Purchasing a rental property, or converting a home you’re leaving into one can be a great idea. It takes strategy, a little financial acuity, patience, and organization. After that, it’s a matter of keeping pace with the operations of managing a property. So is paying for a property manager the best option?
There are a couple ways of viewing this. Professionally, I have heard a few philosophies: “I own one property and don’t want to ever have to deal with it.” “I own 30 properties and like managing all of them.” And all kinds of views in between. There are some things to consider outside of the cost. Things like the ever important time. Do I want to keep my own books, deal with contractors, chase down a late payment? All worthwhile considerations. But aside from time, money is the next most precious thing. And is the cost worth the value?
Let’s start with some basic math. We’ll assume the property you own requires a $100,000 mortgage. With a general 4.5% interest rate and some taxes and homeowner’s insurance, your monthly payment is about $662. Meanwhile, rents in the area are going for $1,000. So far I like what I’m seeing. That’s $338 a month in your pocket. An average cost for a property manager is about 8% of your monthly rent. So we’ll need to deduct $80 from that to obtain one. Still looking pretty good! $258 a month and since the PM is handling everything, you’re literally doing nothing for this money. We call that residual income.
Here’s the better part of that, and the attractive part to owning real estate: Every year or so rent prices tend to rise with the cost of living. Your mortgage however, will stay the same. So as your rent goes up, you make more monthly.
Some people would prefer to manage the property and keep the $80. That’s understandable. $80 a month over $12 months is $960 more in cash flow. That’s hard to argue against. The determining factor will be how much time it took you to make that $960 over the year. If it’s taking hours out of your already busy week (and it’s inevitable, sometimes it will) you might decide the $80 a month is far more in value than it is in cost. Some will disagree.
If you want to consider a strategic approach to your real estate investment you should sit down with a property manager and consider your costs and benefits of their service.