next comes the manager's fee. Fees are set in each contract, so I will not claim a standard one. Ask for the fee in writing, along with every extra charge. Then check your own state's landlord and tenant rules. Your state attorney general or housing agency posts them, and HUD publishes the federal Fair Housing rules. Your state's real estate commission can tell you whether it requires a manager to hold a license, and whether the company you are considering holds one.

Then count your own time. Write down the hours you spend in a month. Include the calls, the drive, the showings, and the bookkeeping. Pick an hourly figure that feels fair for your time, and multiply. That figure is your own, so choose it honestly.

Finally, set aside a reserve for repairs and empty months. The IRS explains in Publication 527, Residential Rental Property, how rental income and expenses are reported. The fee paid to a manager is generally a deductible rental expense, so read that publication or ask a tax professional how it applies to you. The deduction lowers the true cost, though it never makes the fee free.

A worked example

Let me tell you about a man named Daniel. He owns one rental house that brings in $1,800 a month. The year's rent is 12 months at $1,800, which is $21,600.

Daniel looked at a manager who offered a fee of 8 percent of the rent. That is a made up figure for this story, so please swap in the real one from your own contract. At 8 percent, the yearly cost is $21,600 times 0.08, which is $1,728. A month of that fee is $1,728 divided by 12, or $144.

Now Daniel counted his own hours. He spends about 6 hours a month on the house. That covers calls, a drive, and some bookkeeping. He decided his time is worth $30 an hour. So 6 hours at $30 an hour is $180 a month. Over a year, that is 12 months at $180, which is $2,160.

Set them side by side. The manager costs $1,728 a year. Daniel's own time costs $2,160 a year by his own count. On paper, hiring out costs $432 less. That is $2,160 minus $1,728.

But Daniel did not stop there, and neither should you. He also asked what a bad month would cost him. If the manager charges a leasing fee of one half month's rent for each new tenant, that is $900 each time. If a tenant leaves once a year, the true cost of the manager rises from $1,728 to $2,628. That is $1,728 plus $900. Now the manager costs $468 more than his own time. That is $2,628 minus $2,160.

So the answer flipped. It flipped because of one line in the contract. Daniel laughed about it later. He said the fee on the front page was never the whole story.

He also thought about the harder things. Does he live close enough to answer a night call? Does he enjoy the work, or does he dread it? Those feelings are real, and they belong in the math too. For Daniel, the numbers were close. So the deciding piece was how he felt about the work, and that is a fair way to decide.

Where it goes wrong

I have seen good people stumble on both roads, so let me be gentle about it.

Owners who manage alone often undercount their hours. They forget the late calls, the trips to the store, and the worry. They also miss legal rules that are easy to trip over, like the notice a landlord must give before entering, or the deadline to return a deposit. A small slip can cost real money. And a landlord who gets too friendly with a tenant may struggle to ask for late rent.

Owners who hire out have their own traps. Some sign a long contract without reading how to end it. Some never learn about the extra fees. Some assume the manager will watch every detail, then find out the manager only does what the contract says. A manager may also choose a repair person who charges more than the owner would pay. Ask how repairs are approved, and set a dollar limit above which the manager must call first.

There is one more mistake, and it is a quiet one. Some owners treat the choice as a final vote on who they are. It is not. Many owners start alone and hire out later, or the other way around. A contract with a clear exit lets you change your mind.

Questions to answer before you leave this page

How many hours a month do you truly spend on the property, and what is an hour of your time worth to you? What is the manager's full fee in writing, including the leasing fee, the renewal fee, and any markup on repairs? Does the contract say how either side can end it, and what it costs to leave early? Does your state require the manager to hold a license, and have you asked the state real estate commission about the company you are considering? Who must approve a repair above a set dollar amount, and have you written that limit down? Are you living close enough to respond, and would you want to if you could? Have you read IRS Publication 527 or asked a tax professional how the fee is treated on your return? And when you picture the next late night phone call, which answer lets you sleep better?