Why you need to rethink your relationship with property management

This article is specifically targeted to you small mom and pop landlords, but also you folks who want to jump into building wealth through real estate should take note. I want to address the following areas — what to look for in a property manager and the impact of price shopping. I see way too many mistakes from small real estate investors and I want to nip these in the bud now.

What to look for in a property manager

First, I want you to consider the fact that you’re entrusting the care of one of your most valuable assets in the hands of a third party to be its steward, protector, and guardian through thick and thin. With this in mind, trust and competency are going to be your biggest key factors.

When it comes to trust, I’d be wary of working with any management team that doesn’t take the time to assess your situation, visit the property, provide detailed recommendations on how they can improve your operations. If they come in and say “yeah I do property management, don’t need to look at your place, it’ll run you X% of rental revenue per month, just sign here,” I’d politely thank them for their time and find a new manager. By the way, as a tangent, I’d recommend you take that approach with any expert you hire — no assessment means no business!

Remember, property managers aren’t people who just collect rent. These are professionals who have a deep understanding of what it takes to run your rental business operations. If you view them as solely as a rent collector, don’t be surprised if all you get is rent collection from your property management arrangement. Look at them more like your strategic partner and consider what processes they put in place to be incentivized to maximize the economic output of your property.

As it relates to competency, your manager should have a deep understanding of what it takes to run a property as well as a very strong foundation of tenant protection laws. Here in Los Angeles, the City loves to pass tenant protection laws with the best of intentions. Unfortunately, most result in shifting too much risk to the landlord which ultimately chips away at the incentives to actually provide more housing, but that’s a discussion for another time. Point is, your manager better be up to speed on these laws or you’ll find yourself without a rent check and perhaps even a lawsuit! Horrible outcome.

Price Shopping

Every real estate investor dreams of an outcome where they pocket all the rental income and have no corresponding expenses. This holds especially true when it comes to property management. If I had a dollar for the the amount of times I’ve seen people get angry over a property manager charging 6% instead of 5% or 4% of rental income, I’d be writing this article from my private beach resort in the Bahamas. I believe people’s perception of the compensation structure for property managers is because property managers do a poor job of conveying their true value. A good business idea for anyone looking for one is to help these folks articulate the value they provide in a way that their clients can better understand. Leading back to my previous point, let’s be very clear — Property managers do not simply just collect rent and remit to the owners. If that was the only job they had, there are many technological solutions available to just simply handle that. Property managers scope is to ensure the building is maintained, operating expenses are being handled, rent is collected, the tenancy laws are complied with, tenant personalities are property managed, and the building appears to be supervised and watched. They also typically are the ones who will source new tenants for you (including lease negotiation) and they handle the turnovers in restoring the vacant units to market ready condition. If your property generated $10,000/mo in rental income, do you believe there are many competent managers out there who would be excited to just earn $600/mo to do everything above? If you can find such a person, power to you. However, this is the real world and to do the entire above, especially also handling the sourcing new tenants, is not going to be solely incentivized to do this for the 6%. Leasing typically involves leasing commissions, which are usually calculated as a percentage of the entire lease term. Repairs typically have a management overhead cost. Capital improvements, such as renovations, are 99.9% out of scope, so don’t be surprised if you need to pay your property manager a project management fee for getting it done.

A Solution

I’d be remiss if after all of this I didn’t offer a solution. If you have apartments in the Los Angeles area and are looking for a great property manager who really knows his stuff, I’d recommend working with my partner, Eric Cuevas, at the Bauhaus Group. He has quite a few doors under management and his approach to managing properties in my opinion is second to none. I may be biased since he manages all of our developments, but you can check his site out here at www.bauhaus.la. Reach out to him anyway and see how you can improve your rental operations.

Otherwise, contact us by hitting the big orange Contact Us button below and we can chat about your real estate strategy.

-Stephen Morris, CPA, MBT, CCIM