Paul Moore is the managing partner of Wellings Capital, a private equity real estate firm.
Have you seen M. Night Shyamalan’s thriller Servant? It’s terrifying!
It follows a couple who hire a nanny to care for their baby after a tragedy. The real tragedy is what happens next. The series’ critical question is, “Do you know who you welcomed into your home?”
I fear most multifamily property owners ask that question at some point. “Who have I invited to care for my baby?” Many aspiring portfolio builders actually throw in the towel over this issue.
Your story doesn’t have to end this way. You can rejoice over your property manager and partner with them to grow your baby into the cash-flowing machine you’re dreaming of.
Do you need a property manager?
The answer depends on both you and the property. Here are a few issues to consider.
- Is this your full-time gig? Do you and your spouse have full-time careers? You’ll probably make more money focusing on your jobs and hiring someone to manage your property. I recently spoke to a dentist who was pulling out more hair (his own!) than teeth trying to manage a portfolio of single-family rentals. Don’t make this mistake
- Do you need to maximize cash flow today? Many multifamily owners are in it for the long game. They’re fine with lower cash flows today in exchange for growing equity. A property manager cuts into your profits. After dealing with the three T’s (toilets, tenants, and trash) for a while, most owners believe it’s worth it.
- Are you local or far away? Real estate investors are increasingly buying outside their area. They can manage remotely, but it’s the exception. Check out David Greene’s great book Long-Distance Real Estate Investing. David explores how to buy, rehab, and manage out-of-state rental properties.
- How large is your property? If your apartment is up to about a dozen units, you should consider an off-site firm to manage your property. Above that level, you can consider an onsite, live-in manager. And above 60 to 80 units, you’ll want a professional management corporation with a full-time onsite manager and maintenance staff.
How do you select a multifamily property manager?
You didn’t get to choose your parents. But you can choose your property manager.
Here are some thoughts and questions for your consideration. I’m focusing on the off-site property manager, but these principles apply to live-in or corporate managers as well.
- Interview a broad variety of managers. Don’t just hire the first person you speak to.
- Utilize an objective evaluation system. It will be tempting to hire the person you like best. Probably someone similar to you. An objective scorecard will help fight your natural biases. It’s best if you have someone alongside you to help make this decision—someone objective who will tell you the truth.
- Meet them in person. Our brains are designed to spot sincerity and deceit. Look in their eyes. Hang out with them for a while. See how they talk about their spouse, their staff, and their tenants. How do they treat the waiter or maintenance person? Do they tip generously? And remember the names of “unimportant people?” Do they share your views about landlords, tenants, and the world? They don’t have to check every box, but they’d better check most of them.
- Systems and software. Do they run their company on a spreadsheet? Or, like a guy I know, on a yellow legal pad? What software do they use to collect rent and process payables and make reports? Can they show you proof that every escrow account is fully funded? Do they bristle when you ask that question?
- Marketing and tenant screening. How do they locate new tenants? How aggressive are they in spreading the net when there’s a vacancy? But how careful in enforcing standards and saying no to tenants who aren’t a good match? Is there any hint of discrimination in their processes?
- References. Check their references—both the ones they give you and those you uncover. What do current and former landlords and tenants say about them? Locate some who no longer use them and find out why.
- Criminal checks and death by Google. Do a criminal background check on your top candidate(s) and their staff. Deeply Google them and their current and former properties and companies. Some angry tenant comments can actually be a good thing in context, if they mean they’re doing their job and effectively evicting bad apples.
- Repair personnel and procedures. How quickly and effectively do they respond to repair requests? Do they perform routine cleaning and maintenance, or only react to emergencies? Is there any hint they’re profiting from unnecessary or overpriced repairs? Do they employ competent internal staff or work with licensed and insured third parties? (There are pros and cons to each.)
- Timeliness and legal stuff. When do they provide quarterly and annual statements? Can your CPA readily use this data to finish your books and tax returns? How neat and complete are all their tenant files? Can they show you why they rejected every prospective tenant last year?
- Default to saying no. Keep your objectivity hat on and look for reasons to eliminate every potential manager. This is not the time to choose your new buddy or check a box and move on to the next deal. A bad decision here may mean there is no next deal.
How much should you spend?
Great property managers are worth their weight in gold. It’s likely you’ll pay more for the right one. Don’t negotiate so hard you demotivate them.
Most off-site property management firms charge between 6% and 12% of collected rent. The number of units, tenant demographics, and breadth of services will play a role. Corporate managers typically charge 3% to 4% of monthly revenues plus the total cost of staff.
There may be additional fees for special services performed. These may include advertising, evictions, filling vacancies, or repairs. Don’t expect free labor, but don’t be scammed with bogus charges like lease renewal or vacancy fees either.
A friend of mine gets a 50% discount by filling vacancies and doing all of the maintenance himself. This may be a good plan for some.
Partnering for growth
Hiring a great manager may be the difference between you retiring with a large cash-flowing portfolio or giving up in year two. But a great property manager can help grow your portfolio, too.
Property managers will hear about acquisition opportunities you’ll miss. They know about landlords preparing to retire and sell and other discouraged owners who are giving up (or even losing) their portfolios. Will they share this info with you? Why would they give you the heads-up before a dozen other clients?
You know why. Because you treat them like gold. You will regularly appreciate their efforts. You will refer them to others. You will drop them cards and gifts and bonuses at various times during the year. You will write glowing online reviews. You’ll know their kids’ names and give them $2 bills.
Practice the golden rule with your property manager, and they’ll pay you back in spades. And you’ll be more profitable, have more peace, and leave this world better than you found it.
And that’s a good goal for all of us.