Buy and hold real estate is, in my humble opinion, the best investment there is. That being said, it comes with a very noteworthy challenge: You have to manage the properties you purchase.

Which leads to the big question: Should you choose in-house property management or outsource property management.

Should You Hire a Third-Party Property Manager?

Of course, there is no “right answer” to this question. A lot of it depends on what your goals are. Are you looking to grow a large company and be a full-time real estate investor? In that case, it probably makes more sense to manage yourself.

Do you want to invest passively and grow a nest egg while doing another job? Then it would make sense to hire a manager.

Do you like getting your hands dirty and doing the rehab and maintenance yourself? In that case, I would lean toward managing yourself.

Do you dread the challenging interactions and occasional hostility that can come from tenant interactions? It likely makes more sense to hire a third-party manager.

In-House vs. Third-Party Management

As with most things in life, there are trade-offs to each approach. Right off the bat, managing yourself saves the money it would cost to hire a property manager. Most property management companies charge 10% of collected rents, all late fees collected, and the first month’s rent for each new tenant.

That being said, as every business book will tell you, time is money. Hiring a property management company saves you time, which you can use for your job, finding more motivated sellers and value-add opportunities, and/or just doing whatever you want to do.

But the costs are more than just the money involved. Managing yourself reduces the possibility of fraud. Yes, if you hire employees or use contractors, there is still a chance to get defrauded. But when managing yourself, you are closer to the action and it’s easier to monitor what is going on and if everything is above board.

In the worst cases, I’ve heard of property managers getting kickbacks from contractors or leasing units but not exactly telling their client about it and simply pocketing the rent from this “vacant” unit.

But furthermore, your incentives aren’t perfectly aligned. As noted above, property managers usually get the full first month’s rent for a new tenant. While this covers the cost of their leasing agents, those costs are often fixed (some leasing agents work on commission but many are paid a salary).

Given that, it’s actually in the manager’s interest for the property to turn over more often as they have more opportunities to lease it and collect the full first month’s rent. Higher turnover is, of course, contrary to the interests of the property owner.

So, it doesn’t necessarily need to be fraud for it to be a problem. Bad incentives can lead to less effort and thereby worse outcomes in certain areas. And regardless, no one will ever care more about the outcome of your properties more than you.

This goes hand in hand with the advantage of increased control that you have as an owner-manager. Unfortunately, there are also a lot of things you need to have in place in order to manage effectively.

Most notably, you need to make sure you are in compliance with the Fair Housing Act, otherwise you can get in serious trouble. This takes time and energy. Systems are critical and they won’t appear overnight.

Third-party property managers will (or at least should) have these systems in place. This goes all the way from having a lease, application, deposit, and pay-or-quit templates on hand as well as policies and procedures that should be followed for leasing, collections, maintenance, etc.

The infrastructure these property managers have in place is a major advantage and something someone who decides to manage themselves will have to build over time.

Third-party managers also allow you to offload a lot of headaches. Most tenants are good, but a few are really tough to deal with. With a third-party manager, you have a layer of insulation from those complaints, which will make decisions on those matters less stressful and your life easier.

But don’t be fooled, there is no such thing as “hassle-free” property ownership, unfortunately.

Managing the Manager

Even if you choose to hire a third-party manager, you need to manage the manager. Demand monthly income, vacancy, and receivables reports. If properties aren’t getting leased or delinquency is high, make sure to question them about it. Be a bit of a pest. The squeaky wheel gets the grease after all.

And if the manager isn’t improving, do not be afraid to switch. Just be thorough about vetting your replacement.

That also leads to one last key advantage of managing yourself: You gain experience doing it. Even if you decide to eventually hire a property manager, it’s a lot easier to tell when someone is pulling your chain if you have some experience doing it yourself.

Which Should You Choose?

Again, a lot of this depends on what your goals are. But there are a few tips I can offer based on the size and location of your company.

If you only have one or two rentals, especially if you are house hacking, it likely makes sense to do it yourself. You are not going to be a high-value customer for a property management company and as long as you find a maintenance company to do the maintenance (assuming you don’t want to do it yourself) it should not require a significant amount of time.

If you have a decent number of rentals (say five to 20 or so), then a property management company makes more sense. Such a portfolio will require a good amount of time, but will rarely generate enough income for you to quit your job (unless you own them debt-free or are also flipping or wholesaling) and thereby will not leave you enough time to properly manage it.

If you are buying properties out of state, then you effectively need to hire a third-party management company but need to do so extra carefully as investing out-of-state comes with an assortment of risks and challenges.

And finally, if you work for a corporate fund or REIT, well, management is not a specialty I’ve seen such companies have. So it would be wise to hire a property management company.

But again, that decision is based on many, many factors. It’s up to you to look at your goals, situation, and the advantages and disadvantages of each in order to decide the best option for you.

CTTO Article Source: www.biggerpockets.com