Property Management 101

Mike Hambright: Welcome to the FlipNerd.com podcast. This is your host Mike Hambright and on this show I will introduce you to VIPs in the real estate investing industry as well as other interesting entrepreneurs whose stories and experiences can help you take your business to the next level. We have three new shows each week which are available in the iTunes Store, or by visiting FlipNerd.com. So without further ado, let’s get started.
Hey, it’s Mike Hambright. I’m with FlipNerd.com. Welcome back for another exciting VIP interview where I interview some of the most successful real estate investing experts and entrepreneurs in the industry to help you learn and grow.
Today, I’m joined by joined by Jean Jensen who runs the property management operation for Gentry Real Estate Group in Arizona where they’ve managed as many as 1,200 doors at a time. Property management is not an easy business and many of us wouldn’t want to touch it with a ten-foot pole, me included. But it’s important and it comes with the territory of building wealth through rental properties, and it’s something that needs to be done right, otherwise you won’t be building wealth I assure you.
Today, we’re going to have a property management 101 show, kind of a lesson to help you learn what’s important in property management, and we’re going to make this as educational as possible. And before we get started with Jean though, let’s take a moment to recognize our featured sponsors.

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Hey, Jean, welcome to the show.

Jean Jensen: Thanks Mike; I appreciate you having me.

Mike Hambright: Yeah, I’m glad you’re here. This is a little different format than what we typically do. Typically we just kind of get right into the entrepreneur and learn their story. But property management is such an important thing to get right, and an expensive lesson if you get it wrong. We kind of talked beforehand about having kind of a lesson, so I think that’ll be interesting for the folks listening. But before we get started with that, why don’t you tell us a little bit about you and your background, and Gentry.

Jean Jensen: Sure, I got started in real estate in 2006 as a recruiter, and I actually got to talk to 50 to 100 agents a day and learned a whole bunch about the business and decided I could do this, too; it sounded like fun. Everybody really wants to work for themselves, right?

Mike Hambright: Yeah.

Jean Jensen: So that was the plan. Then with the downturn of the market here when we headed into 2008 I managed [inaudible: 00:03:34] properties and negotiated short sales. So I certainly had my experience with distressed properties. I feel like I always chose the hardest part of real estate, because now I’m in property management.

Mike Hambright: Yeah, well of course being in Arizona, too, because that’s been the epicenter for difficult real estate over the last few years.

Jean Jensen: Right.

Mike Hambright: And for those that are listening we had Spencer Caldwell, who is one of the owners of Gentry on the show a while back, and he buys, the other side of their company buys a ton of houses at the auction and that’s essentially fueled the property management business, right? They would basically assist people buying houses at auction from an agent or brokerage standpoint and then ultimately manage them as well.

Jean Jensen: Exactly. Our Property Management Division stems from our auction company and our clients’ needs for buy and hold management, and they’ve sold over 7,000 homes at auction over the last seven years or so. So you can see how that would definitely feed our Property Management Division. And we take pride in being a full service company, so it’s easy after you purchase your property in order to create passive income.

Mike Hambright: Yeah, you know as we talked about it in the intro or as I talked about it, I guess, property management is kind of a necessary evil for a lot of real estate investors. Ultimately, everybody is looking for passive income, building wealth, things like that. But it still has to be managed, of course, and if it’s mismanaged then you won’t be building as much wealth as you hoped.
So why don’t you talk a little bit about the importance of quality property management, whether it is somebody doing it themselves, or hiring that out.

Jean Jensen: Right, well, you want to make sure that you’re educated in what it’s going to take to be a landlord before you jump into it, because a lot of people don’t realize how much work it is. It’s not a part-time job usually, if you manage your own properties. You need to make sure that you’re educated not only on the areas so you make a good investment. Your property is actually going to be cash flowing and building equity over time.
But also that you’re educated on the state and federal laws so that you don’t get yourself in trouble with the landlord tenant acts, you know, repair issues and things like that. So it’s really important when you’re going into real estate investing if you are looking to be a buy and hold investor. And make sure you’re educated on the area so that you get what you’re looking for out of it, which of course is a passive income and is wealth building over time.
But also make sure that you’re protected, that your property is protected; you have good tenants in there that aren’t going to destroy the property. Use a screening company. If you run into problems, which is going to happen in any facet of real estate, you need to make sure that you have a plan in place in order to be able to take care of it in a timely fashion and professionally as well.

Mike Hambright: Yeah, I think in my experience I think where a lot of people get into trouble is they tend to way underestimate the expense for turnover and vacancy, maintenance, and make ready, especially turnover.
And I know a ton of people in real estate, people that manage some of their own rentals, and they’ll say, “Well, somebody moved out a couple of weeks ago, and I’m just finishing up the make-ready to get it rent ready again.” It’s like a couple of weeks? You just lost rent for half a month, plus it still has to be leased now, and plus you’ve got to drive back and forth showing it and all those things. And maybe the biggest expense that a lot of folks don’t consider is the opportunity cost of their time, like what else can they be doing if they’re not doing that.

Jean Jensen: Right, exactly. Vacancy is always going to be your biggest expense in real estate investing and buy and holds. It’s important to have a marketing plan in place so that you’re turn time is quick, and a team of vendors that can actually get your property rent ready again in a timely fashion.
Renewals, tenant renewals are also absolutely a reflection on your property management skills. You know, if you’re not responsive as far as repairs go, if the tenants don’t feel like they can reach you, they’re probably not going to be happy in the property and you’re probably going to experience a lot of turnover.
So if you can do it, absolutely on your own, you know, make sure you’re educated and you stay on top of things and hopefully you’ll have a good relationship with your tenants and they stay for a long time; because I’ve seen that before, too. We’ll get really lucky and have tenants that stay in our property for 12 years. But those are a very small percentage.

Mike Hambright: Yeah.

Jean Jensen: So the turn times, absolutely it’s staying on top of repairs for your tenants are going to eliminate, or at least minimize your vacancy rates.

Mike Hambright: Yeah, and talk a little bit about the legal side of it, because I think a lot of people don’t really consider that either, and some states are very different than others, very landlord friendly; some states are anti-landlord, or it feels like it and very difficult to get people out.
And in all honesty, I live in Washington, D.C., and this was a number of years ago. And I remember reading an article in a newspaper and it literally was like an op-ed piece on how to live in a property for free for a year. And it literally was like a how-to article for basically how to get around paying rent and how the landlord can’t get you out. I mean it was crazy, but it happens, and people don’t really consider that.

Jean Jensen: It sure does. On that end, if you run into an eviction scenario, you need to be comfortable with the county laws; what it’s going to take, certified mail notices, you know, to make sure that they can’t deny receiving any sort of five-day notice, any sort of attorney notices to reclaim the property. And what it’s going to cost, as well, in order to do this. Typically in Arizona it’s not that great of an expense, about $300 to $500, depending on which county you’re in.

Mike Hambright: Yeah.

Jean Jensen: But it definitely helps to have an attorney on call that will file these things and in a timely fashion for you, because they are segmented to, you know, five days for this, and then once you get served with the attorney notice, ten days for this. So you want to make sure that you’re familiar with the laws of the county in your area and you have somebody that can help you process the paperwork when you need to.

Mike Hambright: Yeah. So I want to talk a little bit about the case for hiring a property manager versus doing it yourself, and I know you’re going to be biased in terms of hiring a property manager. And in all honesty, I have a portfolio of rental properties and we don’t manage them ourselves, and never plan to. I just know that my opportunity cost is too high, and in all honesty, it’s a difficult business to scale. I mean I think when you work with a property manager that has hundreds of units then they can scale it.
But on your own, I just think for 8% to 10% on average what property managers charge, most people’s time is much better spent finding more deals, or enjoying life, or whatever it is other than dealing with tenants and toilets and termites and all that stuff.
But to kind of give the case a little bit, and we’ve kind of talked about a number of these things, for using a property manager. We talked about a number of these things already, but some other reasons why somebody should use a property management company more so than do it themselves.

Jean Jensen: I think all of us in America really are trying to have a passive income. I mean that’s the goal, and that’s the American dream.

Mike Hambright: Yeah.

Jean Jensen: To be bringing in a monthly cash flow, building wealth and not have to work. There’s always going to be a problem that arises every once in a while that maybe you need to get involved with if you hire a property management company. But for the most part that’s the coolest part about it; you generate long-term wealth, monthly cash flow without having to do anything. We all work to live, right?

Mike Hambright: Yeah.

Jean Jensen: And live to work, at least the majority of us. Property management’s a dirty business, you know. I don’t think people realize that until they really get into it and start to get their hands dirty.

Mike Hambright: Yeah.

Jean Jensen: I am biased, but I really think it is worth the 8% or 10% to give yourself the freedom of time, to go look for the next investment, and also to protect yourself from liability. Nobody wants to take a phone call in the middle of the night because their tenant’s toilet is overflowing.

Mike Hambright: Right.

Jean Jensen: A well versed property management company is going to have a 24/7 maintenance line, so you never have to deal with things that arise like that, unless it is like a major cost, and then if it’s a really good property management company, they’ll get three bids for you and contact you about what’s going on with your property.

Mike Hambright: Yeah, there’s a reason why, and I know you’re biased and I’m biased, I guess, because I want folks who listen to the show to not have regrets while managing their own properties. I know people that have bad experiences with property managers and now they take care of it and they’re just more comfortable because they’ve had bad experiences. But I don’t think there is anybody who has ever said I really love managing my own properties and that it gives them joy doing it. That’s just crazy.
But for those who are listening out there, we’ve had tons of other folks on the show that talk about lead generation for real estate, and some comment sources are absentee owners, which basically means the people are probably renting their property out and they don’t live there themselves. And even going to like the eviction and courthouse or wherever evictions are done and try to find landlords there, and it’s largely because these people are managing it themselves and they’re about to rip their hair out.

Jean Jensen: Right.

Mike Hambright: But enough harping on that, so why don’t you talk about some of the things that property managers do. And again, if somebody wants to do this themselves, then these are things they’re going to have to do as well. But if we talk about specifically the leasing side of it, what, and I don’t even know exactly what you guys do, but just share what a good property manager does to keep properties leased, and then to keep tenants there as long as possible.

Jean Jensen: Absolutely. Well when you’re looking for a property management company, or looking into managing it yourself, you want to look for occupancy rate of the property management company, anything over 90% is usually decent and that means they have a shorter turn time and will have a lower vacancy rate for you.

Mike Hambright: And what did you call that again? The occupancy rate?

Jean Jensen: Correct.

Mike Hambright: Okay.

Jean Jensen: The occupancy rate above 90% is usually a good indicator that they’re going to do a good job and really aggressively market your property and get tenants in there.
On another note, you don’t want to take the first tenant that comes along. There are tons of people looking for housing and you want to make sure that you get the right person in there. I think I said previously, use a screening company. There are a number online that you can go sign up for to run credit and background checks. Where if you’re using a company, some of us use private investigators and run three separate checks on the tenants, to make sure we’re going to have the least amount of problems throughout your lease term as possible.
Make sure somebody can afford the property, you know, so you’re not going to deal with phone calls saying, “Oh, you know, my washing machine broke last week, so I’m short and I’ll pay you on the 15th.” You know, three and a half times the rent is the going rate.

Mike Hambright: Right.

Jean Jensen: So make sure that somebody has enough income that they’re not going to be in a tough spot.
Then once the property is leased, it’s been marketed and hopefully leased within 30 days, you want to make sure that you can stay on top of all repair needs with open communications lines if there’s a problem.
And if you’re out of state, make sure that you have a trusted network of vendors that can handle the problems that arise. So that’s another thing that property management companies will do for you. We refer a lot of business to repairs, so you can usually be sure, because of that whole volume, that you’re getting the best price possible when you use a property management company. If you don’t, make sure you build a good relationship with those people that will do the same for you.

Mike Hambright: And so you don’t actually do the make-readies yourself; you outsource that and get multiple bids? Is that what I understand?

Jean Jensen: Correct.

Mike Hambright: Yeah.

Jean Jensen: Well, that’s what it takes to get a property rent ready, and what that means as far as our guidelines go and send a bunch of bids, and then hopefully get the property ready in the next week.

Mike Hambright: Right. Yeah, I think from some experiences I’ve had in the past with property managers were early lessons for me, and hopefully there will be lessons for others listening. But it’s really important, and again I don’t know exactly what your payment structure is and we don’t necessarily need to talk about that, but your property manager’s not incentivized to turn over properties.
And what I mean by that is I had a property manager, again this was a very early lesson, to where they were incented, and they basically got paid about a month’s rent for each time they rented a property. But they tended to make a lot, they did all of the make-readies themselves, and they just charged us.
And so what happened was it became clear that the guy was making far more money doing make-readies than managing the property, and so every time that property would turn over he would get paid a month’s rent to re-lease it, plus he would get paid probably several months’ rent to do the make ready.

Jean Jensen: That’s right.

Mike Hambright: And if you’re structured that way, it’s human nature that they’re going to do what their incentivized to do and in his instance whenever somebody gave him any problems or had any problems at all, he would just get them out as fast as possible. And then the financial burden would be the on us because he was making a lot of money basically just churning tenants. So I think it’s really important to make sure that your property manager is aligned with your interests financially.

Jean Jensen: Absolutely. It should be always clients first. The goal of any good property management company should be to keep as much money in their investor’s pocket as possible.

Mike Hambright: Yeah.

Jean Jensen: And that’s how you keep a good property management company running, is a) you keep tenants in there for a monthly cash flow for your investors, and b) keep your clients happy. It should always be the investor needs first. We work for you. The tenant is just a customer. If you feel like that’s not the case, then definitely start looking elsewhere.

Mike Hambright: Yeah, and I’ve also known some other people that have managed properties themselves and they still tell me that, “We have very little turnover; we’ve had all these tenants,” and they’ll use some metric about people that have been there for a long, long time. And then what you find out later is it’s because they’re charging way under market rents, and so they’re kind of marketed as OW, “Hey it’s a win, and I don’t have any turnover and I don’t have to deal with that.” And it’s like, but you’re leaving how much money are you leaving on the table by charging $200 or $300 less a month in rent?
Yeah, you don’t have any turnover, but it would cost you far less if you had a professional property manager that kept the market rents in there. You had some turnover here and there, but you’re collecting far more in rent. So kind of talk about that, the role that a property manager plays in making sure that they’re getting top of the market rents or kind of balancing turnover and rents.

Jean Jensen: Absolutely. Well, that’s their passive income right there. You don’t want to discount that; that’s the point, right?

Mike Hambright: Yeah.

Jean Jensen: A property management company will run a comparative market analysis for your property. They’ll look at anything that has closed in your subdivision within a half mile radius within the last six months to find which ones are most comparable to your property and list it at the higher end, because why not, right? We use a good marketing strategy and we want to get you as much money as possible on a monthly basis.
We’ll also track for you the amount of showings that you get, so at that point if your property isn’t getting any showings at the listed price, then you know, okay, maybe I need to go down $25. And that will also help decrease your turn time, keeping on top of seeing how many people are going to see your property, how many applications you get in at the current market value that it’s listed at, and making adjustments to compensate for that.

Mike Hambright: And do you guys ask perspective tenants as well, like if they look at it and they say, “I’m not interested in that.” Do you often ask them, can you give us some feedback as to why you’re not interested in that?

Jean Jensen: Absolutely, and if we’re having an issue getting a property rented, you know, it’s been on the market for more than 30 days, then we’re going to start reaching out to the people who have seen the property and ask them what’s going on here. Maybe it’s because it backs up to a freeway, so we need to unfortunately lower the rent price $50. But again, vacancy is going to be your biggest expense, so making sure that you’re aware of what’s going on while your property is marketed and making adjustments accordingly is going to put more money in your pocket, even if you have to lower the monthly rent price.

Mike Hambright: Yeah, okay. Well, talk a little bit about a good property manager’s ability, or even for those who are looking for property managers when they’re looking for what to select, in terms of the class or the type of rentals that they manage. And let me give you some background.
For a while when we started to accumulate rental properties we kind of focused on what we’d refer to as kind of a B-property, so probably just below median price point in our market, kind of an entry level homes. And then over time we found that the ones that cash flowed the best for us are more of what I would refer to as a C-level. And still in very much working-class neighborhoods, good neighborhoods. We don’t buy in the hood or anything like that. We try not to.
The challenge I ran into was the property manager that I had at the time I guess when we went from B to C it was more of the C class tended to be more of the local little magazines, Thrifty Nickel type magazines, and the signs in the yard. And the B class was more of marketing them on the Internet and finding people that way. It seemed to me to be a very different skill set at the time, and some of that is just the specialty the original property manager had. But just talk about the ability for property managers to manage different classes of properties, if you will.

Jean Jensen: Absolutely, each different type of property is a whole different animal. So your property management company should be set up with different systems actually for C properties than they are for B properties. It is a different skill set, absolutely. You need to market yourself in different places, and the ability to handle the types of issues that come up with C properties. They are usually a little bit older, so these can go wrong with those properties a little bit more than the newer ones.

Mike Hambright: Yeah.

Jean Jensen: Some property management companies will specialize in a certain type, and some are set up to handle all of them. So you want to make sure that you share a lot about your investment and make sure that it’s the right fit for the company that you’re choosing as well.

Mike Hambright: Okay, great. I guess can you spend a few more minutes just making the case for why it may make sense for somebody to manage properties themselves, and if not, why a property manager may make sense?

Jean Jensen: You know, I would say you’re local and you’re under three properties, it may be a good decision if you are well educated on your area in what it takes to be a landlord to protect yourself from liability. Get a team around you, and at that point it’s plausible in order to manage your own properties and not get yourself in a whole bunch of trouble. But if it starts being more than that, even at three you’re going to have a full-time job, for sure.

Mike Hambright: Yeah.

Jean Jensen: But if it starts being more than that, it’s absolutely worth the 10% investment to make sure that you’re protected, and that your time is yours, as well. I know we’ve talked a lot about passive income, but that’s really the goal in buy-and-hold investments; the passive income and equity building up over time.
And once you feel that your plate is starting to get too full, now it’s time to look for a good property management company. We’ve talked a little bit about what to look for; somebody who has a high occupancy rates, low turn times. And then somebody that uses a really good screening company to make sure that you get the best tenants as possible and you’re going to have the least amount of problems, and that has a legal team should you need to get a tenant out. Unfortunately those situations do arise, and it’s no fun to deal with.
I would say it’s a weight lifted off your shoulders to hire a well-versed company and somebody you can really trust.

Mike Hambright: Yeah, that’s great. And I would tell people, too, just a few words of wisdom from my experience, and this is not to knock the smaller property managers at all. But you just have to be careful. There have been a few different property managers that were individual people or husband and wife teams and we had a husband and wife team.
First off we had somebody, the first person that I mentioned that really made more money doing make readies and turnovers and re-leasing than the property management and took forever to get the properties ready.
Secondly we moved to a husband and wife team that when we met with them it was like, “This is the Holy Grail; we wish we’d found you before.” And lo and behold a couple of months into it they are getting divorced and they’ve shut down their business without telling us, and, “Oh, by the way, we haven’t collected rent for six weeks.”
All of these things were just kind of a nightmare and so I think it’s really important that if you’re working with a small team you find somebody who has a long track record and referrals. And that’s somewhat of a case for working with more of a firm or a larger company, because yes, they have turnover, but they have backups to help fill in the gaps as they arise and things like that.

Jean Jensen: Right. Absolutely. We’re inheriting a lot of properties right now from somebody who had been doing it for a really long time. He had really great relationships with his clients, but he fell off a ladder and broke both of his ankles.

Mike Hambright: Yeah.

Jean Jensen: So at that point, he decided he’d not be managing properties and you’re going to be looking for a new company, so it is great to have somebody who has backups and you’re not going to be in a situation, well, wait a second. We have to collect September rent and where is it going?

Mike Hambright: Right. Awesome. Well hey, thanks so much. I wish we had more time. We’re already kind of at almost a half hour now, but thanks so much for sharing all your insights on property management. If folks want to learn more about you or about Gentry Property Management, if they happen to have properties in Arizona, for example, where should they go to learn more?

Jean Jensen: Our website is www.gentrypm.com. You can always email me as well. I’m available 24/7 at [email protected].

Mike Hambright: 24/7? Really?

Jean Jensen: My phone’s forwarded to my cell phone. You’re never off work in this business.

Mike Hambright: Yeah, I understand that. Well Jean, hey, thank you so much for sharing your knowledge today. We appreciate it. And for those that are interested in learning more about Gentry Property Management we’ll add a link down below. And for those of you that are managing your own rentals, think about your opportunity costs of your time; what else you could be doing with that time that ultimately maybe well worth the investment to pay somebody else to do. Again, Jean, thanks for joining us today.

Jean Jensen: Absolutely, and thanks for having me, Mike.

Mike Hambright: All right, we’ll talk to you later.

Jean Jensen: Okay.

Mike Hambright: Thanks for joining us on today’s FlipNerd.com Podcast. To listen to more of our shows and hear from incredible guests, please access all of our podcasts in the iTunes store. You can also watch the video versions of our shows by visiting us at FlipNerd.com.