Critical Questions to Ask a Property Management Company

Guest article by Eddie Miller:

You probably already understand the amazing benefits of a self-directed IRA, you may even own rental property or are considering the possibility, yet you might not be sold on utilizing a property management company.

Why should you? Well, let’s first look at this from a technical and then a practical perspective.

Technically, the IRS stipulates “when purchasing rental property in a self-directed IRA you may not personally perform any repairs or maintenance of property held within your IRA. Doing so would be considered ‘sweat equity’ and a contribution to your account. Sweat equity cannot be properly measured in value, and the IRS only permits contributions to an IRA to be made in cash. Repairs and maintenance must be paid for at current market rates and must be performed by a third party.”

“Property management can be handled by the IRA owner. However, you must not perform sweat equity or pay for expenses out of your own pocket. You can decide who performs maintenance duties on your own. Or you can hire a third party property manager to perform these duties for you. Again, all income and expenses flow directly in and out of the IRA funds, not your own.”

Now, let’s look at a practical perspective…

When I started investing in real estate my partner and I purchased, rehabbed and sold property, then we also began holding and managing some of our own properties as rentals. As our business grew, we became advisory board members of our local Real Estate Investment Association and, as a result, we met other investors who were challenged with managing their properties.

We found that managing rentals can be a hassle! Yet, because it was a core aspect of our business we figured out how to overcome these challenges to create profitable investments.

Throughout the process we actually uncovered six key points to creating profitability:

• Purchase the property that will provide the desired annual rate of return with consideration of the cost of the purchase, repairs, taxes, insurance, vacancy, management, etc.
• Hire an efficient, effective and reputable property management company.
• Have a sound lease agreement with clear rules and regulations.
• Market for qualified tenants.
• Conduct a thorough background screening.
• Have effective, ongoing communication with tenants.

Quite simply attempting to manage your own property can be a daunting task, and a mistake at any of these points can be costly, which can dramatically lower your desired rate of return.

The core business of a property manager is managing property, which of course is logical, but easily overlooked. By selecting an efficient, effective and reputable management company, you will decrease stress and increase profits.

Below are the top 15 questions to ask property management companies during an interview.

1. How long have you been managing properties?
2. How many properties do you manage? Some companies have on-site mangers that manage a lot of doors, but few properties. These companies don’t typically make the decisions that can impact your profitability. Make sure the firm manages enough properties to know what they are doing, but not so many that you become just a number.
3. Do you have a company website, and can I get the address? Websites are a minimum for management companies. The site should be informative, professional, and showcase properties.
4. How many people do you have on your team? You don’t want a one-person shop that could be faced with trade-offs between accounting functions and showing functions. In addition, small offices can often lack the resources to immediately address any situation, causing a small problem to become big.
5. Can I get references from at least 3 owners? Any reputable company that has been in business for a few years should have success stories.
6. Where’s your office, and what geographic areas do you operate in? Office location is important when considering how frequently your property will be shown or what the travel charge will be for maintenance calls.
7. How will you market my property? A full service marketing program will use professional signage, online advertising, MLS, etc. Ask how many websites they utilize – the more the better.
8. What is your tenant screening process? This is a critical question to ask, and their process should be comprehensive. Inquire about the application process. All tenants over 18 years of age should be screened for verification of income, employment, credit, criminal history, eviction history, terrorism list, and sexual predator history. References should also be called.
9. Can I review your lease agreement as well as your rules and regulations, and have these documents been reviewed by your attorney? A bullet proof lease is your best defense against a tenant that is trying to take advantage of a situation. Not all lease agreements are created equally.
10. How do you handle maintenance requests? Someone should be available 24/7 to handle maintenance emergencies. After an issue has been reported to the management company, the company should dispatch a qualified technician to first determine whether the repair is general wear and tear or tenant neglect. Tenant negligence should be paid for by the tenant after the repair is complete. If the repair is no fault of the tenant, the owner will be responsible for the cost of the repair.
11. What training and licensing do you have? Both the property manager and management company must be licensed/registered with the city and state (i.e. Real Estate Broker/Associate). In addition, inquire about other professional property management training and affiliations.
12. What happens if a tenant does not pay rent? The delinquency process and eviction process should be explained; the company should have a clear, aggressive collection process for tenants who are not paying on time. Progressive companies will track their internal tenant delinquency rate monthly and should be able to share that information with prospective clients. Inquire about the eviction process and costs (this is why a strong screening process is critical to assist in preventing the need for evictions).
13. What insurance do you carry and what should I carry? Inadequate insurance can leave the owner high and dry if a catastrophe happens. Most management companies are required to carry Errors and Omissions insurance, Workmen’s Compensation insurance (if there is an in-house maintenance team) as well as general liability. Minimum coverage should be $1 M. (For landlords Hazard, Liability and if necessary Flood insurance is suggested for each property.)
14. How often will you inspect my property? Some type of walk through or inspection should be performed annually. Ideally, there should be a move-in inspection, a 6-month inspection, and an 11-month inspection prior to the tenant renewal or move-out. If a tenant is moving out, then an additional inspection is conducted after the tenant has moved out before the security deposit is returned.
15. How often does the company send out financial statements and reports? This is the critical factor of your relationship with the management company. It is important to receive and review monthly financial statements and maintenance repair updates.

By utilizing these targeted questions to interview the management company you are considering working with, you will ensure you have selected the right company to represent you, which should help to limit the risk of a low return on your investment.

Eddie Miller is the CEO of Pristine Property Management and Miami 4 Investors, co-director of the Miami Landlord Association, and two-time best-selling author of “Living Inside-Out: The Go-To Guide for the Overwhelmed, Overworked and Overcommitted” and “The New Masters of Real Estate: Getting Deals Done in the New Economy.”