When you buy an apartment building you need to decide whether you will manage it or if you will hire that out. There are advantages and disadvantages to both and we will cover some of those as well as focus on Managing the Property Manager if you do decide to hire one.
First off, from a management stand point on apartment buildings, you will have different management needs for a duplex vs a 20 unit building vs a 200 unit building. A duplex is relatively easy to manage, with only 2 tenants and a small building, so there is much less that can go wrong. Appoint a tenant as the on-site caretaker that mows the lawn, shovels snow, cleans the hallways/common areas, changes lightbulbs and reports problems and you can save a good deal of headache. For a mere $100 or so/month the caretaker can do all of this and save you a lot of time. With this, however, you need to make sure they do their job. The issue with a duplex is that a management company eats into your profit. They likely will charge you 10% of the income or more and then charge extra on repairs/maintenance and charge up to a month for a new tenant placement. For a building that is likely only making $400-$800/month in total profit that is a big expense.
For a 20 unit (or similar) you now have a larger building and more tenants, which creates higher demand. This demand will put a lot of time stress on you if you choose to self-manage. Unless it is your only building, you may need to hire some people to take care of the maintenance, showings and accounting. I still employ the same caretaker strategy and may even utilize 2 caretakers that live in the building. One side benefit of this is that you now have 2 tenants that have their eyes on the building and have pride of living in the complex. With a building that is 20 units, hiring a 3rd party management company starts to make sense. The manager can charge 7-10% and make enough money to be profitable. They will also charge $200-$500 to do leasing. Those amounts take a hit on your profit, but it won’t be as large of a hit as a smaller apartment.
For a 200 unit you will either need to have a dedicated staff to care for your building, do showings, accounting and deal with tenant issues or hire a 3rd party manager do take care of the property. A 3rd party management company will charge between 3-5% to manage your buildings and will hire on-site staff in order to operate the property. Affording on-site staff usually comes right around 75 units. This is a beautiful thing in my opinion. The on-site staff is hired to be sure the property is running properly. You have the leasing staff and the maintenance staff. In a duplex or even 20 unit, if a repair needs to be made, they need to call the management and then they need to deploy their staff that may be across the city to get to the property. With a larger building, the maintenance staff is right on site. They are on the property every day and ensure that the property is running smoothly. The leasing staff, will do the rent collections, possibly book keeping, tenant checks, leasing and coordination with the manager and maintenance.
If you are going to self-manage, then I would start a management company and run it as a separate business. Property management is not the same as being an investor, it takes a totally different focus and dedication. You will need to hire the right people and put the right systems in place to be successful. Treat it like a separate business.
There are some advantages to starting a management company and managing your own properties:
1. You save money. You don’t need to pay the manager the 3-10% fees and leasing fees, but you will be hiring people to do that, along with maintenance, etc. Don’t think you’ll save that whole amount, but you likely could save half of the charges.
2. Save yourself from potential fraud/abuse from the 3rd party management. Some companies over charge and under deliver and some will steal your money along the way. This can happen with your own staff too. I had an employee stealing application fees and deposits. She would do the property showing and collect the $35 application fee in cash from people and never turn in the application or the money. She also took a few security deposits from un-suspecting prospective tenants that thought they got approved to live in our properties. Fortunately we think that we caught this at an early stage and fired the employee before too many people got taken advantage of.
3. You have full control and get to make all the decisions. You care more about your assets than anyone else.
4. You can manage other properties for clients if you so choose. This helps create more efficiencies and puts some money in your pocket.
Overall, I am a big advocate of using 3rd party management. If you hire a good manager they will have your property running efficiently and profitably (as long as you bought it right). Unless you want to build a property management company of your own, 3rd party is the way to go. With using a 3rd party management company, you will still need to manage the management and communicate clearly. You will get out of them, what you put in. If you let them run the property as they wish and don’t communicate with them, then you should expect average at best results. If you communicate with them on a weekly or more basis, have a business plan and align your objectives, then you should expect excellent results.
Some advantages of using 3rd party management:
1. It saves you time. Using 3rd party management could be the difference between having time to find more investments and not. By not managing, you may be able to build your business larger and faster.
2. They have the processes and systems in place. 3rd party manage many units, often thousands and they have everything in place to be successful. Good companies want to grow their business and maintain a good reputation, so taking care of your property is their priority.
3. Save you money. They can potentially save you money and make you more money. They have maintenance, leasing staff, etc in place and can efficiently manage your property. They can get to repairs right away to keep your tenants happy. They also know the market. They are seeing competing properties daily and have their pulse on the market.
4. They can bring you other purchasing opportunities. Management companies are often the 1st ones to know when a property is going to be for sale.
It is up to you to choose who will manage your property. There is good and bad to both. I have had to fire management companies for not doing a good job, but have also found that I am not the best manager for my properties. One of the best things about out of state investing for me, is that it forced me to hire 3rd party management companies, which has allowed me to focus on building my business.
Assuming you go with a management company, your work is not done. It is very important to be sure that you are managing the management company and helping to create a positive environment. Choosing the right management company is an important step, but how you communicate and deal with that company is just as important.
Communication is critical. You should be talking with the management company every week, especially in the beginning. Schedule a weekly phone call and go over issues, vacancies, strategies to improve the performance, strategies to make the residents happy, etc. They should know and understand your expectations and also have a detailed business plan in place to go by with running your property. During your calls make sure that the business plan is being followed and if not, then figure out how to course correct.
I think one of the most important things for you is to be sure the management company and all of the on-site staff understand that you care about the property and the residents. If those who are working at your property think you don’t care or just care about the money, then there is a chance that will rub off on them, which will create a negative environment. Having a complex that has happy residents and on-site staffing will make a huge difference to all involved as well as to your profit. Encourage your management to do extra things for themselves and the residents. Hold door prize contests, have a 4th of July BBQ, pool party, give away turkey’s at Thanksgiving, etc. I also would encourage you to buy books on leadership, sales and customer service for the staff. Be sure they understand their role is to serve the residents and that the residents are to be treated well and with respect.
A few more things on Managing the Manager: Do a few surprise visits as well as scheduled visits or hire someone to secret shop the property and pretend they are trying to lease a unit. You will be able to see how they are treated and the condition of the property. Also, pay close attention to the financials. Be sure that you have full access to the books at all times and are able to see what is coming in and going out. The last thing you want is to be caught off guard on your properties financials.
To your success!