It can be a thankless job where it feels like you are always trying to stay one step ahead of the inevitable next problem.
I learned a lot in this role because I was literally right down there in the trenches, dealing with every problem myself.
This experience taught me something that has served me well throughout my investing career:
You shouldn’t have a college kid manage your 100+ unit portfolio of apartments!
Of course, I’m grateful that I was able to be in that position, as it benefited me by giving me a school-of-hard-knocks introduction into the world of real estate investing, but my experience showed me just how important a good property manager was.
Not only that, but even the most diligent, hardest working guy should not be acting as a property manager to even a small to mid-sized portfolio on their own.
Many people looking to get into real estate end up asking themselves if they should self-manage.
It seems like a logical question to pose when you’re starting out, but I want to cut to the chase here and tell you that no, you should not self manage (in 99% of cases).
Finding a Better Way
The owner should be focused on asset management, which we described in our 5 Steps to Asset Manage like a Pro for Multifamily Investments article.
Self-managing is typically not the best use of your time as an investor-owner, but it’s beyond that.
By wearing too many hats at once, you’re just committing yourself to performing at a novice level in each of those fields.
How can you truly maximize your asset management skills when you’re trying to source deals and property manage at the same time?
On the flip side of that, why would you expect to do a better job at property management than a company who has that as their main focus?
If you’re choosing best-in-class property managers for your market, it’s practically impossible for you to outperform them with so many balls up in the air at once.
The thing to keep in mind here is that while the vast majority of investors should work with third party property management companies, you can’t go in blind.
If you’re ignorant about what a property manager does or should be doing, you can’t perform proper asset management.
You’re basically just giving everyone an invitation to take advantage of you.
That’s why it’s very important to have some kind of hands-on experience in property management at some point in your career.
You need to get a taste of being at the physical property, dealing with tenants, and getting yourself into some hands-on difficult circumstances. This allows you to understand how property management works and the challenges associated with it.
Your expectations of what your property manager should be doing for you need to be rooted in reality.
This doesn’t mean you have to have managed 1000 units, you you really should get your feet wet a bit or you won’t be capable of managing the manager.
You want to know not only how to hire the right property manager, but how to hire them the right way to set the foundation for your working relationship moving forward.
In my opinion, the property manager is the most important team member you need to select as an investor or syndicator, and they need to be on-point from the moment of your purchase of the property in order for you to get the most out of your investment dollars.
Here’s a quick guide of five things to implement or be aware of when you are dealing with property managers for your multifamily investments:
1. Revenue and Expenses:
One of the first questions you need to be asking when you start a relationship with a new property manager is what can we do collectively to drive more revenue and decrease expenses?
This is a question that needs to be continually revisited every month to keep the property on track.
There are some obvious answers to that question that every owner will be implementing by default, like increasing occupancy and upping the rent, but those are answers anybody can give.
When you’re trying to select a good property manager, you want to know that they’re going above and beyond the standard playbook to give you even more value.
The answers to these questions will vary from property to property and it is up to the property manager and owner to craft strategies that are unique to their situation. Some examples might be:
Automatic, Card-Based Laundry Machines:
This not only increases the ease of use to the tenants, but also eliminates the risk of theft. Coin based machines are often a prime target for thieves, who not only take the coins within, but also damage the machine in the process, inflicting painful expenses on the property owner.
Water Leak Detection Systems:
Battling against water issues is something every owner and property manager will have to face sooner or later.
When you’re managing 100+ unit apartment complexes, it becomes a bit of a heavy burden to figure out why your water bill was high last month.
Do you have to go through every toilet in the building, increasing labor costs in the process?
New technology for water leak detection has arisen in the past ten years that would be able to solve this problem for you.
Manufacturers Moen and Waxman have popular options that smart property managers are already utilizing in the properties they manage.
2. Budget and Priorities:
An extremely important step to ensure future harmony with your property manager are to work collaboratively to craft a realistic budget prior to your ownership.
If the owner is coming in with an unrealistically low budget, then they’ll inevitably end up disappointed and unsatisfied.
These things need to be aired out and thought out ahead of time to make sure everyone is on the same page.
The general environment of the property management company should be one of keeping tenants happy, but there has to be a balance.
The property manager knows that quickly responding to tenants concerns is the hallmark of a properly run building, but this has to be done working within a realistic budget.
Management needs to include their staff in these budget-crafting discussions, including the maintenance staff.
Everyone needs to be in communication with one another and united under a common vision.
If you worked together with your property manager to craft a sensible budget and they are still going over that amount, it’s now truly on the property manager to explain why this is the case.
While it’s a tough balance to strike, the answer the property manager provides can’t simply be “the tenants complained.”
You’ve worked together with the property manager to arrive at this figure and now they need to stick to it.
There are far more tenants than there are owners and it is easy for a property manager to mindlessly serve the tenants without keeping the owners’ interest in mind.
The main priority is keeping your net operating income in line with your projections.
Making sure everyone is aware of that figure is imperative.
When it’s below where you want it to be, you know that warrants further investigation – is the problem high vacancy or high expenses?
If you weren’t setting goals and making your team aware of them, however, perhaps no one even notices as your NOI goes to the toilet.
Keeping a strong and constant stream of communication with your property manager is essential.
The owner needs to visit and be in touch with the property manager on a regular basis.
It’s all too common that an owner will purchase a property, select a property management company, and then disappear, letting things just run themselves.
There’s no worse approach than this and you will suffer the consequences if you are this laid back with you and your investors’ money!
The truth is, there’s a lot of up-front getting to know each other that you need to do when you start a relationship with a new property manager and even when you’ve been working together for years, you need to keep the lines of communication open.
This helps both the owner and the property management company.
If there’s no communication, then the owner will be ignorant about the current workings of the property and taken aback whenever an unexpected bill arrives.
The truth is, nobody likes surprises in the real estate investing world. They usually turn out to be negative.
We want to know what those negatives are from miles away so we can prepare and budget for them.
There needs to be a balance between the property manager and the owner/asset manager.
A good property manager should be extremely easy to contact. If the owner calls, they should answer the phone or call back shortly thereafter.
Unresponsive property managers are horrible property managers. At the same time, it’s also the owners responsibility to continually check in and let their voice be heard.
A common problem is you’ll end up playing telephone throughout the property management organization.
The owner only speaks with the regional manager or owner of the property management company, who then passes a garbled and truncated version of the owner’s vision to his site manager.
By the time the goal has filtered down to the maintenance staff, the message has already been passed through too many people and key details are lost.
This doesn’t mean everyone has to be speaking to each other daily, but every point in the organization needs to have some point of contact directly with the owner.
At the bare minimum, there should be monthly review calls to go over the property’s financials, but it’s preferable to have more frequent communication.
We recommend having a weekly call to discuss vacancies.
That way, if occupancy is lower than expected, the owner and property manager are reacting immediately, as opposed to a month later.
You should also go over any major issues or maintenance items on these calls as well.
Come prepared for your monthly financial review call. You should be reviewing your budget and comparing it to the actual expenses through your variance reporting to find areas of improvement.
These calls keep everybody in check and focused on the task at hand.
As all of you business owners and entrepreneurs out there know, systems are what separate successfully run organizations from “small businesses.”
If you don’t have proper systems in place, no amount of work ethic in the world can make up for that fact.
This is very true of property management companies.
Property management systems are extremely important for keeping expenses on budget.
For example, more expensive repairs can often be attributed to tenant negligence rather than actual wear and tear.
Say a tenant in one of your buildings threw a large bone down the garbage disposal and broke it.
This type of repair was beyond the ability of your maintenance staff, so a plumber had to be called in to get the job done. The added cost of the plumber caused you to go over budget for the month.
Systems are extremely important for keeping expenses on budget – more expensive repairs are often caused by negligence rather than wear and tear.
For example, say a tenant threw a large bone down their garbage disposal that required a plumber to be called in because it is beyond the ability of the normal maintenance staff to repair.
This would likely be an expense that wasn’t budgeted for properly, but it was due to tenant negligence and the costs should be billed back to the tenant.
If the property manager doesn’t have systems in place to do so, little expenses and situations like these will add up over the long term and do serious damage to a property’s NOI.
One of the areas you want to make sure your property manager has robust systems for is accounting.
Proper accounting is super important for the property management industry and to you as the property owner.
The property manager should have at a minimum an in-house accountant and bookkeeper if they are managing 100+ unit portfolios.
An oversized focus should be put on maintenance systems by the property manager.
Maintenance will improve the life of the property and save money over the long term.
It also reduces vacancy and increases the quality of the tenant base.
Due to the recurring and constant nature of maintenance expenses, having streamlined systems to make maintenance more efficient and cost-effective saves tremendous amounts of money over time.
The truth is, most property management companies are small, but even small companies can have poor systems that break the lines of communication.
That’s why it is extremely important to vet the property management company to make sure they have functioning systems in place that you have confidence in.
You can see how without the systems in place, it’s very easy to go over budget – if an unexpected expense arose you might need to delay some non-essential renovations, like new carpeting in the common hallway, in order to stay on budget.
Without good systems to see in real time that you’ve gone over budget, as well as good systems to communicate and re-schedule the new carpet installation, it’s extremely easy for no one to address the need to re-schedule.
Then the installation happens, you’re over budget, and all this happens without anyone noticing until after the fact.
5. Technology / Learning / Methodology:
You also want to make sure you select a property management company that is always growing and evolving.
The principals at the company need to be voraciously learning and integrating new methods, ideas, and technology.
Technology has already transformed many industries, including ones close to home for us as multifamily investors, such as the hospitality industry.
The multifamily space is ripe for some major changes through technology and you want your property manager to be on the forefront of that so you are benefiting tomorrow as opposed to ten years from now.
This could range from employing property management software that significantly improve your systems soon after it is released, rather than waiting for it to become industry standard. Another example would be finding new revenue streams for your owners.
For example, large multifamily apartments can form agreements with internet service providers to provide building-wide internet and cable access that the property manager and owner can then bill to the tenants.
The owner gets increased revenue by obtaining a discounted bulk rate for the whole building, but charging the tenants similarly to if they signed up as an individual.
If your property manager isn’t keeping up to date with these kind of trends, you’re leaving a lot of money on the table.
It’s painful to say this, but we’ve seen instances where the property management company might even have updated software, but are not leveraging it properly.
This isn’t about staying “cool” with the latest products, it’s about truly getting utility out of new technology in ways that have tangible benefits to your business.
An example of an extremely useful piece of technology that your property manager should be using today would be cloud based financial reporting.
This allows owners to see all financial information for the property in real time. I would consider this to be a necessity in order to work with a property management company, yet only 10 years ago no one had heard of it.
That can show you the advantage you’ll have by staying on the cutting edge of these trends.
As a property owner, you need to put a lot of focus on the property management component in order to have long term success in this industry.
Your property manager is your best partner as a real estate investor.
They are the guardians of your investments and are your first line of defense when there’s a problem.
They also tend to be extremely helpful beyond that — they have tons of local contacts, source new deals, and have access to hard to obtain market data that you can leverage in future investments.
Choose your property manager wisely!