Why Don’t Property Management Companies Just Buy Property?
Property management can make your life as a landlord very easy, but at a cost. Are these property management companies worth the money you pay them and why don’t real estate property management companies just buy their own rentals? These are questions that scare me from being a landlord.
When considering owning rental properties I always come across the same problem, why wouldn’t property management companies simply buy the property I am considering? A while back I was looking at a $35,000 condo and the realtor showing it even offered to be my property manager. I though to myself, I am putting down $7,000 down plus closing if I buy this rental and this guy looks like he has $7,000, why wouldn’t he just buy it and manage it for himself?
The answer is kind of sad. Property management has less risk and more reliable profits by not actually investing in the properties. Don’t get me wrong, lots of property management companies do have real estate of their own, but some companies only manage other’s properties.
If I offered you three opportunities, which would you choose?
Option #1, You Buy and Manage – You Pay $7,000 today and profit $300 a month and have a 10% a year chance of losing $2,000 (to a major repair or bad tenant). Profit in one year: $3600 – 200 (10% chance of –2000) = $3,400 – Hassle and Risk
Option #2, You Buy and Someone else Manages – You pay $7,000 today and profit $200 a month and have a 10% a year chance of losing $2,000 (to a major repair or bad tenant), but have no phone calls or interaction with the actual tenant. Profit in one year: $2400 – 200 (10% chance of –2000) = $2,200 – Risk but less hassle
Option #3 You Manage – You pay $0 today and you profit $70 a month and possibly an additional $700 every time you sign a tenant and have no risk. Profit for one year: $1,540 – 0% risk, some hassle.
The point of this article is to ask one question, why are their companies who only manage other people’s properties. If there is enough money for them to make their cut and also give you your cut – why wouldn’t they simply buy these properties and cut out you out. They wouldn’t have to hassle with setting you up as a client or giving you a call when something goes wrong. Why would they not manage their own properties – since there is so much money to be made.
You might say, maybe they don’t have the money to invest – but if they were really this successful, they could find an investor. The fact of matter is there is no risk to the property management company. If the $1200 a month house doesn’t rent, they aren’t out $1200, they are out $120 of revenue. If the roof caves in or the a/c or furnace gives out, they aren’t footing the bill (if anything they are sending you a bill and possibly getting a kickback from the handyman performing the service). Make no mistake, these managers are making money when repairs are performed.
If you really think about what I am saying, I think you will see that the writing is kind of on the wall – Rentals are far from risk free and the hassles can be worth paying someone to handle them. Is there money to be made? Yes, but just something to consider.
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