#45: Should You Manage Your Rental Properties?

Foreign welcome to the Passive Income MD Podcast where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. Hey everyone, hope you're having an awesome week. This week we're going to be talking through the discussion and the question, should you manage your own rental properties? Now, if you're thinking about this because you already have a rental property, you're not sure what to do, congratulations. That's a good problem to have to wonder whether to do this or not. For others who are thinking about getting properties, you might be thinking about this as well too, because it might affect where that property is that you buy, especially if you're going to think about self managing. Now I have some pretty strong thoughts on this and we'll talk about it on this episode. Now, when it comes to income, right, we talk about passive income quite a bit. I would say that's I put passive income in quotes, at least the passive part, because I mean, few things in life are truly passive, meaning you put in zero work and receive income in return. I mean, the whole idea of just making money in your sleep right off the bat, I mean, of course that's super appealing to people. But let's be honest, it takes some work and energy, capital, something up front to allow for that passive income to grow over time. And you know, if you don't know my definition of it, I'll tell it to you here. I say passive income is income that is not proportional to the time you put into it. So I'll say it one more time. Passive income is income that is not proportional to the time you put into it. Meaning that in the beginning you might put a little bit extra time and maybe the income is there, maybe it isn't great initially, but over time it starts to grow with the same or less effort. And that's the beautiful thing. You can scale your income and leverage your time and energy. And that's what makes it passive income to me. Now, when it comes to the irs, they consider owning properties and the income that comes from it as passive. At least they call it passive. Now the reason that's important is that passive income, especially according to the irs, falls in a different bucket from active income. The reason this is important is that the IRS puts passive income in a different bucket than active income, like your day job. Now, even though it's called passive, I mean, there are Plenty of day to day tasks that need to be performed to make sure any rental property is performing well. I mean, some of those tasks include and not limited to this by any means. It's like collecting rent, marketing or advertising for open vacancies. You got to screen tenants, show the property. So to potential renters, you got to make sure your lease agreements are signed correctly, they're in compliance. You got to collect safety deposits, make sure the property overall is in compliance with local national standards. You've got to handle maintenance requests, make sure that they're completed and done. You find the right vendors to make sure all this work is completed and scheduled. You've got to pay out vendors, you got to pay utilities. And you know, that's just a few things to, to name. But the extent to which these things need to be performed really depends on how big the property is. Is it one unit, is it 10, is it 50 or 100? You know, you may have to do just a few of these things on a monthly basis, but for some other properties, you may have to do these constantly on a day to day basis. Now, when you look at all these responsibilities and you lay it out like this, I guess the next logical question should be, should you manage your own rental properties? Now, if the answer is no, you already know that, then you're likely in the market to, you know, you're gonna be looking for a property manager. Now, finding that property manager isn't necessarily easy, just so you know. We'll talk about that in a future podcast episode about, you know, what it takes to find a good property manager. But just so you know, there's a vetting process there too. So some people say, hey, I should just manage this property on my own. Now, as with pretty much everything else in life, there's no one perfect answer for all scenarios. So because of that, I thought I'd take a little bit of a deeper dive into this question and think through it. And if you're kind of sitting on the fence, maybe it'll help you make a decision on your own. So in thinking through this, I think it's important to ask yourself a couple key questions. And so let's start with the first one. Do you have the time? Now, I mentioned all those tasks before and a lot of them aren't necessarily difficult. I mean, at least from a technical standpoint, you know, they just really become problematic when they start to stack up. I mean, imagine spending days trying to fix up a unit while, you know, marketing and showing other units of potential renters. I mean, and you multiply that by 20 or 30 units, that's a full time job. And if you have that time to dedicate to it, good for you. However, if you're a physician who's already feeling pretty stretched at work, you know, maybe you have a family and you already feel like you don't spend as much time with them as you'd like, you have hobbies that you like to pursue and you just haven't had the ability to do so well, then maybe this isn't the right thing for you. I mean, imagine throwing a full time property management job on top of that. And just so you know, it is a job. I mean, that's why professional companies are there, that's why they're a huge business and, and they exist because of this situation. So I think you really have to really ask yourself like how much free time do you have to devote to it? I mean, one of the properties that I have, just so you know, it's a condo that my wife and I lived in during our residency. It's a one bedroom condo. It was recently renovated and is in a fantastic part of town. I mean there's truly a ton of competition whenever this condo comes up for, for rental. And because of it we've had the luxury to be able to pick some really amazing tenants. And this has allowed us to self manage this property. They pay us on time. They actually are amazing tenants and they understand that I'm a busy professional and so they actually help me in terms of finding vendors or something needs to get fixed. Oftentimes they fix things on their own and they ask me if it's okay and I just tell them to send me the bill or we take it off the rent. And so in that situation, it's made it very, very doable. And sometimes for that one property, you know, when you're normally paying property management anywhere between 8 to 10% of the rent, you know, then it starts to become, hey, if, if I've got great tenants who are basically self managing and you know, I'm able to do that, then maybe, maybe I should self manage. Now there is another property that owns, it's like a six unit on the other side of town. It's actually probably a little closer to me, but it's an older building and there have been a ton of renovations, there have been a ton of maintenance requests. Plumbing and electrical stuff tends to come up quite often, plus there's turnover here and there. Personally, I felt like I didn't have the time to deal with all that and all the building issues. So it was a no brainer for me to hire property management just from the time perspective. Now I've talked about it in previous posts, you know, how much is your time worth? We're going to address that a little bit later as well. Now here's another question. Do you have the expertise, as I mentioned, some of those tasks that you have to do and when you manage a building is really making sure the building continues to be a good investment. If you remember it's an investment, it produces cash flow for you, hopefully. And so in some ways I like to call owning properties. It's a business. You need to figure out ways to optimize it, Increase income, decrease expenses, you know, increase at the end of the day, what's called your net operating income because that really affects the value of your property. And of course you're trying to optimize cash flow. Now, all these type of things. Do you have the expertise to be able to shape and drive this ship to get where you want to be like any other business? Now where do you get this expertise? I mean, there's definitely some experience involved. Maybe you've read books, found articles you have hunting on Facebook, groups like ours, passive income docs where you're talking to other people about it. Maybe you have a community of people locally that are willing to help you. But beyond that, what are you using to learn about this and do it? Well, I mean, at this point, I've been around enough properties to know what these property managers do. Now, most of the time, again, it's not extremely complicated, but when it does get complicated, having someone who knows how to deal with that type of situation is absolutely vital. It's funny, like, I kind of think about it sometimes, like my job in anesthesia. Now the good thing is technology has gotten so great with our machines, with all our monitoring that in a lot of ways a good portion of what we do is very, very safe. And especially when it's not complicated, in some ways, a lot of us can do it and handle it quite well and quite easily. Now what really distinguishes a good anesthesiologist versus let's say a poor anesthesiologist is someone who knows how to really handle the complications when things get tough. And I think that's the same case when it comes to these property managers. In most cases, 90% of stuff they deal with doesn't matter who you have. But with that last 10%, it makes a huge deal because there are tons of like local, state, federal guidelines you have to make sure you're in compliance with all of them, all the management type stuff, and learning how to deal with the nuances of dealing with tenants. Having a good property management team in there to know how to handle things and control costs is huge. And so are you willing to keep up with all the current news, the regulations, to make sure you're in total compliance? Are you willing to put in the time, energy and effort to learn how to operate this business to the best and fullest degree? You know, and so that is my question for you. Now I have another one. I mean, how much is it then to hire property management and ultimately is it worth it? Now, I found that for smaller properties, property managers will look to receive somewhere about 8 to 10% of gross rents. Now as the property gets larger, you might see that drop down a little bit just because of economies of scale. And sometimes you'll see it get down to about 5% in management fees. Also, it's important to recognize that there are some additional fees that the property management charges, especially when the time when, you know, the property becomes vacant, like a unit becomes vacant and actually has to get rented, there's usually some sort of turnover fees. Sometimes there are showing fees and placement fees. It's usually some percentage of the first month's rent. So look out for that as well. But as a side note, you know, while you can bargain, let's say, for the lowest possible fee, you know, for a management company, you can look around and find the one that gets paid the least. Just so you know, you're also removing a lot of incentive for the property management to do a good job or spend any real time or effort on your property. You know, it's definitely one of these things, you know, you get what you pay for. I absolutely believe that with property management now, I don't want to get, quote, unquote, overcharged, but at the same time I really look for that high quality property management and I don't mind paying them quite well to do their job as long as they're performing for me. So then this question remains, is it worth it? Now that's really up to you. You got to realize how much you want to spend time doing this. How much is your time worth? And if you're listening to this, you're a high income professional. You know, if you set your hourly rate like at least internally, at least mentally, and anything less than 250, I'd be surprised. Many physicians that I know consider their hourly rate in terms of life and, you know, in terms of what they decide to buy or pay for, they set the rates as $500 an hour. That's their assumption. If they can find somebody to do it for less than that in something that they just don't enjoy doing, it's worth it at that point. So my question to you is, how much are you paying these property management? How much time are you saving by having them? How about the mental hassle, the energy and things like that? At least you gotta consider all of that. I mean, another question I have to ask is, do you live close to the property? And being a good property manager really means being able to get to the property quickly when issues arise. Obviously there are some issues that can be done over the phone or with online these days. However, if there's a large, you know, geographic barrier distance between you and the property, it becomes difficult to manage it. I mean, what if you have to pop over there for a major issue? Now one of my properties recently had a fire and actually it's out of state. I mean, how am I going to get up there quickly if I was going to self manage? Thankfully I have a great, you know, I have great property management up there now. How often do you want to drive by it? How much do you want to check it out again? Time is money. The drive there and back. You got to factor these things in. The time, you know, you spend there at the property, trying to figure out what issues. I mean, this is not only time that's valuable for you, but I always think about it as opportunity cost. Like what else could you be doing? Could you be focusing on finding another property? Could you focus on, you know, spending time with your family? Could you focus on, I mean even spending time making more money? You know, whether it's as a physician or even as a business, like what's, how's your time best used in that situation? So then people tend to ask, okay, can I afford to the property management fee? They look at these 8 to 10% numbers, they look at the turnover fees and they're like, I don't know if I can afford this or I'm not going to get the cash flow that I want if the management fee is in place. Personally, I believe that if you're a practicing physician or a high net worth individual, you should absolutely hire property management. I mean, sure there are exceptions like the one bedroom condo that I own, but sometimes I think about that as well. I'm like, maybe I should find management for that. But so far, honestly we live about 20 minutes away from it. But if that Changes, I will likely find property management for it. Now, I believe that your time, again, is best spent elsewhere. Your time is absolutely limited. For those of you who have active lives outside of the hospital, you know that you're trying to squeeze those things in. It's better to keep as much time free because you don't know how you're going to want to spend it. You don't know what other kind of opportunities are going to come up. For me, I like to spend as much time as possible, of course, with my family and, you know, as my kids are growing, I mean, again, that is opportunity and time that, you know, you'll never get back in the future. And so I think it's absolutely true that your time is your most valuable asset. So this is what I say. I say be willing to invest in others and other companies to free up as much of your time as possible. It's all about leveraging other people's time, energy and effort to get the best benefit for. I mean, it's a win win for everybody all around, in my opinion. Now, I know we talked about this. How do you know you're hiring a good property manager? Well, we'll get to that in another podcast, but really it takes some experience to find that, and your first one may not always be correct. There's always ways to get referrals. The best is always firsthand experience. Sometimes you got to try people out. You know, you can look on Yelp and look for reviews and these type of things, but not until you know for sure. You know, having had experience, will you be able to figure that out. I mean, it helps to have, again, people that you trust who are working with those people who are able to vouch for them. That is probably your next biggest thing. So please do not pick anybody just purely off of reviews. Try to get off some sort of, try to get some sort of like firsthand experience for sure. So thinking about all of these questions, I mean, again, you know where I sit. I believe that hiring a property manager is the way to go. I mean, it's up to you. But if you ask yourself these questions, what answers do you come up with? Figure out what works best for your situation. I mean, real estate investing, it can be relatively passive. It definitely makes it a lot more passive when you have help. Now, it just requires a little bit extra due diligence upfront to make sure that you're selecting the right property manager to help you with this and making sure that you're finding the right property. And, you know, I, I always say that I factor property management into the purchase. When I'm buying a property, I'm assuming that I'm going to get a property manager and I make sure that the cash flow works with that in place. And that's what I typically recommend for people to do as well. So, you know, if it's done right, you got the right team in place, you can still be cash flowing amazingly and really set your whole portfolio and investment up to create that result that you want. And hopefully that result is to create your ideal life, to have that passive income and to really have the time that you want to spend doing the things you love with the people you love. Anyways, have a great week and we'll talk again next time. See ya. Enjoy the show. Let me know by dropping a review in the podcast app you're listening to us in. And if you haven't already, make sure to hit subscribe. Are you part of our community yet? Join thousands of physicians who are also on this journey to creating their ideal lives through multiple streams of income. You can join us on our Facebook group Passive Income Docs, and you can always learn more at our website, passiveincomemd. Com. Thanks again for allowing me to be a part of your journey. See you next time.