Real estate investors have found that investing in residential properties with the buy-and-hold objective will stabilize a portfolio. The theories behind successful investment in rental properties are cash flow, appreciation, property management, and tax benefits.
Investors must recognize the importance of property management to maintain value and retain occupancy. Cash flow will only happen with a satisfied tenant.
Often, investors turn to the self-help method and handle all property management issues to save the expense of management fees. This method works for the investor who proves agile, patient, firm, and handy. Every investor must take a long, honest look from within and ask certain questions.
- Do I want to handle evictions?
- Do I want to deal with repairs and damage caused by wear and tear, misuse, or pets?
- Do I want to be responsible for finding professionals to do the work that I cannot, like landscaping, pool repair and maintenance, or issues relating to the structure?
- What is the value of my time?
The time expended by an investor to maintain investment properties has value, and this value needs to be considered as though additional cash is injected into the property.
Making the Right Decision
Self-managing a property, let alone several, will take considerable time. What impact does it have on one’s lifestyle? This consideration needs careful and realistic evaluation, especially if the property is marketed as a vacation home or a short-term rental where the churn of the occupants is the byproduct.
It takes a combination of skill sets to manage a property. Forcefulness, practicality, and communication are the main combination. Not only does a property manager have to deal with the tenants and enforce the lease, but finding and handling vendors are also major tasks.
A property manager needs the intensity to handle a non-paying tenant and the friendliness to attract another. Their dealing with community or neighborhood groups, government authorities, and contractors is also a part of the management scope.
The costs associated with property management will seem high initially, especially when warranties for the renovation work remain in place. But what about the wear and tear over time? Typically, the costs associated with property management are 8%-12% of the collected rent. These costs will be higher when a third-party management team is brought in when a significant amount of attention is needed for the property.
The investor needs to consider and factor the following into the cost equation:
- the number of properties in the portfolio, and
- the economies of scale.
The Pros and Cons of Self-Help
Even when an investor knows its bandwidth to handle management issues and wants to do so, there are pros and cons to consider.
The potential saving of 8%-12% in costs is the first incentive to try the do-it-yourself method. This is holds true; especially early in the investment stage when the repairs and maintenance are non-issues. Any potential for a higher cash flow and control are the best choices.
Professional property managers have the systems and the infrastructure in place to quickly locate a vendor, find a qualified replacement tenant, and account for the income and expenses on a monthly and ongoing basis. Relationships with contractors and vendors and the procedures for tenant maintenance requests will be in place.
Real estate investment over a long-term hold involves much more than finding and working toward a profitable transaction. The real work comes with preserving the value of the asset over time.
An investor’s lower cash flow may still result in a profitable investment if the investor’s lifestyle is not disrupted and the value of time is factored into the success equation.
If you are considering creating a residential portfolio, then it is in your best interest to work with a reputable hard money lender in Los Angeles. PB Financial Group is a premier, direct hard money and bridge lender that has provided quick funding since 2007 and closed over 2,700 loans. We aim to efficiently satisfy your financing needs on important real estate projects throughout California.
PB Financial NMLS #357614/DRE #01522495