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The 3 Criteria Most People Use To Select A Property Manager (And Why They're Flawed)

6/7/2019

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The 3 Criteria Most People Use To Select A Property Manager (And Why They're Flawed) - carnelian property management newcastle

When choosing a property manager, it can feel like everyone is offering much the same thing. The fees and charges between different options can make it hard to compare apples with apples.

Many investors resort to creating a spreadsheet, listing all the real estate agents they can find and recording the management fee, lease preparation fee, monthly admin fees, advertising fees, etc. for each. Some even work out the annual cost of using each agency, and whoever comes in cheapest "wins".

If this sounds even remotely like you, read on. In this article we cover the 3 criteria most people use to choose a property manager, and why these criteria are flawed.

1. Choosing A Property Manager Based On Management Fees

Investors are generally aware that the majority of the expense in engaging a property manager is the payment of the management fee, the percentage of the rent retained by the agent in exchange for their service managing the property ongoing.

With the exception of the occasional low-service / low-involvement offering (often from a Sydney-based or online-only company using satellite and high turnover staff on the ground), most management fees in the Newcastle region sit between 5.5% and 8.8%. Most commonly, the fee is around 7.7% and if you find lower than this, you are already ahead of many. Most agencies also charge a monthly admin or statement fee of $5.50 to $12.

New investors in particular generally assess and appoint a property manager based on the lowest management fee they can find. This is a flawed method of finding a quality agency, and here's why.

Let's say you have a property with a typical asking rent of $460 per week. All other fees being equal, the difference a lower property management fee makes is as follows:

An agency with a 6.6% management fee will cost $30.36 per week to manage, or $121.44 per four weeks
An agency with a 7.7% management fee will cost $35.42 per week to manage, or $141.68 per four weeks

What seems like a significant difference in management fees makes a difference of just $20.24 every four weeks, or only $263.12 per year.

Now, investment is a financial pursuit. Every dollar counts. But there's more to consider than management fees alone.

To put this in perspective, a saving of $263.12 per year between a 6.6% agency and a 7.7% is the equivalent of having your $460 per week property vacant for 4 days.

The annual difference between a 6.6% and 7.7% management fee is the equivalent of having your property vacant for just 4 days.

So, far more critical than finding an agency offering low fees is finding an agency that will minimise vacancy and fill your property fast. How do you know whether an agency will do this?

Search for their business and read reviews on Google and Facebook.
Look for an agent with some "skin in the game". A principal or business owner, rather than a salaried employee, is far more invested in getting you a great result quickly as it directly affects their business.
Look for businesses offering flexibility around open inspection times, ensuring they will be there to show the property to potential applicants at a time that suits the applicant (not just a time that suits the agent)

2. Choosing A Property Manager Based On Highest Rent Appraisal

Before even comparing fee schedules from various property management businesses, some investors will shortlist real estate agencies based on the highest rental appraisal they are offered for their home.

We've covered this topic in detail before in our post "Should I Choose The Agent That Estimates The Highest Rent For My Property?", but the short answer is no.

It is a misconception that a higher rental estimate suggests greater experience or market knowledge from an agency. Sometimes a higher estimate is actually a sign of an inexperienced property manager or a business development manager needing to hit their new business targets for the month by securing another landlord.

Scepticism aside, let's say one agency with a 6.6% management fee suggests listing your property at $460 per week while another agency with a 7.7% management fee suggests $480 per week. We see this all the time.

The lesser rent in this instance would see you receiving $429.64 per week after management fees, while the higher rent would see you receiving $443.04 per week. This difference of $13.40 per week equates to an annual difference of $696.80.

At first glance, it seems like an obvious decision to make to go with the higher rental estimate. But think further about this. The lower the asking rent, the broader the pool of quality applicants you will receive for your property and the more quickly your property will be filled, providing you with income.

The lower the asking rent, the broader the pool of quality applicants you will receive for your property and the more quickly your property will be filled, providing you with income. Minimum vacancy beats higher rent.

In the above comparison, the difference of $696.80 per year equates to 10 days of vacancy in your property. It is very likely that a property listed for $20 less per week rent will be filled at least 10 days more quickly than if a "top of the market" rent is sought. Yes, a higher rent could be achievable, but you bleed income while waiting to find a tenant for the higher asking rent.

Remember, minimum vacancy beats higher rent.

3. Choosing A Real Estate Agent Based On Financial Measures Only

Of course, property investment is a financially-driven pursuit. The objective is long-term financial gain and minimal short-term impact.

But choosing an agent based on spreadsheets of fee comparisons misses many critical considerations entirely:

Enjoyable to work with - You need to get on well with your property manager. While you don't need the experience to be a social wonderland, you want to enjoy the experience of working with your property manager, as ideally they will be entrusted with your investment and its success for years
Easy to reach - You need to know your property manager is easy to get hold of both as an investor and from a tenant's perspective. Messages left with a receptionist or junior staff member don't solve problems quickly or get you the information you need when you need it
Experienced property investor - It is recommended you have a property manager who is an experienced home owner and property investor themselves. Without this knowledge and first-hand experience, there is relatively little understanding of the impact a vacant property, late-paying tenant, or excessive maintenance requests can have on an investor
Experienced handling sensitive issues - How experienced is your property manager at dealing with sensitive matters related to your tenant or property, such as loss of employment, relationship breakdown or death?

There are many "soft" qualities and attributes a spreadsheet comparison of fees won't address, but which are arguably more crucial to the long term success of your investment and your level of enjoyment along the way.

There are many "soft" qualities of a property manager which are arguably more crucial and which a spreadsheet comparison of fees won't address

For more tips we recommend reading our article "How To Find the Best Property Management Company In Newcastle".

If you are seeking focused, experienced, transparent and professional property management in Newcastle, contact us now. We'd love to meet you and discuss your investment.