As you might know, I am completely against owning rental properties. The returns are simply not there, especially ignoring speculation on the housing market growth. That’s why it’s my opinion that if you want to get involved with rentals, you should start a property management company.
- No upfront money
- It usually pays first month + a flat percentage (6-10%ish)
- Vacancies don’t hurt you
- Someone trashes the place, it’s not yours
- It’s scalable into a whatever size you want (imagine if you get up to a few hundred properties)
- Repairs are paid for by clients, not you. Also if you are sneaky you might be able to net 20+% off repairs for yourself.
- You don’t have to destroy yourself getting the absolute cheapest contractor, because you aren’t footing the bill
- Service charge, the tenant calls and you serve, you get paid (imagine getting $50+ for each call you service)
- If you absolutely must own rentals, it will be much more manageable while operating a property management company
- The property might be operating at a negative cash flow to the owner, but virtually impossible for it to be anything but positive to you!
- Financially, vacancies and evictions don’t directly hurt you, but they may indirectly hurt you when you lose a client
- You are a bit of a hostage to the client, if they have 20 properties under you, they have leverage
- You are dealing with people and regardless of screening, you are going to hit some terrible individuals
- Potentially late night phone calls
- Always putting out fires (hopefully figuratively)
- You have to deal with evictions, cleaning, etc (potentially indirectly).
- You are most likely going to want to build relationships with contractors, and they can be flaky at times.
- Paperwork / Reporting to clients, you are now their accountants effectively.
So after taking a look at some of the Pro’s and Con’s, it appears to me that it isn’t a bad gig if scaled up. Imagine you have 200 properties @ $600 average clocking in 9% + first month. That’s $120,000 of “first month fees” and $129,600 of monthly recurring fees. Assuming you service 20 a month @ $50 a service call, that will bring in another $12,000 a year. Kickbacks from contractors and savings might also bring another $12,000 – $24,000 (guessing).
Bringing you grand total for the 200 properties to roughly $300k. Then you take out maybe $50k for a realtor to get the places rented, another $50k for records keeping, $25k for a basic office, putting you right around $175k, but let’s call it $125k-$150k to be conservative.
Sounds like a pretty sweet gig right?
There are a couple if catches though, for instances this is a projection for 200 properties, which might take you years to acquire. Also 200 properties start to get unmanageable to the point you have to hire more people to help, killing your profit on scaling. Now it’s hard to argue you wouldn’t be coming out way ahead if you had 500 or 1,000 properties, but it’s going to be a major production and a lot of time and effort to get to that point.
The potential is there, but the last thing to consider is, what’s your competition. There are a surprisingly high number of people out there willing to pounce on managing other people’s properties, and they might poach some of your clients or flat out undercut you. As time goes on, and you scale up, you will become bloated. It’s pretty hard to compete with a lean guy managing 20-30 properties and under-cutting you by a few percentage, heck he will probably have a more hands on approach due to the fact he isn’t managing 500-1000 properties simultaneously.
Lot’s to consider, but if you absolutely must get involved with rentals, I still think starting a property management company is the way to go.