Real Estate Acquisition

Property Management: Critical Piece For You To Make Money In Real Estate

By January 30, 2013 May 14th, 2019 4 Comments

If you want to make money in real estate, find the best real estate investments, and enjoy financial growth, the next step is to find top notch professional property management. Although you don’t have a property to manage as of yet, finding the best real estate investments requires you to engage a quality professional property management firm early in the game.

Now let me tell you why. Once you start looking for properties, you will be dealing with brokers. Brokers make their money through commissions traditionally paid by the seller when they sell a property. Consequently, no matter how honest the broker is, he or she is biased toward selling properties. This bias can lead you down a rabbit hole. On one end of the spectrum are those brokers who are basically honest, but can’t help seeing the asset and submarket through rose-colored glasses. On the other end of the spectrum are those brokers who are dishonest and have no problems lying to you to make a sale. They would tell you the property comes with money-growing trees if they thought that you would buy it. Having a property manager on your team can counter-balance the broker.

The two biggest mistakes you can make at this point are assuming that all brokers are honest and not having commercial real estate property managment on your team. Property managers are incented differently. They have to eat what you kill. In other words, if you buy a property, they have to manage it. They don’t want to be in the bad parts of town. They are not going to advise you that occupancy rates and rent growth are high when in fact they are low. The last thing they want you to do is rely on unrealistic expectations that they cannot meet. They know that if those expectations don’t materialize, you will be on their back demanding answers.

FINDING PROFESSIONAL PROPERTY MANAGEMENT

Hopefully, by now, I have convinced you that you need quality property management in your corner. How do you go about finding professional property management? Start with a simple internet search to accumulate a list of possible candidates. Keep in mind that there are national, regional, and local management firms. Eliminate the national firms right off the bat. Firms like Greystar, Archstone, and Bell Partners just to name a few are titans in the multifamily space. They manage tens to hundreds of thousands of units. They partner with multi-billion dollar institutional players and are far too busy to give you the attention needed to be successful.

You are going to want to look into the local and regional firms in your market. Just like Goldilocks, you don’t want someone too big or too small. For financial growth, you are looking for someone who is just right. As a multifamily investor, here are some of my requirements for a property manager:

  1. Minimum 5 years in business
  2. Minimum 2000 doors under management
  3. Multifamily focused
  4. Prefer 100% Fee Based
  5. Professional property management software
  6. Professional designations

5 YEAR AND 2000 DOOR MINIMUM

I put minimums on number of years in business because I like to see a track record. A track record shows the ability to grow a business successfully and compete in the market place. It also allows me to ask for references and confirm the manager’s past performance.

The 2000 door minimum is largely due to economies of scale and bulk buying. Larger companies can buy products at steep discounts when they buy in bulk. They can pass that savings onto their owners when replacement items are needed. Bulk buying is just one of many economies of scale savings that larger property management firms can pass on to their owners.

MULTIFAMILY FOCUSED

Whatever asset class you invest in, you want your property manager to be a specialist in that area. You will be surprised how many firms are unfocused. Their management portfolio’s will read like the Lou Bega song Mambo #5 a little bit of multifamily in my life, a little bit of office by my side, a little bit of retail is what I need, a little bit of industrial is what I see, a little bit of hospitality in the sun – You get the picture. I don’t want a generalist jack-of-all-trades. I’m looking for financial growth and to make money in real estate. As such, I want a specialist in my asset class with a proven track record.

100% FEE BASED

Typical residential property managers will charge 8% – 10% of gross rents for their services.

Typical commercial multifamily managers will charge 3% – 5% of gross rents for their services.

This is fee based property management. You agree on an established fee and that is what you pay. Personally, I like to pay on the lower side and incent up with NOI performance bonuses, but that is a different post. You will find that some management companies will have a dual model. They will manage on a fee basis as well as manage their own portfolio. This can create a conflict of interest. When these companies find a qualified resident, are they going to fill your property or their property first?

PROFESSIONAL PROPERTY MANAGEMENT SOFTWARE

As the owner, you will be receiving monthly, quarterly, and annual statements from the property manager. While reporting using Quickbooks or Excel is common in the residential space, it is unacceptable in the commercial space. If a property management company does not use professional management software, it is usually an indication that they are too small to justify the expense.

While I don’t have a preference, make sure your company is using one of the many professional software packages available, like Yardi, MRI, AMSI. These programs allow you to track expenses and create reports that are specific to multifamily and are far superior to Quickbooks and Excel.

PROFESSIONAL DESIGNATION

While many physicians hate the merit badge approach to medicine, I appreciate the professional designations that come with property management. This allows me to be confident that my property manager meets certain industry standards.

-CPM (certified property manager – the gold standard in the industry)

-CAM (certified apartment manager)

-ARM (accredited residential manager)

-RAM (registered in apartment management)

I prefer to see upper-level management carry the CPM designation with the onsite property manager carrying at least one of the lower designations.

SUMMARY

Professional property management can make or break your financial growth in real estate. Not only does a qualified competent manager know how to make money in real estate through efficient and effective operations, they also know how to find the best real estate investments in a market and act as a counterweight to an enthusiastic or unscrupulous broker. Find the right property manager and you will be cashing checks on a regular basis.

P.S. Taking the time to find the best property managers in your chosen market will insure that you find the best real estate investments, enjoy financial growth, and make money in real estate!

Want to learn more?

Download your free copy of Evidence Based Investing and learn why it’s a preferred asset class.

Download Now

Dennis Bethel

Dennis Bethel

After 18 years of working in the trenches of a broken health care system, Dennis Bethel, M.D. extricated himself from medicine utilizing the power of passive income from real estate. Now he helps others conquer their number one financial fear, cut their biggest expense, and tame the greatest threat to their careers.

4 Comments

  • Dan says:

    This was really well done. Are there websites I can use (besides google) to find good leads? E.G. Associations good property managers are with?

    • Dan, IREM (Institute of Real Estate Management) has a very good webpage that can allow you to find their members in the market you are looking for. You can search based on professional designation like CPM or ARM. Good luck and remember that finding quality property management really is a critical piece for success.

  • What do you make of John T. Reed’s assertion that it is essentially impossible to hire a good property manager due to their misincentives, i.e. kickbacks from repairmen etc? It seems using some kind of incentive payment model where they’re paid based on your profit, not gross rents might help.

    • Hello WCI,

      Thanks for visiting and for the question. I do agree that finding quality property management can be a challenge. This is especially true in the residential space. Residential property managers typically charge 8% – 10% for their services. So if your single family home is renting for $700 a month, they get $70 at the most. In order to make a living, that manager will need to have a large volume of properties to survive. I have hired and fired my fair share of residential managers. Some are downright dishonest, however, most are just inattentive due to being spread too thin.

      In the large multifamily space, quality professional property management is easier to find. They typically charge 3% – 5% of gross rents (just one of many economies of scale you can enjoy when you go bigger). I like to see a negotiated base pay on the lower end 3% – 3.5% and incent up based on NOI performance. This can be done a couple of different ways. Set an annual target NOI. If your property management team hits that, you can negotiate 4% of gross rents. A certain percentage above that 4.5%. Top out at 5% for even better performance.
      Another way to do this is to profit share. You set your target NOI and the property management firm gets a negotiated percentage of the NOI that is above and beyond the target.

      There are three ways to raise NOI – increase rents, decrease expenses, and increase retention. By incenting NOI as I suggest, you introduce the temptation for the property manager to defer maintenance. I like cutting expenses through economies of scale, but I do not like deferring maintenance. Doing so will ultimately lead to higher turnover (decreased retention) and an unsavory reputation in the long run.

      The two ways I recommend combating this are first to scrutinize the monthly P&L you get from the property manager and second regular site visits. In general, a smaller property will have operating expenses over 50%. States with high property tax, like Texas, can be even higher. Once you get up to 175 to 200 units, it can be possible to get under that 50% mark. I like to track and trend my operating expenses monthly. It is important to look for irregularites and question them. I also think it is important for an owner or asset manager to visit his or her property regularly. With residential properties, you should probably visit your property frequently. In my larger fractional deals, the asset manager visits the property quarterly. It is not hard to spot deferred maintenance when you walk the premises, tour units, etc.

Leave a Reply