I’ll come right out and say it: There is no excuse for purchasing a rental property that doesn’t cash flow enough to cover a property manager and all related fees. Whether you intend to manage yourself or have a PM from the outset, the property management must be in the budget.
The Future is Unknowable
If I haven’t scared you off yet, consider this thread over on the Mr. Money Mustache forums. It’s a pretty heart-wrenching tale of a young man in a coma following an auto accident, and his sister’s attempt to keep the ship afloat in his absence. The sister had no knowledge about the property, the tenants, how to place a new tenant in his residence (which was necessary to cover the mounting medical costs), or anything else about his business.
The great news about this particular story is that the family and friends came together and have taken great care of the property so far, and that the young man appears to be on the long road to recovery. Still, consider for a moment what impact a similar story would have on your family and friends if you were incapacitated in some way. If they could not or would not step in as property managers, you might recover to find your assets in serious jeopardy. If they were willing to step in, as in the story above, would you feel right about placing that burden on them?
Let’s look at a more positive scenario. STB-Mrs.-Vagabond and I plan to slow travel the world in early retirement. For this reason, and because our properties are out of state, I have them covered by a Property Manager with no exceptions. Still, some people don’t mind managing their own properties from afar… but what if you’re abroad or far away, and again become unable to care for your properties, through death or serious injury? If the cash flow also supports your significant other or spouse, you may leave them with no income, and far from home.
Really, there’s no reason to not at least pencil in a line item for property management and make sure that the property still cash flows. At worst you’ll pass over some properties that you might have otherwise considered, and at best you’ll self-manage for a long and healthy life, earning even more from the property because of your high standards.
Don’t Just Budget for Property Management by Percentage
OK, so at this point you may be convinced. You’ll start working a 8-10% property management line item into your analysis going forward. End of discussion, right?
Not so fast.
As I mention in my detailed article on analyzing a rental property, there’s more to property management than just paying them the fees to collect rents, pick up the phone, and resolve issues. There’s also a matter of recurring costs for things like tenant placement. Most property managers charge between a half and a full month’s rent to place a tenant in your home when it becomes vacant, and another fee (usually a couple hundred dollars) when a tenant renews the lease. This means, yup, you need to account for these fees too.
In my own analysis, I assume that an average tenant is going to stick around for two years. Obviously I hope to do better, but this seems like a fairly safe estimate. On my duplexes I plan for one lease renewal fee and one tenant placement annually. There might be two of one or the other in a given year, then nothing but lease renewals for years. The point is that we are trying to approximate the long term average costs, not predict the exact costs in any given year.
Plan, But Don’t Become Paralyzed
Just because you allow for the possibility of adding property management at a later date is no reason to worry excessively about what could happen to you. If you provide for others with your rental cash flow, you might interview PMs and have a few in mind in case it becomes necessary. Communicate your wishes to whomever would be looking after your property empire in your absence, and then live your life knowing that you’ve added an extra layer of protection for everyone around you.