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I’ve been syndicating multifamily properties for years, and I’ve watched other syndicators and investors make the same mistake over and over again: they try to manage their properties on their own. I’m sure you’ve heard the expression “penny-wise and pound foolish,” and it’s never been more accurate when describing someone who is trying to save money by managing a multifamily property by themselves.
It’s ironic that one would think they’re saving money by taking on the property management on their own, because most often they end up leaving money on the table. There are no economies of scale involved, and frequently new owners aim for rents that are below market value without realizing it. An experienced property manager will know area rents, and they’ll also know how to lower expenses and increase property income. With those facts in mind, why would anyone take on the property management themselves?
Choosing the Right Property Manager
I live in California, but I invest in and syndicate properties in Texas, Georgia in Florida. Logistically, it simply wouldn’t be humanly possible to manage all of my properties on my own. Instead, I hire one of the strongest property managers in each market. They have an in-depth knowledge of competition, rents, concessions, and a variety of other factors that go into properly managing a multifamily property.
A strong property manager will know how to screen out problem tenants, as well as act as a strong point of contact for tenant problems and concerns. Because of his or her experience, they will help to decrease tenant turnover by resolving any problems quickly and effectively. This is particularly important because many times tenants refer their friends and business colleagues to the property if they’re happy with the way the property is managed and their problems are resolved.
Another job that a strong property manager can take on is the marketing. They know the market, they understand the competition and what the property’s strengths are, and they use that knowledge to effectively market available units. They may use social media, ads placed in apartment guides or other forms of advertising, but they know how to leverage the property’s assets.
One area investors often overlook is how a property manager can save them money on maintenance and repair costs. They have built relationships with vendors over the years, and know which ones are reliable and cost-effective. Effective property managers continually review existing maintenance contracts like landscaping or painting, for example, and solicit competitive bids to ensure that the costs are in line with other companies.
As you can see, there are many different ways that the right property manager can positively impact your investment. I’ve found that finding the right one starts with asking the right questions.
Question #1: Do you have appropriate experience in my exact business plan?
There’s no question that many qualified property managers have extensive experience managing multifamily properties. The bigger question is, is their experience directly related to your business plan?
I specialize in investing in value-add properties. This is a unique business plan that involves many different strategies to bring out the full value of the property, with the ultimate goal of increasing the monthly income by raising rents. It may involve renovating, repairs, and upgrades to bring the property to a competitive level with other properties in the market that would justify a rent increase.
A property manager without direct experience in value-add properties wouldn’t be of much help in this instance, as property improvements are a specialized area. A property manager that specializes in Class A luxury apartment buildings wouldn’t be of much help on a value-add property. While it may seem obvious, there are some investors who are impressed with the luxury apartment building experience, but if their strategy is value-add, that property manager wouldn’t be efficient or cost-effective.
Value-add upgrades may be as simple as exterior renovation like painting and landscaping the property, or they may be a complete interior renovation that involves new flooring, countertop, bath fixtures, new appliances and many other items. With an average cost of $6,000 per unit, the total cost can add up quickly. Without direct experience managing value-add properties, the property manager wouldn’t begin to know where to source the components or the contractors needed.
There are also a multitude of logistical considerations as well. In order to effectively upgrade a unit, it has to be taken off the market while the renovations and upgrades are completed. Deciding how many units to upgrade at one time and working out a realistic timetable takes experience. There also may be concessions required to appease tenants during the upgrade phase. Having prior experience is essential for a seamless value-add project.
Question #2: What reports can you provide, and how frequently can you provide them?
Due to the distance between the properties I syndicate and my residence in California, I can’t simply drop in to visit with each property manager to see how things are going. So I ask my property managers to provide me with weekly reports that provide a clear picture of the financial status, vacancy, and rental status of each asset.
Not all property managers are willing to prepare these types of reports, as they are time consuming and require a certain amount of expertise. If the candidate that you’re considering for property manager isn’t willing to prepare these reports, it’s probably not a good idea to hire him or her.
So what’s included in my report? The report lists the type of units available at the property, how many are occupied, how many are currently vacant and available, and how many are vacant but leased. Based on the units leased, there is a percentage listed showing the current vacancy rate.
There is also a traffic count, by day, listing how many qualified people came in and inquired about leasing. There is also a listing of what brought them in, such as an ad in ApartmentGuide.com, signage, or some other form of advertising. This activity report is important because it shows whether additional marketing is needed or if what is being done is adequate.
My report also has a series of renewal metrics, which shows how many units are pending, the percentage of tenants renewing their lease, and when the leases expire. There are also financial metrics, which includes a “projected occupancy” column by number of units and dollar amount.
As you can tell, it’s fairly complex and thorough, but it provides me with an overview of how the property is performing, and whether or not I need to become more involved in “managing the manager.” I mentioned that I require this type of report weekly, but others may feel that a quarterly report is adequate. A property manager who can provide this type of report at the frequency that is needed is a good hire, and possesses the kind of management expertise you want for your investments.
Question #3: Can you tour a property on my behalf and send me an operating and CapEx budget?
When you look at a potential property and plan to submit an offer, you’ll need your property manager to tour it. The tour is very important for several reasons:
1. The property manager can tell you if the property is in very bad shape. I’m not saying you shouldn’t buy that property, but you should know what you buy in advance.
2. The property manager needs to walk the property to create an operating budget, so you’ll know exactly how much it costs to run it (utilities, payroll, marketing expenses, etc).
3. The property manager needs to walk the property to create an estimated CapEx budget (old roofs that needs replacement, HVAC systems, etc).
If the property management company isn’t willing to walk properties – then you might consider using a different company.
Additional Thoughts
One of the other things I do is tour the managed properties to see their condition, talk with tenants if possible to get a feel for their rental experience, and get a first-hand look at how the property is managed. I walk the property with the property manager to hear how he or she thinks we would be able to lower expenses or conduct improvements to increase rents.
I also tour the property without advanced warning, sort of a “secret shopper” approach to see if I like what I see. I’m not looking for problems, but often when you appear unannounced you can find things before they become a problem.
Summary
Hiring the right property manager is a critical aspect of protecting your investment. You want to have a strong property manager, and I’ve found that finding the right property manager starts by asking the right questions. Make sure that he or she has specific experience in your particular business strategy. In my case, it’s value-add properties. If they don’t have that experience, it wouldn’t be a good hire. Ask about the type of reports they can provide, and the frequency with which they can provide them. This is an excellent way to track the viability of the property. Finally, find out if they’re willing to walk the properties and help you underwrite the deal by sending you an operating and CapEx budget.
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About the Author
Ellie is the founder of Blue Lake Capital, a real estate company specialized in multifamily investing throughout the United States. At Blue Lake Capital, Ellie helps investors grow their wealth and achieve double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
Ellie is the host of REady2Scale , a podcast that highlights honest, insightful, and thought-provoking discussions on the multiple approaches for successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital at www.bluelake-capital.com and learn more about Ellie at www.ellieperlman.com.