How involved should I be in my real estate investment property management?

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My Real Estate Involvement didn’t stop at the purchase

When I first started my real estate journey, I basically had no idea what I was doing. That is likely true of many people who entered it by accident. I purchased my first condo as a place to live because real estate was going crazy in southern California. As part of the purchase process, I was provided with copies of the most recent financial statements and CCC&R’s for the Home Owners Association (HOA). Honestly, they were not that good, low reserves, high rent to own ratio, etc. This raised red flags for the lenders, which caused a bit of heartburn. I was eventually able to close though. In the year after I closed, there was a special assessment put in place to cover some repairs. There was also talk of another one being necessary.
These factors, along with the fact that it was difficult to get more information about what was happening, led me to join the HOA board of directors. For the first few years, it was as an advisory member, with no voting rights, etc. As time has gone on, I have gotten more involved on the board, in part because no one else volunteered, but also because there were financial issues that put the HOA, and thus, every owner’s investment, at risk, and had to be addressed.

You have to make a choice

As you can see, I made a conscious choice to become more involved with the HOA than simply being an owner. I was willing to put the time toward being a board member because I saw it as a way of protecting my investment.
This same choice is repeated every time someone purchases an investment property. Some people want to be very hands on, and manage the property themselves. In the case of a condo, it is possible to take that to the next level and get involved with the management of the HOA. Other people are either not interested in, or not able to have this level of involvement in their property. This could be due to other work obligations, being an out of town investor, the number of properties they own, or simply a desire to focus on their strengths, which don’t include property management.
Let’s take a moment to look at the different levels of involvement, starting from most involved to least. I mentioned two above, but there is room in the middle for a third. With each level, I’ll talk a little about what they might entail, and why you may want to choose each one.

You manage your property, and then some

If you purchase real estate, and the thought of having someone else be involved with managing it seems foreign, then you probably fall in this category. There is an expectation of higher levels of effort required on your part. You will be finding tenants, coordinating repairs and rehabilitation, and potentially helping out on neighborhood boards or HOA boards where your property is located.
This level of involvement will expand or contract to utilize the resources you have available. It will also be constrained based upon the location of your properties. If they are close, you will be able to manage more of them like this. The more spread out they are, the more likely you will need help.
More properties and larger distances may still allow for high involvement if you either put together and manage, or are part of a team. In that case, you may be heavily involved in some properties, while your team handles others with you having close oversight.
The benefits of this style of management are the intimate knowledge you will have regarding your properties and the connections you gain in doing so. This will also give you a breadth of experience in the different areas of real estate property management. That experience will serve you in the future should you adopt a lesser degree of involvement by knowing what to look for with property management companies.

You bought it, they run it and you check in regularly

This will probably be the 2nd most common group that real estate investors fall into. In this situation, you may do the legwork to find a property and make the purchase, with the understanding that you will have a property manager handling the day to day operations. There is still a range in the amount of interaction that you can have, and this depends on your comfort level. If you are confident in the property manager you have found, it may be possible to simply check in once a month when you receive their financial statements, and either acknowledge a deposit or make a transfer if money is owed for expenses. On the other hand, you may choose to handle some functions, like paying bills, or coordinating repairs while leaving tenant management and rent collection, to the property manager. This and other configurations will break along the lines of standard themes: proximity to property, number of units owned, other businesses, family responsibilities, etc.
The benefits arise in the time that you have to put toward other endeavors, which could be another business or relaxing on the beach with a fruity beverage. The point is, that you have a choice. If you only hand off part of the responsibility, you have the choice to offload those items that are either not you favorite, or are ones that keep you from focusing on higher management functions of your business.
Either way, this choice is predicated on the quality of the management team you have put together. The more in sync they are with your needs and concerns, and with good property management principles, the more responsibility you will be able to give them.
This style may be an outgrowth of the more involved first style. As you become more comfortable with your property management team, you may be more willing to increase their level of responsibility.

Real Estate is part of my investment portfolio

This stage is essentially the set it and forget it model of real estate investing.
You may either choose this stage or it may choose you. If you have a number of different businesses, of which real estate is just one, then you might have a dedicated team that handles it with a lot of autonomy. You may be playing to your strengths here, knowing that the management of real estate is not your strong suit, but you want to have it in your portfolio.
Some real estate investments may put you in this category by their nature. Examples of these are Real Estate Investment Trusts (REIT), or if you are involved in the financing side of the transactions. In both of these cases, you are essentially providing funding for another entity to purchase and manage real estate.
The obvious benefit of this is that you have essentially no management responsibility. Real estate is simply an investment you keep like stocks or bonds or an ownership in another business.
The downside is that if something goes wrong, your investment may be at risk. You have very little latitude to step in and take over. In the event you did have the ability to step in, you may not have enough warning to be able to intervene in time to make a difference.

How to decide, and where do I stand?

Let’s talk about where I stand first. I fall between the full control management and the property manager with oversight. I personally manage the property close to me, as it is relatively low oversight and easy to handle. I also remain on the HOA board, so my involvement is high. For properties that are not close, I use a property manager. Even then, I continue to pay a number of bills and approve work to be done, so it is definitely not a hands-off management style.
Hopefully some of the downsides listed, aren’t too much negative to scare you. There is a long-standing rule that you should only invest in things you understand. You should also do your due diligence before making any investment.
In this context, due diligence is learning as much as you can about property management and real estate. This, in combination with your knowledge of other investments, will guide you to the level of involvement you need to have to be comfortable, and hopefully, ultimately successful with a real estate investment business.
In the comments, tell me what your involvement level is in your real estate investments.

The Importance of Responsiveness in real estate investing

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In any business, there are certain characteristics that stand out with successful people. One of the most important ones in my experience, that is often not mentioned, is responsiveness. This is applicable whether it is you as the investor, or someone on your real estate team, whether property manager, attorney, etc.
In this article, I will talk about:

  • What is Responsiveness
  • Why is it critical that you are responsive
  • Why is responsiveness important for your real estate team?

What is Responsiveness?

According to Webster’s Dictionary,
Responsiveness: 1. reacting in a desired or positive way 2. quick to react or respond

Both of these definitions can be applied in the sense of responding to peoples’ needs, be they tenants, agents, HOA, etc., whether positively or negatively, in a timely manner, and following through if something is promised.

Why is it critical that you are responsive?

The simplest possible answer to this is that real estate investing is a business, and you don’t work in a vacuum. There are other people involved, whether they be your tenants, a real estate agent working for you, a mortgage company, etc., and their ability to be successful in business depends on you and others fulfilling obligations that you make to them.
Responsiveness is really like completing an implied contract. Sometimes this is actually formalized in a agreement, as when you have a mortgage that you agree to pay on a certain date every month. If you do not follow through, there are defined penalties.
Other times, the call for responsiveness is in a more tenuous agreement, like when you tell someone you will do something for them. There is a tacit agreement that you will provide something that they are asking for as it relates to your business. Of course, this could be in your personal life as well, but that probably goes without saying. Some places where this comes into play are with a realtor who may be helping you find or sell real estate, a tenant who calls with a problem, or with an attorney who is helping you with legal documents.
Each of these situations requires you to be responsive because they all need your input in order to do some portion of their jobs, or to maintain their living space. One way to look at this is to think of everyone who needs something from you, as a client, whether an actual client/tenant or not. If you do not provide them information they need, you may miss out on a real estate deal, or miss a legal deadline, or have a tenant leave because they do not feel you are maintaining their unit properly for it to be habitable.
Not being responsive not only can cost you money and/or missed opportunities, but it also reflects on you personally. If people sense that you are not getting back to them in a timely manner, they may choose to not work as closely with you, meaning you may miss deadlines or lose out on an opportunity. There may also be an impact on your reputation, and cause other people to not want to work with you.

Why is responsiveness important for your real estate team?

Many of the same reasons mentioned above will apply to the team of people that you put together to help manage your real estate investment. I would argue that responsiveness on the part of your team is even more critical because they are working with people on both sides of the business. They need to work with you to keep you informed of any changes, needs, issues, etc., and they need to work with clients and other contractors to ensure compliance with contracts, projects, requirements, etc.
One specific area where responsiveness is critical is on the part of a property manager. If you have real estate in a location that is not close to you, and it is being managed, then close communication becomes critical. Since you are not there, you cannot visit the property to check in regularly. The property manager is your sole point of contact, as well as that of any tenants.
If there is a problem at your property, you need to be able to count on the property manager to let you know as soon as possible. This falls under the desired reaction definition, where they know that in an emergency, they need to tell you not just what is wrong, but how they are initially handling the situation, and finally, a long-term solution. If this communication does not happen, then a problem might persist, and/or get worse and propagate into additional problems.
As well, if you issue an order to your property manager, they need to respond either within a reasonable amount of time, or provide an immediate response in which they state a time-frame for action. This is important because some items are time-sensitive and you need to be confident that your directives are carried out.
You can find different examples of critical responsiveness concerning each of your real estate team members.
Finally, the degree to which your team is responsive reflects on you as a business owner. There is actually a twofold reflection on you since the focus is not directly on your interactions, but on those of people you have hired. The first impression for people is that responsiveness is a barometer of how much you and thus your team value other people’s time. The second is more second order, in that if people find your team to not be responsiveness, they may see this as a failing of the team members, but also of you in your ability to train your team, recognize critical business skills, and finally your judgment in hiring the right team members.

A responsive recap

The first thing to keep in mind is that real estate investing is a business. All businesses succeed to a degree by how they manage interactions with other people. One aspect of this interaction is responsiveness, the ability to respond in a desired and/or positive way, or being quick to react or respond to a given situation.
The need for responsiveness applies whether you are completing a task for a client, providing direction or information to someone on your real estate team, or interacting with a contractor.
If you are not responsive to a client, most likely a tenant in the real estate case, then they may very well think you do not consider them to be important. At that point, they may simply stop attempting to work with you, which may mean that problems occur at your property that go unreported, or they may simply move out, either immediately or at the end of their lease. This could mean the loss of a desirable tenant and thus steady income.
If you do not pay attention to requests or issues with neighbors, you open yourself up to potential legal action, property disputes and potential damage to your property.
Your team needs you to be responsive because in many ways, you have the final say on their tasks. If you don’t give approval, everything slows down, deadlines may be missed, and small problems may turn into large ones.
Conversely, you need to have a real estate team that is responsive as well. If they ignore tenant requests or problems, those may turn into more serious issues, or the tenants may simply leave. If they do not respond to you in a timely manner, you may lose track of where a project or property stands, and miss a deadline, or let a project get off track. This can cost you time, money and hassle. Finally, if your team is not responsive with each other, or other contractors, you will likely encounter delays and inevitably pay more for projects or services. More seriously though, in this case, is that your reputation may be damaged and you may lose the opportunity to work with the best people for a particular service or in a real estate partnership.
It is important to remember that just as it is a business for you, it is also business or a material need for your team and your tenants. When you have made a commitment to someone, it doesn’t matter if you are doing this as a part-time gig, or a full-time business, they have an expectation that you will follow through.
If you make the effort to be responsive in all facets of your business, and surround yourself with a team who share that goal, you will likely find yourself with more people wanting to work with you, and better relationships with tenants and neighbors. Taken together, that adds up to a successful real estate business.

Does Real Estate create Active or Passive income?

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Many of the stories you hear about real estate investing refer to it as a way of building a passive income stream. There are other people who insist that it is very much an active income source. You may be thinking, “Why is this even important?”. Let’s dig in a bit and see if we can figure it out.
Here is how I am going to break it down:

  1. Define a Passive vs Active Investment
  2. Is Real Estate Investing Passive or Active?
  3. Why is this an important distinction?

Define a Passive vs an Active Investment

Before I discuss whether real estate is a passive or an active investment, I want to make sure what these investment types are. Here are some quick definitions.

  1. Active Income Source: Income is earned as a direct result of your day to day involvement with the business. A standard 9-5 job is the prime example of an active income source.
  2. Passive Income Source: This is a source of income where your involvement is not required on a regular basis to generate income.

Is Real Estate Investing passive or active?

As I mentioned above, many people think that real estate investing is a source of passive income. From my own experience, I would say that it is actually an active income source. I think it is likely that the actual answer falls somewhere in between, and may shift depending on your personal experience.
If I were to leave it at that, it would be a huge cop-out, so lets look at what factors make real estate investing passive or active.

Passive Income Factors

There are a number of reasons people thing that real estate makes a good passive income source. Here are the ones I think make the best case:

  • Rental income – This is the primary reason that people think real estate is a passive income source. Once you have signed a lease, you should have a check arriving every month from your tenant.
  • Minimal Expenses – Once you have leased a property, your expenses other than a mortgage, taxes and insurance, should be minimal, as they would transfer to the tenant.
  • Long-term tenants – If you have a tenant for a long time, a level of comfort usually develops to where there is less need for your involvement. If it is a good tenant, most problems get solved quickly, and few things crop up on an ongoing basis. They generally pay their rent on time, so you don’t have to follow up to ask for it.
  • Time Investment – Most people feel, and in general it is true, that for any given property, the time involved for maintenance, searching and bringing in tenants, and managing finances, is far less than needed for full-time employment. The more you automate expense payment and maintenance needs, the more you can minimize your involvement and thus make it more passive.
  • Property Managers – If you have a property manager handling your real estate, then your time investment may become even more passive. If you have provided clear direction and procedures for your management company to follow for various situations, then there is less need for your involvement.
Active Income Factors

Just as there are reasons that real estate is a passive income source, there are also a number of compelling reasons that it is actually a very active source of income, meaning you need to be more involved.

  • Number of properties/units that you own – This may be the most basic reason that real estate becomes a more active investment. The more units that you have, the more likely it is that at any given time, a problem will crop up, or you will have a vacancy that needs to be turned around, or a rehab that is occurring. If life would cooperate, these would all synchronize and happen all at once, then you could deal with them and move on, but it doesn’t generally work out that way.
  • Self Managed Properties vs Property Manager – If you do the management of your properties yourself, rather than hiring a property manager, you will spend more time on the process. Instead of simply being able to answer questions and issue orders, you will be doing all the various management activities on your own. This applies especially in the case where you are just getting started with property management and perhaps don’t have many standard operating procedures and workflows in place.
  • Significant Maintenance/Rehab needed – If you have properties that need a lot of rehabilitation work to be completed, then you will need to be more involved. If you are rehabbing a property and have specific ideas for what is being done, you will need to keep a close watch on the work being done.
  • Problem tenants – If you have tenants that give you issues, and potentially require legal intervention, for example, an eviction, they are going to take more of your time. This may be true even with a property manager as they will still require your approval in certain situations to outlay money for legal or other advice.
  • Hands-on Personality – If you have the type of personality where you want to be involved or have a say in all of your investments, then real estate investing can definitely be an active investment. This could range from being more involved with the day to day management of your properties, to taking a position on a home owners association (HOA) board if one of your properties has one. You can really choose how much time you spend in these situations, but they have potential to be significant amounts.
It really isn’t one or the other, but both

As I alluded to before, I don’t think it is possible to classify real estate investing as a purely passive or active source of income. There are aspects of it that fall in each category. The amount of time that you choose to put in to management will determine what the income source is.
It is possible that as you get more experienced, your level of involvement may decrease on a property by property basis. This is because you may put SOP’s into place and have defined work-flows that do not require as much of your input anymore.
On the other hand, you may become more involved as time goes on. This could be due to having more properties, and thus having more management to deal with on a regular basis.
It could also be that as you become more experienced with managing real estate, you see that there are areas where you want to be involved more. This rings true for me in the case of an HOA. I was not very involved with the property until it became clear that the management of the HOA was not very good. The security of the finances of the complex were in jeopardy and thus my individual investment was at risk. For this reason, I chose to become a member of the board, and it has become very much an active income source for me.
The last story also brings up an important point that no one is as interested or cares about your property as much as you do. The more control you want to have and the more you want your property to succeed, the more active a role you will have to take.

Why does it matter

This question should come up as part of your decision about investing in real estate. As with any investment, you want to look at the pros and cons to see if it is right for you. Depending on your temperament and time availability, and how much you see yourself being involved with the real estate management, could help you decide that real estate is appropriate for your investment portfolio.
If you think you will want to be more involved in the management of real estate, but don’t have the time to commit to that, you may consider investing in a real estate investment trust (REIT). This is essentially a fund or group that funds real estate purchases that are managed independently. From the investor point of view, it is like investing in a mutual fund, except it is not stocks or bonds, but shares of ownership in property.
On the other hand, if you have some available time, or would be willing to find time to work in management, then real estate may be appropriate from an active vs passive income point of view.

Recap

Let’s do a quick review of what I discussed, then bring this to a close.
Passive vs Active income is determined by how much involvement you have in earning the money at any given time. The less you are involved while still having income, the more it becomes a passive source.
Real estate investing generates income that falls on a continuum of passive to active depending on a number of factors. These include:

  • Whether you manage the property yourself, or use a property manager
  • The amount of automation you have introduced into your management procedures
  • How long you have been doing real estate investing
  • How many investment properties you own
  • What sort of tenants you have
  • Existing rehabilitation and maintenance needs
  • Proximity to your properties
  • Personal risk tolerance

These factors are all important either before you invest in real estate, or if you are already invested because they affect your profitability. If you are able to put little time in the investment and have it run smoothly and profitably, then the income may be passive. If you have more time or want to be involved, the income will definitely be actively earned. Either way, real estate has to be managed, and treated like a business. Your interest and abilities will determine the success and thus profitability of the investment.

Evaluating a property manager

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The Need for a Property Manager

When you purchase rental real estate, you will shortly realize that you have to manage the property. In many cases, you may choose to do this yourself. In some cases, including but not limited to, if the property is a significant distance from you, or managing personally does not fit your current work-flow, you are going to need to find and hire a property manager. This could be an individual, or a management company.

My Property Management Experience

When I first became involved in real estate, I truly had no idea what I was doing. Firstly, I was working with properties that were out of state. Secondly, the property manager that I was using was the family of a friend who also owned real estate in the same city. This worked out well for a while, but when the going got tough, the gaps in experience were exposed, on both of our parts. I went through another individual and then a company before ending up with the company that I use now. There have been some definite growing pains and lessons learned in this process.

Evaluation Criteria for a Property Manager

What I’m going to discuss now, are some of those lessons learned, in the context of what to look for when hiring a property manager. Here are the evaluation criteria I have come up with:

  1. Responsiveness – When you contact them, they should get back to you promptly. If there is a problem on the property end, you should be notified quickly with potential solutions.
  2. Proximity – They need to be close to your properties. If they are not close, they will not visit them, and your properties, and thus your profits, will suffer.
  3. Professionalism – In interactions with you and with tenants, handle problems at a high level, be polite but firm when dealing with problems. If there is an issue, you need to be informed promptly.
  4. Real Estate Knowledge – They need to be experienced in the business. Finding tenants, rent collection, accounting, construction estimating, able to prioritize repairs.
  5. Pricing – They should match what the local market is for management. From what I’ve seen, it is usually 10% of the income, including rent, late fees, etc. when they handle leasing a unit, there is generally a fee of the first months rent. There is a lot of variability in what people offer. I think the best is when people state something up front, and them stick with it. Much as it might be frustrating to ask for a change and have it refused, there is something to be said for a company that knows what works for them and is willing to stick to their guns.
  6. Communication – the most important thing, bar none. If they won’t talk to you, or respond to you, find someone else. If you don’t understand something, ask. You should expect a logical answer. If they are legit, they will have one. My best experience with a company was when I had a series of requests that were denied and I didn’t understand why, I called them. Just getting on the phone an being able to establish common ground, helped a lot.
  7. Business Relationships – When you own real estate, you are going to have to have work done in one form or another. A lot of this may fall in the handyman category: basic repairs, cleaning, etc. Sometimes you are going to need a plumber or electrical or some other more specialized work done. Sometimes you will need work done outside of business hours. In all of these situations, you are going to have to rely on your property manager to find someone to get this work done. The more relationships they have with a network of contractors, or handymen and other specialists, the easier this process will be. A larger network also means they are more likely to know who provides the best quality service.

Finding a Balance

Upon reading this list, I’m sure the next questions is going to be along the lines of how important and what precedence should be given to each topic. The easy thing would be to say that this is going to be unique to each investor, dependent on their individual preferences. While this may be true to a degree, I expect that none of you came here looking for some half-baked cliché about what will or won’t work. Here is what it boils down to:

  1. The company or individual you hire has to be close to your property. It is the gravity model of real estate; the further away, the less impact it has on them and the less they think about it.
  2. Property management should be their primary focus, and they should have significant experience at it. I would shy away from a company that offers management as an add-on service to a realtor’s business or some such. When the going gets tough, they will focus on their primary business and your property will be left hanging.
  3. Having a professional organization. This follows closely with number 2 in that having experience likely means they have work-flows and procedures in place to handle both standard activities and unexpected occurrences. If it seems like they are reinventing the wheel, run away fast!
  4. Communication is key. This might be number one in that if they are slow getting back to you when you are first contacting them, it is a red flag.

What did I miss?

There you have it, my best ideas for what you need to evaluate a property manager. As I said, people have different ideas and needs. You might think some or all of these are great, or just the opposite. There may be, it is likely even, that there are qualities I didn’t even list that are deal-breakers for you. Either way, I want to hear what they are, so please, leave your thoughts in the comments.