Should I hire a property management company?

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Not now, maybe later. That’s it, in a nutshell. Here’s what I mean:

On your first building, likely a 2-4 unit building acquired with an FHA mortgage, you don’t want or need a manager. First, you need to learn a bit about the business –  what it’s like to fill vacancies, collect rents, deal with maintenance issues, etc. Second, the 5% of the rents that you pay a management company is money you want to help pay your mortgage. So I recommend against hiring a management company at first.

But I definitely recommend hiring one later, and here’s why: Management doesn’t scale. As you add more units, you add more headaches. This is why my parents, who’ve owned apartments for 40 years or something, never got to be really big landlords. They always insisted on managing themselves. They got every call in the middle of the night, dealt with all the tenant BS, etc. And because of that, they never felt like going to the next level, because it would have added a ton of stress to their lives.

They should have done what we did at first: Hire a competent management company and focus energy on finding and buying more units. In LA, you can get a good management company for roughly 5% of the rents collected, plus expenses (for things like materials and labor for fixing problems, etc.) – that’s a small price to pay to get back your time.

(Incidentally: keep in mind that managers rarely make money on that 5%. Instead, they manage in order to develop a relationship so you’ll use them as brokers when you buy or sell, which is where they make their real money. Read the management contract closely – you’ll almost always find that it includes the manager getting the right to act as broker should you choose to sell the property during the course of the management contract. This is not necessarily unfair, but you should always be aware of what you’re agreeing to before you sign.)

So go manage your first building yourself. But when you’re ready to move out and buy another one, consider hiring a good manager to take over for you. It costs more in the short term, but it’s the only way you’re going to have the time and energy to buy a lot more units. And that, after all, is what this is all about.

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