SS207: What Investors Get Wrong About Property Management

SS207: What Investors Get Wrong About Property Management

It is normal for real estate investors to misjudge several important aspects of property management. In this episode, Charles discusses property management and common investor misconceptions.

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Talking Points:

  • When I first became a multifamily investor, I self-managed my own properties for 6 years and made many mistakes that I commonly see other investors make.
  • Overlooking the time and effort required to manage a property correctly
    • Underestimating tenant management: New investors commonly overlook the time required for not only making repairs but also collecting rent or collecting late rent, addressing tenants who are not following the terms of the lease, in addition to preparing units for rent, marketing apartments, and ultimately signing leases with new tenants.
  • Inaccurate Financial Projections
    • Misjudging repairs and maintenance: Rental properties, especially older rental properties, require consistent maintenance. The actual costs for repairs and maintenance are typically higher than expected. Performing thorough due diligence before purchasing a property will give the investor an accurate idea of the property’s condition and what deferred maintenance needs to be addressed.
    • Overestimating rental income and anticipating immediate returns: the rental property business is a proven business model for building long-term wealth, but it takes time to achieve significant returns. Once you purchase a property, investors should focus on making repairs and updating units to increase rents with new tenants. After this happens, the property will produce more income, increasing its value. Over the years, as you pay down debt and rent increases, you will start experiencing higher cash flow, property values, and a higher net worth.
    • Dramatically cutting costs: When I purchase properties, I will usually decrease expenses by bringing on new management and vendors, but this is not something that continually happens. Large complexes put their contract services out to bid every year. For smaller investors, maybe every once in a while or when you notice a dramatic increase in what you pay any specific contractor. Real money and wealth are made by increasing rents, not decreasing expenses. Remember, we are trying to make the properties we invest in better, more valuable properties.
    • Not budgeting for vacancies: Many landlords, including myself, underestimated the cost of vacancies when I started investing. Check out episode SS151 to learn how expensive turnover really is.
  • Undervaluing the importance of professional management
    • When you hire professional third-party property management, you are now turning the corner from landlord to investor, and there is a significant difference. Investors don’t manage their properties. If you have enough units and you have full-time employees to manage your properties, that is a different situation. Still, the owner is not actually managing the tenants and property on a daily basis. They are more interested in buying properties and have regular calls with their property managers, also known as asset management. You can listen to episode SS190 to learn more about asset management.
    • Good property management companies have a team of good people who will work to make your property successful. This includes handymen, contractors, leasing agents, and other third-party vendors. Typically, the rate they can command from outside contractors and vendors will be less than what you would pay if you randomly contacted them.
    • Property managers know more about the local rental market and city than you will ever know. They have more contacts in the city departments than I ever had as a landlord. They know what units rent for since they manage hundreds of units in your sub-market.
    • Lastly, is that property managers remove emotion from your rental business. They aren’t going to rent a vacant apartment to the first person. They will strictly follow the rental guidelines set by you and them when you hired them. They won’t budge on late rent, forget to run background checks, make handshake deals, delay evictions, or become friends with the tenants. Managing properties you do not own is much easier since managers can play the I work for the owner card, which tells the tenant that they are just doing their job, have no say in the matter, and cannot bend the rules.

Transcript:

Charles:
Are you making these common mistakes with your rental property? Most new landlords overlook these common management points that can influence the property success. I’ve spent hundreds of hours dealing with tenant issues, property management, and repairs, and I’ve seen all the mistakes, cost and hidden traps that most investors can never see coming. Here’s the truth. I thought hiring a property manager was a waste of money until I realized how much time and money it actually saved me. Welcome to Strategy Saturday. I’m Charles Klow, and today we’re diving into what investors get wrong about property management. Whether you’re a new landlord or you’ve been in the game for a while, property management is one of the most critical elements of turning a rental property into a profitable investment, but it’s often overlooked. Stay tuned because by the end of this episode you’ll understand how to avoid these common pitfalls and turn your rental property into a long-term profitable investment.

Charles:
So let’s get started. Property management is one of the most critical aspects of your rental property being a profitable investment, but many landlords, especially new landlords, overlook its importance. When I first became a multifamily investor, I self-managed my own properties for six years, and I made many mistakes that I commonly see other investors make. Number one is overlooking the time and effort required to manage a property correctly. So underestimate tenant tenant management. And this is a big one because new investors commonly overlook the time required for not only making repairs, but also collecting rent or collecting late rent, addressing tenants who are not following the terms of lease. In addition to preparing units for rent, marketing apartments and ultimately signing leases with new tenants, this can be very time consuming if you don’t have a team. Number two, inaccurate financial projections. So misjudging repairs and maintenance rental properties, especially older rental properties, require consistent maintenance.

Charles:
The actual cost for repairs and maintenance are typically higher than expected. Performing thorough due diligence before purchasing a property will give the investor an accurate idea of a property’s condition and what deferred maintenance needs to be addressed. Overestimating rental income and anticipating immediate returns. The rental property business is a proven business model for building long-term wealth, but it takes time to achieve significant returns once that your property is purchased and investors should focus on making repairs and updating units to increase rents with new tenants. After this, and only after this happens, the property will produce more income increasing its value over the years. As you pay down debt and in rents increase, you will start experiencing higher cash flow property values in a higher net worth, dramatically cutting costs. So when I purchase properties, I will usually decrease expenses by bringing on new management and vendors, but this is not something that continually happens.

Charles:
Large complexes put their contract services out to bid every year for smaller investors. Maybe every once in a while or when you notice a dramatic increase in what you pay a specific contractor and you know, you see that price creep and you’re like, okay, now I have to find someone else or start talking to other people and see if I can get this for a better price. And real money and wealth are made by increasing rents, not decreasing expenses. Remember, we are trying to make the properties we invest in better, more valuable properties. We wanna become slumlords and you know, start making money, all this money right away because we’re just taking out all of the management and all of the repairs. We wanna make the properties better, so we’re gonna be investing into it, but we’re really taking out a lot of the fat that maybe the previous owner was paying for contact services and for vendors that maybe were overcharging them or weren’t doing what they’re supposed to.

Charles:
Both are very typical with people that have owned properties for many years, not budgeting for vacancies. So many landlords, including myself, underestimated the cost of vacancies when I start investing. Check out episode SS 1 5 1 to learn how expensive turnover really is because you’ll be amazed at what it really costs from the time that it goes vacant to the renovations, to the time it takes to rent it, and for the costs just remarketing it and renting it again. Number three is undervaluing the importance of professional management. So when you hire professional third party property management, you are now turning the corner from landlord to investor. There is a significant difference and investors don’t manage their properties. If you have enough units and you have full-time employees to manage your properties, that is a a different situation. Still. The owner is not actually managing the tenants and the property on a daily basis.

Charles:
They’re more interested in buying properties and having regular calls to the property managers, also known as asset management. You can listen to episode SS one 90 to learn more about asset management. Good property management companies have a team of good people who will work to make your property more successful. And this includes handymen contractors, leasing agents, and other third party vendors. Typically, the rate they command from outside contractors and vendors will be less than what you would if you randomly contacted them, what I call yellow page pricing. Property managers know more about the local rental market and city than you ever will, and you know, they have more contacts in state apartments than I’ve ever had as a landlord and they know what units rent since they manage hundreds of units in your submarket. Maybe you just gave ’em a 20 unit building to rent, you don’t really know exactly what’s going on.

Charles:
Well, they’re basing the rents and the rent increases off maybe 200 units that they have in the submarket where you’re located so you know exactly what that unit should command and rent and they can price it accordingly. Lastly is that property managers remove a motion from the rental business and they aren’t going to rent a vacant apartment to the first person, right? They will strictly follow the rental guidelines set by you and them when you hire them, and they won’t budge late rent or forget to run background checks, make handshake deals, delay evictions, or become friends with the tenants, or maybe taking security deposits that are less than what they’re supposed to happen. All these type of things that happen with new investors that are really trying to rent the unit and are trying to make deals and, you know, don’t make deals in the front end and property managers won’t do that, and that’s something that’s really important to the success of your property.

Charles:
Managing properties you not own is much easier since managers can play the I work for the owner card, which tells the tenant that they’re just doing their job and have no say in the matter and cannot bend the rules. It’s much different if you’re managing a property that you do own and all your tenants know you own it. Now they are able to try and push you to kind of get emotional and tell you about this or that, and this is where problems really start to occur. So it’s important that there’s that really clear line distinction between property owner and property manager. And the easiest way of doing that is by having a third party professional property manager. So I hope you enjoyed, please don’t to rate review, subscribe, so make comments and potential show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndication superstars.com. Look forward to two more episodes next week. See you then.

Charles:
Have you always wanted to invest in real estate but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding, and didn’t want tenants calling you? Since 2006, I’ve been buying income producing properties in great locations that provide us with consistent passive income while we wait for appreciation in the future and take advantage of tax laws while we’re waiting. And unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out invest with harborside.com. If you like the idea of investing in real estate, if you like the idea of passive income, partner with us at investwithharborside.com. That’s invest with harborside.com.

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 Superstars, LLC exclusively.

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