Operating a rental property is challenging work because modern buildings are unrelenting in their demand for care. The property needs to be protected from seasonal weather changes, wear and tear, and other threats.
The structures of the building need constant attention to keep them from falling apart, and as a result, the building loses value. Tenants also have needs, which the owner must address to keep the rental comfortable and profitable.
For these reasons, investment properties are not considered a source of passive income to the same extent as stock investing is. Rental properties are only partially passive; the moment the owner stops spending time on their asset, that is the moment it starts to fail.
How to Make Your Investment Property a Source of Truly Passive Income
Management is what helps an investment property retain its value and appeal to potential renters. But this can be a limiting factor if:
- You lack time. Time freedom is one of the reasons people invest in real estate. The investor does not have the time to personally manage the property, and if a rental property takes too much of the investor’s time, that will defeat the goal.
- The investor is not interested in property management. Not everyone who buys rental properties wants to deal with maintenance issues. They may also have no desire to manage employees and tenants.
- The investor lives far away from their property. Investors who buy properties in distant locations to take advantage of the favorable conditions in that location may not be able to manage the asset effectively from a distance.
- The investor does not have the necessary skills to manage the property. Property managers who are not hands-on with building maintenance may find managing their rental properties challenging.
- The investor’s portfolio of properties has grown beyond what they can personally manage. All property investors want their portfolios to grow, and the time eventually comes when they have more assets than they can manage independently.
For such investors, the best option is to hire a property manager. The property manager will take over the task of overseeing building maintenance and the operation of the rental property business. This unlocks the investment property’s potential as a true source of passive income.
However, as an investor looking to hire a property manager, you should hire someone with a proven track record. The wrong property manager will compound the problems you are trying to solve with your investment properties.
How to Choose a Property Management Firm
The property manager represents you and your brand. Therefore it is essential to make sure the firm aligns with your values and objectives in every way. Here are the top seven criteria for choosing a property management company.
1. Choose a local firm – The property manager must be aware of and comply with federal, state, and local regulations. But in addition to these regulations, there are local variables that affect the way a property must be managed. This is why you need a local firm that is in touch with the peculiarities of the location.
2. Choose a company with specialized knowledge – Property management expertise varies with the type of investment property in question. If you own invest an apartment complex, do not hire a manager who specializes in single-family homes. Also, avoid managers who say they can manage any type of property. Each type of investment property comes with its specific challenges.
3. Choose a company with experience – Time imparts know-how that cannot be gained any other way. Moreover, with experience comes a vast network that can come in handy for solving problems. For example, how long has the company been in the business? How many properties do they have under management? How big are they, and how qualified are the management and staff?
4. Check the firm’s licensing, insurance, and affiliations – A competent property management company should have licenses and certifications to prove its technical expertise. They should also be respected members of the local chapter of their professional organization. The property manager should comply with regulatory requirements for insurance and make sure to verify all licensing, membership, and insurance claims personally.
5. The firm must have an impeccable reputation – What does the public have to say about the company? You can get this information by checking online reviews and asking the firm to provide references. For online reviews, check Angie’s List, Zillow, Google, and GlassDoor for insights. Also, call the property owners on the list the firm provides.
6. Evaluate their firm’s performance and their systems – Look at the statistics for the properties the company manages; occupancy, vacancy, eviction, and turnover rates; the average length of a tenancy; and rent collection data (delinquency, percentage collected on time, or percentage of late payments). Also, look at the systems they have in place. Can tenants make payments on the portal or submit complaints electronically?
7. Review the property management agreement and other documents – Request a sample property management agreement. What is the monthly management fee? What is the exit clause? Are responsibilities clearly spelled out? What happens if there are disagreements? You also want to see samples of the tenant lease agreement and owner report.