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Self-managing rentals: the opportunity cost

November 4, 2021

Self-managing your rental investments to save property management expenses may seem like a good idea, but this decision has significant tradeoffs. While Picket and its Elara Property Management subsidiary are focused on large, multi-market SFR portfolio management, we know first-hand that the right teams and technology can help all SFR owners save time and grow net operating income over the lifetime of their investment.

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Your time is valuable

Typically a rental owner will pay between 8-10% of monthly collected rent for a full-service property management company. It's important to note that the percentage only applies to collected rent, which means your property management company is only getting paid when you make money. If you own five properties that are generating $6,000 per month total in rent, the cost of a property manager will be roughly $480 per month. For that $480, you should expect to get high-quality asset bookkeeping, resident management, maintenance, vendor management, billing, collections and more.  

The fact that you own a rental property already implies that your own time is significantly valuable when applied elsewhere. Although you may not pay yourself to manage a property, there is a real expense to doing so because every hour you spending managing is an hour you do not spend on another high-value activity. As you evaluate that opportunity cost, ask yourself: what $ per hour would you be willing to go work for some other job that had nothing to do with your rental properties?  If you spend a workday per month on each property (a conservative estimate when we include all work - onsite, coordinating/calendaring, accounting, etc) that means you are paying yourself roughly $12 per hour for the work you do.  Is that a number you would accept if they were not your own properties?  If not, and we highly doubt most owners would say yes to that, you should hire a professional management company and reclaim your time for more productive and lucrative opportunities.

While spending a day per property in this example is roughly equivalent to working for $12 per hour, you are not actually paying yourself that $12. Why does this matter?  When you pay a property management company the $480 per month, it is considered a property expense and reduces your taxable income.  Because you do not actually pay yourself, you are not getting the benefit of this expenditure at the property level. So for simplicity, let's assume we pay 25% of our net property income per year.  This means that you are losing out on $120 of tax savings each month. Now you are implicitly paying yourself $9 per hour.  In other words, for 5 days a month, you are effectively working at or near minimum wage.

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Economies of scale

Economies of scale effectively means that as you do things in larger and larger volumes or quantities, the cost of any single unit decreases.  A professional property management company like Elara leverages economies of scale by managing properties for multiple owners and managing those properties at a much lower cost. With some property management companies, you may not be directly rewarded by that scale, as the property manager may mark up labor and parts to become more profitable.  In these cases, the economies of scale are only helping the bottom line of the property manager, not the owner.  At Elara, we decided from the start that property owners should reap the advantage, so we have a 0% markup on parts and labor. Here's a quick real-world example of that owner benefit in action:

We all know the importance of good HVAC management, and the pain and price tag that comes with repairs and replacements. Elara's founders have established pricing on par with national real estate operators and passes those savings on to property owners with 0% markup. When you inevitably need to replace an HVAC in a property, instead of paying $8,000-$10,000 for parts and service (which would effectively drop the hypothetical hourly wage we calculated above to $4.40 per hour), with Elara you would pay less than half of that, saving you thousands of dollars. If you assume that for each of your properties you will have a major expense event, like the above, once every 10 years over the course of that 10-year period, Elara would save you about $2,500 annually, or $208 per month in maintenance expenses.

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Remove the stress

Aside from the cost of your time, there are additional, less quantifiable downsides to managing your own properties. The reality is that managing rentals, communicating with residents, managing collections, coordinating maintenance, and managing HOAs are all fairly stressful for most SFR investors. With the backing of Picket's Decision Science technology, the Elara team is able to build out highly-efficient processes to tackle these challenges, so owners can focus their effort elsewhere.

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Stop working for your investments at discount prices and let your rental properties work for you. Picket and Elara are here to help.

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