Should You Self-Manage Your Rentals or Hire a Property Manager? (Rookie Reply)

0:00Ashley Kehr:You found the deal, ran the numbers, and you're ready to go. But before you write that check, how much should you put down as earnest money and what actually happens to it if you need to walk away?

0:10Tony Robinson:Today on The Rookie Reply, we're digging into three questions straight from the BiggerPockets forms, earnest money, due diligence protections, self-managing versus property manager, and how to confidently analyze a market that you've never set.

0:27Ashley Kehr:this is real estate rookie podcast i'm ashley care and i'm tony j robinson and with that let's get

0:33Tony Robinson:into today's first question so this one comes from the bigger pockets forums and it says i'm under contract on my first investment property and my agent suggested i put down five thousand dollars in earnest money i've also heard about a due diligence fee that's separate and non-refundable I'm confused about the difference between the two. How much should I put down and what happens to my money if the inspection comes back bad and I want to walk? Can someone break this down for a first time? Homebuyer. Now, I've only leveraged earnest money. I actually haven't ever paid a due diligence fee, but I think I remember one of the recent agents we interviewed talking about this.

1:11Tony Robinson:But, Ash, have you ever used a due diligence fee separate from earnest money?

1:17Ashley Kehr:No. And the guests that we just had on, that was the first time I had really learned about that because we just have the earnest money that we put down and you have a window, a period of time to do your due diligence. And that's usually when you get your home inspector to come out and then you can get quotes on different repairs that need to be made or you can negotiate. But after that, time limit is done and then your earnest money is no longer refundable unless there is another contingency in your contract. Like say that typically if somebody does a loan, you'll see that the interest rate for the loan they're getting, if the interest rate goes above 7%, then they can get their earnest money back and get back out of the deal.

2:05Ashley Kehr:So that could be like something contingent that it's on or maybe it's contingent on them selling their own house and they have 30 days from the start of the contract to get their house under contract or something like that, then that could also be refundable. But what we learned about this due diligence fee is that you're basically paying the seller of the property days to look at the property and you don't get that money back. That is just, here you go, I'm going to pay you$50 per day. I need five days to do my due diligence and that's what you're getting paid. And then at the end, those five days, you decide if you're going to walk or if you're going to continue through with the offer on the property.

2:48Tony Robinson:Yeah. And that was episode 696 with Ellie Ridge. And she's a realtor out in the Bay Area, which is one of the most competitive markets that are out there. And that's why I think there were some things that were specific to that area that we don't quite see in other parts of the country. But I think in most markets, you're probably just going to need to put down an earnest money deposit. it. But to your point, Ash, I think that they're, well, I guess to answer the question, right, he says, you know, what happens to my money if the inspection comes back bad and I want to walk? Well, that is the entire purpose of the due diligence period in your purchase and sale agreement is that you get to say, I want, for me, I usually put 14 days.

3:27Tony Robinson:What does it look like for you in New York, Ash?

3:29Ashley Kehr:Yeah, I'm usually doing less just because we can usually get a home inspector They're out there pretty quickly, but I'm usually doing like less than seven days, to be honest.

3:40Tony Robinson:Yeah. And it depends on the offer, right? If you're buying from like a wholesaler, you know, a lot of times you can't bake in a due diligence period. But if I'm buying on market, my usual approach, I'll ask for 14 days. And during that 14-day window, that gives me the ability to send an inspector out there, get my inspection report back, maybe send any qualified professionals to look at certain elements that the inspector recommended I get other folks to look at. And then once you get back all of those inspections and those projected costs, you can then go back to the seller and say, hey, based on my findings, there were some maybe material changes that I didn't know or I wasn't aware of when I made my initial offer.

4:18Tony Robinson:And because I now need to maybe replace the entire roof instead of patching it, or maybe all of the electrical needs to be redone because of X, Y, and Z, well, now my offer goes from X to now Y. And hey, Mr. and Mrs. Seller, if you agree to these terms, we can continue on with this contract. If you disagree, well, then this is my ability to walk away because we're still within our due diligence period. So that is the entire purpose of the due diligence time period in your contract is to give you the opportunity to dig deeper, complete your due diligence, and then either say, yes, I'm ready to move forward or no, I want to walk away.

4:52Ashley Kehr:Coming up, you've got the keys, but now someone has to manage this thing. And should that be you? We're going to break down the self-manage versus the property manager decision right after this. We'll be right back.

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7:17Ashley Kehr:You close down your first deal. Now the question every new landlord faces, do you manage this yourself or do you hand it off to a property management company? So our second question comes from the BiggerPockets forums and it says, I just closed on my first rental property, a single family home about 25 minutes from where I live. I've been going back and forth on whether to self-manage or hire a property manager. The PM I spoke with charges 10 % of monthly rent plus a leasing fee equal to one month's rent. My cash flow is already thin at about$200 per month. Self-managing would protect that margin, but I've never been a landlord before and I'm worried I'll make mistakes.

7:56Ashley Kehr:What should a rookie actually consider here? I think this is a great question to be asking yourself because there's many things you should be asking yourself before you make the decision. and this first of all the the fees of the property manager I would say this is very very typical the 10 percent of monthly rent you can see it vary from when I was managing 80 residential units and I handed those off to a property management company they gave me a big discount because it was so many properties at a larger or so many units at a larger scale so it can vary depending on how many units you are bringing they can give a bulk discount but you also you can see this go up to 12%, 15 % of the monthly rent.

8:41Ashley Kehr:So you want to make sure you understand what is included. So what exactly are they doing for you? Are they doing the bookkeeping? Are they handling the maintenance requests? Are they taking all of your leasing questions? What is happening with all of that? What is included in that? Then the next thing is the leasing fee equal to one month's rent. And also, I've seen that very, very typical to be one month's rent. So what you need to consider here are any additional costs. So for example, when I used a property management company, they also charged$25 per a month per a property. And that was for any after hours, phone calls, or maintenance.

9:23Ashley Kehr:So instead of charging me overtime for their employee to go out to the property to do an emergency thing, They just consistently charge that$25, and I would still charge their standard rate of, I think it was$45 per an hour for any of their maintenance work. That was done. So ask about any of those other fees that may be tacked on. While I was working with them, they added in something to their agreement, property management agreement, that they would be performing six months preventative maintenance at each of the properties. Every six months they would do this. and you would be charged X amount.

10:02Ashley Kehr:I think it was like$75 or something. Well, it ended up being a lot more. They would go in and say all of these things that need to be done and then upcharge you all of these things. And it was like it started to get ridiculous at this point of things that actually didn't need to get done. So really understand their process and their model, and that can help you make a decision. Then the next thing is looking at your time. Do you have time to self-manage? You're going to need to respond to messages. You're going to have to do lease renewals. You're going to have to show the apartment when you're renting it.

10:36Ashley Kehr:So there are different things. I think, yes, the money and how much they'll charge, but also what are you actually getting for your money? And then do you have the time to do it? But 100%, you can self-manage your property for sure.

10:50Tony Robinson:I think with all the tools that are available to landlords today, self-managing is probably easier than it's ever been. And I think with the right support, the right frameworks, the right systems, you know, BiggerPockets has books on managing properties. We've done tons of episodes on the Rookie Podcast. I mean, you get a really good lease, maybe find a really good attorney in case you do need some support around evictions or, hey, how should I handle this question or relationship? And then you put all the tools and the automation in place and self-managing, I think, is a viable option for most people listening today.

11:24Tony Robinson:But I think to your point, Ash, that the question that we want to answer is, well, hey, what is your actual goal on this first deal? And maybe what are your long-term goals for yourself? If you really want to be a hands-off investor and you just want to focus on finding the deals and underwriting and analyzing, getting the financing and putting the deal together, but you have no interest in actually managing, well, then, yeah, hand it off to your property manager and just try and make sure your next deal has a little bit more margin. But if you want to be part of that management process and that is a part of the game that you want to learn, then I think it's worthwhile to jump in today.

11:56Tony Robinson:But, Ash, I think you hit all the important questions someone should focus on as you're going through that.

12:01Ashley Kehr:If you go to biggerpockets.com slash leases, there's also lease agreements available per state. So they're made by attorneys and they're specific to your state. You'll just have to change them specific to your property. So, for example, if you have a shared driveway, you know, putting that in, you know, what are the parking rules, things like that that are specific to your property. You'll have to make those changes in there. But it's a great free resources using those lease agreements.

12:28Tony Robinson:All right, guys, we're going to take our final break. And while we're going, if you have not yet subscribed to the Real Estate Rookie YouTube channel, you can find us at Real Estate Rookie. And then you can not only hear our voices, but see mine and Ashley's faces. And sometimes we'll put cool little pictures up on, you know, on the screen. You can see things like that. but just another place for us to connect and continuing to help you find your first or your next deal. But we'll be right back after we're from today's show sponsors. Quick gut check. If your investments are generating income, how much of that are you actually keeping?

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16:09Tony Robinson:Learn more at schwab.com slash trading. All right, guys, welcome back. We're here for our last question. And this one says, I live in an expensive market where the numbers just don't work for me as a first time investor. I've been looking at markets in the Midwest and the Southeast where prices are lower and rents look stronger on paper. The problem is I've never been to these cities. I don't know anyone there, and I'm not sure how to tell if a market is actually good or if I'm just looking at cherry-picked data. How do I properly analyze an out-of-state market before I commit? This is a question that I feel like we get often from rookie investors, especially those who are in high-cost-of-living areas.

16:50Tony Robinson:Remember, the numbers don't work out all that well. So when we talk about selecting a different city, and I appreciate how they frame this is, you know, they said, how can I make sure that it's a good market and that I'm not just looking at cherry picked data? I think that we can build confidence for ourselves by going and sourcing our own data. And it sounds like you're talking about a traditional long term rental. So we'll just go with that as your strategy here. But the things we want to look at, obviously, price and can you afford to buy there is probably the first thing, right? Because even if all the other numbers work out, but you can't actually afford to go into that market, then it's not worthwhile.

17:29Tony Robinson:So just the actual cost of real estate as it relates to your ability to buy. But once you check that box and you say, okay, I actually can't afford to invest here, things like population growth. Are people coming in or are people leaving? Which way is this population headed? things like jobs and industry and diversity of business, which is actually slightly different for, you know, if you're doing like a short term rental for long term, those things are important, right? Because if, if one company employs 80 % of the people in that town, and that company goes under, well, what happens to that local market, right?

18:03Tony Robinson:But if you've got, you know, several business headquarters, and you've got a university, and you've got large medical centers, and there's some diversity of industry there, well, then that's a good sign for you as well. The other piece you can look at are things like crime stats. And is this a place where, you know, you, you, you, you know, you might get robbed while you're sitting at a red light, or is this the kind of place where you can, you know, sleep at night with your doors unlocked? So just understanding the, the data around crime schools and how well those schools do and trying to identify which parts of the city and which neighborhoods have the better performing schools, because people typically want to live in those parts of town to send their kids into those better schools, which means you get a better tenant pool and things of that nature.