To be fully transparent, you might not need to hire a property management company. If you enjoy the problem solving, have time to handle after-hours emergencies, and aren’t frustrated by navigating the byzantine processes put in place by local governments, you are more than capable of managing your property yourself.
If you don’t enjoy the process however, the question centers around your time. How much time is managing your property taking? How much is your time worth to you? We have a straightforward pricing policy that enables you to measure if it’s cost-effective to hire out versus continue to manage your property yourself.
When You Want to Maximize Your Property’s Value
There are two ways to look at the value of your property – its Net Operating Income (NOI for short – gross income generated by the property minus expenses), and its current market value.
It’s important to note that this is different than other residential real estate, which is literally priced based on what you can get someone else to pay for it (it’s slightly more complicated, but most realtors come up with a price based on what recent comparable homes in the area sold for – one sale that came in high or low can significantly alter the ‘market value’ price for an individual property).
Most every real estate investor initially focuses on a property’s net cash flow, which makes sense. Say you just purchased your first rental property for $200,000 with a down-payment of $40,000. Say you rent it for $1,200 and your expenses (reserves for repairs, property taxes, property insurance, loan payments) add up to $900 a month. Then your $40,000 is earning you $3,600 a year (9% of your initial investment is coming back to you as cash per year). With that perspective, a $99 a month for property management feels expensive as that is 33% of your monthly net cash flow.
But NOI doesn’t include debt service nor loan payments in the expenses (it’s all expenses to operate the property save for debt servicing) because different owners use a wide variety of capital structures to finance their properties – if we tied the property value to a specific loan and interest rate, the market would not be able to make apples-to-apples comparisons.
To use the above example, if your expenses (minus loan payments) for the property are $200 a month, your NOI is $12,000.
Now, the current market value for your property equals the NOI divided by the Capitalization Rate (also known as cap rate – indicates the rate of return that is expected to be generated on a property).
Current Market Value = NOI / Cap Rate
Let’s say the current cap rate for Columbus is 6%. That means the current market value of the above property (earning $12,000 a year) would be $200,000 – meaning you would be right in line with your purchase price of $200,000.
But if you hire a property management company that charges $99 a month, and is able to bring the rent up to $1400 a month, you just increased your NOI by 10% and your property value by $20,200. If they are able to reduce your expenses on the property as well (for example — by having pre-negotiated rates with companies to handle repairs) by $100 a month, your NOI just increased from the $12,000 when it was self-managed to $14,400 and the property value is up to $240,000.
In this scenario, simply by hiring a professional property management company, you are able to increase the value of your property significantly without any other additional expenses. At the same time, doing so enables you to have a property that generates something that much more closely resembles the passive income that real estate investors look for.
All of this being said, if you’re not ready hire a property management company, feel free to sign up for our newsletters to see how you can turn your investment property into a successful, income-producing asset.