Property Managers - a new look

In the past I think I've made my views on property management companies pretty clear. I don't like them. I think that they destroy your profits and can often turn a good property into a dump. But to clarify, I'm speaking about companies who manage multiple properties, not individuals that you hire.

The Landlord Blog has a great post about how she is looking for a new property manager. Instead of finding an advertised company, she advertises in the local paper for an enterprising individual. This is the perfect way to have a property managed if you are unwilling/unable to manage the place yourself. By looking outside of professionals, you get the benefit of dealing with someone more likely to remain honest.

John T. Reed agrees. In his review of Rich Dad, Poor Dad he says (italics are mine):

Kiyosaki [author of Rich Dad, Poor Dad] says, “A great property manager is key to success in real estate.” He’s nuts. Experienced property owners do not hire independent 5%-of-the-gross property-management companies. When syndication was big, those companies owned income properties all over the U.S. They tried to use local companies for everything they needed, but they found they could not get good service out of local property-management companies so they all started their own in-house property-management companies. [...]

The problem with property-management companies is that they neglect properties and use expensive suppliers and subcontractors. I estimate that approximately 90% to 95% of property managers take kickbacks from those expensive suppliers. When I was a property manager I reported a number of bribe attempts to my boss. Both my predecessor and my successor at the job took kickbacks. (A subcontractor showed me a canceled check cashed by my predecessor and my successor was fired for taking kickbacks.) My secretary had worked for a major property-management company before working for me. She said every property manager in her old company took kickbacks.

If you ask the typical successful investor if he ever used a property manager, he will shudder at the memory, admit that he did once, and somberly swear, “Never again.”

Anesia at The Landlord Blog is, in essence if not fact, finding independant contractors to manage her properties. She is creating her own in-house management team. This provides a large number of specific benefits.

• Reliance upon her - Unlike a Property Management Group, her managers probably only manage the properties she assigns them. If she is displeased with their performance, she can replace them. Compare that to a company who likely manages properties for dozens of investors. If you break contract with them they still have plenty of other streams of revenue to fall back on.
• Lack of a network - Because these individuals are likely to only be managing her properties, they most likely don't have a network of contractors that they frequently use. As a result, they're less likely to take kickbacks or order unnessecary work.
• Work on her terms - If you go to a major Property Management Firm and bring your own contract with you, you'll be laughed out of the door. These firms have their own contracts they you have to sign, not the other way around. But when Anesia hires these individuals she can draw up the contracts that they'll work under. Obviously both side need to come to agreement, but that gives you a lot more leverage than the standard PM boilerplate.

Obviously the down side of such an arrangement is that she'll have to be much more active in helping these people manage her properties, in addition to the extra workload of hiring new personnel when one of her managers is fired/quits. But that additional work is worth the risk reduction of having more control over how your properties are handled.

If you choose a professional Property Management Group because you were too lazy to manage your properties, I seriously suggest that you consider other forms of investment (try an S&P 500 index fund. Good returns with minimal effort). But if you want your properties to be managed to free up some time for other activites (like finding new properties), I strongly urge you to review Anesia's methodology and try it for yourself. It'll be far more profitable in the long run.

And if you are in the Phoenix area and are looking for a way into real estate, I suggest you apply to her for the job. Not only can you earn money towards that first down-payment, but you will learn a tremendous amount about real estate and will have regular access to an experienced investor.