The property manager is like a spouse for the investor. He/she is perhaps the most important part of the investor’s team, especially for an out of state investor. Property manager is the direct contact person with the tenants and vendors. He/she is the boots on the ground and deals with the day-to-day affairs of the property. Finding and hiring the right property manager is similar to finding the true love. Then after the marriage, the journey is just starting. Property managers come in a wide range of style, capacity, and experience. It is important to properly vet, interview, and hire the right team.
A good place to start is getting referrals. One can get referrals from brokers, lenders, and other professionals in the industry, but the best source is other investors. People who have worked with the manager can share details of the operational style and competence of the company. But just getting good recommendations is not enough. When getting a reference, ensure that the client has a similar type of property as us. If our project is a value-add 50 unit apartments, talking to a happy client who had the manager take care of her duplex is of no value. The investor has to determine if the manager is well suited to the type of property. Managing class A luxury condos is very different from managing class C workforce housing. The Manager needs to know what level of finish the units require for the class, how to work with the type of tenants, and also have experience/competence in dealing with issues that are unique to the class type. A team specializing in class A might not have experience/confidence in dealing with section 8. Over renovating is class C could be wasting money, and under renovating in class A could mean getting less than the maximum possible rent.
The type of building and the number of units is also important. A 100 unit high-rise building has very different management needs than a 20 unit garden style apartments, or a single-family rental property. The first requires an onsite manager and maintenance staff whereas the other two properties won’t be able to support it. Managers who are primarily used to dealing with single family homes and duplexes may not have the experience and the capacity to manage a larger building, and vice versa. A company that focuses on large buildings don’t have the efficiency or experience in managing smaller properties. A great set of first questions would be, “how many units do you manage? In what part of town? What class assets? Type of buildings? Number of units in the building? Experience with value-add projects that involve heavy renovation? Do you have staff for on-site management? On-site maintenance personnel?”
It’s also crucial to match the project style to the management capabilities. There are property managers whose philosophies are such that they price the units lower than market to minimize turnover and save money. If the investor has plans for a massive value-add that wants to push the current market rents, we can clearly see the potential mismatch in styles.
If we are doing a value-add project, we must clearly communicate our plans and determine if the management has experience and capacity to handle the type and volume of work. We can use a contractor that we hire or use the management company. If we decide to have the management handle the renovation, we need to work out the details; Does the management have an in-house maintenance team? How many? Are they capable of handling the type and volume of work necessary for the plan that we had in mind? If the management hires a 3rd party company for renovation, who are they? How will they be managed and held accountable? Will we be able to communicate with the 3rd party vendors? Will there be project management fees? Are there protocols to make sure that the timelines and the budgets are kept? It can’t be stressed enough that the investor must explain in detail exactly what needs to happen – (6 month-to-month units will need to be renovated initially, finished and leased within 4 weeks, then subsequently 2-3 units will be renovated and leased every month. We need to keep the cost under $6,000 per unit and here is the scope of work..)
It is important to know what to expect in daily operation. If the management takes 3 weeks to turn a unit when the investor expected/assumed 1 week, this can put a lot of strain on the relationship. These expectations must be discussed ahead of time to minimize friction later. “How long does it take to turn a unit? How long does it take to market and lease a unit? Does the management company offer unit inspections? Will the management be responsible for keeping the premise clean? What kind of software is used to manage the property? What reports will be provided? Who advertises the units? On what platform?” Make sure to find out if the management company has an in-house maintenance personnel, and if so, how many. If they have 3 but manage 1,000 units, this can give the investor a clue that they are understaffed and will not be able to handle the volume of work orders. If the management company doesn’t have in-house maintenance personnel, we need to find out how the work orders are handled – who is called, what are their availability/capacity/cost, how soon they can usually get to the units, if there are back-ups, and who coordinates the unit access, etc.
The importance of having a thorough understanding of the fee structures and management contract cannot be stressed enough. Does the contract require a commitment? What are the consequences of breaking the contract? If there is some sort of commitment for a period of time, the investor must carefully consider the implications. If things don’t work out, a mismatched property manager can ruin a project, and it becomes important to part ways quickly to look for alternatives. The investor must learn all the fee structures. Every company has a different way of billing their clients and there are multiple fees. Just comparing management fees is similar to only considering a potential spouse’s looks without any regards to their personality, values, or habits. Some of the common fees are as follows: management fee that is usually a percentage of the total revenue. Verify if it’s a percentage of the total potential rent, or a percentage of the actual collected rent. Interests are more aligned when the management fee is a percentage of the actual collected rent. Then there are leasing fees: Leasing fees for new tenants and also leasing fee(smaller) for renewals. Some companies may not charge for lease renewals. In addition, there are usually some sort of project management fee for coordinating and supervising a third-party vendor. Some companies outsource all of the maintenance work and charge 5-10% fee on all work orders and renovations. These can add up! The investor should verify if the vendors that the management uses are competent and competitive in pricing. Call around to compare rates and ask for references.
Some of the other fees may include salaries and benefits for personnel – leasing agents, maintenance team, etc. especially if it’s a bigger type of building with dedicated onsite manager, leasing agent, and handyman. Some of the miscellaneous things to find out ahead of time are: who keeps the application fees? Late fees? The investor must take all these into account when comparing fees for different management companies. There can also be differences in how fast the companies can turn the units and lease them, and also at what cost. If a company with higher fees can turn the units at a lower cost and lease them very quickly, it’s possible that they can actually cost less overall than the company with lower structured fees.
A good property manager should have the best interest of the owner and look for ways to optimize the operation by saving costs and increasing profit. The good manager also cultivates and maintains good relationships with the tenants and vendors. She treats everyone with respect, fairness, and firmness. She is level-headed and can handle unexpected events with grace and confidence. She is well aware of and abides by the local codes and regulations. She can also provide a lot of valuable insights in regards to pricing and marketing the units, renovation standards, ways to improve operation, and more. A manager should also be involved in the initial underwriting of the property. The investor doesn’t want to buy a property only to find out that the property manager doesn’t feel great about working on the property for one reason or another. It is prudent to get the property manager involved early. Walk the units together, go over the plans and budget, and see if we can align our goals and expectations for the project.
We discussed at length about how to find the right property manager, but perhaps equally as important is being a good owner that is easy to work with. A lot of the hard work is done before the hiring. If we were diligent about the vetting and hiring process, we should’ve ended up with a solid, competent management team. Because we hashed out all the details ahead of time and aligned expectations, we should not need to micro-manage everything. We still need to check in and get updates, but nothing is draining like a hovering micro-manager. If we have confidence in the manager, we can give success metrics to shoot for (expense ratio, vacancy, NOI etc) and give the team some freedom in how they achieve the goals. This can pay a lot of dividends in building trust and respect. The owner also should be committed to making investments to provide safe and acceptable conditions for the tenants. We don’t want to be slumlords where our tenants are living with roaches, mice, and leaking ceilings. It takes two to tango, and we must be committed to being respectful, resourceful, and helpful partner in the project.
Aside from cost and qualifications, the investor must feel confident and comfortable with the management team. We will be interacting with them on a daily basis and it is important to ensure a good match of personality, style, priorities, and more. Just like a marriage, the investor must find “the special one” that they share similar values and goals with. If you are a loyal member of the NRA and an avid hunter, you’d probably want to find out if your potential spouse is a vegan and the president of local PETA chapter. We’d want to get to know our potential life partner by meeting his/her friends and family, and in the same way we ask for references from our property manager. And just like a good prenup, the management contract and details need to be discussed thoroughly before the marriage. And finally, once married we must do our part in being a good, considerate partner. Don’t forget to squeeze the toothpaste from the bottom!
By: Ki Lee
real estate, property manager, partner, business team, business relationship, property management