Buying Investment Property

Is Professional Management Right for You?

Managing rental property takes a lot of time. Unfortunately, most beginners tend to underestimate just how much.

Here is a list of some of the things you can expect to be handling:

  • screening prospective tenants
  • setting the monthly rent
  • drafting a rental agreement
  • advertising
  • showing the apartments to prospective tenants
  • negotiating rent renewals
  • collecting and distributing security deposits
  • conducting inspections on vacated apartments
  • repairs and maintenance
  • bookkeeping
  • handling the problem tenant.

If this list makes your head spin, consider hiring a pro to take care of one or more of these items.

How Much Is This Going to Cost?

A property manager could cost you anywhere from 4% to 10% of your monthly rental income. He or she may also charge you a lease renewal fee of 20% to 50% of the first month's rent each time a lease is renewed.

What Will I Get In Return?

A good professional manager not only takes care of the items listed above, but sees to it that your property is well taken care of, and that the rents charged maximize your investment income.

If you feel the cost of a professional manager is just too high, consider hiring someone to handle the more time-consuming items such as screening the prospective tenants and showing the apartments.

Screening a Professional Property Manager

You should always screen a professional manager before hiring one to make sure that you feel comfortable. They are going to be watching over your investment, so you should feel confident that they are qualified and have your best interests in mind. Here are some questions you may want to ask:

  1. What kind of experience and education do they have?
  2. Do they have any professional affiliations?
  3. What kind of properties do they manage?
  4. Are records kept on a computer?
  5. What kind of reports and communication will you receive?
  6. How will repairs and maintenance be handled?
  7. How are screening and credit checks done?
  8. What are the fees and the specifics of the contract?

Also be sure to obtain a listing of references for your verification.

If you ultimately decide to hire a professional, make sure that everything is clearly laid out in a contract. It may be a wise decision to have an attorney review it to save you from potential problems.

Investment Partnerships

Another way to shift 1) some of the burden of property management and 2) some of the cost of the property, is to form a partnership. The downside is you will also be giving up a portion of the profits. Many investors buy rental property together with the idea that each will share in the profit and the management.

This is not as easy as it sounds. You have to find someone you trust, and whom you feel that you can work with on a professional level. Remember that the relationship could be damaged if, down the road, you don't see eye-to-eye.

Anytime you form a partnership, you should involve your attorney and accountant to draft a partnership agreement. This way, the terms of your responsibilities and ownership are clearly laid out.

With an investment partnership, you can transfer the real estate owned (for instance, to younger family members) at a discounted value, by gifting (or selling) to them minority partnership units. The discounts are created due to the lack of 1) marketability, and 2) control - both very common conditions that exist with minority partnership interests; this is because the party that receives the minority interests in the partnership typically cannot sell the partnership interest (or the real estate owned by the partnership) because they do not control the partnership. Further, a minority owner cannot or compel any distributions from the partnership, nor does he or she possess any management rights. For these reasons, the percentage of the partnership owned by a minority partner could be worth less than the partner's percentage ownership of the partnership and underlying real estate; and typically the partnership agreement has additional restrictions that reduce the value of the partnership units held by a minority owner.

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