SS71: Understanding Property Management with Smaller Properties

Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing understanding property management with smaller properties.

Watch The Episode Here:

Listen To The Podcast Here:

Talking Points:

I was speaking with an investor a couple of weeks back that was asking about hiring a property management company for a 3-unit apartment house he owns. He was telling me about the different managers he spoke to and what they charged etc. His property is a C-class building in a C-class neighborhood.
After he explained what his proposed course of action was I had him breakdown his management with the potential fees the manager was proposing and when he factored in reserves and vacancy; he was nearly breaking even in other words; his manager was the only one making any money and I find this the case with many small landlords; especially in C class properties and I see landlords post online about a completed deal and they list the financials (which fails to include many important factors like vacancy) and their potential cashflow and their ROI.
Mistake #1 is when calculating potential returns on any property you need to include all particulars, including vacancy and a healthy reserve that is contributed monthly. If you are dealing with older properties and C-class properties; you need to contribute more to this reserve. If you own a 1-10 unit (maybe 1-20 unit) building; don’t use 5% vacancy; you should be using 7%-12% vacancy and make sure you are contributing enough to reserves to cover apartment make-readies (preparing the unit to be rented again).
Understand what your manager is charging you monthly from your rent (the percentage); is it rent due or rent collected? Understand how much it costs per hour for their handyman, to mow lawns, snow removal, lease renewals, and new move-ins, and figure this into your numbers. How much are evictions? Will they use your attorney?
How good of a deal are they getting from their contractors? Will they call your contractors? Are their handymen knowledgeable? I really want my PM only to call a licensed contractor as a last resort and most issues do not need a licensed person coming in.
The truth is that with smaller properties the property manager is most likely making more on a monthly basis than the owner; possibly if there is no mortgage or the owner has owned it for decades this is not true but in most situations; it is true. You need to work property management numbers into your proforma BEFORE you purchase; even if you plan on managing it yourself since there is a good chance that several years down the road; you will want to hire a property manager.
Years back with smaller properties you could get a property for a lower price because the owner is self-managed and never included the cost for 3^rd party management in their numbers. Today, that is going to be much harder since people are overpaying for all types of small rentals.
Next, make a plan before you start. How many units do you want to purchase and own? What is the end goal? Management becomes increasingly less expensive with the more units you own; the closer they are together.
Lastly, if you are a long-term investor; maybe just hire a part-time handyman as you grow and hire a part-time admin person to assist with rent collection and passing issues along to the handyman. Creating your own property management team is going to make you much more profitable while giving you the most control. Or maybe your investment strategy is just appreciation and you don’t care about monthly cash flow; either way, I would have a backup if your plans change.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing understanding property management with smaller properties. I was speaking with an investor a couple weeks back that was asking about hiring a property management company for a three unit apartment building he owns. And this property is a C-Class building and a C-Class area. And he was telling me by the different managers he spoke to and what they charged. And after he explained what his proposed courts of action was, I had him break down his management and with the potential fees the manager was proposing. And when he factored in reserves in vacancies, he was nearly breaking even, or other words, his manager was the only one making money. And I find this a case with many small landlords, especially in C-Class properties. And this is the reason why I want to record this episode.

Charles:
I see landlords post online about a completed deal, and they list some financials which fails to include many important factors like vacancy or reserves and the potential cash flow in their ROI. And mistake. Number one is when calculating potential returns on a property, you need to include all particulars, including vacancy and a healthy reserve that is contributed to monthly. If you’re dealing with older properties and classy properties, you need to contribute more to this reserve. Next is if you own a one to 10 unit or maybe even a one to 20 unit building, don’t use a 5% vacancy. They, you see all over the internet of people using you should be using a 7% to 12% of vacancy and make sure you’re contributing enough to reserves, to cover apartment, make readys, or in other words, preparing the unit to be rented again. And you’re also including the manager’s fee for releasing that unit.

Charles:
Understand what your manager is charging you monthly from the rent, the percentage, is it rent due or rent collected? Now, most managers are rent collected, meaning that if you have a 10% fee, rent’s a thousand dollars a month, you will pay them a hundred dollars a month. But rent due is really just, if it was 10% rent due, that means you’re paying a hundred dollars a month. If they pay, or they don’t understand how much it costs per hour for their handyman. Now this is very important for smaller complexes because you probably don’t have your own superintendent or your own contractors, right? That you’re gonna be using. You’re not gonna really have a, a, a, probably a lawn contractor or a snow removal contractor. In most situations, you’ll be using the handyman from your property manager. So find out how much it costs for the mowing lawns, the snow removal, how much release renewals how much for new move-ins and figure this into your numbers.

Charles:
You know, how much are evictions will they use your attorney? This is very important. You don’t wanna find out months down the road when you, when this happens how much is gonna be charged? You wanna know upfront how good of a deal are the they getting from their contractors? I mean, will they call your contractors? If I have a, Hey, if there’s ever a plumbing issue, call this person, are they gonna call that person? Are there handyman knowledgeable? And this was something that came up years back with one of my properties where a property manager there was an issue with some outside light fixtures at one of our properties. And our property manager called us and said, my handyman can’t figure ’em out. AKA. They can’t like change. ’em, You know what I mean? Can’t replace them. And they wanted to call an electrician and that just takes whatever you’re gonna pay before.

Charles:
And just triples, maybe quadruples what the price of that would be, you know, really want my PM only to call a licensed contractor as a last resort. And most issues do not need a licensed person coming. Yes, if you’re running new lines coming through, you know, electrical lines or obviously putting gas lines or anything like this, plumbing, you know, plumbing lines or anything like major, yes, or a need a licensed person coming through. But most issues do not require a license person coming in. And that’s really just gonna triple, quadruple what the cost is gonna be to replace that. So you have to know about their own team and how knowledgeable they are going in. The truth is that with smaller properties, the property manager is most likely making more on a monthly basis than the owner, possibly if there’s no mortgage or the owner has owned it for decades, this is not true.

Charles:
But in most situations, it is true. You need to work property management numbers into your perform before you purchase. Even if you plan on managing it yourself, since there’s a good chance that several years on the road, you wanna hire a property manager. Now, years back with smaller properties, you would get a property for a lower price. Owner, self management never included the cost for third party management into their numbers. And there was always a caveat and a, you know, a way of brokers getting around that. Well, there’s no self there’s no management fee in there, cuz he’s self-managing. So now I’m not gonna self-manage it. Or even if I am, I want to get a discount on the price because they cost my, I need to manage the property today. That’s not gonna, that’s gonna be much harder to do since people are overpaying for all types of small rentals especially like one to 40 units where you can get FHA financing and people can house hack, but yours back, it was something you could do.

Charles:
Today. They probably won’t even have any type of management fees in there. You’re and you’re overpaying. And you gotta put your offer in right away. Next, make a plan before where you start. I mean, how many units do you ultimately want to purchase and own? And what is your end goal management becomes increasingly less expensive with the more units you own and the closer they are together, you might own 20 units, but if they’re all all within the hour drive of each other it’s much different than if they’re a five minute walk from each other, right? So be strategic when you’re buying properties and you’re planning out what you want to do. Lastly, if you are a long term investor, maybe just hire a part-time handyman, as you grow and hire a part-time admin person to assist with rent collection and passing issues along to the handyman, you know, creating your own property management team is gonna make you much more profitable while giving you the most control or maybe your investment strategy is just appreciation. You don’t care about monthly cash flow either way. I would have a backup if your plan changes. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments, and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See you then

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.