Are you considering getting into the rental business? If so, let me provide you the best proof that you should never buy a rental property. That proof being in the form of property management companies. These companies alone are concrete proof that rental properties are not worth your time.
Property management companies are often full service companies that will get your rental property rented, answer the late night phone calls, and deal with rent collection and evictions, all for a price. The average property management company in the Midwest will run you about 10% gross, and sometimes 10% gross plus the firsts month’s rent (but this article will reference only 10% gross). Simply put, if you rent your rental property for $1,000 a month, they take $100 a month, no matter what.
Seems pretty reasonable right? Well remember those late night calls I mentioned before? Those calls can be costly, and although your property management company will assess and complete the repairs, there is a fee. How much is the fee? That varies a lot, and without being able to check it out yourself, this situation will require blind faith in your property manager. Maybe it comes back at $250 for some plumbing issues or $5,000 for a new roof required, decisions will have to be made and odds are you will be slightly in the dark when it comes to actual damage and repairs costs.
Maybe that $100 a month cost ends up being $150 a month averaged out during the time-frame you rent, 15% seems fairly reasonable. That of course ignores some of the bigger issues with property management, if your place isn’t rented, you eat the costs of carrying. Also if there is an eviction that costs you a few months of rent and results in substantial damage to your property, that’s on you as well.
So many reasons why you should never buy a rental property, but let me offer the biggest argument of all. Why wouldn’t these property management companies not simply buy properties themselves? Often times these property managements companies do hold some rentals (that they usually buy at amazing prices), but why even service individuals with their rentals? It certainly isn’t a capital issue or manpower, so why?
Because they make more money with less risk managing your property. Also they can charge the full repair costs to you, where as they might try to find a cheaper work around for their own properties (and keep their rental property margins higher).
The bottom-line is that rental property management wants you to carry all of the risk and reap only the rewards, its a pretty kick-ass business model. So just remember, you should never buy rental property. You want to make an argument about return and positive cash flow? More to come on those subjects later.