I am often approached by investors from all over, not just the US, that have invested in properties in Kansas City. The common problem that seems to concern them is property management. I would really like to say that it's just a misunderstanding or lack of communication that leads to these problems, but unfortunately in most cases this is just not what is happening.
I have been managing properties on an exclusive level for over 4 years, and usually only managed those properties that my company was involved with every step of the way. I found this to be the most productive way at maintaining a professional approach with my clients. I currently manage just over 80 properties and just don't have many problems with the tenants or the properties. I decided to do some undercover work to find out exactly what is going on with property managers and why they are unable to find qualified tenants in a market that is full of renters.
Please keep in mind, this research was conducted over a 2 year period and consisted of data found primarily in the Kansas City market only, though I did ask some of the same questions to clients that have properties in other locations, to see if this was being followed in other markets.
I am in no way, saying this is the rule for all markets, as I am confident that not every property management company operates with this little of competence.What I will post over the next few weeks is data that has been recovered over this 2 year investigation in to what is wrong with property management companies, and why they struggle to perform.
The first topic discussed is the placement of tenants.
What my research has made ever so obvious is that most PM see this business strictly as a numbers game, now this might sound like a statement of the obvious, until you read deeper. When you consider most PM's charge anywhere from 0-100% of the first month's rent to "place" a tenant, and then anywhere from 7-10% of the monthly collected rents after that, you can begin to see where the problem lies.
If your paying for office space, internet service, office supplies, insurance, gas, marketing and of course employees and your "net" gain on an average rent of $700 monthly is around $60, you can clearly see the need for ALOT of properties to pay these expenses. Since its more profitable to "place" the tenants than it is to collect the monthly rents, the background checks ran on most tenants are just non existent, due to the cost. The end result of this of course, is more often than not you are getting a very questionable tenant and most likely will result in an eviction within the first 3 months or so, obviously not the goal.I found thru investigations, that most, if not all KC property managers were either NOT running a background check of any kind, or only focusing their search at a LOCAL level. This is just not a good idea, tenants move from one city to another with no regards to financial intelligence. They usually have family or friends in that town, thus you could run a local search on a tenant and find absolutely nothing wrong. If you were to run them nationally, you would see a whole different picture. The problem here of course is it takes money to get a nationwide criminal check, where as most states now have their court system online and are either free of charge or cost very little. I can run a search for all of Missouri for free, where as if I run for the State of Kansas it costs me a dollar per report. The problem here is of course, if they have never been to court in Missouri or Kansas, then its not going to tell you all you need to know.
Insist on a nationwide criminal check!!
Just as shocking as electing to ONLY run a local criminal check, is the fact most didn't even pull a credit report. This one stunned me, as there is information on the credit report that is very valuable in the decision to rent to a tenant or not. The credit score is one thing, but more importantly is what is on there to bring that score. If your renting to someone that has judgements from the utility companies, guess what this means for you, either you will pay the bill sooner than later, or your going to get a call from your PM saying that the tenants never got the heat turned on and now you have a swimming pool in your basement or living room(if no basement), and you will need to wire 10K for repairs. The other issue is if your renting to someone with a judgement for child support, their freedom could be over anytime. It's likely they have a warrant for their arrest if they are not paying their child support, and that means an eviction if they get caught and hauled off to jail. These are not that rare at all, especially the utility judgements, I see them quite often.
The last topic for now will be the decision to place, and well you will see is the shortest explanation as found in the investigation.
This probably shocked me more than anything. My research found that most companies make a decision to rent to a tenant based on 3 factors. 1. No evictions ( Thats good) 2. Verifiable Income ( Keep in mind, no mention of the source of this income, I will explain in a bit) 3. Verification of Employment and Rental Reference. What could be wrong with that? Let me explain if you will.
If you are basing your decisions on nothing more than those topics, here is where you will run into trouble.
1. No evictions — well that's great, but what else is there if anything. Have they been arrested for drugs, inappropriate relations with a child or any other serious crime. Again if you are only running local searches this information might not be available, but you better know it or you could end up in a legal struggle for your property if ceased for drug use, law suits for moving in an offender, or thousands in repairs for someone "running" with the wrong crowd.
2. Verifiable Income – Great! But what is the source? If its unemployment, you better not accept it, it WILL expire and usually its 27 weeks, don't bank on it being renewed, as this is not a given. If it's SSI or some other government benefit, better confirm it's renewable and just not a one time occurence for the year. Is there a ratio being applied to the rent vs income? You better be asking for a no less than 2x the rent, or you are in the "gray" zone with that tenant. It could come down to them making a decision to stay warm or pay the rent, most often they will pay your rent, get the gas turned off and freeze up your plumbing, then bail when the water lines break causing you thousands in repairs. Ideally you would want to see 2.5 times the rent in verifiable and reliable income.
The other NO-NO in income is personal day care, first off it's just a law suit waiting to happen in your home, the 2nd is if this tenant is moving more than 5 miles away, most of her current clients are not going to follow her, as they can find someone considerably closer, thus leaving your NEW tenant with no income. Just a bad idea all around.
3. Verification of Rental & Employment References – Again all good. But here is what I found, their rental reference usually only went back to their current landlord. Are you joking me? When questioned what they were asking, it usually came down to these few quesitons:
a. Are they leaving on their own terms?
b. Did they pay their rents on time?
c. Would you rent to them again?Hardly a professional interview. And why only the most recent landlord? You need to go back at least 3 and preferably 5, to see if there is some pattern being exposed. Are they tidy tenants? Did they tear the house up? How often were they late? Any problems with the police visiting? Anything else I need to know?
Verifying employment is a pretty straight forward process, but most PM's were only going back 1 year, again WHY? If they are job jumpers, this almost always leads to an eviction (unless of course they are in school, then this is pretty common as their class schedules change like the weather). Why so many jobs? Do they have a career path laid out? What is their average time on any one job?
To summarize this posting.
1. Insist on nationwide criminal checks
2. Insist on credit reports ( not just 1, but all 3)
3. Place restrictions on the Income ratio, and actually perform professional interviews from landlords, and not just 1 or 2.<moderator: delete advertising>
Wishing you all massive returns!
John
Nicely done,
and for the reason's you post I would never buy a home in the US that is above the freezing line, in other words has constant cold weather and subject to frozen mechanicals.. I did some stuff in detriot and it was a night mare.
the other issue is buyers will look at nicer bigger homes thinking they are great, but the tenants look at them as costing them way to much money to heat and cool.
This poster has some very good and honest feedback for you all. he is not big with only 84 units but he is very accurate on what he is describing.
I would venture to guess that 50% of the Aussies or more buying through there off shore buying services do not make any where near the returns based on property management issues.
I know US investors do not. Thats why our truewholesale.com model is exploding.
JLH
Great Post John I was just in Kansas City meeting With Jp Sauer and his group over at Peak management .
MY two cents was added to your post …I am often approached by investors from all over, not just the US, that have invested in properties in Kansas City. The common problem that seems to concern them is property management. I would really like to say that it's just a misunderstanding or lack of communication that leads to these problems, but unfortunately in most cases this is just not what is happening. I believe property management need to be the strongest variable for any investor whether they are from the USA or over seas client.
I have been managing properties on an exclusive level for over 4 years, and usually only managed those properties that my company was involved with every step of the way. I found this to be the most productive way at maintaining a professional approach with my clients. I currently manage just over 80 properties and just don't have many problems with the tenants or the properties. I decided to do some undercover work to find out exactly what is going on with property managers and why they are unable to find qualified tenants in a market that is full of renters. We manage 137 properties and just recently purchased 67 homes in one area. Local investor is buying and we will also mange those. So we will hit the 200 home mark soon. I think the part that is over looked and missing is the tenants they are very important part of the team since they are paying for the homes.I don't see enough real estate investors mention them .
Please keep in mind, this research was conducted over a 2 year period and consisted of data found primarily in the Kansas City market only, though I did ask some of the same questions to clients that have properties in other locations, to see if this was being followed in other markets.
I am in no way, saying this is the rule for all markets, as I am confident that not every property management company operates with this little of competence.( that is very true being we buy in 7 states ( for Jay yes below the freezing line only , so naturally we have several teams going at one time. I make sure the property management we choose runs a system similar to ours or we ask the investor to make sure they demand the same items we outlined for them.What I will post over the next few weeks is data that has been recovered over this 2 year investigation in to what is wrong with property management companies, and why they struggle to perform.
The first topic discussed is the placement of tenants.
What my research has made ever so obvious is that most PM see this business strictly as a numbers game, now this might sound like a statement of the obvious, until you read deeper. When you consider most PM's charge anywhere from 0-100% of the first month's rent to "place" a tenant, and then anywhere from 7-10% of the monthly collected rents after that, you can begin to see where the problem lies.
If your paying for office space, internet service, office supplies, insurance, gas, marketing and of course employees and your "net" gain on an average rent of $700 monthly is around $60, you can clearly see the need for ALOT of properties to pay these expenses. Since its more profitable to "place" the tenants than it is to collect the monthly rents, the background checks ran on most tenants are just non existent, due to the cost. The end result of this of course, is more often than not you are getting a very questionable tenant and most likely will result in an eviction within the first 3 months or so, obviously not the goal.( very true I look for investors and management companies that actually buy and invest in the same markets and own homes) So it is not a numbers game but a legitimate business to be taken very serious.I found thru investigations, that most, if not all KC property managers were either NOT running a background check of any kind, or only focusing their search at a LOCAL level. This is just not a good idea, tenants move from one city to another with no regards to financial intelligence. They usually have family or friends in that town, thus you could run a local search on a tenant and find absolutely nothing wrong. If you were to run them nationally, you would see a whole different picture. The problem here of course is it takes money to get a nationwide criminal check, where as most states now have their court system online and are either free of charge or cost very little. I can run a search for all of Missouri for free, where as if I run for the State of Kansas it costs me a dollar per report. The problem here is of course, if they have never been to court in Missouri or Kansas, then its not going to tell you all you need to know.
Insist on a nationwide criminal check!!
Just as shocking as electing to ONLY run a local criminal check, is the fact most didn't even pull a credit report. This one stunned me, as there is information on the credit report that is very valuable in the decision to rent to a tenant or not. The credit score is one thing, but more importantly is what is on there to bring that score. If your renting to someone that has judgements from the utility companies, guess what this means for you, either you will pay the bill sooner than later, or your going to get a call from your PM saying that the tenants never got the heat turned on and now you have a swimming pool in your basement or living room(if no basement), and you will need to wire 10K for repairs. The other issue is if your renting to someone with a judgement for child support, their freedom could be over anytime. It's likely they have a warrant for their arrest if they are not paying their child support, and that means an eviction if they get caught and hauled off to jail. These are not that rare at all, especially the utility judgements, I see them quite often.With very little to no loans for home buyers there is a large amount of renters. Credit reports really don't say to much.If they are renting most likely because there credit is sub par and they can not qualify for a loan. I find looking at the w2s and bank statements , along with payroll checks. I can build and analyze there financial picture.Checking for liens ,judgements , and or any thing like child support is also great idea. At the end of the day we basically qualify the tenant like they are buying the home and make sure debt in income is manageable.Making sure we set the tenant up for success as well.Now this is in our market( we only manage homes in South Carolina . We buy and sell in quite a few states.
The last topic for now will be the decision to place, and well you will see is the shortest explanation as found in the investigation.
This probably shocked me more than anything. My research found that most companies make a decision to rent to a tenant based on 3 factors. 1. No evictions ( Thats good) 2. Verifiable Income ( Keep in mind, no mention of the source of this income, I will explain in a bit) 3. Verification of Employment and Rental Reference. What could be wrong with that? Let me explain if you will.
If you are basing your decisions on nothing more than those topics, here is where you will run into trouble.
1. No evictions — well that's great, but what else is there if anything. Have they been arrested for drugs, inappropriate relations with a child or any other serious crime. Again if you are only running local searches this information might not be available, but you better know it or you could end up in a legal struggle for your property if ceased for drug use, law suits for moving in an offender, or thousands in repairs for someone "running" with the wrong crowd. ( this is a grey area but must be looked into. We work directly with the local police and have them do the inspection ( call it a community watch program )walk through with the tenant.This helps keep every one on the straight and narrow path.
2. Verifiable Income – Great! But what is the source? If its unemployment, you better not accept it, it WILL expire and usually its 27 weeks, don't bank on it being renewed, as this is not a given. If it's SSI or some other government benefit, better confirm it's renewable and just not a one time occurence for the year. Is there a ratio being applied to the rent vs income? You better be asking for a no less than 2x the rent, or you are in the "gray" zone with that tenant. It could come down to them making a decision to stay warm or pay the rent, most often they will pay your rent, get the gas turned off and freeze up your plumbing, then bail when the water lines break causing you thousands in repairs. Ideally you would want to see 2.5 times the rent in verifiable and reliable income. SS < unemployment anything that runs out is not verifiable income at the end of the day we are allowed to say yes or no…
The other NO-NO in income is personal day care, first off it's just a law suit waiting to happen in your home, the 2nd is if this tenant is moving more than 5 miles away, most of her current clients are not going to follow her, as they can find someone considerably closer, thus leaving your NEW tenant with no income. Just a bad idea all around.( NO NO NO No to running a day care out of the home )
3. Verification of Rental & Employment References – Again all good. But here is what I found, their rental reference usually only went back to their current landlord. Are you joking me? When questioned what they were asking, it usually came down to these few quesitons:
a. Are they leaving on their own terms?
b. Did they pay their rents on time?
c. Would you rent to them again?Hardly a professional interview. And why only the most recent landlord? You need to go back at least 3 and preferably 5, to see if there is some pattern being exposed. Are they tidy tenants? Did they tear the house up? How often were they late? Any problems with the police visiting? Anything else I need to know? Again when we get numbers to call and we don't know who is on the other line.We do call the other companies and try to do as much back ground research as we can.
Verifying employment is a pretty straight forward process, but most PM's were only going back 1 year, again WHY? If they are job jumpers, this almost always leads to an eviction (unless of course they are in school, then this is pretty common as their class schedules change like the weather). Why so many jobs? Do they have a career path laid out? What is their average time on any one job?
To summarize this posting.
1. Insist on nationwide criminal checks I AGREE
2. Insist on credit reports ( not just 1, but all 3) I don't see that this is always necessary in today economic world credit system is not set up for most people to succeed.
3. Place restrictions on the Income ratio, and actually perform professional interviews from landlords, and not just 1 or 2.Get as much information as possible from all the above sources ….
Sincerely
Alex FranksAlex,
Thanks for the reply.
I know JP and Shane very well, as we do some business together.
I agree with you on the credit scores and I should of clarified that a little better. I don't concern myself as much with the score itself, as this is just today's reality. I'm more interested in civil judgements that would appear on there. If your waiting on tenants with over 700 FICOs, you are going to be vacant for a very long time.
Wishing you the best of luck!!
John
JLH,
Thank you for the reply!
I added a couple "buts" to your thread.
jayhinrichs wrote:Nicely done,and for the reason's you post I would never buy a home in the US that is above the freezing line, in other words has constant cold weather and subject to frozen mechanicals.. I did some stuff in detriot and it was a night mare.
the other issue is buyers will look at nicer bigger homes thinking they are great, but the tenants look at them as costing them way to much money to heat and cool. I would somewhat disagree with this, as alot of families in KC, have more than 3 children, and per Section 8 guidelines and state law, once their children reach a certain age and they are of the opposite sex, they must have their own bedrooms. I rent out 4&5 bedroom homes, actually just as quick as a 3 bedroom home. I just purchased a 5 bedroom home, I am 3 days into the renovation (as of this post), and I already have it rented to a Section 8 tenant @ $975. In some cases the tenants just simply don't have a choice, they have to rent the larger homes.
This poster has some very good and honest feedback for you all. he is not big with only 84 units but he is very accurate on what he is describing. I am a "small" PM by some standards, but in Part 3, I will reveal what I found out about the "large" PM companies. Stay Tuned, it will be an eye opener.
I would venture to guess that 50% of the Aussies or more buying through there off shore buying services do not make any where near the returns based on property management issues. I 100% agree here. PM in the states and more specifically KC, can be a problem. This is why I spent 2 years investigating PM's to determine what was going on. Outside of the companies that were just blantantly ripping their clients off, most of the problems I found, are what I have been discussing in these posts. When an investor finds that one company that operates like a PM should be operating, the returns are enormous. It's not hard to come up with the numbers, purchase a property fully renovated under 40K, rent it for $700-1000, based on number of bedrooms, and with property taxes being almost irrelevant, in KC anyway, this should leave a "net" cash flow of around $575-875 per month.
I know US investors do not. Thats why our truewholesale.com model is exploding.
JLH
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