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Should You Self-Manage Your Rentals or Hire a Property Manager? (Rookie Reply)
00:20:53
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- [00:00]
A
You found the deal, ran the numbers and you're ready to go. But before you write that check, how much should you put down as earnest money and what actually happens to it if you need to walk away?
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B
Today on the Ricky reply, we're digging into three questions straight from the biggerpockets forms, earnest money, due diligence protections, self managing versus property manager, and how to confidently analyze a market that you've never said.
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A
This is the Real Estate Rookie podcast.
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B
I'm Ashley Kerr and I' Tony J. Robinson. And with that, let's get into today's first question. So this one comes from the Bigger Pockets forums and it says I'm under contract on my first investment property and my agent suggested I put down $5,000 in earnest money. I've also heard about a due diligence fee that's separate and non refundable. I'm confused about the difference between the two. How much should I put down and what happens to my money if the inspection comes back bad and I want to walk? Can someone break this down for a first time home buyer? Now, I've only leveraged earnest money. I actually haven't ever paid a due diligence fee. But I, I think I remember one of the, the recent agents we interviewed talking about this. But Ash, have you ever used a due diligence fee separate from earnest money?
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A
No. And the guest that we just had on that was the first time I had really learned about that because we just have the earnest money that we put down and, and you have a window, a period of time to do your due diligence and that's usually when you get your home inspector to come out and then you can get quotes on different repairs that need to be made or you can negotiate but after that time limit is done and then your earnest money is no longer refundable. Unless there is another contingency in your contract like c, say that typically if somebody does a loan you'll see that the interest rate for the loan they're getting, if the interest rate goes above 7%, then they can get their earnest money back and get back out of the deal. So that could be like something contingent that it's on or maybe it's contingent on them selling their own house and they have, you know, 30 days from the start of the contract to get their house under contract or something like that, then that could also be refundable. But what we learned about this due diligence fee is that you're basically paying the seller of the property days to look at the property and you don't get that money back. That is just, here you go, I'm going to pay you $50 per day. I need five days to do my due diligence and that's what you're getting paid. And then at the end those five days, you decide if you're going to walk or if you're going to continue through with the offer on the property.
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B
Yeah. And that was episode 696 with Ellie Ridge and she's a realtor out in the Bay Area, which is one of the most competitive markets that are out there. And that's why I think there are some things that were specific to that area that we don't quite see in other parts of the country. But I think in most markets you're probably just going to need to put down an earnest money deposit. But to your point, Ash, I think that they're. Well, I guess to answer the question right, he says, you know, what happens to my money if the inspection comes back bad and I want to walk? Well, that is the entire purpose of the due diligence period and your purchase and sell agreement is that you get to say I want, for me, I usually put 14 days. What does it look like for you in New York, Ash?
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A
Yeah, I'm usually doing less just because we can usually get a home inspector out there pretty quickly. But I'm usually doing like less than seven days, to be honest.
- [03:40]
B
Yeah. And it depends on the offer. Right. If you're buying from like a, a wholesaler, you know, a lot of times you can't, you can't bake in a, a due diligence period. But if, if I'm buying on market, my usual approach, I'll ask for 14 days. And during that 14 day window, that gives me the ability to send an inspector out there, get my inspection report back, maybe send any qualified professionals to look at certain elements that the inspector recommended, I, I get other folks to look at. And then once you get back all of those inspections and those projected costs, you can then go back to the seller and say, hey, based on my findings, there were some maybe material changes that I didn't know or I wasn't aware of when I made my initial offer. And because I now need to maybe replace the entire roof instead of patching it, or maybe all of the electrical needs to be, you know, redone because of X, Y and Z. Well now my offer goes from, from X to now y and hey, Mr. And Mrs. Seller, if you agree to these terms, we can continue on with this contract. If you disagree, well then this is my ability to walk away because we're still within our due diligence period. So that is the entire purpose of the due diligence time period in your contract is to give you the opportunity to dig deeper, complete your due diligence and then either say yes, I'm ready to move forward or no, I want to walk away.
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A
Coming up. You've got the keys, but now someone has to manage this thing. And should that be you, we're going to break down the self manage versus the property manager decision right after this. We'll be right back.
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C
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A
Okay, welcome back. So we just learned about how to protect your earnest money. You close on your first deal. Now the question every new landlord faces. Do you manage this yourself or do you hand it off to a property management company? So our second question comes from the BiggerPockets forums and it says, I just closed on my first rental property, a single family home about 25 minutes from where I live. I've been going back and forth on whether to self manage or hire a property manager. The PM I spoke with charges 10% of monthly rent plus a leasing fee equal to one month's rent. My cash flow is already thin at about $200 per month. Self managing would protect that margin, but I've never been a landlord before and I'm worried I'll make mistakes. What should a rookie actually consider here? I think this is a great question to be asking yourself because there's many things you should be asking yourself before you make the decision. And this first of all, the fees of the property manager. I would say this is very, very typical. The 10% of monthly rent, you can see it vary from when I was managing 80 residential units and I handed those off to a property management company. They gave me a big discount because it was so many properties at a larger or so many units at a larger scale. So it can vary depending on how many units you are bringing. They can give a bulk discount, but you also, you can see this go up to 12%, 15% of the monthly rent. So you want to make sure you understand what is included. So what exactly are they doing for you? Are they doing the bookkeeping? Are they Handling the maintenance requests, are they doing, you know, they taking all of your leasing questions like what is happening with all of that? What is included in that? Then the next thing is the leasing fee equal to one month's rent. Also I've seen that very, very typical to be one month's rent. So what you need to consider here are any additional costs. So for example, when I use a property management company, they also charged $25 per a month per property and that was for any after hours phone calls or maintenance. So instead of charging, you know, me overtime for their employee to go out to the property to do an emergency thing, they just consistently charge that $25. And I was still charged their standard rate of, I think it was $45 per an hour for any of their maintenance work that was done. So ask about any of those other fees that may be tacked on. While I was working with them, they added in something to their agreement, property management agreement, that they would be performing six months preventative maintenance at each of the properties. Every six months they would do this and you would be charged X amount I think was like $75 or something. Well, it ended up being a lot more. They would go in and say all of these things that needed to be done and then upcharge you all of these things. And it was like it started to get ridiculous at this point of things that actually didn't need to get done. So really understand their process and their model and that can help you make a decision. Then the next thing is looking at your time. Do you have time to self manage? You're going to need to respond to messages, you're going to have to do lease renewals, you're going to have to, going to have to show the apartment when you're renting it. So there are different things I think the yes, the money and how much they'll charge, but also what are you actually getting for your money and then do you have the time to do it? But 100% you can self manage your property for sure.
- [11:32]
B
I, I think with all the tools that are available to landlords today, self managing is probably easier than it's, than it's ever been. And I think with the right support, the right frameworks, the right Systems, you know, BiggerPockets has books on managing properties. We've done tons of episodes on the Rookie podcast. I mean you get a really good lease, maybe find a really good attorney in case you do need some support around evictions or hey, how should I handle the tenant question or relationship and then you put all the tools in the automation in place and self managing I think is a viable option for most people listening today. But I think to your point, Ash, the question that we want to answer is well, hey, what is your actual goal on this first deal and maybe what are your long term goals for yourself? You know, if you really want to be a hands off investor and you just want to focus on finding the deals and, and underwriting and analyzing, getting the financing and putting the deal together, but you have no interest in actually managing well, then yeah, hand it off to your property manager and just try and make sure your next deal has a little bit more margin. But if you want to be part of that management process and that is a part of the the game that you want to learn, then I think it's worthwhile to jump in today. But Ash, I think you hit all the important questions someone should focus on as they're, as you're going through that.
- [12:42]
A
If you go to biggerpockets.com leases, there's also lease agreements available per state. So they're made by attorneys and they're specific to your state. You'll just have to change them specific to your property. So for example, if you have a shared driveway, you know, putting that in, you know, what are the parking rules, things like that that are specific to your property, you'll have to make those changes in there. But it's a great free resources using those lease agreements.
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B
All right guys, we're going to take our final break and while we're going, if you have not yet subscribed to the Real Estate Rookie YouTube channel, you can find us @RealEstate Rookie. And then you can not only hear our voices, but see mine and Ashley's faces. And sometimes we'll put cool little pictures up on, you know, on the screen you can see things like that. But just another place for us to connect and continuing to help you find your first or your next deal. But we'll be right but we'll be right back after we're from today's show sponsors foreign.
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C
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B
All right guys, welcome back. We're here for our last question and this one says I live in an expensive market where the numbers just don't work for me. As a first time investor, I've been looking at markets in the Midwest and the Southeast where prices are lower and rents look stronger on paper. The problem is I've never been to these cities, I don't know anyone there and I'm not sure how to tell if a market is actually good or if I'm just looking at cherry picked data. How do I properly analyze an out of state market before I commit? This is, you know, a question that I feel like we get often from rookie investors, especially those who are in high cost of living areas or maybe the numbers don't work out all that well. So when we talk about selecting a different city and I appreciate how they frame this is, you know, they said how can I make sure that it's a good market and that I'm not just looking at cherry picked data. I think that we can build confidence for ourselves by going and sourcing our own data. And it sounds like you're talking about a traditional long term rental. So we'll just go with that as your strategy, as your strategy here. But the things we want to look at obviously price and can you afford to buy there is probably the first thing, right? Because even if all the other numbers work out but you can't actually afford to go into that market, then it's not worthwhile. So like just the actual cost of real estate as it relates to your ability to buy. But once you check that box and you say, okay, I actually can't afford to invest here. Things like population growth, are people coming in or are people leaving? Right? Like which, which way is this? Is this population headed? Things like jobs and industry and diversity of business, which is actually slightly different for, you know, if you're doing like a short term rental for long term those things are important, right? Because if, if One company employs 80% of the people in that town and that company goes under, well, what happens to that local market? Right? But if you've got, you know, several business headquarters and you've got a university and you've got large medical centers and there's some diversity of industry there, well then that's a good sign for you as well. The other piece you can look at are things like crime stats and is this a place where you know you might get robbed while you're sitting at a red light or is this the kind of place where you can sleep at night with your doors unlocked. So just understanding the data around crime schools and how well those schools do, and trying to identify which parts of the city and which neighborhoods have the better performing schools, because people typically want to live in those parts of town to send their kids into those better schools, which means you get a better tenant pool and things of that nature. So there are certain data points that we can go grab to help us understand without taking into account anyone else's data. What is the actual health of this market and what does that look like? So I would just start building my own database of data points. And I've shared this before, but if you guys go into the real estate rookie Facebook group, we don't talk about that often, but it's still sort of a pretty active Facebook group. And you search for my name, Tony Robinson. One of the very first posts I did in there, and this is before I was a host on the podcast, I just like did a huge data dump of the research I was doing as I was searching for my first market. And I had tons of data points in there. I can't even remember at this point, but I pulled like every, you know, they're called MSAs, but like, you know, statistical areas, and I put all these data points for all these different parts of the country. So if you want to see what my research looked like, just go search in the archives for that real estate rookie Facebook group.
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A
One thing that I think you can do is like really narrow it down to two or three markets. And then Tony did this with one of his markets is connect with an agent from Agent Finder in those markets and ask them what they know about this market. And I remember, Tony, when you talked to this agent, you got this long email back that was just this wealth of information about that market. And then you can kind of take those three emails from the agents and compare them and use that as, okay, here's somebody here's boots on the ground. What are the pros and cons? And then even take it a step further and ask them, like, what are some of the negatives of investing in this city? And put them on the spot for that. Because nobody can say, oh, this is perfect. There's no, you know, nothing wrong. This is the best investment. That's going to be a red flag right there not to work with that person and ask them, like, honestly, what are the negatives of this? Like, if someone was going to ask me about that for Buffalo, I would say that within, like the Last year and a half, I think it's been, there's been new, there's been political changes where they're really, really cracking down on landlords. The evictions are getting way worse, way longer, way harder with the new judge they have in the, in the city. So I think that would definitely be a negative. The second thing is, is that the property taxes are really high too. So you know there's going to be negative things with every city. And I think that's, you want to know all the glory, but you also want to know what are going to be the pain points before actually stepping into that market too. Okay, well, thank you guys so much for joining us for this episode of Ricky Reply. I'm Ashley, he's Tony. And if you guys aren't already a member of Bigger Pockets, you can sign up for free. But we also have a pro option and it is getting better and better by the day. So. So I used to have this all memorized of these pro perks that you could get, but we just added so many of them that I don't even have them memorized anymore. So I'm just going to share with you guys real quick some of the things. So we actually now have a pro partner where you can get $2,000 per year towards your DSCR loan closing costs. Okay. We love DSCR loans. Okay. Plus 0.25% off your upfront funding fees. Another 1250 if you do a fix and flip loan or bridge alone off your upfront fees. Okay. Insurance, everyone needs their landlord insurance and proper insurance. So we've now partnered with steadily and you can get a 5% discount up to $256 per year off of your insurance premium. And then we go into, you know, rent ready. You get that for free as a added perk of, you know, that's included into your membership. Baselane, you're getting automated banking and the bookkeeping for free. With Baselane Home Depot you get their elite tier pricing which I'm going to actually be using very, very soon on my my next rehab. So there's a ton more things I could go into, but it definitely is worthwhile. You can start a free trial for seven days and check out these pro perks and see if it's worthwhile for you. But just head over to biggerpockets.com and I think we actually might have a 20% off code that you guys can use. Try Tony or try Ashley, see if any of those work. They were valid at one point. I'm not sure if they are anymore. But I'll work on getting those codes working again if they're not. But you can put in Ashley or put in in Tony to get that 20% discount. Thank you guys for listening and we'll see you on the next episode.
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B
Episode hey rookies. If you're watching this, we want you to apply to be a guest on the Real Estate Rookie Podcast. That's right. Ashley and I are looking for amazing stories just like yours to be a part of our Real Estate Rookie Podcast. Now look, you don't need to be an expert. You don't need to have done thousands of deals. Even if you've done one deal, your story could help inspire the next listener
- [24:07]
A
as a rookie investor. Especially if you just got your first deal. It is all fresh in your minds and you are the best person to tell your story. Give your experience on how you got it done to help sell someone else get their first deal.
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B
So head over to biggerpockets.com guest if you want to be a part of our show again. That's biggerpockets.com guest and we'd love to
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C
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