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314: The Problem with Property Managers

May 31, 2019bmanasseroUncategorizedNo comments

SHOW NOTES FOR EPISODE 314: THE PROBLEM WITH PROPERTY MANAGERS

If you’re an out-of-state real estate investor, you recognize the value of good property management. In fact, it could be argued that one’s success or failure as an out-of-state real investor rests primarily upon property management. In this episode, Bill shares the challenge of managing property managers and the built-in obstacle of conflicting business models.

Introduction

I have always invested out-of-state! I don’t know what it’s like to have a property in the same town, let alone the same state. That’s all I’ve ever known. If you can invest locally, I would highly recommend that you do so. But if, like me, you must go out-of-state, I cannot emphasize enough the importance of have a good to great property manager. They can make or break your investing efforts.

I always recommend that every out-of-state investor visit their properties at least once a year. Do I do it? No, only when things get bad. And why do they get bad? It usually has something to do with property management.

I have switched property managers multiple times. Why, for a number of reasons – and it’s not all property management’s fault:

I own all C properties and they have their risks
- C properties usually have big advantages:
  - A higher ROI
  - Increased cash flow
  - Easier to boost value, revenue and equity
- Disadvantages
  - Usually require more attention
  - More maintenance and repairs
  - Great long-term tenants are more difficult to find
  - More frequent turn-overs
- The biggest problem is that the business model for property management companies often clashes with the property owners business model
  - Property managers generally make from 5 or 6% on larger multifamily properties to 10-12% on single family homes. It’s not a big profit margin. In fact, I always wonder how these companies survive on such a small margin.
    - For larger multifamily properties, they can cover staff and many other areas of support
    - But for smaller properties, it’s not much
      - I have a 3 bd/2 ba home in Atlanta area that gets $1,050 a month in rent. That’s $105 per month for the property management company.
      - For that $105, they
        
        Oversee and make sure my property is well maintained. Administer the
        
        Payments to utility companies
        
        Trash collectors
        
        Landscapers/lawn mowers
        
        Changes heating and A/C filters
        
        Markets to, screens, interviews and finds tenants
        
        Makes sure the rents are collected every month
        
        Sends me monthly detailed reports
        
        Sends me my profit
    - Now, for class B & A properties, it’s not such a big a problem
      - They make more because rents are higher
      - The properties don’t require as much work because they’re already in good shape
      - Good tenants are easier to find because the properties are in big demand
    - But for C properties, it’s another story
      - They are often older properties that require more frequent repairs and maintenance
      - Have higher demands
      - Good tenants are harder to find so property managers often “settle” for borderline tenants
      - More tenant turnover (which means higher turnover costs – could average $1,800 per unit – that’s if the tenant didn’t completely trash the place)
      - Requires more staff to handle the workload
        
        More maintenance people required
        
        Administrative people (answer phones, market to and screen tenants
        
        People to show to tenants
      - The small monthly management fee amount doesn’t cover the costs, so the way they make up the difference is in two ways:
        
        Do more volume
        
        Take on hundreds of properties (even though they don’t have the staff to adequately handle all their clients)
        
        Have lots of fees for specific tasks
        
        Maintenance and repairs add-on fees: for example, every time plumbers unclogs a sink or toilet, they add on 10-20%
        
        In-house repair guys can charge $200 to change a light bulb
      - Property management firms that are successful, often move up to handling only A & B properties where they make more for less effort
      - So what happens to the little guy who is trying to survive off his property cash flow income?
        
        He often is squeezed and squeezed as the PM(property manager) is trying to make his nut each month
        
        Repair a water heater, replace an A/C condenser, do a turnover and your cash flow is gone — for the year, in some cases
        
        The high cost of regular maintenance and repairs increases
        
        They don’t have the time to find you the good tenants
        
        Marketing goes out in the form of online advertising (apartments.com, Zillow, Trulia, Craigslist, Facebook, etc.)
        
        Tenants respond with emails or phone calls
        
        Hot leads grow cold – It may be days before someone in the office can return the call. By then, they have already seen a few places
        
        If they do get back to the people, the ones that are still looking are probably not the most choice tenants because the good landlords got the good folks early
        
        If they do get back to someone, they schedule a showing, if you don’t follow-up frequently with the prospect they may forget and no show. It’s not unusual to see 80% no shows
        
        Plus most tenants WHO WORK (which are the ones you want) can only meet in evenings and weekends, when your PMs offices are closed
        
        You complain because the place has now been vacant too long
        
        The PM says the rents too high and recommends lowering the rate thinking that they will get more calls and will hopefully find a few when then get around to it
        
        More frequent turnovers mean higher expenses and less cash flow…
      - Maintenance and Repairs
        
        They have an in-house person or use outside vendors
        
        In either case, what is the accountability?
        
        I drove by a property where they had to repair an underground water line that cost $300. There was nothing but overgrown grass, no signs of any kind of dig
        
        Are they just trusting and paying outside vendors

So what’s the solution

Carefully screen your PMs
- Interview and ask the hard questions (see blog http://olddawgsreinetwork.com/10-questions-for-prop-managers/)
- Ask for references but find other buildings they handle and contact them
- Set a monthly budget and hold them to the budget
- Set parameters
- Ask for monthly reports of the things you want to know
- Set up a system and “tenant funnel” that generates a lot of leads that can be quickly screened
  - See episode #211 with Neal Bawa
Maintenance and repairs
- Set limits on repairs, pre approvals for anything above $100 or $200
- Get detailed maintenance reports with phone numbers of the people who did the work and someone who can verify (tenant)
- Call your tenants and ask them how they feel the PM is doing
On getting good tenants
- Set up your own system
- Place your own ads and set up a system where you can respond in less than 3 hours
- Don’t just email. Call back
- Learn how to prescreen before you ask them to apply
- Have easy ways to apply (online, send PDF, etc.) – get them to pay the fee
- Get your own person who can do showings evenings and weekends (realtor, another tenant, House Mom, contractor…)
- Set higher rents
- Take the applications yourself and screen and do background checks with a company like RentPrep (see episode #129)

Landlording doesn’t have to be a drag. We can tachle the key issues just by doing our due diligence and putting the right systems in place.

314: The Problem with Property Managers

SHOW NOTES FOR EPISODE 314: THE PROBLEM WITH PROPERTY MANAGERS

Introduction

So what’s the solution

Carefully screen your PMs

Maintenance and repairs

On getting good tenants

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