(Hint: you’ll probably spend more without one)
Brevity Count: 2957 words (13 minutes).
Are you thinking about moving out of the city and renting out your apartment? If so, I don’t blame you! Living in New York has become extremely tough lately, hasn’t it?
We all know that the city will someday return to its former splendor, but at present, the effects of Covid are still evident everywhere you go. And unfortunately, the pandemic’s consequences span beyond your favorite restaurants and coffee shops permanently shutting their doors; you still have the financial responsibility of your property to contend with in a city that has grossly decreased in popularity and demand.
You are probably starting to think about how you can rent out your apartment, deal with tenants, and make sure your property doesn’t lose its value while you escape into the ‘burbs. Maybe you are thinking about leasing it out yourself, or perhaps you are considering hiring a Property Management (PM) company to deal with the process.
Since you’ve decided to move out of the city, I’m going to give you a useful tool to help you plan your next steps. A lot of our clients found it useful, at least.
The topics I’ll be covering also apply to those who are already renting out their investment properties, as they will help them make better strategic and financial decisions.
The fundamental idea behind this strategy is very simple, but it is often overlooked by owners/investors who are caught up in the day-to-day responsibilities of owning a property and managing tenants.
As you embark on this journey, remember this Fundamental Principle of Real Estate Investing (by yours truly ?):
The moment you decide not to live in your apartment and want to rent it out, then
Your Property Needs to Make you Money.
…and the more money the better. That’s it.
If you keep this fundamental principle at the front of your mind and are able to assign a dollar value to the different activities involved with managing a property, then you’ll know right away whether you should do the work yourself or lean on the help of a professional management company.
To help you make your decision, here are 10 key questions to help you determine if you need to hire a property management firm to manage your rental apartment(s) in New York City.
Speaking from experience, if you can’t confidently provide an answer or solution to at least six of the below questions, then you might be losing money by not hiring a professional property manager.
To make things easier, I’ve categorized the 10 questions into the following sections:
A: How to Market the Property and Find Qualified Tenants
B: How to Deal with Emergencies
C: How to Deal with Legal and Financial Activities
D: How Much is Your Time (and Mental Sanity) Worth?
Let’s start with the first section.
A: How to Market the Property and Find Qualified Tenants
Question #1. Do you know how to set the optimal rental rate and employ the right marketing strategy that gets your apartment rented fast?
Do you market your apartment(s) yourself, or do you have a broker you trust who is an expert in marketing rental properties like yours?
Many people rely on brokers they’re friends with, which is fine if your friend specializes in rental properties like the one(s) you own. However, if your friend deals mostly with sales listings, or works in Brooklyn while your apartment is in the Upper East Side, then he/she might not be in tune with the relevant rental market for your property. And this could cost you a lot of money.
For every month that your property sits unrented, 1/12 of your potential annual revenue goes down the toilet. That is 8.33% of potential yearly earnings, gone forever!
Meanwhile, your fixed costs keep adding up.
Choosing the right broker or property management firm could mean that your apartment is rented in 2 weeks, rather than 3 to 4 months. The right marketing agent can help you earn at least 25-30% more rental income your first year alone.
A reputable and experienced PM firm either markets rental properties directly or partners with real estate brokers who specialize in renting the properties managed by that PM firm. This means your chances of quickly renting out your apartment dramatically increase.
Question #2. Do you know how to approve and qualify a tenant? What is and is not legal to ask?
Did you know that a recent New York State law forbids landlords from asking tenants for more than one month’s rent as security? This may come as a surprise, since only a year ago many international tenants in the city would override their lack of credit history by offering rent for the full year in advance. Well, that is no longer allowed in New York!
So, what can you do instead to qualify an international tenant? And should you trust an applicant with a high income but no credit history?
We’ve found that the simplest way to qualify these tenants is to have them use a guarantor such as Insurent, or to find a well-qualified American co-signer. You should also ask for realand verifiable references.
This is just one of the many dynamic situations you will encounter when dealing with new tenants.
Unless you have years of experience handling with these real estate investment situations, an experienced property manager will be an invaluable asset to have on your side when negotiating lease agreements and approving tenants.
Question #3. Do you know how to dramatically increase the likelihood that the rent is paid on time every month?
The easiest and most reliable way to get paid on time is to have a system that accepts automatic online payments from tenants. This system must also be simple and free for the tenant to use.
Accepting rent payments via check is a recipe for wasting time and receiving late payments.
The most sophisticated PM firms have systems in place that send automatic reminders to tenants when their rent is due, encourage free automatic online payments, and impose automatic late fees.
When evaluating whether to use a PM firm, you need to consider the cost of late rent, and the time commitment of chasing late payments and/or collecting and depositing checks.
B: How to Deal with Emergencies
Question #4. Do you know how (and are you willing) to handle an emergency on Thanksgiving or New Year’s Eve?
You need to have the resources, stamina and willingness to handle tenant emergencies on holidays that you would rather be spending with your family, because sooner or later, one will happen!
I can speak to this first-hand, because over 10-plus years, my company has frequently received unwanted calls or emails about problems requiring prompt attention exactly when you need them the least!
You need to really think about this question and answer it honestly: children’s birthdays, client meetings, long-awaited vacations, personal crises and sickness don’t relieve you of your obligation to your tenant.
A professional PM has staff on duty around the clock that can handle any situations that arise, even on the 4th of July. Again, it’s something you should seriously think about.
Question #5. How do you deal with stress?
Tenants who have a problem with their apartment, such as a broken dishwasher or a leaking sink, can be relentless. They will call and email you multiple times a day until you have resolved the issue. Even worse, they may withhold rent or threaten to sue you.
The worst case scenario is going to happen sooner or later, so you need to be prepared.
I’m not trying to scare you, but after 10 years of managing apartments in New York, I have seen it all.
Of course, you might get lucky and have fantastic tenants who always pay on time and never call you. But even very respectful and qualified tenants will expect a certain level of service from their landlord, which needs to be carefully managed.
On one hand, you want to keep your tenants happy so they will stay long-term and continue paying rent. On the other hand, however, you can’t bend over backwards attending to ridiculous maintenance requests; you are not running a 5-star hotel.
Where and how do you draw the line? Do you know when to say yes and when to say no? And most importantly, can you handle the stress of being contacted by your tenants on a weekly basis? (Yes, there are tenants who demand service from their landlords every week!)
It boils down to one question: Are you the type of person who can emotionally handle this type of pressure? You will need to seriously consider whether you are capable of engaging in productive conversations with your tenants to appease them and keep them paying rent.
If that doesn’t sound like you, then you might want to hire a PM firm, which can shield you from unwanted stress and wasted time.
Question #6. Do you have a list of reliable preferred vendors?
It’s Sunday morning. It’s snowing, and you receive a call from your tenant, who says that her dryer is not working properly so she can’t dry her French Bulldog’s winter jacket. Now, her dog has a light cold, and without her coat she can’t take her out to play in the snow.
Your tenant is having a meltdown.
Do you know who to call? If your apartment is in a full-service building, the super may be able to handle minor maintenance requests, but more technical problems like a dryer that isn’t drying or an AC unit that is too noisy will require a certified technician.
Do you have a list of preferred vendors who can quickly and reliably fix the problem without breaking the bank – even on a Sunday?
Simply knowing who to call can save you thousands of dollars. We have seen countless “DIY” landlords who have called (and paid!) two or three cheap repair companies, only to eventually find out that the specific appliance can’t be repaired and needs to be replaced.
Had they been told from the first visit, they would have saved thousands of dollars in useless repairs!
One of a well-established property management company’s greatest assets is its list of reliable and cost-effective vendors that can be called for any emergency. That list alone can save you enough money to more than make up for what you will spend on management fees.
C: How to Deal with Legal and Financial Activities
Question #7. Do you know how to handle a tenant who doesn’t pay on time or requests a rebate in rent?
You receive an email from your tenant with subject: “COVID Rental Relief.” In the email, she writes that she wants her rent cut in half, because all of the other apartments in her neighborhood are now on the market at much less than what she’s currently paying.
Do you know how you can and should respond? And what are your options if she stops paying rent?
You may incur in the occasional “professional tenant” who tries to work the system and milk any current legal/political events in order to stay in the apartment without paying rent for as long as possible.
Would you be able to handle these complicated situations without breaking the bank by involving an attorney from the get-go?
An experienced PM firm can negotiate with the tenant for you within the constraints of the law and potentially save you thousands of dollars in legal fees.
Question #8. Do you know how reduce the cost of fixing your apartment (“turning it over” in real estate jargon) after a tenant moves out?
There are two factors you need to consider when answering this question:
First, tenants who are about to move out will expect to receive their security deposit back, and they sometimes might try to use the security deposit as their last rent payment.
After years of experience, we have found that communicating with the tenants a couple months before move out to set expectations about how they should leave the apartment (per the lease agreement) and remind them to pay rent through the end of their lease is the best method. This eliminates many of the disputes that may arise when we do the final inspection, and more often than not, the apartments are actually returned in much better shape.
If you plan on managing your property by yourself, you need a plan for how you’re going to communicate with your tenants before they move out, and when you inspect the property after move out, you need to know what is legally considered damage and what is normal wear and tear. You can then return the security deposit, or a portion of it, accordingly.
You now need to consider the second factor: Once the tenants have vacated, do you have a certified, reliable and fast contractor you can call to turn the apartment over? This includes painting, patching holes left by hanging TVs or other fixtures, fixing doors or hinges that might be lose, sanding the floors, replacing light bulbs, and cleaning and re-grouting bathrooms.
If you were just planning on calling your cousin who’s a painter, you’ll need to think of a new plan unless he can provide a Certificate Of Insurance (COI). Contractors are not allowed to work in any building in New York without one.
And most importantly, do you know how much you should pay for the work? If not, you are putting yourself at risk of being ripped off.
A PM firm can handle all of these factors for you. They will normally have in-house contractors, or a short list of the preferred contractors suitable for the different jobs, which will save you both time and a lot of money.
Question #9. Do you have the resources and know-how to keep the property books in order so you can maximize your investment’s financial return when you file taxes?
Did you know that residential real estate investments (apartments up to three-family houses) can be depreciated over 27.5 years and provide a substantial reduction on your taxable income? Your accountant should know that at least, but this is only the first step for reducing your tax liability. You must also keep record of every improvement expense on the property.
You need to keep track of every single expense, including common charges, real estate taxes, marketing expenses, trips to check on the property, and all repairs – ideally in a dedicated bank account.
If you are not well-organized or don’t have a dedicated software to handle the bookkeeping for your property, you’re at risk for losing money in unreported expenses and inaccurate tax filings.
An established PM firm can provide accurate bookkeeping, detailed monthly reporting, and a dedicated bank account, which will save you a lot of time and money, as well as the stress of having to deal with these tedious tasks yourself.
D: How Much is Your Time (and Mental Sanity) Worth?
Assuming you have found an acceptable tenant, prepared yourself to handle the pressure of being a landlord, developed a plan for emergencies and keeping the costs under control, and are able to organize your books and face potential legal issues with your tenants, you still have one final item to consider:
Question #10. How much do you value your time?
Being a landlord requires a significant time commitment, even if you are only managing one property. If you already work as a professional in another field, the value of your time (and mental sanity) is likely way higher than what you would spend hiring a property management company. Let’s do a quick calculation to give you an idea.
If you are a landlord in New York, you likely make at least $500k/year. Assuming you work 220 days per year (which excludes weekends and some extra days off), you make about $2,272 and change daily before taxes.
Assuming you work an average of 8 hours per day, your hourly rate comes out to at least $284.
Now, this is not a perfect calculation by any means, because nobody works productively for 8 full hours a day. When you account for all of your daily distractions, your hourly rate is technically much higher than that. For the sake of this argument, however, we’ll assume your time is worth at least $284/hour.
From experience, I can tell you that best-case scenario, managing a property will require at least 5-10 hours of your time each month. That is $1,420 to $2,840 per month, if we apply your hourly rate.
And this cost does not include the emotional weight of having to deal with property issues, especially when it’s inconvenient – your tenant is guaranteed to have an emergency when you’re on vacation or out to dinner with friends.
This cost also doesn’t take into consideration the potential financial losses you may experience from not having the right contractors, not knowing how to handle legal problems with your tenant, and not knowing how to properly enforce timely rent payments.
Unless you own a castle or a large multi-family home, a property management firm will not cost you anywhere close to $1,420-$2,840 per month. In fact, it will most likely end up saving you money with its expertise.
Ultimately, your decision to hire a management company depends on your lifestyle, stress tolerance and whether you are prepared to deal with all of the aggravations that come with being a landlord.
Hopefully, these 10 questions can help you better evaluate your options and make an informed decision.
If you like this article, please comment and share it with whomever you think could find it useful.
As always, if you would like to expand the conversation or have questions, don’t hesitate to contact me:
Luca Paci
Pure Property Management
March 26, 2021 5:28 pm