Strategic Property Management: How Many Properties Make a Property Manager Cost-Worthy?
The cost of owning and managing multiple rental properties can be substantial, particularly when considering the expenses associated with a property manager. However, the number of properties you own is not the only factor in determining whether having a property manager is cost-effective. This article explores the key considerations in deciding if a property manager is necessary and how many properties are needed for this to be financially beneficial.
What Determines the Cost-Worthiness of a Property Manager?
ROI and Cash Flow are crucial factors to consider when deciding whether to hire a property manager. The return on investment (ROI) of your properties plays a significant role. A well-thought-out investment strategy that targets a minimum ROI, such as 6%, indicates the potential profitability of a property under professional management. If you can achieve this ROI efficiently, a property manager can be a worthwhile investment. Conversely, if you lack the experience or the ability to generate a consistent 6% ROI, you might be better off investing your time and resources elsewhere.
Optimal Circumstances for Hiring a Property Manager
Special Circumstances: If you have inherited or received properties with no mortgage, it could be possible to manage them yourself without a property manager. These situations generally benefit from less management intervention, especially if the properties generate enough positive cash flow to cover the management and maintenance costs. However, for those who have invested their own finances, strategic planning and careful maintenance are essential to ensure a sustainable return.
Financial Viability: Cash Flow and Income Streams
For properties to support a property manager, they must generate a sufficient amount of income to cover management fees and expenses. The Rent-to-Value Ratio (RtV) is a critical metric here. This ratio is calculated by dividing the monthly rent by the property's purchase price. A property with a Rent-to-Value Ratio of more than 1 is ideal, as it ensures a positive cash flow after expenses. In primary markets like New York, San Francisco, and Los Angeles, properties often have an RtV ratio of more than 1. However, in secondary or tertiary markets, the RtV ratio may fall below 1, making it challenging to sustain a positive cash flow without professional management.
The Condition of Your Properties and the Quality of Tenants
The condition of your properties and the quality of your tenants significantly impact the need for a property manager. Properties that require frequent maintenance and attention are more likely to necessitate professional management. Additionally, tenants can be categorized into three broad types: independent, interdependent, and dependent. Dependent tenants often require more attention because they expect others to manage the property.
Generating Positive Cash Flow
Another crucial factor is whether your properties generate enough positive cash flow to cover the typical 8-10% management fees charged by property managers. If your properties do not support the property manager’s income, reaching this threshold can be difficult, making self-management more feasible. However, if your properties consistently earn more than this percentage, a property manager could be a valuable asset in optimizing your rental income.
Conclusion
Deciding whether to hire a property manager is a complex decision that involves a range of financial and logistical factors. While the number of properties is not the sole determinant, it is essential to consider the properties' financial performance, the time you have available, and the condition of the properties and the quality of tenants.
A property manager can significantly enhance your property management efforts, but the decision to hire one should be based on a thorough analysis of your specific circumstances. By understanding the key factors involved, you can make an informed decision that maximizes your returns and minimizes your risks.