property management: self vs hiring out

In short

A friend of mine once drove forty minutes at midnight to fix a toilet in a rental he owned, and he told me later he never felt more like a landlord or less like an investor. If you own a rental home, you will face that same choice about who runs it. You can manage the property yourself, or you can hire a management company to do it for you. Hiring out usually costs a percentage of the rent plus some extra fees, and that cost comes straight out of your monthly profit. Managing alone costs you time, and time has a price even when no bill arrives. Count both costs before you decide, and count them in dollars. Neither path is the better one for every owner, because each owner has different numbers and a different life.

The whole of it

What it is

I once watched a neighbor of mine handle a tenant dispute over a washing machine with more patience than most people bring to their own family. He was a self manager, and he was good at it. Property management is the daily work of keeping a rental running. It covers finding tenants, collecting rent, answering repair calls, and keeping the home in good shape.

When an owner manages the property alone, the owner does every bit of that work. When an owner hires a property management company, the company does the work and charges a fee. Some owners split the job, keeping the repairs and hiring out the tenant search, or the other way around. There is no wrong shape for this arrangement as long as someone is clearly in charge of each task.

How it works

If you are holding a rental right now, you have probably already done most of these jobs at least once. Think of the work in four parts. First comes leasing, which means advertising the home, showing it, screening applicants, and signing the lease. Second comes rent collection, which means billing, chasing late payments, and keeping records. Third comes maintenance, which means fixing problems and hiring repair people. Fourth comes the legal side, which means following the rules about deposits, notices, and fair treatment of applicants.

A management company usually charges a monthly fee that is a percent of the rent it collects. Many also charge a leasing fee when they place a new tenant, and some charge a renewal fee, a setup fee, or a markup on repairs. The contract spells all of this out, and the owner must read it before signing. A company that quotes only the monthly percent may still have other charges buried in the agreement.

Self management has no such fees, but it has its own costs. The owner pays for advertising, screening reports, and repairs. The owner also pays with evenings and weekends. A phone call about a leak does not wait for office hours.

Let me say it plainly: a free hour is rare.

The legal side deserves a short word of its own. Landlords must follow the Fair Housing Act, which bars discrimination against applicants in housing. The Fair Housing Act is a federal law, and the Department of Housing and Urban Development is the federal agency that enforces it. State and local rules cover security deposits, notice before entering, and eviction steps, and they differ from place to place. I once watched a landlord lose a deposit dispute over one missed notice. A good manager knows these rules. A self manager has to learn them. Mistakes here can be costly.

The numbers, and where to find yours

You have probably wondered what a fair price looks like. Fees vary by market and by company, so the only honest source is a written quote. Ask two or three local companies for their full fee schedule in writing, and ask them to list every charge, not just the monthly one. Put those quotes side by side.

Next, find your own numbers. Your monthly rent comes from your lease. Your past repair costs come from your bank records and receipts. Your hours come from your own honest count, and a month of tracking them will teach you more than any guess. Write down how long each task really takes, including the drive time.

Then price your hours. This part is personal. A friend of mine earns $40 an hour at his regular job and could work extra shifts, so an hour spent on rental chores truly costs him $40. If you enjoy the work and have spare time anyway, the cost feels lower. Only you can say. Be fair with yourself, though, and do not call your time free.

Tax matters also touch this choice. Management fees are generally a deductible expense for rental property, and the Internal Revenue Service explains rental income and expenses in Publication 527, Residential Rental Property. A tax professional can tell you how it applies to your own return.

A worked example

Let me tell you about a woman named Carla, who owns a small house that rents for $1,800 a month. Her yearly rent is 12 months at $1,800, which is $21,600. A management company quotes her 8 percent of collected rent each month, plus a leasing fee equal to half of one month's rent each time a new tenant moves in.

The monthly fee is 8 percent of $1,800, which is $144. Over a year that is 12 times $144, or $1,728. Suppose a tenant leaves and a new one moves in during the year. The leasing fee is half of $1,800, which is $900. So her first year with the company, with one new tenant, costs $1,728 plus $900, which is $2,628.

Now Carla counts her own time. She figures that handling the house herself takes about 5 hours a month on average, with a few long weekends for turnover. Five hours a month for 12 months is 60 hours. She adds 20 more hours for one tenant turnover, which brings the total to 80 hours. Her time is worth about $30 an hour to her, so 80 hours at $30 an hour is $2,400.

Her own costs run a little differently. She would pay about $150 for advertising and screening reports, so her self managed cost is $2,400 plus $150, which is $2,550. The two paths land close together, $2,628 against $2,550. Carla sees that the money alone does not settle it. She asks herself what else matters. She lives three hours away, she hates late night calls, and her job has been getting busier. Those facts, not the dollars, decide it for her, and she hires the company.

Her neighbor Sam owns a similar house, lives two streets away, and likes to fix things. His numbers look the same, but his life looks different, so he keeps the job himself. Both choices make sense.

Where it goes wrong

A friend of mine once got a surprise bill from a management company, and it came from a place he had never thought to look. The first is the fee list that was never read all the way through. Some contracts carry charges for lease renewals, for coordinating repairs, or for ending the agreement early. The owner should ask about each one before signing.

The second is the owner who counts his time as zero. Picture a man who saves $1,728 in fees and then spends 150 hours doing the work. At $40 an hour, those 150 hours are worth $6,000, so he gave up $6,000 of his own time to save $1,728. He never notices the trade. That feels cheap until a busy season arrives. An honest count of hours keeps that trade in plain sight.

The third is a lapse in the legal rules. A self manager who keeps a deposit the wrong way, or who skips a required notice, can end up owing money to a tenant. Learn your state and local rules before the first lease, and recheck them from time to time.

The fourth is a company that does not do its job. Some owners hand over the keys and never look again. A manager still works for the owner. Ask for monthly statements, check them, and speak up early if something looks off.

The last is mixing money. A self manager who pays rental costs from a personal account soon loses track of what the house earns. Keep a separate account for the property. It makes tax time calmer, and it shows the true picture.

Questions to answer before you leave this page

How many hours a month does your rental really take, and have you counted the drive time and the late calls? What is one hour of your time worth to you, and would you spend it differently if you had it back? Have you asked at least two local companies for their full fee schedule in writing, including leasing, renewal, and early termination charges? Do you know the deposit and notice rules in your state and city, and do you know where to read them? Would you answer a repair call at midnight without resentment, or would that call sour the whole arrangement? If you hire out, how will you check that the company is doing what the contract says? And if you manage alone, who will cover for you when you are sick or away?