Roller coasters are fun.
They go up and down. They are unpredictable.
Yet these very same qualities I enjoy about roller coasters are the qualities that make rental properties less enjoyable.
The cash flow on my Memphis rental property investment has been a roller coaster of a ride. Saying this though, if it means getting some advice from property management groups on how to move forward, this may be something worth looking into, especially as we know how there is nothing wrong in asking for a helping hand. No matter what industry you work in, we all have good days and bad days.
Up Then Down
This property was featured in the article The Perfect Year on a Rental Property Investment – Looking at 1 Year of My Memphis Rental.
2015 was a great year. One tenant with only $150 in repairs. The positive cash flow of $4,199. Wow.
Then the tenant moved out. Tenant turnover is expensive – no rent while it is vacant, a list of repairs to get it ready, and a placement fee from the property management company. It didn’t go that well and cost roughly $2,400, as covered in Tenant Turnover From Thousands of Miles Away.
But in March 2016 the future looked bright. I made plenty of minor improvements while the property was empty, hopefully to avoid future maintenance calls. I had to do one major improvement, but thankfully I had condo insurance to help get started on that. The new tenant signed a two year lease at 2.5% higher rent the first year and 5% higher the second year.
I thought the roller coaster was going to swing back up.
Stuck in Maintenance Hell
The last 10 months have not gone as planned – it has been one minor expense after another.
Major expenses are one thing. A new roof, HVAC, or water heater is going to really hurt. I can look on https://waterheaterreviewssite.com/best-water-heater/ to get a good one, but still. You need the good years to bank some cash and pay for these major expenses that will one day arrive.
The new tenant calls every month with something else she wants fixed and the property management company takes care of it. Everyone’s happy right?
It is common to have a property management agreement where the owner isn’t contacted for small expenses. Anything under $300 the management company will not contact the owner and use their discretion. Hopefully that discretion takes into account what the owner would want.
The frequency of this tenants calls and the rubber-stamped repairs by the property management company is a horrible combination. My bucket has sprung a leak.
Over the 10 months this tenant has been in the property, there is an average of $225 a month in expenses! I won’t go through the list of repairs, some are valid, others aren’t. Only one of the repairs did they contact me first as it was over the discretionary threshold.
What Went Wrong?
Three things: the property management, the tenant, and me.
The property management company has to balance the interests of the tenant and the owner to keep everyone happy. I do not believe they have been working in my best interest.
The tenant is not self-reliant. They are not approaching the rental with an owner-like mentality, closer to a hotel-like mentality.
I haven’t been proactive in managing my manager. It took 10 months of this for me to finally say “enough is enough”. After 3 or 4 months I should have done something, but I was busy getting married. Even after that I was in denial or lazy.
The Changes
My first goal is to try to make the property management company act in my own best interest. It’s important to note that different property management companies will operate in different ways and not all of them follow the same procedures. If the property management doesn’t want to cooperate, it might be time to start using another Colorado Springs property management service. A service that suits your needs better.
You would think this could be accomplished with a couple of phone calls, but unfortunately, this property is managed by a big company. There isn’t one person like I have for my Atlanta property. There is a system and a process.
I don’t have a ton of leverage to make sure my voice is heard in this system. But there are people who can help. The rehab / turnkey company I purchased the property through refers a lot of business to this property management company. They want to keep that relationship in good standing.
One level higher, the national turnkey marketer I purchased from does even more business in Memphis. They want to keep that relationship in good standing.
It is great I have these people in my corner, but it takes some action on my part to call on them. Their voices are louder than mine.
Ultimately I’m likely to move on from this property management arrangement, but I think jumping ship now places the blame entirely outside of myself.
I need to pay attention and use my resources to get my voice heard. I need to play the politics game. I need to learn how to manage my manager otherwise this is likely to repeat itself.
The Big Picture
I don’t live off the cash flow from my investments, so this doesn’t hurt as bad as it might for other investors.
I view cash flow as necessary to keep you in the game long enough to reap the benefits of the other components of rental property return (like appreciation). The 10% cash-on-cash return goal is simply a margin of safety for when things go wrong.
Luckily those other components offset this bad run of luck in cash flow. In the past six months, Zillow shows appreciation of $4k, more than making up for these issues.
If you have the right mindset and the ability to see past short-term issues with rental properties, in the long run it will all work out.
How do you handle the roller coaster ups and downs of rental properties? Or if you don’t have properties yet, what scares you the most about this?
I’ve been lucky so far on my units – I’ve had the same tenants in the single family home for about 7 years now. The duplex is still new (about a year old) and I haven’t switched tenants yet (although I’m sure that’s inevitable).
Regardless, I’ve come to learn that it’s really hard to find a good property management company. They obviously don’t handle it as good as you or I would so you can’t just let them do their thing. I thought I could just hand things off to them and they would be good-to-go… but they’re not. They need managed as well. So now I’m starting to become a little more proactive in calling the PM and discussing plans, goals, problems, and solutions.
Still a little early to see if that will help with some of the ups and downs, but hopefully having them know a little more what I want will help fix some of the preventable parts of the roller coaster ride.
— Jim
That is great to hear! My other property still has the original tenant, I think roughly 5 and a half years, which really helps! I am raising the rent for the first time though, but hopefully they stay…
Great point about being proactive managing the PM. That is one of those things that investors (myself included) have to learn the hard way!
So cash flow for you is just to cover property maintenance. Does this mean your goal for rental property is to hold for as long as possible and then sell when the value has increase substantially? If the properties have an 25 year amortized mortgage, you intend to retire in your 50s or are you planning to sell before the properties are paid off?
Good question. I would not state that cash flow is just to cover property maintenance, hopefully I get some, but it would be used to grow my portfolio. So I save up the cash flow to purchase a new property eventually.
I plan to refinance my properties along the way to pull out cash and put it to work in the form of a new property. Basically I’m doing a growth stage of building up my portfolio, then will be in a position to decide what is best. That might be paying some off and living off the cash flow. I wrote about some calculations with refinancing here: https://rentalmindset.com/know-when-to-refinance-investment-properties/
Hi Brian
Unfortunately, your experience is par for the course in landlording (even with a property manager). Great insight on managing the manager. You have the right idea that property managers are basically listening to two masters: you (the owner) and the tenant. By definition, they cannot make everyone happy.
I ran into the same issues with my first property manager also. The problem is that only owning one property with that manager means that you are not as much of a priority as people with larger portfolios. I have found that sometimes just letting the manager know that you are paying attention (quarterly calls, for example) encourages them to mind expenses on your behalf.
If all else fails, you could just not extend a renewal to the tenant and/or change the manager.
Keep us posted on what you decide!
Great idea with the quarterly calls. That alone can show you are more active than most owners and actually paying attention.
Regarding only one property, that is why I’m trying to pull in people with more leverage. If someone owns more properties, that is another great way to have leverage.
Do you prefer smaller property management companies for this reason?
Unfortunately, I know exactly how you feel. I’ve been managing my property manager over maintenance and tenant turnovers all year. I check in with my PM nearly every month, usually through email and then by phone if necessary. There have been a handful of occasions where had I not been persistent in questioning repairs (e.g. whether it was tenant caused or not) or very high labor costs that the PM just rubber stamps to pass on to me as the owner, I would have had to pay hundreds more.
As property owners, we are the clients that make the PM’s business run. However, the sad truth is that the PM’s day-to-day operation is often influenced more by appeasing an angry tenant that they see more frequently than an out of state investor. Unless your portfolio makes up a large portion of the PM’s units under management, we don’t have a lot of leverage. So I continue to stay on top of every maintenance bill that comes in, no matter how small, and keep my eye out on other PMs in case I need to make a sudden change.
When researching property managers online, often it is the tenants who are most vocal and give bad reviews. So delivering bad news to the tenant isn’t exactly in the PMs best interest sometimes.
Have you found emails are effective with your PM? I don’t feel it is for me (which could be more who I am working with). A phone call really makes them answer the tough questions!
Emailing has been pretty effective for two reasons. First, I have a day job so I usually don’t get around to firing off emails until the evening. Second, it serves as a written record of what we discuss and agree to. Sometimes, I have to attach a previous email as proof of what was agreed to or to remind them of an outstanding issue.
Emailing doesn’t work every time though and sometimes my questions go unanswered. So there are times that it’s just easier to talk over the phone and cover everything in one conversation then a series of emails.
That makes sense. I have had struggled getting emails answered in a timely manner, but it might just be my limited experience.
Hmmm, my biggest fear of hiring a property manager is that they just end up calling me and not doing their job. I do like how they will just handle anything under $300. Maybe up that to $500 to have them bug you less?
B/c all my rentals are in SF and Lake Tahoe, I just deal with them myself. I actually LOVE to go visit my two SF rentals b/c it makes me proud to walk around in the properties that I bought as a young lad. Also, I love going for a maintenance call to do a quick walk through and check to see if my tenants are taking care of the property and not hiding some extra pets or tenants off the lease.
Maybe I’m weird this way, but given I don’t work, going to see my properties feels like fun work. Gotta protect a good part of the net worth!
If I move back to Hawaii, I plan to higher a property manager and pay up for hopefully better service b/c I’ll have three properties for them to manage. I’ll also vette the heck out of the tenants, just like the CIA. That’s more than half the battle!
Sam
Ya I think $500 in SF might be a little bit better – just about any maintenance call here is close to $300. They start much lower elsewhere.
Glad to hear it is fun! That doesn’t make it work then!
I’m still a newbie at it and while my investment property has gone okay, a couple of maintenance issues have popped up. Overall, it’s been higher than the 10% of rents which I used as an estimate. Since I am a novice and have no idea what a lot of these maintenance issues should cost, I rely on my PM. My PM might just be the same as OB’s…but I’m not on top of it as he is!
I agree – it is really hard to tell how much maintenance should cost. Basically we have such a short time perspective so far. I’m at 8 “property years” – it might take hundreds to feel confident I know how much maintenance should be in an average year.
Great numbers. I’m more interested in cash flow than appreciation. Appreciation is great, but it’s icing the a cake. I need to see the cash coming in each month to rest assured.
I also am more interested in chasing cash flow as it is more predictable than appreciation. But without a doubt, the majority of the returns come from leveraged appreciation. Just don’t get greedy and try to chase it, because if the cash isn’t coming in, plenty of people get burned!
One thing I’ve heard of is putting a deductible in the lease, or at least something that says “any repairs < $100 the tenant is responsible for." May be a helpful solution to discourage the ticky tacky repair calls.