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Personal Finance FAQ

If Your Property Manager is Also a Realtor, Understand the Incentives in Using Rental Income to FIRE

Call it what you will, incentives are what get people to work harder.
–Nikita Khrushchev

We achieved FIRE (financial independence retire early) mainly off the income stream from our rental properties.

We’re not the only ones who think that this is a good path. To wit:

You get the point.

Buy property. Put renters in it. Live by the 50% rule. What’s left over after your mortgage payment (or, if you’re like us, and have no mortgages, what’s left over…period) is what you can live on.

However, if you’ve had some rentals and managed the properties yourself, sometimes, dealing with tenants can be, shall we say, inconvenient. You also have to be prepared to deal with the human side of real estate investing.

So, given that you don’t want to work in retirement, logic tells you to hire a property manager. That’s what we did, and she’s great. She’s totally a partner in what we’re doing, and we’re friends with her and her husband as a result of our 12 year working relationship.

That said, she’s a Realtor. Her incentive is to make money, and, ideally, make the most money for the least amount of work possible.

Why Your Landlord Empire Will Not Draw a Realtor’s Attention for Property Management Income

Let’s do a little thought experiment.

Let’s say that you need $10,000 a month in income to support your lifestyle.

Given the 50% rule, assuming you own those properties without a mortgage, you’d need $20,000 in rental income to meet your $10,000 a month income requirement.

So, further assume that you can buy a house for $75,000 and rent it out for $1,000 a month (YMMV).

To get to your $20,000 a month rental income target, you’d need to buy 20 houses.

That’s $1,500,000 of real estate you need to purchase.

Now, let’s look at this from the property manager cum Realtor point of view.

Your property manager, in helping you buy those properties, assuming that she’s not representing both sides of the transaction, will make a 3% commission, or $45,000 (I’m not incorporating paying the broker, etc. in this thought exercise to make a like-to-like comparison).

After that, if you’re paying a 10% property management fee, your property manager is making $2,000 a month, assuming full vacancy and no leasing/renewal fee.

After the sugar high of making the commissions from buying the portfolio that supports your income needs, the income, while steady, dries up significantly. The average rental property requires 4 hours of property management per month, so your property manager is working 80 hours a month for $2,000: $25/hour.

What else could make your property manager $2,000? Getting a Realtor commission on a $66,666.67 house.

I’m willing to wager a mortgage payment (see what I did there?) that it would not take a Realtor 80 hours to be involved in the sale or purchase of a $66,666.67 house.

Simply put, a Realtor cum property manager isn’t nearly as incentivized to manage property as to buy and sell it.

How to Get Your Property Manager to Pay Attention to You

As I wrote about in “Getting People Who Live in Houses to Pay You,” 17.7% of the invested assets of people under 70 with a net worth of more than $2 million is real estate. It’s lucrative.

However, there’s still an art to extracting the value from the real estate.

As I’ve written before, we rebalance our real estate portfolio, and we use Zillow to help us know when and for how much to rebalance our real estate portfolio.

The reasons for doing so are twofold:

  1. It frees up capital for reinvestment. It we have a property worth $150,000 generating $1,000 a month in rental income because it has appreciated, we would want to sell it to buy two houses worth $75,000 to generate $2,000 in rental income.
  2. It’s a commission making incentive for our property manager. Each time we cycle through our portfolio, our property manager gets at least 3% on each end of the transaction. In that example, she would make $9,000 for the round trip. That’s 37.5% of the property management income in the thought exercise we outlined above.

We also pay our property manager cum Realtor project management fees for the rehab work that we do on our newly acquired properties, so she gets to triple dip. She gets 15% of a total job cost, so she’ll generally make about $3,000 for each rehab that we do.

Therefore, each time we refresh out inventory, she’s making about $12,000. Cycle through 2 houses out of a 20 property portfolio, and you’ve doubled your property manager’s income.

Because we use Zillow to help us manage our real estate portfolio, we’re also pretty low maintenance clients of hers. We’ve worked long enough together that we buy properties sight unseen because our property manager knows the area well enough to fill in key pieces of data (e.g. “that neighborhood is where all the drug deals go down. Don’t buy there!”). We generally put in 6-8 offers before getting one accepted, and, since we’re cash buyers, we can close quickly.

That provides certainty to our property manager. She knows she’s getting the rental income. She knows that we’re somewhat active “traders” of our rental property portfolio. She gets steady income from the property management, and while it’s not going to keep her brokerage open, it’s enough to hire an assistant. She also knows that she’ll get spurts where we are buying, selling, and rehabbing, which is another income stream.

That (and the fact that we’re extremely nice and fun people) keeps her focused on us.

Otherwise, if you expect your property manager to give you a ton of attention because of your landlord portfolio, you’re setting yourself up to be disappointed. If I was a Realtor and property manager, I’d much rather buy or sell a $100,000 house every month than manage 20 properties. Wouldn’t you?

How do you ensure a successful relationship with your property manager as part of your FIRE strategy? Let’s talk about it in the comments below!

By

Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

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