Welcome to the second installment of my (Mis) Adventures in Real Estate series that focuses on property management problems. The series is based on my experience owning out of town rental properties and all the drama that surrounded them. In case you missed it, check out Part 1: That Time I Bought 2 Our of Town Rental Properties. This post is called The One with the Fraudulent Property Manager. If you or someone you know uses or is thinking about using a property manager, read this post!
These days, rental properties are all the rage. If you watch HGTV, you may think that owning a rental property is an easy and smart way to earn extra income on the side while building long term wealth. Well I want to show you that it’s not always the case, especially if the property is out of town and you rely on a property manager to run it. Before looking at my own property management problems, let’s first take a look to see why people use them in the first place.
Why Use a Property Manager?
People use property managers if they don’t want the hassle of finding tenants and dealing with issues involving their rental property. In fact, many PMs advertise their services as an easy way to own rental properties with peace of mind. If your rental property is out of town, then you’ll be relying on a PM even more so.
Here are some of the services provided by PMs:
- Finding, screening, placing and evicting tenants.
- Collecting monthly rent on your behalf.
- Tenant Relations.
- Routine Maintenance.
- Pest Control.
- Renovation Projects.
I bought out of town rental properties because they were cheap and had decent cash flow. The cash flow covered all of the expenses related to the properties, including the PM fees. So I thought it was a good investment. I was profiting a few hundred bucks each month and someone else had to deal with the actual day to day running of the properties. What a great plan! But here’s some problems that I never thought of, before hiring property managers.
Property Management Problems
A Property Manager Will Cost You Lot’s of Time and Lot’s of Money!
It turns out that using property managers is twice the work of just managing the properties on my own. I learned 3 very important lessons that I’ll share with you.
The 3 key things to remember when using a property manager to run out of town rental properties are that:
1. You Lose Control of Your Rental Property
If you think that your property is in good hands with a property manager, think again. You won’t have direct control over what happens with your property. In my experience, this affected me in 2 main areas. The first area has to do with filling vacancies and tenant selection. I’ve used several PMs and found that they tend to (a) just fill a vacancy with anyone (bad tenant); or (b) they’re too cautious in waiting to find the “perfect” tenant. The first will cost you lots of money in loss of rents and damage to the unit, while the second will cost you money in the form of long term vacancies. Both situations will cost you a fortune and quickly turn a good investment into a bad one.
Tenant issues are one thing, but what I found equally frustrating is that when I wanted to get some renovation work done, I was at the mercy of the PM’s schedule. Normally, if you want to do renovation work, you would get a few quotes and select the best contractor for the job. While many PMs claim they do this, I have my doubts and think that they just have 1 go to person for renos.
I’ve done a lot of renovation work on my own home and know that dealing with contractors and selecting the right finishes etc., is a lot of hands on work. When it came to my rental properties I was basically out of the loop and that did not sit well with me. I wanted to be more involved but because of the distance, it was not practical. Lesson learned. If I ever do rentals again, it will be in my own town because I am not a hands-off kind of person.
2. You Won’t Have Effective Oversight
If you have a property manager, you need to have some form of oversight for them. In my experience with rental properties, I had more issues with my property manager than with my tenants. My issues were: (1) how they marketed the property, (2) how they screened tenants and (3) how they handled maintenance and renovations on the property.
Every month you‘ll get a bill from your PM with a service fee and other types of expenses relating to your property. A typical PM service agreement gives them a bit of leeway for small repair and maintenance expenses (up to $500) and anything beyond that, they need your approval. The problem I had was that I had no way of knowing that the expenses on the bill were real and not faked.
Sure you can ask to see receipts but oftentimes it’s just not practical to have a receipt for a shingle or a piece of siding that blew off in a windstorm, a broken door latch, a toilet seat etc. If you’re a homeowner, then you know that there are tons of little expenses here and there that are necessary to maintain the upkeep on your home. With rental properties you can easily double that. These small expenses are one way that property managers can rip you off because you really won’t have a way of knowing for sure that they are real.
3. The Property Management Business is A License to Rob Investors
For real estate investors, one of the biggest property management problems is getting ripped off. My first property manager was the absolute worse when it came to charging me for routine (it turns out it was fake) expenses and repair work (that was never done!). I was over charged for things like lawn care and snow removal. I suspected that I was getting ripped off but had no real way to prove it. When I called them out on it they said that I don’t have to use that service; so I was able to cancel it. Like I said before, the property management business is a license to rob investors.
I Could Have Lost My Entire Investment Because of a Fraudulent Property Manager
As I said in the first installment of this series, I bought out of town rental properties that needed some renovation and other work to bring them up to code. They were older buildings that had some galvanized water lines and a small bit of knob and tube wiring. These things were flagged on my home inspection and as a condition of insurance, I needed to remove and replace the wiring and plumbing.
My property manager had an electrician and plumber on staff so I was assured that these things would be dealt with in a timely manner and that they would provide the paperwork to give to my insurance company. So I was charged a few hundred bucks for the removal and replacing of the wiring and water lines and I didn’t give it a second thought.
That was a HUGE Mistake…I should have! There is a saying that goes something like “trust, but verify.” I should have taken the time to visit the buildings to verify for myself that the work had in fact been completed.
I never verified things for myself and I paid the price for it because, when I sold my properties, guess what got flagged on the buyer’s home inspection report? Yup, you guessed it, knob and tube wiring and galvanized piping! By that time I had already switched to a new PM. Not surprisingly, I heard reports that my old PM was under investigation for fraud.
This is why I will never buy an out of town rental property again. Had that wiring caused a fire or the water lines corroded and leaked, my insurance would not have covered me and I could have lost hundreds of thousands of dollars!
If you’re thinking about buying a rental property, then I highly recommend NOT using property managers. Buy local and run it yourself. It’s the only way you’ll make money and have full control over the property.
My experience has taught me that most PMs either don’t have the time or manpower to effectively manage every property that they have. But more importantly for us investors is that the property management business is not all that transparent which leaves us open to being ripped off and defrauded.
For a scathing review of problems with Property Managers read my Lessons Learned from Owning Rental Properties.
I hope you found this second installment entertaining and amusing! Stay tuned this summer for these upcoming posts in my (Mis)Adventures in Real Estate series:
The one with the asbestos!
The one with the crazy tenants!
The one with the rat infestation!
If you guys have any of your own real estate horror stories, please comment and tell us about them.
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Thanks so much for reading this post on property management problems and have a great week!