Investment Property - A Primer to Property Management and Finances

Your investment property is purchased, the papers have been signed and your budget is set. But in the excitement of the moment, don’t forget to calculate the expenses that will be involved in property management fees, taxes and other property costs that will inevitably crop up. Being prepared doesn’t just mean budgeting for the mortgage. Keeping the following things in mind will keep your finances ahead and your cash flow positive. 

Property Management Costs
Most property managers or management start with fees between 5 - 10% of the gross rents for all the properties being managed. Then the fine print comes into play. Some companies charge for setting up the account, advertising the vacant property, running checks on tenant candidates, even for trips to the property. While there are plenty of honest property managers worth every penny, never assume anything is free. Know the fee schedule. 

The cheapest rate of 5% may seem like a steal but it may be for bare bones service. And yet that 5% may only cover collecting rent and staying on top of the accounting. Anything additional could trigger an hourly charge for services which could make even basic repairs and attention to the property significantly more expensive than another company charging 8 - 10% for more comprehensive service. 

When going through the selection process for a property management firm, the fee schedule should be a large part of your decision. Contact all of your prospective managers and ask them about their fees, large and small. Don’t tell them you’re comparison shopping and don’t tell them who else you’ve talked to. Let them sell themselves to you. In that initial call, you hold the cards. Property managers want your business and will make their fees and services as attractive as possible. They will present their best rates and best services. Get exhaustive details on all services provided and at what cost. Take that information and compare with the other companies you contact. 

Something to highlight while sifting through your choices is whether or not the property manager gets paid when a property is vacant. If they do not get their 5 - 10% when the house stands empty, their priority will be to find replacement tenants. While this sounds like a good motivation to make sure your cash flow is positive, it’s not the best carrot to dangle in front of your property manager. Their hurry to solidify a lease may make them careless in the selection process for a tenant. They may not call references or gloss over the lack of recorded income on the application. In the article about developing the relationship with your property manager [insert link here], it’s highly recommended that landlords keep the main responsibility of approving tenants. If your property manager isn’t careful, mismatched tenants may tear up the property, leaving you with the bill. 

Another strength to look for in a property manager is detailed accounting. When your tax bill comes at the end of the year, all management, repair/maintenance, mortgage interest, insurance and other expenses incurred with an investment property are generally deductible. The better the financial records coming from the property management company every month, the easier your (or your accountant’s) job will be when tax time rolls around. The more deductions you can make, the smaller your tax bill and the more money you’ll keep in your pocket to continue building wealth for yourself and your future.