Tenants and toilets are the main reasons people do not get into rental real estate. When I was first starting this business, I thought of calling my management company “TnT Management” – shorthand for tenants and toilets. I believed in my self-made DIY rental guru, H. Roger Neal – he wasn’t going to let toilets get in the way of his financial freedom!
My husband and I started with one 6 unit apartment building and divvied up the work: I took the tenants, he took the toilets. It was a pretty good arrangement for us, even when we added two more units. Then 6 more. Then another two.
Steve had actually taken an online course when he was laid off from his job. He became an Accredited Residential Manager from the Institute of Real Estate Management. We figured this was it – he wasn’t going back to work. He was going to be a full-time real estate investor (6 years later I’m happy to say he still is!) Check out the course here: https://www.irem.org/credentials/for-individuals/arm
I didn’t take the course, but I delved into everything I could read on the subject. My primer was Neal’s Streetwise Investing in Rental Housing. I also very much enjoyed Mike Butlers Landlording on Auto-Pilot – he got me inspired to do the rent-to-own business. Then of course there was Property Management for Dummies. I started listening to Robert Kiyosaki’s books on my iPod in the car and at the gym (remember the iPod, before everybody just listened to their smartphones?) I had gotten through the first couple chapters of The ABCs of Property Management when my priorities shifted sharply into another universe.
Temper your rental real estate investing dreams with reality!
Suddenly I was less interested in The ABCs of Property Management and more interested in What To Expect When You’re Expecting! And I had to make a decision, because I could not handle first-time motherhood, work my full-time job, and continue to manage tenants. We decided I would keep my full-time job for the steady paycheck and health insurance, and Steve would work the business full-time as a solo entrepreneur.
He didn’t do too badly, considering the circumstances. Not only did he solo-manage the 16 units we had, he started bidding at the tax sale auctions, and landed us 4 new double-blocks, bringing our total owned units to 24. Once he got those rehabbed and rented, he had his hands full!
When Savannah was 2, I got laid off from my job. Part of me thought this was an incredible opportunity – I had a little bit of severance and about a year of unemployment to live on – I could jump into this full-time! And I did, for about a week. And then reality set in. 24 rental units is not enough income to support two full-time people, let alone provide seed money to grow the business into something that can. We were stuck. (I detail this whole story in my 9-part How It All Began blog posts in the archives, starting in May if you want some interesting reading.)
The part where most landlords fail
We were too small to be self-supporting, let alone take anyone on who could help. Yet we were too big for Steve to do it all himself correctly. Just keeping everything organized was tough – we lost a lot of money in fees and penalties during that time. And – this was embarrassing – we had one tenant who bounced several months worth of rent checks before we caught her. I know it’s hard to believe that would go unnoticed – but that’s how overwhelmed we were.
This is how most landlords lose it. They get overwhelmed. They get stuck in this Suck Zone of being too big to handle and too small to hire help. Then they get a bad tenant or two (or five) and throw up their hands. And their dilapidated rental property ends up at tax sale.
If writing this blog saves just one fellow investor from this fate I will have done my job.
Property Management – Do it yourself? Or hire a pro?
If pregnancy hormones hadn’t caused me to become forgetful and lose my iPod I may have finished Robert Kiyoski’s The ABCs of Property Management. And if I had, Steve and I may have come to grips earlier on that we should not have been self-managing this many units.
I finally picked up that book again just this past May – a print version this time. I like having something to read while my now 5-year-old daughter watches her shows on Sprout. What I read made me very angry. The author, Ken McElroy is one of Kiyosaki’s Rich Dad Advisors. He owns a property management company. And this guy was basically calling me a moron from the pages of his book for managing my own units. He told me he hoped I enjoyed the work, because I sure wasn’t creating any value! Of course – he owns a management company! The more landlords he can convince to give up a percentage of their rents to a manager, the more his industry grows and the better his bottom line! I literally threw the book across the room, I was so offended.
But then I picked it up again.
Clearly it had touched a nerve. A raw, exposed nerve. Expanding into the business of wholesaling, flipping, and rent-to-own had got us out of the deep rut we were in, but we were still spinning our wheels. And the reason for that was my husband was still very much involved with managing the rentals.
We were helping some of his investment partners self-manage their own properties, and they were paying us for that service. The additional income allowed us to pay a friend on a contract basis to help us out - she was the one who discovered the tenant with the bounced rent checks and got our money back through the court system, God love her! But even with that, and the five or ten hours per week I could devote between working and raising Savannah, a lot of the load was on Steve. And this was keeping him from some serious income opportunities.
I squared my jaw and read the rest of the book. McElroy detailed all the things a good property manager would do for a harried landlord like myself. OK, Mr. Big Shot. I’ll take your advice and incorporate it into my own management company! I’ll build it from the ground up!
So I started looking into that. I needed some training – I was street smart in addition to being book smart, but I’d had no formal schooling. And in Pennsylvania I would actually need to be a licensed broker to own a management company if I wanted to expand beyond buildings I had ownership interest in. To become a broker, I would need to become a real estate agent and sell houses under another broker for a minimum of two years. To become an agent, I’d have to take a 7 week course, and pass a licensing test, then get a broker to take me on.
I thought about it, very seriously. But again, reality. I have a full-time job. I couldn’t just leave it to go sell real estate – new agents make on average $15,000 in their first year, and there’s no health insurance or paid time off. So I would have to do real estate during the hours when I’m not working. Those hours are already taken – with my current rental real estate business. Also with raising my daughter. I couldn’t give those jobs up either!
When one of our investment partner’s rental units was shut down by Wilkes-Barre’s One-Strike law, it threw us all into safety mode. Steve and I decided it was best to advise all investors we worked with to hire a licensed broker for management rather than self-manage in the current hostile environment. In the process of researching these management companies for them, we decided to try our own advice.
Our friend, Illana, was disappointed by this decision. She has a natural talent for managing tenants, and also for staging and showing properties. We are paying for her to take the real estate class, and to sit for her exam and get licensed. Steve is taking the course with her – I was initially going to do it but we decided I already have three jobs. Steve decided having a license will only help his business finding properties for other investors.
Currently, we are in the process of transitioning eight years of self-managed properties into the hands of a broker. It’s quite the process! Some of our tenants didn’t weather the change well. I few have tried to pull some funny stuff with the new manager, telling her we agreed to discounts we never would have even dreamed about. Still others stopped paying altogether. That’s fine – evict, evict, evict. Ginger Snapped, and now is a bad time to pull crap like this on me! This wasn’t unexpected, and I’m confident my business will survive and even thrive. We really need to get our new manager up to speed, though!
More about that next week. I put together a list of what I expect from a professional property manager, and I will share that manifesto with you then. I’ll just leave you with this one piece of advice from someone who’s been through the ringer:
When you start out in rental real estate, manage your own property. It’s good for you! You get to know the business, and your rental market intimately. I have no regrets starting off this way. Now I know what I expect from a pro – they have to be even better at it than I was! That said, read lots of books on the subject of property management, the ones I recommended in this blog and others. Take online courses. Haunt sites like www.biggerpockets.com , www.mrlandlord.com and The Landlord Protection Agency’s site www.thelpa.com. Read my blog every Sunday! And find your way to real estate investors group meetings. Ours - NEPA Investors Network - is the second Wednesday of every month, 7pm at the Petro Iron Skillet restaurant in Dupont (we moved from the Grotto.) The Wyoming Valley Real Estate Investors Association, more of a landlords group, meets the last Tuesday at 7 at the Wyoming Valley Church in the Dolphin Plaza on Highway 315 in Wilkes-Barre.
When to stop managing your own rentals:
Stop when it starts to become too much. When you stop having time to organize the bills and the paperwork properly. When it feels like you’re always working but there’s not a lot of money to show for it. We probably should have stopped after 16 units. We’re handing it off at 25. I’ll keep you posted on how that’s going.