INCREASE your ROI by using a Property Manager

I know what you’re thinking, the title sounds ridiculous right?  10 years ago I would have agreed with you that property managers COST money, they don’t make you MORE money!  Since then I’ve learned a lot about rental properties, and where the true costs come from, and the fact that a good property manager (good being the operative word here) can substantially reduce your costs, including vacancy, which also increases your revenue.  And you don’t have to be a finance guru to understand that lower costs plus higher revenue equals higher return on investment.

Is it just that simple?  Unfortunately not, finding a good property manager isn’t easy, and some property managers take the lazy/inefficient/ineffective path because they are only considering their best interests instead of their clients best interests, and they’re ok with just charging you the monthly minimum fee (Mayco only makes money off collected rent, so we only make money when you make money).  On top of that you have to be assured that your property manager takes a proactive approach to all things and has solid well thought out systems in place to avoid things “falling through the cracks”.   I can’t speak for all property managers, because they are definitely not all good, but I’ll be referring to the property management services from Mayco, and if you’re not in the Shreveport/Bossier area hopefully you can find a company with similar offerings in your area.  At Mayco we have invested in all the best tools available for property management, and we know and follow all the industry best practices.  This translates into the absolute best possible performance for all of the properties we manage.

These are the things that most rental property owners don’t think about when managing their own properties:

Day Job – Are you a professional investor?  Retired?  Independently wealthy and really enjoy spending your spare time showing houses and answering calls about stupid questions from your current or prospective tenants?  Chances are you have a day job, and if it’s anything like a typical job either it will interfere with your rentals success, or your rental will interfere with your career’s success.  There are very few exceptions to this rule, and here’s what I mean in a couple of scenarios:

  • Imagine your rental is vacant, and you’re getting lots of calls, emails and texts requesting showings, because you work 8-5 you aren’t able to answer all of them, they go to voicemail, and many go unanswered.  The ones you do return or answer are often asking questions that they can answer themselves by just reading the posting for the property where they got your phone number, which adds to the frustration of the volume of calls you’re already receiving, and may even further reduce the likelihood that you pick up or return the calls in the future.  Additionally you’re only available on the weekends to show, and possibly some evenings, so you schedule your showings for a few days away on saturday and keep your fingers crossed that they like the place and want to rent it so that your phone will quit “blowing up”.  Saturday comes and only 2 of the 6 appointments you’ve scheduled during that week show up, and 1 of those 2 say they’re not moving for a few months and just checking out rentals in the area to get a feel for what things cost, because they have NO problem openly admitting to wasting your time even though the information they’re looking for is widely available on 50+ websites.  The other potential tenant says they like it and would like to put in an application, but are planning on doing it later.  Lather, rinse, repeat for a few more weeks (or months depending on whether you want to use your weekends for things you actually WANT to be doing) and you’re thrilled to get a tenant that shows up with money in hand ready to fill out the application and move in right away.  Since you’re just ready for the phone calls and time wasting showings to stop you accept their money, sign the lease, and give them the keys, accepting half of the deposit because they said that would really help them afford to be able to move in, but they promise to pay the rest of the deposit with the following months rent.  Next month rolls around and you discover that they spent all their money on the funds needed to move in, but they get paid on the 12th and will pay what they owe then.  You explain about the late fees and how expensive that will be, they then tell you all about their family member their supporting in the hospital which is the reason they don’t have enough money, and you reluctantly tell them you’ll waive the fees this month.  The 12th rolls around and they call to let you know you can come pick up the rent, you stop by on your way home from work and they happily hand you a check for half of the rent, letting you know that some unforeseeable catastrophic emergency has popped up in the last few days and that’s all they can pay.  Nevermind that they agreed to pay the rent in full today with the balance of the deposit, and on top of that you waived the late fees due to their hardship.  They say they get paid again on the 26th and promise to pay your balance then.  You don’t hear from them on the 26th, but don’t remember until the 28th to call them and find out where the rent is, they say you can come by and pick it up anytime because they’ll be home.  After 3 attempts stopping by you finally catch them at home and they pay the other half of the rent, but still no damage deposit.  They apologize and say they for sure will have it paid in another 2 weeks when they get paid….. and the cycle goes on forever.  They are getting their rent paid, but just barely and after 4 months still haven’t paid the other half of the deposit, but they definitely haven’t lost your number because they’ve had 5 maintenance requests already.  Eventually you quit asking for the deposit balance because you know it does no good and at nine months they quit paying altogether, won’t answer the phone or the door.  On month 11 You call your attorney to find out what to do, he informs you of the lengthy and expensive eviction process, offers to do it for you for $800, and nevertheless sends you a bill for a 15 minute phone conversation that’s only left you angry and frustrated, but you begin the eviction process he promised would take at least a month.  Finally your court date rolls around, court awards you possession of the property assuming all your paperwork is in order and you’ve followed all the pertinent laws and the tenant is informed they have 24 hours to vacate the property.  They tell you they’ll be moved out in 5 or 6 days for sure, they just have to find a new place and a landlord that will approve them to move in, which they say is difficult to find.  After 2 weeks of not being able to get in touch with them you finally drive by the house and realize it’s empty and trashed, it will cost at least $500-1000 to get it back rent ready and you only have half a damage deposit to offset those expenses, which still don’t even account for all the lost rent you’ve now effectively forfeited.

Q) Isn’t that how all landlords do it?  A) That’s a resounding NO.  I can’t speak for all property managers, but at Mayco we show our available properties 7 days a week.  We also maintain a database of prospective tenants and have systems in place to do a constant follow up to eliminate the possibility of forgotten or missed appointments, loss of contact information, or unanswered questions.  We rarely schedule showing appointments for more than 24 hours in the future, because the longer the wait the more likely the possibility that they find something else and choose a competing property.  We also don’t do “open house” style showings because the highest quality prospective tenants often spend more time looking for a property, and are much less likely to put in an application when they know there’s a high level of interest and could be potentially wasting their application fee due to other applicants that could have possibly gotten their application submitted first, after all they’ve lost application fees several times in the past to that same scenario.  Here is that same scenario for a house listed by Mayco:

  • Day 1 you give us the keys, sign the agreement, and tell us good luck with the house.  We send a representative to the house to analyze it and make sure it’s ready to be rented, if not we document the problem areas by photo, send them to you, explain why they may be problems, and ask if you’d like us to resolve them.  Since the estimated cost is only $200 we’re happy to pay the cost and get reimbursed from the first month’s rent of the future tenant, because we’re confident in our abilities and we want a long term mutually beneficial business relationship with you.  You agree that the house would probably show/rent better and it needs to be done anyway, the estimated cost is much less than you could get it done for yourself so you give us the go ahead.  The work is done the morning of day 2, and our photographer goes out that afternoon to take extremely high quality still photos and a 3D interactive tour of the property.  The photos are edited to optimize lighting that evening and the property is posted on our website and 100+ other real estate websites.  The calls, texts, emails, and messages start coming in the morning of day 3.  We contact each of them as soon as we receive the query, and follow up by phone text and email every day for the next 3 days until we reach them.  By day 5 we’ve received 31 inquiries, spoken with 24 individuals, had 6 showings, and have 3 more scheduled for the weekend, and since it’s Friday we send you our report of the activity and feedback received from potential tenants.  At this point the listing is too new for us to have any recommendations for any changes to our marketing strategy, so we just continue as before.  On day 7 the same tenant from the previous scenario contacts us, sees the property and submits an application all in the same day.  We screen her application and see she’s had 3 eviction filings in the last 5 years, and has a landlord collection for $1,800, and we inform her that unfortunately we cannot approve her application for those reasons, she says she understands and appreciates the extremely fast manner in which we’ve conducted ourselves and completed her screening, and she understands the decision.  The same day that she submitted her application, a young engineer requests a showing of the property, we schedule the showing for 7:30 the next morning, because that’s the only time that works with his busy professional schedule.  He looks at the property, says he likes it, and asks if there are any pending applications.  We pride ourselves on our honesty, integrity and ethics, so we respond honestly by saying yes we do have a pending application, but we encourage you to also put in your application, and if the pending application is approved and pays the deposit to hold we will refund their application fee immediately.  The engineer thanks us for the thoughtful policy and says he’s never heard another company say that, but it’s a relief to know that he isn’t at risk of losing the deposit if we cannot process his application.  He puts in his application that day at work, it’s processed before the end of the workday and comes back with a stellar 720 credit score and 6 times the rent in income.  He’s informed of his approval immediately and we schedule an appointment for the following day for him to pay his deposit to hold the property for 10 days at which time he will pay his first month’s rent, sign the lease, and receive the keys.  On day 9 he pays his deposit and we remove the property from the market for him.  10 days later as agreed he pays his first months rent and signs the lease.  He stays in the house for 3 years, has paid his rent online every month at least 10 days early, and rarely has any maintenance requests.  At the end of the 3 years he’s getting married and decides to move into the 3 bedroom home you just purchased with the profit from the house he’s been renting for 3 years, and says he appreciates Mayco’s exceptional management strategy and wants to make sure he moves into another property we manage.  He moves into your newest investment, leaving his former home in great condition needing only very minor work to get it ready for the next tenant. We’ve been advertising the property on our website ever since he gave his notice to vacate 30 days ago, and because we have a constant flow of interested tenants, and a great reputation in the tenant community we already have 2 approved applications for the property since they were able to virtually tour it with our 3D interactive tour.  The next fully screened and approved tenant moves in 8 days after the former tenant vacated, and the cycle starts again.

If you’ve been managing your own properties that scenario may sound far fetched to you, but I can assure you it’s the truth.  If you’re new to rental investing you may think the first scenario sounds ridiculous, but talk to any rental investor you know and they’ll assure you that’s a very realistic scenario.

Repairs, Turnover, and Vacancy – Ask any tenant why they are moving, and the answer is usually the same, buying a house, need something bigger, getting transferred for work, or their landlord sucks.  I’ve heard the last one more than I can count, and their explanation is always very similar.  “They won’t fix anything” or “They take forever to fix any problems, and when they do they don’t fix it right so it just breaks again” or “I can’t ever reach them when there’s a problem, but they always want their rent money”.   Vacancy is always your number one cost in a rental, and if you’re in a class c or d rental vacancy is usually preceded by 2 or more lost months of rent before you receive possession of the property back, and several hundreds or thousands of dollars in repairs.  That isn’t exclusive to C and D properties, just much more common.  I’ve spoken with surprisingly large numbers of landlords that openly admit to committing the same acts complained about above, not fixing problems or not fixing them timely, “rigging” repairs, and never answering their phones when tenants contact them.  They usually have the same explanation for their behavior, which is “the tenants won’t pay their rent so I’m not going to fix their leaking pipes” etc etc.  My first response to that is usually “you’re just going to let your house get damaged because the tenant isn’t paying?”  Or “do you think that will increase the likelihood they will pay by not fixing it?  In any case I do understand the frustration that comes with late paying or non paying tenants, but with my background in residential renovation and construction I can tell you that delaying the repair of problems can destroy the value of your home to the point that no one will purchase it except for the guys that only buy the absolute ridiculous bargains.  Their bargain = your loss!  Don’t do that to yourself.  All of this to say that our policy at Mayco is to promptly (in almost every case within one business day or less) address tenant concerns, and to only make repairs in a quality and professional manner.  This removes the ability of tenants to justify their bad behavior, decreases the likelihood of permanent damage to the home, and overall improves the tenant experience which translates to longer term better quality tenants.  Everything we do we do for the same reason, because it’s in our clients best long term interests.

We have fine tuned a formula that ensures the highest likelihood of success with your rentals, we are extremely proactive and work to keep our property owners informed with weekly vacancy activity reports, monthly portfolio reports, and immediate contact with any major issues that may arise.  We also offer the flexibility to allow you to use your own preferred vendors for repairs and maintenance, even though we’re contacting them on your behalf.  We’ve structured our entire operation to be for our clients benefit, because we believe that so long as our clients are successful and satisfied we cannot fail.


What’s the best way to finance my rental properties?

One of the biggest factors in the return on your investment is the way your properties are financed.  Levered (or financed) properties *almost always* deliver a higher rate of return than unlevered (paid off) properties do.  Here is an illustration to show you how that’s possible:

Scenario 1: 100,000 purchase price, $1,000 per month rent, 20% down payment, $600 monthly note.

$1,0000 Rent

(-) $600 Note

(-) 150 Monthly Expenses

=$250 Monthly Cash Net Profit

$250 x 12 Months = $3,000 Annual Profit

$3,000 / $20,000 down payment = 15% “cash on cash” annual return

Scenario 2: same house paid in cash

$1,000 Rent

(-) $150 Monthly Expenses

= $850 Cash Net Profit

$850 x 12 = $10,200 Annual Profit

$10,200 / $100,000 cash purchase = 10.2% “cash on cash” annual return

This is a VERY simplified set of scenarios that are just for illustrative purposes, but it does clearly show that the rate of return is higher in the first scenario, even though the net income is significantly lower.

There are several different sources of financing for rental properties, I’ll discuss the most common sources in this article.  Look for future articles with more information on more sophisticated financing methods.

Fixed Rate Mortgage – This is just like the mortgage on the home you live in.  Banks consider rental properties to be riskier than loans on owner occupied properties, so the interest rates tend to be slightly higher, the requirements are higher, and there is no government subsidized options for financing rental properties like there are for financing your home.  In most cases you will be required to do a 20% minimum down payment, but some lenders may offer as low as 10%.  Beware these options though, because anything less than 20% in most cases causes the need for PMI, higher interest rates and more stipulations, all of which lower your profit on the home, and most of the time your rate of return as well.  Banks limit the number of traditional mortgages you can have, generally to 4 or less.  Federal regulation limit it to 7, but I’ve never heard of a bank willing to extend credit that far.

Bank Financing – This shares a lot of features with the fixed rate mortgage, but it does have some comparable advantages and disadvantages.  As far as advantages go the biggest advantage is definitely the reduced regulations and barriers to approval.  These loans are generally obtained from your local banking institution, which means you’ll have  an actual real live commercial banker to deal directly with, and hopefully develop a strong relationship with.  Commercial bankers usually have an authorization limit that they are allowed to approve themselves, depending on the institution that may or may not be helpful to you.  Every bank has different standards they have set for requirements, so there are no “hard a fast rules” that apply to all of them.  It’s definitely in your best interest to shop around with several banks to see what they are all offering, when you do you’ll likely discover a range of rates, term options, down payment requirements, etc.  In my experience I’ve seen rates generally 1-2% above fixed rate mortgage loans, max term length at 15 years, and max fixed rate period of 5 years.  There are absolutely banks that offer better/different terms than those, but it usually comes at a cost (lower rates for higher down payments, etc).  Before you venture into bank financing you’ll need to make sure your personal finances are in very good order, and you’re confident in your rental strategy.  Confidence comes through experimenting (renting out your starter home instead of selling it) or a much better option would be to find a mentor that can help provide information on how you can and should proceed.

Investor Financing – This comes in several forms.  What I’ve seen the most often if loans from family members, but it can also be independent investors, or even merchant bank loans.  These are typically much more expensive than other more typical financing options, but in some cases it may be worthwhile to utilize, especially in short term situations (ex: getting a house up to standards for more traditional financing options).

These three options are the most common for rental property financing.  I hope this article is informative and helpful for you!  Look for more article in the future, or contact me for more information.

Is it better to use a property manager or manage my properties myself?

I can understand the appeal of managing your rental properties yourself.  After all when I started off I managed all my properties myself, and it was years before I hired a property manager to do it for me.  I’ve experienced the good and bad of having a property manager taking care of the day to day issues with my properties, and I’d be lying if I said there weren’t potential downfalls to it.

There are several things to consider before making this decision.  I can tell you it’s one of the most important factors in your investment strategy.  Ask these questions of yourself and if you answer them honestly the decision should be easy.

  1. Do you have the time to manage your property properly Depending on the qualify or “class” of your property the typical daily time requirement may be fairly low.  (Class A or A- property generally don’t require much time from a landlord, while class D properties are usually extremely time consuming).  While this is the case when the property is occupied, it’s the vacant periods that are most time consuming and most important to devote your time to, because that’s when the property isn’t making any money.  If you’re avoiding using a property manager just to save money, you may actually be LOSING MONEY by not having enough available time to show and promote the property.  The best value a property manager can deliver is having ample available time to manage your property.  It is not in your best interest to hire a neighbor, cousin, brother, or anyone else that isn’t a full time property manager, because their primary focus WILL NOT be on your property, it will be on what makes them the most money, which is their day job!  (This also applies to the “free rent” some property owners try to offer in exchange for managing their properties, I have never seen that work out to the property owner’s benefit)
  2.  Are you ok with “letting go”?  Whether you’ve decided to be a landlord, or purely a real estate investor, you’re going to have to “let go”.  I don’t mean to say that tenants and property managers shouldn’t have some oversight, but you have to acknowledge the fact that the tenants have leased the right of possession of your property, so if you are extremely particular about the way your property is kept, owning rental property may make your cardiologist more money than it makes you.  Some tenants are fantastic, and will keep your property as well or better than you would if you lived there.  On average thought that will not be the case, and tenants may not tend the lawn as frequently as you’d like, or pick up rubbish that is in the yard or on the porch.  You have to keep in mind that as long as they aren’t doing anything to permanently damage the property, or cause you direct undue financial harm, everything will be just fine.  In line with that idea, if you have determined that it’s in your best interest to hire a property manager to oversee your investments, bear in mind that you hired them because they are a professional (MAKE SURE THEY’RE A PROFESSIONAL!) and breathing down their neck or questioning their every move won’t help to make you any more money, but will likely increase your fees and charges when the management agreement renews.  Real estate investment is supposed to be passive, that’s the real value in it!  It’s understandable to be hesitant in the beginning, but at the end of the day if you know you are a micro-manager it’s probably best for you to stay out of the business entirely, or invest in a managed pool of funds.
  3. Do you have a solid grip on laws surrounding real estate?  If your tenant doesn’t pay and quits communicating with you tomorrow do you know what to do?  Do you know how long it will take to have them removed through legal means?   Do you know what your rights are and what your tenant’s rights are when they aren’t paying their rent?  Do you know what the alternative options are to courtroom eviction?  If you can’t answer all of those questions with a confident “yes” then you need to do some serious studying or hire a professional to do the job.  Violation of tenant rights can land you in jail in some parts of the country, if that happens to you a property manager will be looking extremely cheap!
  4. Are you good at managing and budgeting your money?  Chances are if you can afford to buy an investment property you have some financial literacy, but do you manage and budget your money well?  Saving up a down payment and making monthly payments isn’t the same thing as being able to pay for a $5,000 air conditioner, $1,200 water heater, or even the $3,000 deductible for replacing the 20 year old roof that a tree just fell on?  A good property manager can help to buffer these expenses, but they may not offer the services automatically, so consider asking them about it!
  5. Do you have a list of contacts for repairs, and would you know who to call for what?  I’m a fan of doing a lot of my own work around the house, always have been.  So when I started investing in rental properties I tended to try to do all the repairs myself there too.  It sounded good in theory, because I thought I was saving money, and it gave me an opportunity to “check in” on my houses and see how things are looking.  That was true for the items that weren’t of immediate concern, both for the tenant and for the house itself.  I was working a full time job and didn’t have the time to rush to fix some of the small things all the time.  I learned that those small things, when not taken care of immediately, turn into big things, and when they turned into big things I wound up contacting several different repair people to get the jobs done, because I wasn’t familiar enough with who I should be calling to do what kind of job!  Looking back I would have been better off to pay to have the work done right away, because it satisfies the tenant, which helps encourage them to stay longer, and prevents larger problems from happening, which quickly erase those DIY savings.
  6. Do you know what potential tenants are looking for in your area?  Most property managers operate within a particular segment of market.  They can tell you the pros and cons of investing in every type and class of property, because they do it everyday.  Beware the managers that only manage subprime or class D properties, as their income comes mostly at your expense (they make their money off eviction fees, late fees, and generally a higher management percentage than others).   Once you’ve made a decision on what types of properties you want to invest in, find a property manager whose portfolio resembles your target properties.  They already have a pool of potential tenants contacting them regularly, which you can benefit from.  You can also solicit advice from your property manager to focus purchases or renovations on what those potential tenants are looking for.  Having that information will help keep vacancies low, and return on investment high.
  7. Do you know how to screen and what to look for in a potential tenant?  This is probably the most important out of this entire list.  The expense of one bad tenant could pay a property manager’s fee for 4 or more YEARS!  Between lost rent, legal fees, and repairs/damages to the property the costs add up quickly!  You should do some extensive research on tenant screening before you approve a tenant.  I cannot stress how important this is in factoring rental property success.

There are a lot of things that go into determining your strategy when investing in real estate.  This is not even close to a comprehensive list of things to consider, but hopefully it helps get you started thinking about the most important factors!


What is the value of a property manager?

A good property manager can significantly increase your return on investment.  A lot of people ask “how can that be when they are costing me money?”.  Honestly it’s simple to answer that question.

A good property manager can act as a mentor.  They will actually help you be a better investor by giving you information from years of experience.  Most property managers have the experience and knowledge of a VERY experienced landlord.  One important thing to consider is that you cannot profit from their experience if you don’t ASK for their advice, and LISTEN to what they say!

There is value in having a disconnect between tenant and owner.  One of the things I learned early on is to never let my tenants know I was the owner of the property.  So long as they thought I worked for the owner and I was just “doing my job” they were easier to deal with and much more understanding.  A good property manager can act as gate keeper and referee, saving you a lot of headache, and often times you may never even know they’re doing it.

A professional property manager does it full time, and should be much better at it than you are.  Even if you’ve been investing in real estate for years I can tell you that a professional property manager has more and better experience in the field than you do.

Property management companies have better technology and better connections, they have more people contacting them looking for rentals, and all of that adds up to significantly decreased vacancies.  Vacancies are your biggest expense as a real estate investor, so anytime vacancy rates go down, return on investment goes up!