So, you’re a real estate investor who has decided that a hiring a property management company makes sense for achieving your short-term and long-term investment goals. But finding the right PM team can be a challenge, considering the number of property management companies vying for your business.
A company’s brand messaging and online visibility will certainly play an important role in helping you evaluate your options, but you’ll still need to know the right questions to ask in order to feel confident in the property management company you ultimately select.
Begin with establishing which firms are licensed and the types of properties they manage. Ask for references from those firms that seem most promising. If they can’t or won’t provide you with licensing information and references, move on. A legitimate property management company will be happy to verify their credentials and customer ratings.
Once you receive confirmation of a company’s qualifications, here are some of the most important property management topics and critical questions to ask property management companies before you make a hiring decision:
Setting Rental Rates and Handling Rent Payment Collections:
The profitability of your property investment depends on the rental income it generates. A good property management company is able to bring in the best revenues on time each month. If the rental rate is not accurately established, an investor risks financial losses that can be insurmountable. When the rate is properly established, the investor is on course to earn a higher than average return on investment (ROI).
Here are some important questions to ask a property management firm about setting rental rates:
How do Property Management Companies Establish Property’s Rental Rates?
Property management companies need to have working knowledge of the local real estate market and the ability to utilize current market data to research the most recent rental comparables and achieve the goal of getting a vacant unit rented in a month or less. In addition to influencing the property owner’s rental income, the rental rate can also impact the property’s value.
How do Property Management Companies Determine When and How Much to Raise Rents?
Does the property management company perform rental rate surveys to determine rental rate increases, and if so, how often? Do they have other methods to determine if and when rental rate increases are practical?
How do Property Management Companies manage Rent Collections?
A good property management company offers alternative payment options that make rental payments simple and convenient for tenants, and efficient and cost-effective for property owners. A process that offers tenants the ability to pay online with a checking account, debit or credit card saves time and money, improves cash flow, and immediately reports that funds have been successfully collected.
How are Bounced Checks Dealt With?
Some property management firms have established rules for tenants who bounce a rent payment check that place barriers on their ability to pay by check after the first check bounces. A common policy is to prohibit the tenant from paying by check for at least six months after establishing a positive payment history. Ask the property management company to explain its bounced rental payment check policy. Ask if they provide a clause in the rental agreement or lease that states tenants agree to pay the maximum fees allowed by law for all returned checks.
How do Property Management Companies Handle Delinquent Rent Payments?
A good property management company has an established process for late rental payments that is firm but reasonable. Ask the property management company what process it has in place to deal with tenants whose rent payments are delinquent. Find out what options tenants have to get a late payment in, what penalty they will incur, and how they are monitored to prevent future delinquencies. A strict collection policy should be balanced by a property management team that can respond quickly to tenant issues professionally and with diplomacy.
What is the Property Management Company’s Current Rate of Delinquency?
Ask for the company’s current delinquency rate, how it manages its delinquency rate, and what measures it takes to keep it to a minimum.
What Day of the Month is Rent Due? How Long is the Grace Period, if Any?
Does the property management company require rent payments to be in hand on the first of each month? Is there a grace period for accepting late payments without penalty and if so, what is it? The standard due date is the first day of the month. A grace period that extends to the 3rd or the 5th of the month is standard, but keeping it short is best to prevent cash flow delays.
How Much are Tenants Charged for Fees?
Late payment fees can generate additional revenue, but their primary function is to motivate tenants to make timely payments. Ask the property management firm how late fees are calculated (usually between five and 10 percent of the rent).
How are Evictions Handled?
A good property management company has an established process for evictions that is well documented and adaptable to each individual set of circumstances that surround an eviction. Ask the property management company to provide you with a basic checklist or protocol it follows with each eviction. The best companies are those with an eviction policy that allows them to act quickly, documents all actions, and complies with your area’s specific laws on the eviction process.
The better the company’s eviction policy, the less opportunity for tenants to delay the process and even drag in on for a long period of time. The quicker the eviction process, the sooner the property management team can contain the problem and get a new tenant in place.
Approximately How Many Evictions Did the Company Execute in the Past Year, out of How Many Properties They Manage?
The lower the number, the more confidence you can have in the property management’s tenant screening process.
Do They Offer Eviction Insurance?
Some property management companies provide eviction insurance for a small monthly fee. Ask a property management company you’re considering hiring if they offer eviction insurance that ensures the management company will pay for all attorney and court costs affiliated with a tenant eviction. While eviction insurance is not widely offered, it is a valuable service that reflects the property management company’s confidence in its screening process.
Do they Conduct Rental Rate Surveys?
Property management companies should perform rental rate surveys at least once a year. They should be conducted more frequently in areas in which vacancies or lease renewal rates fluctuate.
Do they Provide a Clause for Contractual Rent Escalators in Leases?
Contractual rent escalators allow rent raises to be established based upon the percentage increases in the Consumer Price Index (CPI). Ask if the company offers them, and if so what terms are contained in the clause?
How does the property management company respond to and track tenant maintenance requests?
Property maintenance that preserves and ultimately increases the property’s value over time should be a top priority for your property management team. You want to look for a property management company with a track record of prompt responses to tenant requests, and transparency in providing property owners with records of maintenance expenditures. A good property management company utilizes both in-house staff and a network of qualified, licensed contractors vetted for quality work and cost-effectiveness.
How Do They Track Incoming Resident Maintenance Requests and Work Orders?
The property management company should be able to identify the software solution it uses to make sure maintenance requests don’t fall through the cracks. The system should provide tenants with the ability to submit maintenance requests online.
How do They Handle After-Hour Maintenance Requests and Emergencies?
Ask how the company ensures that a qualified person or vendor is available to handle after-hour problems and emergencies. There should not be a recorded message that suggests tenants wait for the next business day for a response. Instead, they should be able to reach help immediately.
What are Their Policies and Procedures for Preventative Maintenance?
Good property management companies use preventative maintenance protocols to catch small problems before they become bigger, more expensive problems while preserving the property’s value. Ask if they have a predefined inspection and maintenance program in place that includes promptly addressing known issues. Discuss whether you are willing to allow the management team to make repairs without your approval, or if you want all repairs authorized by you before they are made.
Do They Have an in-house Maintenance Crew?
If the property management company has its own maintenance crew, that means they have worker’s compensation coverage and are licensed, bonded, and insured. An in-house crew should be available for emergencies 24/7.
What Contractors Do They Use?
Ask for a list of the contractors the management company works with, and whether the contractors are covered by worker’s compensation insurance, and are licensed, bonded, and insured. Ask who supervises the contractors’ work for quality, code compliance, and cost-effectiveness. As a property owner, you may want to conduct your own research on the property management company’s primary vendors to confirm their qualifications.
Are There Any Conflicts of Interest With Vendors?
Ask if the property management company maintains vendor relationships based on performance and price. Property managements companies should only work with vendors that offer quality work and price discounts for volume, rather than referral bonuses that benefit the management company.
What is Their Schedule for Inspections?
Ask if the property management company conducts regularly scheduled inspections of units to detect destructive or undesirable tenant behavior and catch problems quickly. If so, how often are unit inspections performed? How are tenants notified of impending inspections?
What Kind of Inspection is Conducted at Move-In?
Apartment inspections at move-in are typical, but when it comes to single-family rentals, the property management company should conduct a detailed inspection complete with taking digital photos. The tenant should accompany the property management representative on a walk-through and sign off on the inspection report. This is the best way to avert disputes over any damages that may occur during the tenant’s residence.
How Often are Inspections of the Property’s Exterior Conducted?
Monthly inspections of a property’s exterior are most desirable, although quarterly inspections are often standard. Ask about the frequency of exterior inspections, and if drive-by inspections during which the property management representative does not get out of the car are standard. Also, ask whether more comprehensive exterior inspections are performed at intervals during the year.
How Often are Inspection Reports Sent to You?
Ask to see a sample copy of the property management company’s inspection reports. Find out how often they send updated inspection reports to property owners.
Rental Marketing and Tenant Retention
Attracting and retaining quality tenants is the crux of property management. It is a crucial service that can make or break an investor’s ability to earn maximum profits from a property.
Where does the Property Management Company Advertise Rental Listings?
Exposure is everything when it comes to marketing rental units. Ask what paid advertising space the PM firm utilizes and how much it will cost you. Ask to see analytics reports of their advertising’s effectiveness. Anticipate them utilizing numerous paid and free placement including relevant websites and social media pages. Ask about offline advertising channels they use as well, such as print classifieds, signage, MLS, and fliers. Ask if the property management company provides a 24-hour call-in line for prospective tenants to get detailed information about a rental property, and leave a request to be contacted.
Check out some of the Property Management’s Current Rental Ads. Do They Stand out Among Competitors’ Ads? How Compelling are they? How Informative?
Some property management firms merely list basic information on numerous websites that may not inspire potential tenants to respond. An effective property management company utilizes marketing tools and trends to optimize advertisements for maximum impact. Ads should provide information that answers people’s basic questions while incorporating copywriting that engages the reader on an emotional level.
What are Your Current Vacancy Rates?
Ask PM companies about their current vacancy rates. You want a company that has a proven track record for filling vacancies in a month or less, and for keeping units occupied consistently.
What is the Per-Lead Marketing Cost?
If you ask a PR management company this question and they can readily provide an answer, you can be assured that they closely track the analytic results of their marketing efforts, which helps them focus on strategies that work and avoid spending money on those that don’t.
Who Handles Inbound Leads from Rental Ads?
Well-placed marketing and ads should direct leads only to someone who is qualified and available to handle them expertly and efficiently. Otherwise, their marketing efforts are wasted.
How Quickly Does Someone Respond to Prospective Tenant Calls and E-mails?
A good property management firm knows how important it is to respond as quickly as possible to potential tenant inquiries. The sooner the response, the better. This can be an area of weakness for some PM companies that lack an aggressive sales initiative and can translate to longer vacancy periods. To test a company’s response time, click the info request on an ad and see how long you wait to receive a response.
How do they prepare a Property both Inside and Outside for Showing?
First impressions are crucial. The property management team should be focused on the details that potential tenants notice. They should be able to tell you what details their market research and experience tells them are most important to potential tenants when they view a residence, both inside and outside.
Do they Show Units That are Occupied?
Ask if the property management company if they show occupied units, and if so, what are the criteria for doing so? Is the unit inspected in advance to make sure it shows well? What steps are taken to minimize intrusion for the tenant? If the unit is presentable and the tenant agrees to allow showings, are ads placed prior to the tenant’s move-out date to minimize the vacancy period?
Who is Responsible for Showing Units? Are Supervised Showings Allowed via Lockbox?
The property management representative who shows units to potential tenants should be experienced in sales and extremely organized. They should be ready to answer any and all questions from prospective tenants about the unit, the lease, the property, and the neighborhood. They should be enthusiastic when it comes to selling potential tenants on the property’s benefits. Allowing lock box access for showings may interfere with optimal tenant showing outcomes, and may even establish opportunities for theft, vandalism or rental fraud. If a management company confirms that it allows lock box access, make sure to ask what precautions are taken to prevent problems.
How Many Showings are Scheduled for a Unit During the Week and on Weekends?
Ask the company how they maximize the number of showing opportunities for your property. The more flexible and accommodating they are with potential tenants, the better.
What Tenant Retention Incentives do They Provide?
Property owners benefit from tenants who stay for long periods. Fewer turnovers mean lower tenant placement costs, happier tenants, and a stable income stream. Ask the property management company where tenant retention places on its priority list.
A good tenant retention policy includes swift responses to tenant needs, an established process to assess needs and receive feedback, offers that provide suitable financial incentives, distributes appropriate notices when rent increases are approaching and has the ability to explain rent increases. Other perks that engender good tenant relations include a welcome packet, a newsletter, and seasonal cards or gifts for all tenants.
How are Tenant Rental Payments and Property Owner Revenues Handled?
As a property owner, it’s important to have complete trust and confidence in the property management company that handles your physical property, your rental income, and any financial responsibilities on your behalf. Your property management company will be entrusted with managing security deposits, rent collection, reserve funds, and maintenance expenditures. Transparency and accountability are essential. Below are some important questions to ask a property management company before you enlist:
How Are Payments to Owners Managed?
- What process is used to transfer revenues to property owners? (Electronic transfer, check, direct deposit, etc.)
- Are revenues sent to property owners for the current month or the previous month?
What day of the month are rental revenues paid to property owners?
- Does the property management company provide property owners with an IRS-1099 and a summary profit and loss statement for tax purposes?
- Can they advise property owners on tax deductions?
- Does the property management company keep detailed financial records and documentation? Is it able to provide a clear audit trail for each property and copies of all invoices for tax purposes and in case legal circumstances require them?
- Are income and expense reports sent to property owners monthly? (They should be).
- Are reports accessible and viewable online? (They should be).
- Can they send you a sample report if you’re considering hiring them?
It’s important to establish beforehand whether or not a project management company’s reports provide all the information you expect them to provide. A sample report with dummy data or no data is sufficient. Providing a sample report should be a stipulation for considering a property management company.
Monthly reports should reflect the amount of rent collected, deducted property management fees, itemized maintenance expenses, net dollar amount, etc., in an easy-to-read format.
Property management companies should have a clear and detailed process for collecting, handling, and recording tenant security deposits. This is critical to encouraging tenant care and recouping costs for damages that outgoing tenants may leave behind. Security deposits must be managed properly or property owners risk losing the legal right to withhold all or a portion of the deposit to cover property damage expenses. In some areas, property owners can be forced to pay tenants double or triple the security deposit amount if the funds aren’t managed and administered properly.
Some questions to ask a PM company:
How do they collect and handle security deposits?
State laws regarding security deposits vary, so property owners need assurance that the property management team they hire understands the laws applicable to the property’s area and follows it to the letter.
Some states require security deposit funds be held in a non-interest-bearing trust account (not any other type of interest-bearing account) so it is important to verify that the property management company complies.
Protecting property owners from legal liability is an integral part of the property management company’s responsibilities, and that means acting in accordance with all relevant laws. No legal shortcuts should be taken. In states that allow property owners to use security deposit funds at their discretion, using the funds early may be allowed. Your property management company should be able to clarify all relevant laws pertaining to security deposit management.
How Much Does the Property Management Company Collect for Security Deposits?
Security deposits provide the only cushion property owners have if a unit is left damaged. Some states regulate a maximum security deposit amount that can vary from one to three months’ rent. Ask PM companies how they decide the amount of the security deposit a new tenant is required to pay, which usually depends on the tenant’s financial history and credit score.
How Soon are Security Deposit Refunds Issued to Exiting Tenants?
Do they send the tenant and property owner a refund report with itemized deductions within the time frame established in local (state) regulations?
What conditions and deductions do they utilize for security deposit refunds?
How often does the property management company land in small claims court over security deposit disputes?
The security deposit refund and deduction process should motivate good tenant behavior, not be looked at as a profit generator. A good property management company does not deduct expenses from security deposit refunds without reasonable cause. Any deductions deemed necessary to cover tenant-caused damage and repair costs should be itemized. A property management company that adheres to security deposit laws keep property owners out of small claims court.
Do They Manage Payments on Behalf of Property Owners (mortgage, insurance, property taxes, HOA fees, etc.)?
Does the property management firm provide services that include signing checks and making payments on the owner’s account? If so, what security controls are in place to prevent misuse of funds or embezzlement?
How Quickly Do They Pay Vendors?
Do they require vendors to perform work and withhold payment until rent is collected or a unit is rented? This type of payment policy can cost property owners in the long run. Keeping vendors waiting for payment on work already completed strains relationships and often results in vendors being forced to raise their rates to compensate for the payment delay’s negative impact on their cash flow. A good PM firm maintains a properly funded reserve that allows them to pay vendors in a timely manner.
Do They Co-Mingle Funds Among Different Properties They Manage?
A project management company’s system for managing multiple property owners’ funds is an important detail to understand before hiring. Make sure to raise this question with any property management company you are considering.
Knowing which of the property management companies are the best for your investment property is a critical step toward achieving your investment goals. Make sure to ask all the right questions, and narrow your choice down to the firm that promotes the most confidence and satisfies your business requirements.