Managing Property Managers is phase two of Managing your rental portfolio. Passive income is a bit of a Myth in that you can't completely let someone else manage your assets for you. They are your assets and only you are going to care about them as much as if you owned them. So property managers are great but you need to take that role in your business something you still monitor. Listen in as Mike and Dave continue their talk on the BRRRR strategy and discuss Managing Property Managers.
David: Alright guys, welcome back Discount Property Investors. This is the Discount Property Investor podcast with your host David Dodge and Mike Slane, hey Mike!
Mike: Hey, how are you today, buddy?
David: I'm good, man. I'm feeling great.
David: Getting a lot done today, man. Laser focused, laser focus, that's how you get stuff done.
Mike: For a couple of guys with ADD, well one anyways, it's nice to stay focused, it's good, you have to. So what is our focus lately around here? We love wholesaling.
David: We love wholesaling.
Mike: So we wholesale like crazy, what's our next focus? Right now we are really enjoying BRRRR. We are buying, rehabbing, refinancing, renting, repeating.
David: You screwed that up a little bit. Refinance is towards the end, but that's the model, guys. Buy it, rehab it, rent it out, refinance your money back out of it, repeat the process, BRRRR, if you didn't know, now you know.
Mike: It's funny because we kind of do two at the same time. So really we have-- rent and refi-- there is no-- is there a reason to do the rent first?
David: Oh I see what you're saying, I see your point, Mike. There has been some properties where we have refinanced out before they have actually had a lease signed, that is a good point. However, that is not-- it's not the norm. The reason is, is most lenders are going to want a lease that is seasoned three to six months before they will allow you to refi. However if you have really good banking relationships, or you are just rock stars like Mike and I, some of the bankers will trust you enough to just let you refinance that property knowing that you are in the process of leasing it. I doubt any bank will let you do it without at least having a tenant lined up.
Mike: -- we have a relationship because I do, I start my refi process--.
David: And I love that you do that because it speeds the whole process up, it saves us two months of waiting, sometimes six of waiting. So that's good, I was wrong, you didn't screw up the R's. You can just wiggle them back and forth. You can kind of move them a little bit in different ways which is cool.
Mike: As long as you get all the R's in there you will be on point.
David: If you are new to this podcast, check us out, freewholesalecourse.com. We have almost 5000 successful people take the course, that provided tons of feedback. So we love to give back and teach you guys about wholesaling. Why do we wholesale? Because we can cherry pick the best deals, and we can sell off everything else. It's a profit center for us. However what is our real passion, Mike? It is passive income. It is money we can get while we are sleeping that is going to come in every single month for the rest of our lives, and it is taxed a little bit lower than all the other money you have to make or can make.
Mike: And you are building wealth.
David: And you're building wealth. Lots of reasons.
Mike: We love rental properties. That's what we are talking about today.
Mike: We are in the R of our BRRRR strategy, and we are going to continue that conversation today talking about--.
David: We are in the second R.
Mike: We are.
David: So you buy, you renovate or rehab, same thing, then you rent. So that is where we are at today. In this particular episode is going to be focused on the property management aspect of it. So in the previous episodes we talked about--.
Mike: Regarding renting, we talked about a whole bunch of good topics.
David: We talked about tenants and toilets in the last episode, which is really a deep dive on dealing with tenants and managing the tenants, managing their expectations, managing rent collection, managing the on-boarding off floating of those tenants, all of the above. The episode before that we kind of did the good summary of rental of all together. In this episode we are going to do a deep dive on the actually property management aspect of the third letter in the BRRRR strategy, or the second R, renting it. So property managers. We have a property manager. In our last episode we just said-- we think that ten properties, if using the BRRRR strategy, again it doesn't matter if you are just slowly doing this. But if you are actively, aggressively using the BRRRR strategy, meaning that you are buying a lot of properties, and putting these into your portfolio, you are getting them through this process, then a property manager is a key player. It is somebody you really want to make a good partnership with, because trying to do the property management and the aggressive acquisition--.
Mike: Can't do it.
David: It's tough.
Mike: You can't do it. I will be 100% candid, we were trying to do the property management in-house--.
David: Twice, three different times.
Mike: Yeah multiple times.
David: I am not even embarrassed to say it. Failure is part of the success formula. I need to say this more. Failure is part of the success formula. You have to fail in order to be successful. Not maybe all big times, but little failures along the road. I am not ashamed of it. We tried two or three different property managers, even bringing it in-house-- it was not working for us. So we had to get a guy who could basically be the CEO of that business unit.
Mike: It's funny because-- this is a guy I have worked with for years on my personal rentals. I told the guys-- hey this guy is pretty good. Eventually we had him come out, interviewed him. He has been a rock star for us.
David: Very happy with him.
Mike: We have thrown him more properties-- we have probably increased his portfolio 50%.
David: It's going to triple by the time we're done. So why property managers, Mike? Let's talk about way. Again, you can't do both if you're aggressive. That's the number one on the why on my list, right? Two is-- it is difficult to deal with people and property at the same time.
Mike: It's that laser focus, Dave.
David: Laser focus if you are-- again, wanting to be aggressive in your growth, right? Further more, it allows you to be more of a passive investor. That is really the goal here, right? I want to be able to get checks in the mail box every month, I want to make money when I sleep. I really want to build wealth and not pay tax on that too. That's very important to me. Income isn't as important as my wealth creation, but everybody is going to have a different opinion on that. To me, I want to be able to build wealth, and the reason I like real estate to do that, is that I am terrible at saving money, I will be the first to tell you, I suck terribly at saving money. How do I save more money than most people I know? I put my savings on auto pilot. I get a house that is rented out, somebody else is paying down that debt. When somebody else pays down a mortgage for you, that is equity, exact same thing as putting nickels, dimes and quarters into a piggy bank every day. Look at a house like a piggy bank you would buy from the knik knak store, right? It's a little pig, it's pink, made of clay, got a little slit in the top. You deposit nickles and dimes and quarters and maybe even ones in there, right? Well in 10-15 years, I am going to own a bunch of piggy banks that are the size of cars filled with hundred dollar bills, right? The reason is, is because somebody else is depositing that money for me. If it was up to me to do that, it would never get done, in fact I would never own any piggy banks, right?
Mike: That is a great analogy.
David: It is, I love it. I am so passionate about it. You guys can feel my energy here. Me, I am a terrible saver. So by buying rental properties, and doing the strategy we are doing, it autopilots the savings. It forces it upon me, I can't even stop the process if I wanted to. I can't spend equity, it's beautiful. But it is going to create wealth, and it is guarantee and insure that I have wealth versus gambling. It's awesome. I know I've digressed, but I am passionate about it.
Mike: So why property managers?
David: Wow that was a big digression.
Mike: So that you can--.
David: A lot of nuggets in there though.
Mike: It was good though. When you are passionate about it you do, you just start talking about the things you love. So why property managers? Like Dave said, it is so you can acquire more properties more quickly, and that's where we are at. Last year we kind of-- were ramping up, and now we are in-- I don't know what you even call it at this point.
David: We are almost one third of our way to the goal. Our goal wasn't eight properties, guys. It was 150!
Mike: I like to compare it to a train. Last year our train was just starting to move. It takes a while for a train to get moving. Some of the things that too us a while was-- we made poor choices with our property management. We didn't get it fine tuned. We didn't have all of our banking relationships lined up. We didn't have all of our contractors, we didn't have all of our lenders, we didn't have-- all this stuff.
David: Which is part of property management.
Mike: All of this stuff which we got in place, now our train is running. Now we are trying to add one a week.
David: One a week.
Mike: That's our goal.
Mike: Again that is big for us, that is huge for us. That could be peanuts to somebody else. Guess what? That's our goal and that is what we are going to--.
David: But I imagine most of the listeners, that is a crazy, crazy high goal. Everybody has a different initiative. [00:10:04.23 - inaudible] has 7000 units. If he had to start from scratch, his goal for year one wouldn't be 150, it would be 1000. So everybody is going to grow at their own pace.
Mike: You are just in a different place. So to me, I think it is an awesome goal, super excited about it. I look at my father, he is a rental investor as well, I don't even know how many properties him and his wife have, I think it is probably about 30 or something?
David: I didn't know he had that many, that's a ton.
Mike: But again, I always used to think that was a lot of properties. He was working full time.
David: You should be getting some really good Christmas presents coming up as he ages. A house a year, man.
Mike: I digress--.
David: Property managers.
Mike: That goal though is awesome to me. I watch my dad acquire rentals slowly which is a great way to do it, because was working a full time job, he was able to add one--. It's awesome, that is an awesome-- he has piggy banks, he has 25 piggy banks. Which is amazing. We added--.
David: Especially if you suck at saving. I am not saying I suck at investing. That is two different things. I am actually pretty good at that. Hopefully you can tell by listening to our podcast. But saving, man, saving is hard!.
Mike: It's also boring.
David: Super boring. Nobody wants to save. With inflation and everything else, it sucks, saving sucks. So put it on autopilot, guys. It is the only way in my opinion to insure you will have wealth down the road. Autopilot it.
Mike: We love rentals, I hope you can tell. So let's get back to our property manager discussion.
David: When we hire we talk maybe about ten. That can change, that is a little bit up in the air.
Mike: And it's kind of up to you too. Dave you had mentioned before, if you just don't like dealing people, and you know you are not a people person, maybe you are super introverted, maybe you are just jerk kind of like me.
David: Short fuse.
Mike: Just shouldn't be dealing with--.
David: At least all the time, right?
Mike: What's the office space? I have people skills. If you don't have people skills maybe a property manager is the best play from day one. The catch 22 is that you really don't know what a property manager does, what he is dealing with. So when you are dealing with the property manager it is a little bit more difficult to relate.
David: Right. So what you're saying is-- it sometimes have more value to be your own property manager prior to hiring one, because you will have more experience doing what he is doing, so you can relate to him. I totally agree.
Mike: If you have just one property, you have to think to yourself, okay what are all the steps in just leasing the property?
David: What's a funny thing to look at it when you say it like that, Mike, when you have one property it is overwhelming, when you have 49 properties--. There are systems, it no longer becomes overwhelming. At what stage are they in, oh the renovation, let's renovate it, whats next? You do that thing. Oh no we are in leasing, okay well we have 49 others, right? Like there is a simple process. It sometimes is difficult to just do one or two. So by scaling you are actually becoming more efficient.
Mike: So it really is personal-- win to hire. We suggest doing it yourself up till about ten. I think it makes sense from a financial stand point as well. You don't really gain scale, you don't have anything to leverage when you talk to a property manager. Hey I have two properties, can you give me a discount on your rate?
David: They are not going to care. Property managers are going to take quite a lot of your cash flow, a decent chunk of it. So another thing too is, if you are using your properties to live off, if that cash flow is paying bills, then a property manager might not be the best solution, because you are paying them for convenience. So I always tell people when I am on wholesale appointments, look I am a cash buyer, I am offering convenience to you. But what you have to offer me in return, for me to even want to work with you is a discount. I don't need to buy your house. I am very clear, I am very transparent, I am very blunt. But I don't do it to be rude, I do it set the expectation and to also help screen so I'm not wasting my time and theirs. But I just say, I am happy to buy it, however I don't really need it. Again, you are going to trade me a discount, and I am going to trade you a cash offer which is convenience. So it's the same thing with a property manager. They are providing you with convenience. You are not having to worry about the leasing anymore, not having to worry about the maintenance necessarily, or different types of things like that. However, you are trading them a piece of the pie. There is always going to be a give and take there. Again, convenience is the big thing. I provide convenience whenever I am the cash buyer, the property manager provides convenience to me when I hire them as the property manager.
So when to hire, we talked about what to expect. I think we should set a little bit of an agenda for the last part of our podcast here, Mike, with pros and cons. I think that's a really good way to look at the property manager. Then last but not least, the fact that just because you hire a property manager, doesn't mean you are done managing. Instead of now managing those people, you have to make sure you know to manage that manager. That person or entity or whatever.
So let's talk about some of the pros of property management. I already mentioned convenience; that's probably the most important thing. You are hiring them, and it has to be assumed-- they are a business, they are profiting off of you. So you are hiring them for convenience. I don't want to take the calls, I don't want to do the maintenance, I don't want to do the leasing, in fact I don't even like people, right? I just want to buy the property and let them do it.
Mike: What does that mean though? It means you are paying for that convenience. So there is a cost to it, and that's basically the trade off. What is another pro to a property manager? They are professional.
David: -- they have all the processes already they have the systems already. Again, it is difficult to do one, because you have a lot of things you need to get together. But once you have those things in like, like for instance a check list for a walk through, a lease agreement that you use over and over and over again a hundred times, they have that process. The application process, they are not going out and checking out Zillow rental manager versus My Smart Move, because they have picked one already. They know what they like, they are using it. All these systems work the same, there is not really a better one, it's just what you like, what interface sticks out to you. It all does the same thing, so don't let it overwhelm you, pick one and go with it. But our property manager, he has systems in place. So we can hand him a property at basically any level. We could give him one that needs 40 grand worth of rehab, he could handle it, we wouldn't want him to but he could. Or, we could give him one that has an occupancy inspection and the maids are leaving as he is walking in. So it depends on how much we want to put into the project, and how much we want him to provide that convenience. It is all about convenience.
Mike: Usually where we hand it off is when the maids are walking out--.
David: Inspector is in the parking lot writing up a report. Alright we are ready for you. We like to line them up, you don't want to kill time in between. So lots of good pros. The only cons are cot.
Mike: There are some other cons though. We briefly touched on--.
David: Also pros for tax times. Check this out, property managers, the ones at least using some legit software are going to be able to send you a 10-99. So they are going to be able to tell you how much money you collected, how much your expenses were. So you can go to your accountant and just give them a piece of paper, versus going through a shoe box full of receipts, spreadsheets, this, that, property managers will really simplify your taxes. That's a very big point, don't forget that.
Mike: Typically going to have an accounting software built into that property management software-- spits it out, it's awesome. The other con is on the maintenance side too. We talked about-- it can be a profit point.
David: It is a profit point.
Mike: They charge on top of the maintenance cost. So if they have their own team in house--.
David: From experience, Mike, 50%-- not income, that's not important to me, 50% of a property management's profit is on the markup of maintenance, did you know that? That's a national average, 50%. So with that being said, the 8, the 12, the 10% you are paying, of course that's money for them, it's income, but they got to run around town and do all this stuff. They have to lease it up and meet people there, run applications and it's time-- there is a lot of overhead that goes into it too.
Mike: Talking about that, that's one thing that I forgot that-- when I first started using a property manager. I tried out a couple of them in the past. I put a cap on their maintenance repairs.
David: Love that.
Mike: You have to determine what level of spending they are allowed to do without talking to you. It could be zero, you may not want them to do any maintenance without talking to you until you are comfortable with them. I typically would set my cap around $100-250 to start. I want them to use discretion, but do not spend more than $250 of my money without talking to me about.
David: I love that tip, Mike.
Mike: Again, 100 is probably the right number. If it's a leaky sink, I don't want them to go out and replace the facet every time or to pay a plumber--.
David: Fix the whole problem, that's--.
Mike: Again, you want to know how they are handling the maintenance. I don't want them to send a repair guy out three times for the same leaky sink, 100 bucks each time.
David: Another thing you want to keep in mind is sometimes cutting a corner is more expensive in the long run, most of the time it is. So that's a great point, Mike. If you have got a guy who is going out every three months to maintenance HVAC unit, bite the bullet, buy a new one. You are going to spend three times more money over a five year period by sending that guy out every 90 days to service it, right? That's another thing to keep in mind. The property manager may not care about you having a top of the line furnace. They may just like an extra 150 bucks in profit from making one call to get the HVAC guy out there.
Mike: The problem with most of the property managers when they are using maintenance as a profit center, is that your goals are not aligned with your property manager at that point. I think that is a very important thing to keep in mind. You have to have your goals aligned. If his goal is to make more money, which is most likely is; his goal is going to be to increase the cost of each maintenance item. Again, they are not going to state that, and they are going to get if you require them to get a couple of bids. But, they are still really not that interested in saving you the money. So it is very important to put that in there in your agreement with your property manager when you do hire them. What other things can I think of-- Dave? Or any others on the top of your head that are important? I am sure we are missing something.
David: I'm sure we are missing tons of stuff. But we can come back and--.
Mike: So managing a property manager, the other thing on that is you should expect and almost demand a written statement with your owner draw every month.
David: This is a good point, Mike. I am very passionate about this. Property management software sucks. It's terrible. Even the best ones out there-- what I mean by this is-- the reporting, the reports. What they are going to give you is a 36-page report for a property that is almost impossible to read. This is great, Mike. What we've always done in the past, we make our property manager create a simple simple simple Excel sheet that shows the dates, the amounts, and the reasons; that's it. That's how I do my taxes too. Dates, the amounts the reasons. So what was the date? What happened? Did money come in? Did money go out? And why? That is what's important. That way at the end of the month we can see who didn't pay the rent, what maintenance was where, and what was collected. Not having to dig through 60 reports, one for accounts receivables, one for late rents, one for maintenance. It's too hard to understand. So have them-- make this be a requirement when you hire them. I need a simple to understand report provided to me at either the end of the month, the beginning of the next month, or whenever they distribute their owner draws. That is very important because if you don't simplify these numbers, the reports they are going to give you most likely are going to be confusing. Not misleading, that's not their initiative. We have seen them all, we have dealt with almost every property management software that is a big deal I feel like. Again, the reports are very difficult to read. So make it the job of the property manager to help with that, and simplify that, so you know what is coming in, what's going out, and you want to keep an eye on that. This is, unfortunately-- dealing with rental properties is kind of a nickle and dime business, it can be. You want to make sure that you are keeping an eye on these little expensespod because a lot of little expenses can turn into big expenses. You have to think, for some of these properties the average cash flow is about 300 bucks, maybe a tad shy of that 275. But, if our property management fees are through the roof, our cash flow could be neutral or net negative at the end of a year. So you definitely want to manage those property managers. Anything else you want to finish up with, Mike? I think we really covered the property managers. Definitely try to do this on your own at first, we recommend it just so you can get a feel for it. You can learn it, you can understand what it's like dealing with the tenants, what it's like dealing with the leasing, what it's like dealing with the maintenance, what it's like even dealing with an eviction on your own. These are good things to learn. A property manager as we talked about several times, they are there to help you grow, but also to provide your convenience in exchange for cost. That's all I've got, man.
Mike: Alright guys, thank you so much for listening. This was our-- guess final episode on the--.
David: On the rent side of BRRRR. Don't worry we have a lot more R's for you guys.
Mike: We are going to talk about rehabbing and-- refinancing--.
David: Then repeating-- no--.
Mike: Yeah refinancing and repeating is coming up. Alright guys thank you so much. Check out freewholesalecourse.com if you are new to real estate and want to learn how to wholesale
David: Until next time guys, see you then.