If your goal is to buy property for cash flow and appreciation, your real money is in effective, efficient real estate operations.
You may have heard the assertion that you make money in real estate when you buy a property. While it is true that buying a good property in a good market for less than market value can establish your baseline profitability. You generally won’t realize this profit until you sell the property.
Again, your real money is in effective, efficient real estate operations.
I cannot overemphasize this point. Effective and efficient operations makes the difference between positive monthly cash-flow and a money-pit that you will continually have to feed with your hard-earned money.
Unless you have a passion for property management,an adequate knowledge-base of property management and you qualify for real estate professional status with the IRS, I would caution you against managing your own properties.
Take a long hard look at yourself in the mirror and ask yourself, “Do I primarily want to be an investor or a landlord?” Operations will make or break you and as such, it’s really a second job.
In most cases, I believe this should be left to the professionals.
The Usual Route
I understand why so many doctors and health care professionals go this route.
- You buy a small residential property that is in close proximity to where they live.
- You may or may not try a local “mom & pop” property management firm.
- You quickly realize that these firms only make small profits on these small properties & have to manage a high volume of properties to survive.
- Most of these property managers are spread too thin and consequently give sub-par service. There are some good ones out there, but they are few and far between.
In response to this, we physicians with our do-it-yourself attitude and healthy levels of confidence often decide to manage the properties ourselves.
More often than not, this situation turns into a recipe for disaster.
Even for those few who are not burdened with negative cash-flow, most squeak by with a break-even stressful second job that won’t give them financial security or peace of mind until the mortgage is paid in full 30 years down the line.
The Profitable Model
What most don’t realize is that there is another class of property managers that only manage larger commercial properties.
These professional property management firms, have systems that take advantage of economies of scale and bulk buying that you and I and even the best mom and pop firms do not have access to.
Their interest is in making their owners money and the smart owners and asset managers will incent their performance as such.
In this model, instead of being burdened with all of the management headaches that come with being a landlord, you can sit back and manage your mailbox as the checks come pouring in.
The day-to-day (profitable) real estate management is best left to the professionals.
Its Your Wealth and Your Retirement, Why not Make it Abundant?
P.S. While real estate operations can create quite a nest egg, property liquidation will always be a consideration. We look at liquidation in the next post.
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Totally concure. A residential property’s value is only determined by comps or what neighboring properties have sold for. A commercial building is a small business and its value will be determined by the bottom line. Improve that and you will increase your return.
Hi Dennis, thank you for sharing your experience! Why are these professional property management firms not owning the properties? It doesn’t appear to be a question of capital as they would need sufficient amount to cover operating expenses.
If having access to these professional property management firms is the key to increasing cash flow, it would seem that they are passing the profits onto the passive owners. What incentive is there for the company to do a more efficient job?
Thanks
Tony
Hello Tony, and thanks for the question. What happens is that some investment partnerships will acquire critical mass in a market and want to collect the property management fees that they would otherwise be paying out. Starting a property management division creates another revenue stream for them. To grow that revenue stream, they will also offer to manage other people’s properties. This creates an inherent conflict of interest. Whenever these management firms get a new renter, there is a temptation for them to fill their vacancies before they fill yours.
“Fee-based” property management companies have sprung up to combat that conflict of interest. In regards to your question “what incentive is there for the company to do a more efficient job?” For commercial multifamily, property management fees generally range from 3% – 5% of gross income. To create further “incentive,” above and beyond the threat of losing the management contract, it is a good idea to negotiate a lower base fee with the opportunity for NOI performance bonuses.