What Is The Biggest Expense A Property Investor Will Face?
As a property investor building a portfolio, the question often asked is, what is the biggest expense I will face when I build out the costs for the portfolio?
For me, it’s really clear that the biggest expense, bar none, is a vacancy. If you think about it, you’re renting a property for $500 a week and it’s vacant for four weeks; there’s $2,000 gone. But you’ve also got to pay re-let fees to the property manager to get a new tenant in, the wear and tear that comes from having people move in and out and—if your property manager hasn’t done the right job in the first place and got the wrong tenant in, who may have damaged it—then you have to spend money to repair and maintain.
So, in my view, if a vacancy is the biggest expense you will face; to mitigate that risk, the best thing you can do is get a really great property manager in place.
There’s a few things I think you can do to ensure you get a great property manager.
The first one for me is: leave a message for them to return your call, and then wait. See how long it takes for them to get back to you.
This is a really good indicator of their priorities and how organised they are. Because if they’re enthusiastic about managing your property, and getting the best outcome for you, they should be organised sufficiently so they can prioritise that call back to you. But if it takes them the next day, or the end of the next day, or even a couple of days, that’s a pretty good leading indicator of the service you’re going to get when you’re using that property manager. So the number one thing: leave a message and just wait, and see how long it takes to get for them to get back to you.
The second thing for me is: when you’re going through the buying process, often people buy the property, get close to settlement, and then they start to talk to a property manager to engage in the process. But I say back that up a long, long way. When you’re buying the property, ring a couple of property managers and ask them for their input during the buying process.
So what does that mean? “Hey, I’m thinking of buying this property at 121 Smith Street as an investment. Do you think that I will get a tenant easily?”
The insights you can get from the property manager’s answer at that time can be really, really insightful. They could say, “Yes, whenever I get a property in that particular section, it rents no problem, and the great tenants tend to want to stay there long term” or, on the flip side, they could say, “I seem to always … with other properties I’ve got in that area, I seem to have trouble. There’s a lot of turnover, and for some reason I just can’t get the tenants to stay.”
Again, that’s really good intel for you in the buying process, to help you make a better decision, but you also get to know a lot about the property manager before you actually need to engage them. When you engage with property managers, they’re all going to tell you how great they are, they’re all going to tell you how good their service level is; but you actually get to see it in action if you do it through the buying process. For me, that’s really, really critical.
The third thing is: ask the question—“Are you a property investor yourself?”
Quite simply: if they are, they get it. They understand what it means if the rent is late … and what impact this has on you as a property investor when it doesn’t hit your account to pay your obligation. So it’s incredibly helpful to have someone who sees what you see as a property investor. Because they’re doing it themselves.
So for me, there’s three things to look for when you’re trying to get a property manager to help you decide—which one to choose, but also to minimize that vacancy—but I’ve got a little tip here:
If you find someone who satisfies and stacks up in these three areas, they won’t come cheap. If you pay peanuts, you get monkeys.
In my view, I see a lot of people skimp really hard to grind down the fees they’re getting; the fees they’re paying for a property manager. But doing this actually undoes the outcome we’re after. If we want to minimise vacancies; we want to get the best service levels we can. And if we want to get best service levels; it costs to resource. The property managers need to have good people around them to manage your property. Whereas, if you drive that price down, and it’s running on really thin margins, they can’t afford to have good staff in place; and then everything starts to unravel that we’re trying to mitigate against when we’re looking at vacancy.
My message is really, really simple: if you get a good property manager, they will help you minimise the vacancy, which will help you eliminate the biggest expense that a property investor may face when building their portfolio. But keep in mind, it won’t come cheap.