The Ultimate Guide to Property Management for Real Estate Investors
(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)
This article is based on the episode of the Building Equity podcast “A Guide to Property Management for Real Estate Investors” with guest David Puskaric, property manager and real estate agent from Parkline Realty in Naples, Florida. Click here to watch the episode.
Investing in real estate is one of the smartest, quickest ways to grow your wealth. Whether it’s generating a steady source of cash flow, benefiting from tax breaks, or building equity, investing in real estate is the best strategy to create long-term profits. While investing in real estate is an exceptionally prudent tactic, it’s also a major financial decision that comes with significant responsibilities for an investment to be successful.
When it comes to operating a fruitful real estate venture, property management is paramount. For investors to maximize their investment’s potential and ensure the longevity of their property, it’s crucial for property management to be conducted efficiently. It’s easy for new investors to gloss over the necessity for scrupulous property management, and many times this neglected component can result in losses on their investments.
Top 3 Mistakes Investors Make When it Comes to Property Management
While the stress of owning real estate property can seem overwhelming at times, real estate investors need to understand the importance of adequate property management for the overall health of their investment. Let’s look at the 3 biggest mistakes investors make when it comes to managing their properties:
1. Being Too Nice- The adage goes, “People mistake kindness for weakness,” and that testament still reigns true today, especially when it comes to business. Many real estate investors who are too nice to their tenants often get taken advantage of: whether it’s allowing rent to be paid late or overlooking major red flags in a tenant’s application, being too nice can become a major setback for investors looking to maximize their investment potential. Benevolence with boundaries is the best approach when it comes to operating rental property to ensure investors aren’t losing money and their properties are generating steady revenue. Some people will look for opportunities to capitalize on the kindness of others, so it’s always great to be aware, making sure you’re not being cheated.
2. Trying to Manage on Their Own- Oftentimes, investors try to take on too much responsibility when it comes to managing their properties. It’s easy for investors to become too attached to their investments, where they can’t separate ownership from management, resulting in answering every single tenant complaint immediately, running to answer every single call and make even the most remedial of repairs. This type of managing can wear down an investor, especially if they own more than one property, making overseeing an almost impossible task to keep up with. It’s recommended to hire a team to handle your property management, especially if you’re new to investing in real estate, to ensure your investment(s) are getting the supervision needed without demanding too much of the investor. Putting a team together, working with a local agent, realtor, a property manager, and learning the local market is the most effective way to manage your property.
3. Not Properly Screening Applicants- Many investors are self-managing their properties, which leaves room for error with screening applicants. It’s crucial for investors to ensure they are maximizing the questions on their applications; confirm if your tenant has ever been convicted of a crime (misdemeanors or more severe charges) and verify credit scores and income; ensure your tenant can afford to live in the residence. If an investor isn’t asking the right questions on the application, there is a higher risk that a potentially problematic tenant could be selected, resulting in issues down the road that could lead to net losses.
It’s highly recommended that owners create a manual for tenants, outlining their maintenance responsibilities for living in the unit, such as switching out filters or cleaning vents. It’s also helpful to provide instructional videos to confirm each task is executed properly.
Protect Your Investment with a Property Management Company
While the throes of owning a real estate property may keep some investors up at night playing catch up, hiring a property management company is the smartest thing to do to protect your investment. Let’s look at the top reasons investors should utilize an accredited property management company:
1. Understanding Local and State Regulations- It’s not enough to just maintain a property, it’s also imperative that all rental properties abide by local and state regulations. Renting out a property in Ohio can be very different than a state like Florida based on the state regulations. Whether it’s registering the property to abide by local regulations, being ADA compliant, or aligning with the Fair Housing laws, not having a thorough understanding of these rules and regulations can be costly for an investor. A qualified property management will ensure your property is compliant with all regulations, mitigating investor risks.
2. Managing Security Deposits and Prepaid Rent- Another common issue with those self-managing their properties is improperly comingling tenant security deposits and prepaid rent; these need to be held separately as funds allocated for damage and the first couple of months’ rent. It’s easy for investors to misappropriate this money at some point, which can lead to legal issues. Hiring a property management company as a third party eliminates the investor liability while ensuring there are no conflicts with the usage of these funds.
3. Complete Organization and Oversight- While many investors may resort to taking mental notes or creating their own spreadsheets and documents, the chances of making accounting errors, overlooking red flags, and committing other omissions increases dramatically. Most accredited property management companies utilize streamlined software that handles all aspects of overseeing a property, from functioning as a repository for official documents/applications and complete expense reports, eliminating any tracking mistakes while providing complete clarity on the rental operation. A professional property management company will also guarantee you’re selecting the right tenant for your unit by making sure all the necessary questions and checks are being conducted during your screening process.
Working with a knowledgeable property management company not only makes managing rental properties easier, but it also minimizes risks and liabilities so investors can focus on other pressing matters while attaining peace of mind.
Increase Your Annual Percentage Yield by Using a Property Management Company
Whether it’s your first rental property or you’re a veteran in the real estate realm operating multiple properties for profit, it’s critical that property owners utilize a property management company to maximize the rate of return on their investment(s). Based on the latest data[1], investors that hire a property management company to oversee operations net a 7% annual yield differential, meaning investors stand to make more money by having the right property management company in place.
Efficacious property management is a crucial aspect to ensuring profitable real estate investments. If you’re looking to invest in real estate using your self-directed IRA, IRA Title Pro helps investors through the entire closing process, from start to finish. Whether it’s buying or selling, IRA Title Pro offers a plethora of helpful tools, resources, and guides for interested investors to gain insight and make it easier for investors to close on real estate properties, offering a quicker, seamless closing experience.
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[1] Gettleman statistic on using a property management company
