Landlord and property manager: I’ve been there
When I’m in need of some amusement, I’ll occasionally browse through real estate investing forums to see what’s being discussed. I often will leave with a sort of pitiful smile on my face, given some of the nonsense that’s out there.
Don’t get me wrong: it’s perfectly fine to be part of online groups. The right ones can be supportive and useful. It’s just that for every experienced, articulate person, there must be 25 people who are “all hat, no cattle” as they say in Texas. Long on opinion and very short on knowledge.
I saw a debate in one of these forums about being a landlord versus being a property manager. Both sides went at it, and were 100% convinced that theirs was the right approach, and the other person was full of a cattle product. And it went downhill from there.
I am very intimately familiar with being both a landlord and a property manager, having done each role extensively at different points in my real estate investing career. So I thought you might want to know my $0.02 on the topic.
I won’t keep you in suspense about my conclusion, so here it is: at some point you need to have experience in both roles, if you’re going to make the most money and keep the most sanity. Now for the explanation.
The benefits of being a landlord
When I bought my first three-family apartment building over 11 years ago, I was the manager, maintenance man, plumber, carpenter, leasing agent, housekeeper, counselor—you name it. If it had to be done, Dave was a phone-call away.
As strange as it may sound, managing my own property and being the landlord did have its benefits: the primary one was control. As a landlord I had total control over my property. I knew exactly what my tenants were doing, what my occupancy would be at the end of the month, what marketing was the most effective, the expenses that were coming up, and therefore what was the state of my cash flow.
When the buck stops with you, you’re in a unique position to have your hand on the pulse of a property.
My control extended even further. I collected the rents and paid each bill, so I had the ultimate knowledge of what was coming in and going out on a daily basis. To some extent I could tune those inflows and outflows, as I got to know the tenants’ situations and also how flexible each vendor was about payments.
Another benefit is increased cash flow. With the average management company charging 10% of gross collected rents, that’s money that you are not paying out of the property as a monthly expense. As a result, you have more money in your pocket at the end of each month.
You can also optimize the expense-side of things: you decide what repairs need to be made and when to make them. You may even do the repairs yourself to save more money. For those repairs that require contractors, you meet with contractors and get bids. More importantly, you get a gut feeling as to the character of all the contractors and whether or not you want to do business with them long-term. As you grow, you can negotiate some discounts with them.
Most landlords that I know are landlords because they want this control and they don’t want to give it up. They feel that if they hand over their prized asset to a third party, the other people will not be able to run it as efficiently as they do themselves.
You must realize that when you are a landlord, you are in the tenant business. Your sole purpose is to keep those tenants happy, handle their needs, account for rents, and pay the expenses to keep tenants in the building. Though it is true that you are technically an investor, as a landlord, your main business is serving other people’s needs.
I did that for over three and a half years. I was one of those people who liked having that control over my properties. In that period, I accumulated 104 apartment units and my monthly cash flow was in the high five figures. I thought this was just about as good as it gets, and that I was King of the Hill.
The problems with being a landlord
I must admit: even then, certain aspects of being a landlord did not make me feel like a “lord” or king at all. I didn’t like collecting the rent every month. Oh, it was great when they sent them in on time to my post-office box, but I did not like going out to collect them. You might ask: “What’s not to like about collecting rents? People are handing you money!”
I did like that part; what I didn’t like was when the tenant was not home, or refused to come to the door. Other tenants would have vicious barking dogs at the door, and might tell me over the insane barking that it was “a bad time to talk” and could I come back in a couple of days. Two days later they’d not be home, but the vicious dog sure was. So around and around I’d go. By the time the King collected all of the rents, it was time to start collecting them again for the next month.
The King didn’t like fixing clogged toilets on Friday nights when I had better things to do, or on Saturday mornings when my favorite real estate infomercial was on. This got old extremely quickly. I began to notice patterns: it was usually the same people each month whom I’d have to chase for the rent, and the same tenants whose toilets got clogged with paper, dolls, and whatnot again and again.
These nuisances didn’t rise to the level of evicting the tenants, so basically I just had to suffer. I have to admit: the wear and tear on me from being a landlord started to factor in a bad way into my desire to own more units!
Once I managed to collect all the money that I was going to get, now came the unpleasant task of paying bills. It wasn’t the concept of paying bills that bothered me—hey, we all have to pay for services we use. What I detested was the process: collect all the bills, open the mail, rip off the stub, put the remainder in that bill’s receipt folder, write the check, make the journal entry, stick both stub and check in envelope, put on stamp, lick envelope, write in return address, etc. (This was before a lot of online services, which now make things a little easier.)
Doing all this for one or two properties is easy; doing it for 22 little properties became two to three nights’ work. Was I ever happy when I finally delegated all of the bill-paying, except for the part where I continued to sign the checks.
It got “better”: of all the bad aspects of being a landlord, what drove me the most crazy was showing apartments, believe it or not. The first thing I learned the hard way: half the people will not show up. You take time away from your family to go to the property to meet people; then they don’t have the basic courtesy to call and say that they won’t be there. So you take the time to drive there, wait for at least 30 minutes—hoping that they’ll show—and then drive home with absolutely nothing to show for your time except deep frustration.
Eventually I got smarter and called people earlier in the day to confirm. Even many of the people who confirmed would not show, and not notify me! This made my blood boil.
I finally adopted the policy of having them meet me at the corner donut shop near my home. Then we would drive to the property, regardless of how far away it was from the donut shop. I learned that if they didn’t show within ten minutes, I could be in my home office, back at work in two minutes. And when they sometimes showed up late at the donut shop, they usually called and I would drive over and meet them. Later I got even smarter and had them meet me in my office. I’m all about improving processes.
Maybe it was the collective pain from more than three years of this, but eventually I realized that if I gave up a little of the control, I could give up a lot of the madness, and I could make more money, faster. I was ready to accept the concept of “property management.”
Property Managers and Property Management
Make sure you do not confuse “property manager” with “property management”. Property managers act like landlords but don’t own the property. They are paid a fee for their services. Property managers have one major responsibility—tenant retention—because keeping those units full represents cash flow.
On the other hand, when practicing property management, you hire a manager to oversee all of your day-to-day activities. Property management is the running of all the systems that it takes to keep a property operating at maximum profits. That means having a robust array of reports about traffic, maintenance activity, exposure, profit and loss, budgets, forecasts, and an executive summary.
Instead of showing units to prospective applicants, you as an investor will look at a traffic report every Monday. That report tells you how many people came to see the property during the last week, what marketing got them there, and how many became tenants.
Instead of going out to fix clogged toilets, the maintenance log tells you how many tenants called in for repairs, when they were scheduled for completion by the maintenance person, and what the approximate cost was.
The exposure report tells you how many vacant units there are, how many are pre-leased, what the physical occupancy is, and what the economic occupancy is (the people who are in the unit, actually paying rent). This report tells you how many leases are coming due and in which months. You can then instruct the property manager to either ramp up or ramp down the marketing efforts.
The property manager prepares the profit and loss statement for you each month to explain exactly what the profits and losses were, based on the income and expenses.
The executive summary explains the profit and loss statement and variances from the proposed budget, which the property manager created at the beginning of the year and is now tracking on a monthly basis.
To give you some perspective, while landlording for three and a half years, I assembled a portfolio of 104 units, consisting of mostly small properties. In the next three and a half years, my involvement in property management allowed me to increase that portfolio by 706 units. Same amount of time, different investing mentality.
Which role is better?
Reading reports and tracking progress sure beats dealing with tenants and maintenance issues. It allows investors to go after more deals and create more cash flow, and the end result is that they become wealthier, faster.
Should you therefore never have any experience with being a landlord? Ideally you should. It’s no different from billionaires who insist that their kids start out in the company’s mail room or manufacturing plant. They want the kids to know exactly what’s involved in some of those humble jobs. Someday when they’re managing, they’ll make far better decisions instead of just barking orders and having no idea what they’re talking about.
Fortunately, you don’t have to be a landlord for years the way I did. You can learn the ropes and then move out of that role relatively quickly. When you’re ready, we have lots of good materials on how to assemble a great package of property management reports, among other management topics.Here’s another efficiency tip: next time you’re reviewing the discussion threads in forums, look for people who have actually done all the things they’re talking about. That will cut down your reading load by about 98%, so you can take all that time savings and go buy more properties.