I know the subject of this blog may have caused 3 reactions. Some people may have rolled their eyes and scrolled away. Or perhaps you were a bit excited, the title alone made you curious enough to continue reading as you are in the process of starting your real estate investing business; the more you know, the better. Like most of us, you smiled as you learned this lesson already and are glad to see someone bringing awareness to this part of investing.
I get it, we are all trying to maximize income and reduce expenses in any business venture but let’s think about it.
Meet Investor Bob from Waco Texas. Bob recently invested in a nice size 100-unit property in Maryland. On paper the deal was sweet and came with instant cash flow. The property is in good condition and doesn’t appear to have many mechanical issues. It is currently 98% leased. Bob already had his mind set, if there were any hidden surprises, he already had plans on hiring a Property Management Team. Bob have been researching good companies, but because this will be his first experience and have nothing to compare the experience to, he decided that the fee is what will seal the deal. His plan was simple, he will interview some Property Managers who appeared to know what they were doing for the most part but charged the least percentage for the management fee. Bob already calculated what his monthly distribution would look like and figured this deal was too good to pass up on.
Besides just the management fee cost, some other things Bob forget to consider when selecting the best fit Property Manager:
a. A la carte pricing of services (don’t assume services are covered under the management fee)
b. Unnecessary use of pricey specialized contractors
c. Not having enough well-established contractor relationships to help control costs
d. Delays in getting a property rent-ready and re-rented (increased vacancy cost)
e. Delays in filing FTP and processing evictions (including missing steps in the process)
f. Delays in processing payments to the owner (where's my distribution?)
g. Not appropriately charging-back tenants for damages and wasteful service calls (especially when the calls are placed as “emergencies”)
h. Poorly screening prospective tenants (can cause damages and evictions)
i. Insufficient monitoring and lack of inspections leads to deferred maintenance (looks good on paper… at first, but there is a substantial cost to you as an investor later)
j. Insufficient or absent tenant retention policies (turnover is your biggest cost)
So, flash forward 6 months into Bob working with his new PM Company and he is beginning to stress out. He starts wondering, "Where is my distribution?" “Why haven’t I been updated on what’s going?” “Do I even have leases for all my units, and can I see how the tenants are paying?” What’s even more frightening is that he noticed the occupancy is tanking and his lender is already calling and emailing often for answers.
Ok, Bob thinks to himself, “Let me contact my PM team and schedule a conference, as something isn’t right.” There has to be a reasonable explanation as I’m located in Texas and they promised me they dealt with other clients like me who aren’t local. They even said they had tons of previous experience working with multi-family units.
Bob flies in to meet with the PM Team. They explain to you they have been working hard to get the community stabilized, but things have been chaotic. Slowly but surely, Bob realizes the confidence the team once had is gone and they admit to Bob they are overwhelmed and underestimated what the job would entail.
So, let’s rewind. The reason Bob chose this company is because they offered him a 6.5% management fee which was less than the average of 8-10% in the market. Bob had to admit to himself the more he thought on what went wrong, he did get a little glance into the future when he noticed the Property Management team only consisted of a husband and wife. The Wife was the Property Manager and Husband was the Maintenance tech. Initially they took a bit longer to respond to his emails as well as they were late to the initial phone conference and completely missed an appointment. The reason why Bob still decided to hire them was the low rate and that they showed how much they charged other clients for work orders. Bob even had the opportunity to speak to a current client for a reference.
Bob was sold, but now today, he is drowning in debt and has no idea how to end this headache.
Here is the point:
By this small Mom and Pop Operation, doubling in size, they were so excited for the opportunity to earn more revenue. But with no additional resources to assist with the day today operations as they scaled up their business, their management quality suffered. Tenants requests weren’t handled in a timely manner, clients aren’t called back right away, etc. Tenants aren’t paying their rent and being filed on consistently. Complaints begin to increase, which increases the stress level on the owners of this company.
Every experienced property manager knows it takes a certain number of people to effectively manage a certain number of properties. If there are not enough people, then the quality of management suffers.
So with this example, let’s say they collect an average of $1000/mo rents for 100 units, and they are charging an 6.5% management fee.
$1000/mo x 100 units = $100,000/mo rents collected x 6.5% = $6500/mo mgmt fee
Now Bob does recall them mentioning they are hiring a part time Admin to assist with the day to day operations.
Great! Problem solved… well sort of. Although a new part time staff member has been hired, it is still not be enough to handle the workload.
Remember… the workload at least doubled, but the staff increased by only 50%. That means the owners still have a bigger workload than they did before, which have caused management quality to suffer.
Ok, you are still not convinced. A company can still charge a higher rate and not be efficient. But let’s just say before this experience, you did more research and interviewing. The number one thing, especially for multi-family investors, you want to ask the management company is what systems it has in place.
What’s the difference? All businesses need to deal with multiple areas of expertise to succeed, and property management companies are no different. They need to have processes in place for…
Marketing – advertising apartments for rent, advertising for new investor clients
Sales – showing and leasing apartments to new tenant, meeting with investor clients and signing them up for service
Operations – dealing with tenant requests, evictions, maintenance and repairs
Accounting – accounts receivable (money owed from tenants and investor clients), accounts payable (money owed to run the company)
Information Systems – all the technology required to run the business, including phones, voicemail, cell service, website, etc.
All of this takes experience, resources and education to learn and build for any company just starting out. However, where many property management companies fail is when it comes to making these systems repeatable.
Many new investors make the mistake of focusing on the property management fee while losing sight of more costly aspects of the management of their properties. And many property managers know this and reduce this part of the cost as a sales gimmick. But now you know too much to fall for this.
Always look under the hood. 😊
Good Luck!”
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