Risk Mitigation in Property Management
There is a reason in real estate school property management is known as a “liability” in investment properties. It’s a nightmare. I know firsthand both as a property owner and as a sales rep who brought on 200+ homes for two of the largest short term rental property management companies in the US. Bed bugs. Lost couches. Security risks. Fraud. Broken furniture. Lawsuits. 1 star reviews. I’ve seen it and heard it all in the past six years. Theft. Squatters. Disgusting levels of cleanliness. It’s ugly and it’s covered up in a mask of Shiny, Happy #shinyhappypeople matterport videos and technical data terms such as “dynamic rate algorithms” and “optimized pricing.”
Large companies who have no vested interest in the local community are a huge red flag. Real estate is largely a local endeavor because markets are so different in nature. Local companies will have better hires, stronger support staff, and have a much keener desire to maintain a strong reputation in market since they are managing for people they know in their community – people who are friends and family.
So how do you mitigate the risk to your investment, your property, and your future stake owning your piece of paradise?
Here are some tips I picked up along the way:
- Know your property manager. Treat your local point of contact as your eyes and ears. Do you value seeing and hearing? Value that person. Thank them. Spend time with them. But if they are not working – FIX IT! Do not trust your eyes and ears to just anyone. If you have that feeling that something is wrong, things are being brushed under the rug (literally!), or they keep giving lip service but not actually doing the things you rely on them to do – FIX IT! Don’t wait until it’s out of hand. If you have eye problems do you just let it go? No, you FIX IT!
- Less is more. I initially thought rentals should have the “homey” feel and be a home away from home. And while certainly guests expect the comforts of home, they don’t need the clutter, decor, and extra “stuff” you think makes your place cute. It should be staged, not decorated. So the furniture needs to be functional over aesthetically pleasing. Think durable, high quality, sturdy, and comfortable when you are purchasing the bedding, couch, patio and dining furniture that are used non-stop during a guest stay. Guests need a place to put their toothbrush, plop their suitcase, and hang their towel. They need a non-skid rug that will absorb sand or dirt; they do not need a frilly pretty rug that looks good but will literally slide out from under them.
- Watch your statement. There is a considerable lack of transparency in the vacation rental industry. It is a loosely regulated, market disrupting new industry of the tech age with a gigantic amount of pending lawsuits and litigation in cities across the country because of the headaches and turmoil it causes with neighboring permanent residents, taxes, and tenancy rights. While all these bigger issues are playing out, the vacation rental companies are making a mint with extra fees on their owner’s statements. $150 charge to replace a $60 microwave. $40 for an a/c check on a new a/c that the maintenance tech didn’t flip a switch on. $125 for an owner clean after the owner cleaned themselves. Booking fees, credit card fees, maintenance fees… they just go on and on. Just like you call the cable company when they go up, call your property manager and walk through each fee to dispute or justify.
- Be a hands on owner. If you establish yourself from the outset as an involved owner, you’ll have fewer ridiculous fees and overall problems with your property. I suggest going in once per quarter for a quick property evaluation. If this is not feasible, ask a neighbor or friend or pay an independent local person to do it. Then plan for a once a year overhaul. Touch up paint. Replace damages. This is where most of the PM companies wind up overcharging you or failing to maintain to an owner’s expectation level.
On the flip side of property management shortcomings – are owner expectations. Be realistic. Do you expect pillows to be returned to the exact perfect place between each guest and nothing to get worn down or need to be replaced? Then it’s simple – don’t rent your home out! For all the guest screening measures there are today, the reality is unless you book your place exclusively to friends and family (and what family or friend wants to pay full price?!) you will not really know who is coming into your home. Cameras are illegal inside bedrooms / baths and there are only so many questions you can ask before handing over the keys to your property. You have to be ok with strangers coming into your home. It’s best to think of it less like a home and more like the investment it is. The expectation needs to be that your property manager is there to help you mitigate risk in your investment. If you have a rowdy group who creates some damage, you need to be able to rely on them to help you identify the damage and repair it promptly. You are relying on a property manager to maintain your home and keep it clean – not shiny, new clean and not in perfect condition – unless you are on 30A and marketing exclusively to a premium market, but that’s another article entirely.
The large companies have a sales force that are trained on how to evade answering the tough questions directly and give the best version of the company in every way. Be sure to interview the GM or local operations staff – particularly your local point of contact, before you sign up. They are the ones handling the day to day issues that come up with your guests. That person will be the one with eyes on your property. All the fancy literature promising huge returns, higher occupancy, and a perfectly maintained home – it’s all just marketing. There is inherent risk with any investment; your goal is to make sure you hire a property management company that is a partner to help mitigate that risk, not exacerbate the risk with their own poorly trained staff or failure to communicate with you when things go wrong.
If this hasn’t scared you off, then owning that investment home can still be a great profit center, a huge tax benefit, and a cost effective way to vacation to one of your favorite locations.
