In this episode we discuss the importance of property management and what things to consider when selecting and working with a property management company.
Our guest is Brenton Hayden — the founder and chairman emeritus of Renters Warehouse USA, a six time honoree of the Inc. 500|5000 list. Brenton attended Harvard Business School and MIT’s Sloan School of Management and was named the youngest franchisor in America by Inc. Magazine in 2011 at the age of 25.
Breton can be reached on LinkedIn at https://www.linkedin.com/in/brentonhayden.
His company’s website is www.RentersWarehouse.com.
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Welcome to Passive Real Estate Investing. I’m your host, Marco Santarelli. This is the show where busy people like you learn how to build substantial passive income while creating wealth for the long term. Today’s show is a very important show about property management. As you know, my eighth rule of successful real estate investing is to use professional property management. You never should manage your properties on your own. There’s a few exceptions to that, but generally speaking, it’s not a good idea.
Property management is a thankless job and it requires a solid understanding of tenant landlord laws, a solid understanding of marketing skills, strong people skills. These are all things that allow you to deal with your tenants and your tenant complaints and excuses when they come up. You see, your time is your most valuable resource, it is precious. You should spend your time with your family, on your career, and looking for more investment property. Property management is not the thing you should be doing.
What do you look for in a property manager? There’s different reasons to have property management. For example, your property manager or at least the professional property manager will know how to market your property to keep it rented. Vacant rental properties are a drain on you and a drain on your cash-flow, and it doesn’t make a productive asset. An experienced property management company will know how to aggressively market that property and keep it leased.
The second, you get better tenant screening, an experienced property management company is more likely to have an effective system for screening and qualifying tenants that will ensure that your property has quality tenants that will meet their financial obligations. That means that they’ll take better care of your property too.
Thirdly, having a professional property management company will protect your investment. An experienced property management company will take better care of your property. Now, what do I mean by that? A property management company that has been in business for a number of years, they’ll have seen and heard everything. They would have come across virtually every possible problem and scenario and be able to confidently handle those problems, as they arise, quickly and efficiently.
Last but not the least, having professional property management makes owning your rental properties a more simple and convenient investment. You see, a company with years of experience in property management, they have systems in place. They’ll be able to have a streamline process setup so owning rental properties becomes a simple passive, not disconnected, but a passive investment for you. That gives you the time to do other things while you still enjoy the financial benefits of owning that investment property.
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Property Management Secrets with Brenton Hayden
On today’s show, we have a very special guest, someone I’ve known for a great number of years. He is a very successful serial entrepreneur, a very smart guy when it comes to property management. I have to say that he’s probably raised the bar higher than any company that I know in the property management space. I want to welcome Brenton Hayden to the show. Brenton is the founder and chairman emeritus of Renters Warehouse USA, a six-time honoree of the Inc 500 5,000 list. The company currently has 27 franchises in 15 States and has seen gross revenues of $13 million or more. They have a portfolio of managed properties valued at $750 million. Brenton attended Harvard Business School and MIT’s Sloan School of Management and was named the youngest franchisor in America by Inc Magazine in 2011 at the young age of 25. Most recently, Brenton was named the Ernst and Young Entrepreneur of the Year in the Midwest.
Brenton’s expert marketing skill and entrepreneurial spirit have largely contributed to the success of his company earning Renters Warehouse numerous awards in real estate and business. Recently in September 2015, Brenton sold his majority stake in the company to a Minnesota-based company known as Northern Pacific Group. Brenton, welcome to the show.
Wow, that’s a great introduction. I got to make sure I send you a little tip after this. Thank you for that. It’s great to be on your show, Marco. Thanks for having me here.
I really like having you on the show. As I mentioned to you briefly before we got recording here, I held out on doing an episode on property management because number one, I wanted someone who is not locally bound. In other words, they weren’t married to one specific market. They had a broader understanding of real estate markets and state laws around the country.
Number two, I’ve known of you for many, many years and you’re a real go-getter. I know that you really dig in to the legal aspects and the operations of everything. It was my belief that I could bring you on the show to really explain property management to our listeners. Here you are, and I’m going to ask you a bunch of grilling questions.
I’m not going to let you down. You came to the right guy. I got just what you need.
Great. My working title for this episode is, Property Management Secrets with Brenton Hayden.
I like the sound of that.
Let’s play off of that. Now, you’re moving. Let’s begin by asking the question, where are you located, just to get people a sense of geography.
I just put down some roots in South Florida, Sunny Isles Beach to be exact. It’s just north of Miami Beach, about ten miles. It’s on the ocean. It’s right adjacent to Aventura. Many people know it. It’s great. I spent a year in downtown Miami in the Brickell neighborhood, very nice neighborhood, and been house-hunting a year. I had actually house-hunted all the way out the San Antonio, Austin, Naples, Florida, up and down the Coast of Florida, looking all over for a year. Because I knew I wanted to live in South Florida, so I thought maybe elsewhere. When I found this house in Sunny Isles Beach, I knew it was for me. It’s adjacent to the mall, the casino, the ocean. Then if I want to go to a nice place for dinner, I can go to South Beach real easy.
Nice. I have to ask this question with a wink. You’re a young guy, I think you’re 29, 30?
I’m 30.
You’re 30. You probably just turned 30. You’re semi-retired, you could be retired but I know you would just be bored completely. Are you doing anything right now other than moving? You still have involvement with Renters Warehouse?
I’m still the Chairman at Renters Warehouse. That means I’m a voting board member and I participate in high level decisions there. That’s not a big time consumer. We have a great management team there. I have a number of investments elsewhere, starting with my largest is LeafLine Labs in Minnesota, which is medical cannabis, government endorsed grower and retailer for the medical cannabis industry there. Onside Sports, I’m an investor in a really wonderful fantasy sports betting application called Onside Sports. What else am I doing? There’s another human resources software company out there called 15Five that really, it’s something I use every day in my business. It’s a great way to pulse what’s going well and bad in your business amongst all your team members and really roll that all up so you can read it. To name a few.
I keep busy. But like I was talking to you offline, it’s about passive investing. I’m not active in the operations of really any of those companies anymore or at all or however it was. Many of these are just passive investments that I try to offer what value I have. It’s usually knowledge, experience, expertise, an open ear to talk to, as well as money in some cases as well.
That’s great. This topic about property management is very, very important. We talk to our clients all the time about the importance of having a great property management team in the markets that you have investment properties in. I like to think of property management as a thankless job because it really is. I don’t refer to property managers specifically as property manager. I often refer to them as asset managers, because essentially at the end of the day, that’s what they’re doing, they’re managing your assets.
To take that even a step further, our team here and I say half-jokingly that you live and die by your property manager, which I only say to stress the importance of having a good property management team. Why don’t you start off by describing what you see a property manager as being? In other words, how would define or describe a property manager?
I know exactly what that is, Marco. I trademarked it. Renters Warehouse owns the trademark as the professional landlords, that’s what we are. We are professional landlords for hire, that’s it. When we design what it is that we would be selling to people, what was our product, what was our service, we listen to them, to what they wanted. We created a no fees upfront, cancel anytime, warranty your tenant, guarantee your rent, protect you against property damage, charge no marketing cost upfront, do all the showings, all the backgrounds checks. Only if and when we find somebody that’s a great tenant for you and you approve, that’s when we move them in.
Then from there, $2.54 a days or $80 a month, flat fee, no matter what the rent is to manage you property. This is what people wanted but they wanted a high amount of service for a low flat fee. Through technology, proprietary technology we invented in those that we partnered with, we were able to create a proven process that really revolutionized the way property management was done. To summarize, you need a brilliant technology set up in order to do it efficiently and to maximize opportunity. You have to be knowledgeable in the business. Renters Warehouse is the largest landlord in the country for a fee. We have the knowledge and the expertise, we have in-house counsel. We’re owned by a wonderful private equity group out of Minnesota that holds real estate in a big way. We have the services that you need.
More importantly, that is what has made Renters Warehouse just a player right now in the property management game, because we redefined the real estate business. We call it, another trade mark we own, rent estate. It’s not real estate. Real estate is different. Real estate is buying it to live in, buying it to flip, buying it develop, that’s real estate. Rent estate is buying it to hold, and that’s what we believe we have created. We’ve created an easy, fast and worry-free way for everybody in America to access rent estate by creating a really renowned professional landlord service.
We say that you should never work with part-time real estate property managers or real estate agents. This is just my personal feeling, because I’ve been burned in years past working with real estate agents that doubled as property managers. They didn’t have a team to work with. In fact, on a small apartment building that I owned, I had a property manager who was a real estate agent collect rents that were virtually all cash or MoneyGram checks. It was either $6,000 or $9,000, but she had collected virtually all cash.
One month, the rents never showed up and I’m wondering, where are the rents? I talked to her and she said she sent them but there was no evidence or proof that it was actually sent to our office. That money never ever did show up and I’m convinced to this day that she literally stole those funds from us.
This is because a professional landlord would have had a bond for you. If we lose your money, it’s our responsibility to get you your money. If a professional landlord loses it, as a licensed agency with a bond, we can file a claim and say, “Listen, we lost Mr. Santarelli’s $9,000, our bad.” We file an insurance claim. This is the importance of using professionals. I say it even in the plumbing business. It’s really cheap to call the plumber off Craigslist to do the little job. But you could probably get a little more peace of mind by calling Mr. Plumber or whatever the big company is that’s done this a million times over and has some insurances and training in place. You got what you paid for in a sense, Marco.
That was a long time ago. You learn through these experiences. Like I’ve said, I’ve made $100,000 plus mistakes in many years passed.
I’ve made million dollar mistakes in recent months, so I know the feeling. You’ve got to take risk, you’ve got to learn these things on your own. Renters Warehouse wasn’t built in a night, we were a very different company today than we were when we started. I’m sure you’re a very different investor than when you started it. It’s called wisdom. That’s why we’re here talking and sharing our wisdom here in this podcast.
Exactly. Your comment is actually a perfect segue to the question that I was leading up to. My question is this, what are the most important things to look for when you’re finding a property manager? Now, I asked that in the broad sense because I know that you understand that question but you’re not in every state. For our listeners’ benefit, if they’re in a state where there isn’t a Renters Warehouse, for example, what are the things that they should be looking for to identify a good professional property manager?
Right off the top, I’ll tell you to use a really good partner, a friend of mine, a company called AllPropertyManagement.com. They will help you find vetted out, licensed and insured professional property managers all across the country. Now, they can’t say that everyone is going to be great but they can say most of them will be good or better. I’ve used them, Renters Warehouse is on that site. We’ve used them for years. It’s a good way, easy way to accomplish the job.
Now, if you are attention to detail like me and you want to check all the boxes yourself and really do you own research, then I think you should start with licensed in most cases. I think it’s better to work with a licensed personnel than an unlicensed. Not all markets is a license-required, so keep that in mind. I think a personnel property business is in order. Go visit their property, go visit their office. Show up, ask them for a meeting at their location instead of at your kitchen. Make sure they are a legitimate business. Do the 101 check.
I’ll spare your listeners some of that stuff, but a lot of people skip that basic stuff, the 101. Let’s go make sure that they even have an office and a receptionist. Because you might be thinking you’re paying for this great service and you show up at their office and they pitched a tent. You don’t know. Do the due diligence, that small stuff. But if you’re looking for a more sophisticated approach, I think you want to really analyze their accounting systems. I think you want to analyze their value proposition. What are they doing for you and what’s the accountability process if they don’t?
I always like to tell people that the table should shifted in your favor. Meaning, if your property manager is not doing the job, you should be able to fire them. Believe it or not, that’s a hard, tall order to get in the property management industry. At Renters Warehouse, you can fire us any day, anytime, no fees. But some companies have exclusive contracts, non-cancelable or have termination fees. I’m not going to say that that’s not a bad policy, but if you’re trying out a property manager for the first year, you should get a little more accountability from them, a test drive.
Don’t be afraid to admit you made a mistake when you hired the wrong property manager. Admit it quickly, fail quickly and move on. You’re going to encounter that. I’m telling you now, if you work with a Renters Warehouse franchisee, we have corporate accountability. As a franchisor, we regulate our offices at an independent level. That’s why it’s nice to work with bigger companies, like the Mr. Plumber instead of Joe off Craigslist. I like to support small business but you’re doing so by even supporting a large business that has local entrepreneurs and franchisees in their markets.
Check out the professionalism. Look online for reviews too. Yelp, the Better Business Bureau. All these places can give you a snapshot of their reputation. Take all that in and that go with your gut, I always say.
Here’s a twist on that question. If you had to boil it down, what actually separates a good and a bad property manager?
Technology.
You’re referring to software application, like Propertyware or whatnot?
People cannot manage properties as effectively as Renters Warehouse can simply because we’ve created the technology that the market needs and we haven’t given it out to the competition. It’s because we’re not done doing what we need to do in the property management business by taking over and replacing it with professional landlord business. When we will, we’ll share what it is that got us there.
In order to do property management at a very high level, you need to deploy custom technology for the job. We go after a single family home and small multifamily properties to be the best professional landlord service we can be. What that does make us not be able to do as we can’t handle commercial property. We’re not going to help you with your industrial spot or your office spot because that means a different set of software. Candidly, we have the most high tech software in the entire property management business. We invented and bought it our self and we’re keeping it for ourselves, we’re making it better. It’s what makes us better, it’s what led to us being a six-time fastest growing company in America. It’s because we have what they need and others can’t duplicate it. It’s a big barrier to entry. I don’t want to be arrogant here.
Another thing that separates good property managers, the real experience at the top. The company is always reflective of its leadership. It’s one thing to give a guy one property, but if you’re giving him fifteen, I think he deserves a meeting with the guy at the top and understand his leadership style, who’s running that property management company and what are his values when it comes to property management?
I found that a lot of people found great value in meeting me when they would think about bringing over a 15, 20 or 30 properties to us. I thought that was smart and I always honored that. I’m glossing over the bullet points. I feel like your crowd is very sophisticated, intelligent real-estate investor crowd. Not to skip over the basic stuff. Licensed, ensured, bonded, you want to have their fees disclosed, you want to review their contracts. These are the basic 101s. You want to check out their office and look up their reputation.
All of those things are like the back of a football card. It tells you the stats. What makes a great property manager versus a good property manager, you’ll find that in stats, in the details. I don’t think it’s any one thing other than, I believe, technology that will forever give one opponent a competitive edge over the other, as we have, I believe in the property management space.
I agree about the technology. It’s very important. We use a lot of different systems within our own business here to keep track of everything. Not just the accounting but actually leads that come in and leads that we work with, and how we’re servicing them, and what’s the next task item. But just to be clear from your end, when you’re talking about the systems, the technology, are these all internal within the office or are these outfacing to the client where they’re logging into an online cloud application where they follow what’s going on with their properties that you manage?
We find that our clients don’t want to know. Our clients are the everyday home owner, they want you to do the job and have transparency to them. Our technology for the customer is in transparency, which we’re very transparent about their accounting, we get a lot of approvals from them before spending their money. That’s what they care about, not so much the technology and the fancy interface and all the fun things they can do with our system. Now, we have that, we just haven’t deployed that.
What the technology we’re talking about is, for example, for one thing our RentFeeder technology. We have the ability, when we take a listing through a proprietary piece of software, to listen on every major rental website in the country overnight, just like that. Now we get tens of thousandths of hits, clicks on every property. We rent a property in a matter of five, ten, fifteen days on average, by the thousands a month, because we have a lot of eyes. Therefore, we get a better tenant, we rent it quicker and get our money. That’s a piece of technology working to maximize your dollar.
Now, let’s go back fifteen years ago, you were able to put it in a little printed book that real estate agents read around town, the MLS book.
I remember that.
You think then, if RentFeeder existed, if some company had RentFeeder and everybody else was using the book, wouldn’t you think I would eat their lunch? That’s the only way I can put that technology is doing for Renters Warehouse, is they’re using the book and here we are with the sophisticated tool. That’s just one of the dozens of tools that we’ve invented or bought or partnered with to make Renters Warehouse this incredible, proven, professional landlord optimization tool. I want to go backwards and say that we’re human enabled technology. We have hundreds of employees and hundreds more around the country as franchisees employees.
You have to have the human interaction with the software in order to make it great. It can’t just be automated because you’re limited. We’re human enabled, tech enabled kind of a property management software company that happens to be really great professional landlord service.
These technologies, and a lot of companies will compile statistics like vacancy rates, the average tenancy length. There’s a whole whack of statistics that people keep track of. Some property management companies do and they talk about it or they brag about it and they advertise it and some don’t. Realistically, how important are these statistics?
To you on the big scale it doesn’t matter. You want a 0% vacancy rate. You don’t care if it’s 5% nationwide. I can’t remember the last time any of my customers asked me what our vacancy rate is. If they did, I bring it up but I stopped bringing up because not many people cared. It’s usually between 5 and 7% on the 10-12,000 properties we have across the county, that’s our Renters Warehouse going rate. We’re not happy with that number, but I’ll tell you what, most people would be if you had 10,000, 11,000 units. We’re going into the winter so we have a higher vacancy rate.
Now, going into summer, good luck, it’s 2, 3, 1% in the peak. Those things matter. They really matter more to me and my executives and my leasing manager because that’s what we’re using to snap the whip on our leasing team and say, “We’ve got to do better.” We’re coaching our leasing team to say, “We need a rent properties faster for more money,” and we’re using those trends, those data sets to do that.
We’re heavily involved in the use of data in our business. We have a 100 plus line spreadsheet with core metrics in the business that are all real estate related data. It’s confidential, I’d share some with you, but that all my executive staff uses. It’s like keeping your finger on the pulse and getting the fingerprint of what’s going on in your business. By having all these data sets, we know exactly what’s going on in the marketplace, we know exactly what’s going on at our brokerage and where we’re succeeding, where we’re failing, where we’re just falling short.
These are just internal metrics that allow a property management company to better measure and manage how successful they are and how good or bad they’re doing. It’s not necessarily a sign of a good or bad property manager if they’re sharing that with you?
We will, we share it with our clients certainly. But as a company, we don’t share our nationwide stats because that’s just more for our own tool. It’s like turning the tuner, we’re optimizing the business. If we do this, then what did we gain? We think we’re pretty fine-tuned now. We have a mantra, the whole year of 2015 is if we could do everything we do 1% better, look how great we would be. Our metrics helped us quantify what 1% in every category would look like. That was our drive this year, is how can we just fine-tune the heck out of this to get another 1% of reduction in market time, 1% increase in global rents.
We’re trying to do whatever we can to really motivate whatever it is we want to do in the business world, which is we want to increase rents. We want to increase the quality of tenant. We want to increase the rate of return real estate investors get. We want to make it easier for us to do the job so we can pass along more savings. By utilizing so much technology at Renters Warehouse, we can keep our management fee at a flat fee of $79 a month instead of charging you a percentage. Because we know what the job takes, because we’ve automized or automated much of the busy work.
It makes us more efficient, we can now manage more properties and we can pass along more money to the customers. It all ties in to everything you do. Going back to even if you just had one property yourself, looking back at my properties for 2015, one of my apartment building was a dog. I must have had a vacant unit every month and that annoys me. If I didn’t have that data, I wouldn’t have known that that was going on.
It’s really important to use data in your business, whether at the smallest level or the highest level. I always encourage that you start with three to seven core metrics on any business venture you do from the beginning because that’s the only way you know if you’re making progress or achieving traction in your business. You start checking the oil and looking at the numbers.
What you just said is actually a really, really good point because it doesn’t just apply to your business or a property management company or our business. It actually applies to the average mom-and-pop real estate investor. If they’re starting to buy investment property, one, two, five, ten and twenty, they need to be able to measure the cash-flow coming in, the expenses going out, what is their overall rate of return at the end of the year. These are just metrics that they need to keep their eye on because it is a business and they need to manage their business just like you manage yours and we manage ours.
By looking at the numbers, you do two things. One, you set a goal; what is the point of the number, what’s the goals of the number. You set a goal. Two, you just document it. You look at it. It does two things. It’s not complicated. Get a spreadsheet out or notebook paper and say, “What do I need this number to be?” That’s your goal. Every week, every month or whatever your reporting period is, go check the numbers. Go check the oil in your car, write down the number. In one second, you can say, “I was under my goal. I need to work harder at that.”
If you look at it for six months and you keep seeing the same thing, then you know you’re the problem or the goal is the problem. You need to start making change that way. It’s like being a good mechanic in your business. You got to diagnose what the heck is going on. First, you’ve got to check the oil.
You can’t manage what you don’t measure. That’s the bottom line. Let’s shift focus to lease agreements. I know you’ve done something rather unique in the industry in that you’ve actually created your own lease agreements. I know this might change from state to state. I know Florida has some awkward laws when it comes to lease agreements. It’s very Draconian in a sense. Tell us about two things actually. Why did you create your own lease agreements? Then drill down into a little bit more of the specifics. Tell our listeners what must absolutely be in those lease agreements.
The deal is in the details. In order to be a great landlord, you’ve got to focus on the details. Where does it all start? Starts in your agreement between mutual parties. We decided to say, “We didn’t want the agreement to be one sided one way or another. We just wanted it to be very straight forward that this is the arrangement.” We spelled everything out. It wasn’t one of this one page of deals that says, “You pay this month’s rent on this day, and thank you.” It was saying, “Here’s the six ways you can pay rent. Any other way is not allowed. Here’s how we handle a security deposit. Here’s how we handle move ins and move outs.” We disclose everything. “Initial this, sign that.”
It provides a learning educational experience that at move in day to understanding what the expectations are here and the agreement that you’re agreeing to. Because I think that was a widely overlooked part of property management. People would just move people in and get them keys real quick and give them keys to a $250,000 property. They could do tens if not hundreds of thousands of dollars of damage just by simply not understanding the rules or being ignorant.
Having that sit down at the kitchen table and saying, “This robust seventeen page lease is important. Listen up because you’re going to be initialing a lot and I’m going to be telling you what you can expect from us and what we expect from you. We’re going to reference that anytime we have issue.” The lease is big.
You mentioned Florida, so we use our custom lease in Florida but, as you know, the only way you can do that is when a lawyer is involved on a per transaction basis. We actually have two services. We have the regular lease that’s issued by the Realtors Association or the Florida, whatever it is, that comes free with every tenant placement. For a fee, it changes by office, you can get what’s called the Renters Warehouse Pro Lease where we’ll bring in our attorney and our crafted lease that meets Florida law. It’s seventeen pages instead of the Florida three and it’s much better. We’re going to charge you $300 because the State of Florida requires us to hire a counsel for you to finish it up. By the way, I’m telling you half of my customers are choosing that ProLease in Florida.
Sure. I would do.
They’re investing in it because they know that that contract is everything and they can use it multiple times over. Hopefully we try to lock in tenants for a long period of time, especially when we do a ProLease.
If an investor is not using not using Renters Warehouse, let’s just say they’re working with a local property management company and that’s just who they chose to use or they were referred or whatever the case is. What would you say is the top three or top five things that they should absolutely make sure is in that lease agreement for their benefit?
I think there’s some fun ones I like to take. I’ll keep the basics out of it. Prorata rent disclosure. Some states have a rule that if you accept a portion of the rent, you’re kind of in fact then agreeing to a payment plan that you may or may not actually want to agree to. Having a prorated rent clause that it says by no means by accepting partial payment is in lieu of an unwritten payment plan. Lot of people get eviction thrown out because they paid $300 of the $900 rent. The guy is the victim. The judge tells him, “You accept the $300 so you got to give him more time. Get out of here.” If you have that clause, you can say, “Sir, he’s initialed next to this clause and understands that partial payment is not a payment plan and we’ve gone a great length. That’s one tip.
Here’s an interesting one. In Minnesota, you’re not allowed to require the tenant to mow the lawn or do the snow removal unless you compensate them. That was a game changer in the industry. Everybody expects a Minnesotan, you rent a single family home, you’ve got to mow the damn lawn. The State of Minnesota didn’t look at it that way. They said, “No, you’ve got to compensate them.” We actually invented a clause where the rent is $100 more if you don’t mow the lawn. If you do mow the lawn you get to reduce your rent by $100. By the way, we require you to mow the lawn.”
I like that.
It’s a way to beat the law. It’s a way to work within the game. Now, if you’ve got some Joe Shmall you wouldn’t have learned how to do this. Our lawyers are very good. They work with the State to develop these rules and work within them. They’re all for good measure but sometimes they end up to be complicated. That’s one. That’s another rule.
Another, termination. The termination clause for tenant, is there such a one? Can a tenant terminate the lease? If so, is there a penalty? You should check to see if that penalty is within the guidelines of the law. Here’s an example. Recently, I’m going to own my own bad news, I was fined $100,000 by the State of Minnesota. That’s a lot of money. You know why? I was charging a larger than allowed NSF fee. I didn’t know it. Our lawyers didn’t tell us this. We didn’t pick the number. There was a law in the credit industry, not related to the real estate industry that applied to us somehow, that said we’re charging a higher than allowable NSF fee.
We were charging $65 if you bounced a check. The law says $30. We had to pay restitution. We even had lawyers. But imagine if you’re an amateur landlord. All these little pitfalls and mine fields out there about the rules that can easily come back to haunt you. I tell you what, the tenants know the rules oftentimes better than the landlords. Attention to detail in your contract is everything. It’s not usually a long agreement. I think both parties, tenant, landlord and the homeowner should read that lease and understand it fully. You only need to do it once and then you’ll understand it for ten years to come.
It’s one of those things we love to do at Renters Warehouse, to sit down with people and go line by line through the lease to make sure everybody is fully aware of what the arrangement is. That’s the power of having a ProLease out there rather than just one of these standard forms that meets the bare minimum.
There’s a lot to consider. It will be great if you provided a lease review service. There’s probably a market for that.
Yes, I am retired now. I might have to look at that.
There you go. A free idea. Let’s talk about fees and fee structures, and here’s why. We get asked a lot of questions about who are the property managers in this particular market or on these particular properties, what do they charge? We can answer those questions at a high level. But at the end of the day we need to put our clients in touch with the property manager so they can have a conversation, get a warm and fussy feeling about them and just really ask them all the questions that are important.
A general question like, what are your comments about fees and fee structures? The way I look at it is there’s a three categories. There’s the monthly fee on the gross collected rent. There’s the lease-up fee. Then there’s the repair and maintenance fee should it apply.
Renters Warehouse has just two fees. We have a leasing fee and a management fee. We unbundled or uncoupled the services. You can hire us just to lease or to manage. I think that’s what the people wanted because we’re number one in a very short amount of time. That was something you might want to look into. Can you hire just for leasing or management? Because that will help you delineate their fees nicely. Renters Warehouse, for example, I hate to shamelessly promote us. I’m unbiased, but I think I created the best damn property management company in the planet. Your listeners can decide that for me.
I think this is what they want. They want a flat fee instead of a percentage base. I don’t think the job is harder on a higher end home. In fact, I know for a fact that it’s not. I do a lot of high end homes and they’re the best tenants and half the time they fix things on their own dime because they don’t even bother. We don’t charge a maintenance fee. What we try to do is we go to a vendor and say, “We’ll give you all the carpet cleaning but you’ve got to be the best damn carpet cleaner. But here’s the deal, you’ve got to give 20% off to our customer. By the way, you got to give us 10%. That means you need to come down 30% and we’re going to pass along twenty to our customer.” We don’t charge you. We try to leverage our size to get a value or get a discount for you.
Some companies, they won’t get you a discount and they’ll charge you on top of the bill for coordination fee. There’s a difference in our business model. That’s why people like us. Some people charge accounting fees. We have just a $10 year end fee only in Minnesota. Every other state is no accounting fees. It’s included in your management deal. Minnesota makes us do these tax forms so we charged it $10. It’s a lot of work.
Leasing fees. Leasing fees sometimes are a percentage of the first month’s rent. Sometimes more than the first month’s rent or equal. I think it’s very fair, depending on what you get to pay anywhere in there. Renters Warehouse is a full service leasing company. We send out an individual leasing agent who is just like a real estate agent but only does leasing and only lists your property. They use our RentFeeder tools and other things to shamelessly promote your property and rent it as fast as possible because they’re 100% commission.
Now, those guys will show it, do background checks, prepare the lease, give you their professional opinion whether this is a good tenant. They’ll show it hundreds of times or one time. If and when they find somebody that’s approved by the client, then we’ll charge anywhere from one to two months’ rent. But listen to what you get as well.
In addition to those upfront services with no fee, we’re going to warranty our tenants for a full year. What we mean is we believe we selected a quality tenant and you ultimately approved that. In the event that they go bad, which we can’t guarantee they won’t, Renters Warehouse sends you another tenant completely free because you paid us a healthy commission and we want to make sure you’ve got what you paid for. What I am saying is we charge a rate that a lot of companies charge. However, I believe we give more value in the form of our tenant warranty.
There’s also add-on services out there. There’s guaranteed rent protection. There’s property protection plans out there to protect you against tenant property damage. There is eviction protection plans out there. There are maintenance plans from power companies and maintenance companies to check your HVAC. There’s all kinds of other ancillary add-on services out there.
When it comes to looking at fees from a 10,000 square foot level, you should always take a look in your cash flow too. You’ve got to compare whether or not you can afford it. That is usually the biggest reason people don’t hire a property manager. We still believe 20% of landlords hire a professional to do it while the 80% do it on their own. When we have dug into this we found it’s because their cash flow isn’t significant enough to pay for our services and they’re trying to not go in the hole as a lot of people are stretching it too far to begin with. It all comes back to the fact that they either got in the bad situation or they didn’t really buy properly and that could have been fixed.
What I find to be average in markets across the country are management fees that are around 8 to 10%. Ten kind of being the average or the street rate. But I see property management companies charging between 8 and 10%. Lease-up fees range from a half month’s rent to a full month’s rent. That’s obviously charged on that first month of collected rent. If there is a markup on repairs, that usually is about 10%. If it’s a $1,000 repair bill, the management company will bill $1,100. That’s typically what I see across the country. Is that pretty consistent with what you see or are you seeing something different?
Generally, yes. However, for example, just devil’s advocate, in Minnesota you’re not allowed to mark up a maintenance request unless it’s fully disclosed specifically to the client in advance. It really changes how that works. For example, how I use technology, our software allows us to either be transparent with our fees or discreet with our fees, depending on the market. That makes it a lot easier for us to manage complex individual politics at each city and state level. Again, technology, coming back to show why I can be a global property manager and not a local property manager.
You mentioned self-managing. I was going to ask you this, give me your opinion on self-managing. Do you think it makes sense for investors to self-manage? Before you answer that question, I just want you to know that I’m of the belief that a real estate investor should not manage their own properties, even if they have some experience. They’re better off focusing on their career, their family, going on a vacation. Doing the things that fit their work and lifestyle, as opposed to spending time trying to manage property.
Again, like I said before, it’s a thankless job. Is that really what you got involved in real estate investing? I want my investments to be passive real estate investments. I don’t want to be a full time manager. Even if I was a full time real estate investor, which I am, but I run a couple of businesses, I don’t think I would want to do property management.
A lot of people don’t look at it the same way as other investing because there’s a Flip That House show that they think they know how to do this now. But if you had a million dollars in cash, in some cases many people have a million dollars’ worth of real estate or debt, they wouldn’t manage their own stock portfolio. They might have somebody else help them. But when it comes to real estate all of a sudden everybody is, “I can handle it.” Maybe you can, maybe you can’t. It’s a matter of how much your time’s worth. That’s why we had to price ourselves effective at $80 a month because some people do look at it, it’s like, “You know what? I could do this on my own and it really increases my cash flow.”
To prove the point, look at the world’s largest landlord, Blackstone Capital, $3.8 billion in properties they bought. They hire professional property managers or have professionals to do it. They don’t necessarily manage it themselves. They’re proof in the pudding. They’re the biggest in the world. They appreciate the quality of property management and the value that it brings. Buying a property is the easiest part. Managing them for the next ten years and optimizing their investment, I think that’s where the good gets separated from the bad real quick. You can see the success of property management there.
I think it’s well worth the fee.
Right, and vet it out because it’s everything. This is the guy you’re hiring to manage probably you’re biggest investment, or this is the company. Even going back to the earlier podcast discussion of using core metrics. If I’m the guy hiring a property management company, I might have three metrics that I just focused on to make sure my property management company is doing what I need them to do. What’s the rent? What’s my vacancy rate? How many months are missing? You can have, as your own investor, using a turnkey service like Renters Warehouse, can still have metrics to keep an eye in your business to make sure it’s going good or bad.
I call tenants that take advantage of landlords professional tenants. They just know how to work the game and they really try to milk it for everything they can. That’s not everybody.
What’s that movie, Pacific Heights. There’s a movie about professional tenants that are nightmares. Everybody needs to watch it. I think it’s Pacific Heights. You need to check this out if you haven’t seen it, Marco.
Okay, I’m going to. That’s one of my rules, one of my ten rules for successful real estate investing is hire a professional property management. Don’t do it yourself because you can’t qualify and screen and interface and sell the property as good as someone who does this day in and day out. Anyway, I know you’re up against the clock. I want to squeeze in one more question here because I’m inching to actually get your opinion on this, because it is a bit of a polarized question and there is so much debate about this.
We, as in our investment counselors and myself, get asked this question a lot. There’s such wide spectrum on the opinions I get on it. The question is Section 8 tenants, are they good? Are they worth it? Are they bad? What are the pros and cons? The opinions and comments are just all over the board and it’s very polarized. I find that people either love Section 8 tenants or they just really hate Section 8 tenants, and there’s very little in between. Tell me what your thoughts are and your experience with them.
I’m in the in-between. I am the largest Section 8 landlord in Minnesota. I have had bittersweet relationship with that division of the public subsidy for a long time. In fact, there was a time when we banned participating in it as a company. Later we were actually then forced to, by law, to cater to that in Minnesota. We had to learn to cope and deal and work together with them to fix it. It’s a pros and cons checklist. It depends on what everybody’s risk tolerance is. But I’ll throw out some generalities, and, guys, they’re generalities.
The rent is generally guaranteed. That’s a good thing. Plus one. However, the tenant usually doesn’t have to put up their own deposits so therefore they don’t have as much interest in getting it back. That’s minus one. Now we’re at a zero. There is accountability if a tenant is a really bad tenant. You can report them to Section 8 and they can lose that Section 8 privilege. That will hold people accountable, you’d think. Plus one. You’re helping people. There’s a feel good. That’s a plus one.
We could go through that test. It’s not innately bad. You still need to do your due diligence in screening the tenant. If you have a tenant selection criteria in some markets you need in order to screen the tenant in advance, make sure you put some thought into what it is that you’re looking for and disclosing that in advance because that’s how it works. Utilize an excellent background check, verify income in addition to the subsidy. Check everything out about these people before you make a decision. Take your time.
One of the biggest tips I’d say is make sure you get your money upfront. I know a lot of people want to move in to Section 8 properties right away and the check will come later. Don’t do it. It doesn’t always come and the paperwork doesn’t always get approved. Don’t take their word for it. There’s always paper work that says so and so is approved for Section 8.
By the way, there’s a negative point here, you’ve got to work with the case worker and fill a bunch of paperwork. Maybe go through different inspections and have to live up to different standards in order to get that government money. Pros and cons. You’ve got to weigh them. I’m right in the middle.
If I had properties in areas that are tough to rent, I’m more likely to use Section 8. If I had properties in areas that aren’t tough to rent, I’m more likely to not. However, in some markets I’m not even allowed to have that discussion because I’m required to not discriminate against public assistance. In some markets, and I’ll tell you this, more than many, have rules that say you cannot discriminate against somebody who is in Section 8 Program. Minnesota is one of them.
One of the other complaints I hear about Section 8 is just the length of time that it takes to actually get a tenant moved into the property because of the paperwork and the case worker and the inspection and all that stuff. How long that takes, I don’t know. Is it worth it? Maybe, if you can lock someone in for many years with “guaranteed rent.” Guaranteed by your taxes through the Federal Government, of course. But that’s a discussion for another day. Brenton, anything else you’d like to share with our listeners before we wrap up?
One, I’d like to come back and chat with you anytime, Marco. I want to thank them for tuning in to the podcast. If any of you all would like to reach out to me, they can find me on LinkedIn. That’s where I’m most active and public. Twitter as well. I write for Entrepreneur Magazine and Entrepreneur.com monthly. If you like to follow my insight, there’s a nice little thread for people to keep in touch with me. Marco, we’re going to talk later. We’ve known each other for a while now. I hope to be on your show again. More than anything, thank you for the opportunity to come on your podcast. It’s been a pleasure.
Absolutely. Pleasure having you. Thank you for your time. I know you have to run. We’ll have you back. Thanks again, Brenton.
Pleasure is on mine. Have a great rest of your day.
You too. Thank you.
As you can see Brenton is a pretty sharp individual. He really knows property management and he’s a great entrepreneur. I hope this episode has helped you see property management from a different angle so you understand the importance of property management, some of the things to think about and consider, what might make a good property management company versus a not so good property management company.
There’s a lot of things to consider. But if you do your due diligence and you screen properly, ask the right questions, review the contracts, make sure that you are certainly protected as a client, then you will find that property management will help you succeed as a real estate investor.
Anyway, I want to thank you for listening. Remember to download our free report, The Ultimate Guide to Passive Real Estate Investing. If you have any questions about real estate or our turnkey properties specifically, feel free to submit that question on one of our websites. Either PassiveRealEstateInvesting.com or our main property website NoradaRealEstate.com. One of our investment counselors will get back to you and help you out. If you have a question for me specifically, just go to the Ask Marco link on the Passive Real Estate Investing website. I will be sure to cover your questions in a future episode.
Again, we have our free mug, our “Keep Calm and Invest on Coffee” mug. I’d be happy to send you one for free. Just leave us a rating and review on iTunes and then shoot an email over to reviews@NoradaRealEstate.com and I will get that in the mail within 24 hours. That really helps us spread the word and we really appreciate you listening and providing us that feedback. Again, thanks for listening and we look forward to seeing you on our next episode.
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