How to Hire a Property Management Company

Somewhere along the line of your real estate investment career, you may outgrow your ability to manage the number or properties you acquired. Or you may find that managing your own property is not a skill that you are gifted in or are good at. In those cases, you’ll have to locate, interview, qualify, hire, and manage a property management company.

Searching for a Property Management Company
• The absolute best method of finding the best property management companies is by referral. Get a referral for a property management company from someone who is happy with theirs or knows of someone who is happy with theirs.
• The second best method is by asking your broker or agent if they know of a reputable property management company.

Interviewing a Property Manager
Here are 13 questions to ask professional property management during your initial phone calls.

1. What is the general vacancy rate in your area? “Your area” could be a city, town, neighborhood, district, street, etc.
• This information is crucial in studying feasibility of owning property in this area.

2. How many units do you currently have under management? What type?
• If you are looking for them to manage your 4-plex, see it to that they at least manage 4-plexes. If you have a 20-40 unit or larger apartment building, see to it that they have under management the same. A property management company that manages 400 single family homes is not the same company that manages 400 units of apartment buildings.

3. How long have you been in business?
• If they have less than a year of experience, don’t use them. They need at least one cycle (spring, summer, fall, winter) completed to know what’s going on.

4. Do you have a start-up or account setup fee for new landlords?
• Know this upfront.

5. What are your percentage management fees? What other ways are you compensated?
• Plug these fees into your property cashflow analysis.

6. What is your policy on who keeps the late fees collected – the landlord or the management company? Or is it split?
• Know this upfront.

7. Do you have your own maintenance staff or do you use independent contractors?
• Gives you an idea of their sophistication.

8. What is the cost for an eviction process from start to finish?
• In San Francisco, it costs about $5000 per eviction. In NY, it costs about $300.

9. Is there a per new lease charge to the landlord?
• Know this upfront.

10. How do you advertise your vacancies? Who pays for advertising?
• Typically, good property managers will have a referral system in place.

11. What are your business hours?
• Know this upfront

12. How are tenant emergencies handled? Weekend calls?
• Gives you an idea of their sophistication.

13. What monthly reports do you typically send owners?
• Know this upfront

NOTE: This interview is not for telling them what you want from every question asked. It is merely to gather information in order to make a decision on if you want to continue.

Character Traits You Want In Your Property Manager:
1. Tough-minded leader yet a people person, diplomatic
2. Creative and entrepreneurial instinct
3. Excellent communicator
4. Good negotiating skills
5. Capable organizational and administrative skills
6. Basic mechanical skills to verify contractor work
7. Local market and in-depth industry knowledge
8. Decisive
9. Integrity and honesty

Qualities and Capabilities You Want the Management Company to Have
1. High quality staff and support personnel
2. Confirmed reputable name in the marketplace and govt. offices
3. Reliable and modern reporting system for financials, operations, and maintenance
4. Excellent tenant relations that are visible and apparent
5. Licensed to manage and posses industry certifications

Components of a Sound Property Management Agreement/Contract:

1. Leasing
• Use best efforts to keep property rented by procuring tenants for the property and negotiating and executing on behalf of the owner.
• All leases for the property shall not be in excess of 12 months without written permission from the owner.

2. Rents
• To collect the rents and revenues from the property and serve or cause to be served all notices for the collection of rent and other charges.
• To initiate actions for evictions and when necessary, to settle, compromise, or release such actions or suits and reinstate tenancy.

3. Service Contracts
• To execute in the owner’s name for utilities and services for the operation and maintenance of the property.

4. Accounting
• Property manager shall keep proper books of account for the property and books shall be open for inspection by owner.
• Property manager shall furnish to owner a monthly statement on or before the 10th of each month.
• Find out if owner is required to keep a reserve monies account with property manager.

5. Compensation to Property Manager
• In consideration for the services rendered to the owner by the property manager under the agreement, the owner agrees to pay the property manager on a monthly basis.
• Compensation can be a percentage (%) of collected rents, a fixed fee, or a per door fee. The percentage ranges from 4% to 10% typically.
• Find out if there is a per new lease fee.
• Find out who keeps the late fees, or is it split?
• Find out if there is an extra charge at any time during the eviction process.

6. Terms of Agreement
• Initial terms are usually for 12 months. Try to avoid a 12 month initial term. If you are not able to do so, negotiate a 6 month term agreement. Never sign on for more than 12 months at any time.
• Either party may terminate the agreement by giving a 30-day written notice to the other party. Avoid 60-90 day requirements.

7. Terminations
• Immediately upon termination, the property manager shall provide owner with all originals or copies of leases and all agreements and related documents.
• All property financial records in possession of the property manager shall be delivered to the owner.

8. Provisions and/or Additional Provisions
• Delete any clause(s) stating that the property manager will act as real estate agent or receive commission if and when the owner sells the property.

9. Fiduciary Responsibility/Statutory of Compliance
• This is the code of ethics clause.
• States the property manager will perform all duties in the agreement.
• The property manager’s first obligation is to obey and abide by the law.
• The property manager will notify owner of professional opinion matters.
• The property manager shall keep the owners’ information strictly confidential and not shared with the public.

10. Be leery of “hold harmless” clauses.
• Responsibility is a two-way street. This clause relinquishes the property management company from all liability of damages to the property.

How to Determine Your Multifamily Capital Expense Budgets and Recurring Replacement Reserves

by Spencer Cullor on October 25, 2011

inShare8

One of the most overlooked aspects of acquiring a multifamily investment property is adequately accounting for capital expense items and recurring replacements that the investment property needs in order for you to reach your investment goals (See “The Importance of Having a Capital Expense Budget When Buying a Property“). Overlooking these expenses will kill your investment before you even sign the loan papers.

Capital Expense Budgets and Replacement Reserves Defined

The replacement reserve is for recurring replacements that you will have to take care of on a normal basis, such as replacing flooring or old appliances that have reached their end of life, and replacing items such as air conditioners or roofs several years down the road. In contrast, a capital expense budget is a one-time amount that you should budget for when acquiring a property. This is a repair expense or an expense to upgrade key components of the property that cannot be covered by the typical replacement reserve.
To meet your investment goals, you need an accurate capital expense budget and recurring replacement reserve, and you need to use them in your financial analysis and underwriting of the property you wish to acquire. Failing to account for a capital expense budget and recurring replacement reserve will leave you scrambling for cash when items break down, and it will make it very difficult to reach your investment goals when these items break down that should have been targeted for replacement up front.

Accounting for Capital Expense Budget and Recurring Replacement Reserve

One of the first things you need to know is how much should be set aside for your Capital Expense Budget. A good way to figure out the capital expense budget amount is to have a contractor inspect the property with you before you put in your offer, and put together a list of all the items that should be replaced over the next three to five years or your investment timeframe and an estimate of the costs to do so. Then you can take that total amount and subtract out the recurring replacement reserve amount for each of those three to five years or your investment timeframe. The amount left is what you will need to fund your capital budget (Total Capital Needs minus Replacement Reserve multiplied by Years before items need to be replaced).
For example, you inspect a 40 unit property that you plan on owning for five years after acquisition with your contractor, and figure out that the roofs need to be replaced, the buildings need to be painted, and half the appliances are in need of replacement; you calculate that the total cost to fix those items is $150K. You decide that you can only set aside $300 per unit per year or $12,000 per year ($300 x 40) into the replacement reserve. Therefore, you know that you will only have $60K over those five years ($12,000 x 5) to work with from your recurring replacement reserve. Now subtract your Total Recurring Replacement Reserve of $60K from your Total Capital Needs of $150K, and you will find that you need a $90K ($150K minus $60K) capital budget to take care of the other items that would be impossible to fund out of the operations of the property without severely affecting the cash flow and investor returns.
Therefore, you want to include that number in your evaluation of the property and adjust your offer accordingly, to make sure you can reach your desired return. If you can’t make the returns you desire after accounting for the capital expenses, you should pass on the opportunity.

Be Sure to Evaluate Each Property on its Own Merits

Each property is different, so it is important to look for these items when inspecting a property and putting together your offer. If you do not feel you have the skills to identify these costs, it’s always recommended to have an experienced contractor on your team who can help you identify them. There are some rules of thumb that we use when evaluating a property. For a capital expense budget we account for at least $1000 a unit on every property. For older properties with a lot of deferred maintenance it can be over $5000 a unit, and for new properties it can be as low as $1000 per unit; but for most properties, we budget $2000-$3500 per unit for a capital expense budget.

How much should I set aside for a Recurring Replacement Reserve?

For a recurring replacement reserve, most lending institutions will make you set aside $250 per unit per year for a newer property and $300 per unit per year for an older property. I have seen as much as $400 per unit in areas such as coastal cities, where assets are exposed to more elements. When you talk to your lenders, make sure to ask them if they escrow for these funds or if you will need to set them aside, and how much they require you to set aside for their financing. Even if they do not escrow for these capital budgets, it is essential that you set funds aside for these normal expenses that arise when owning a property.
When should I fund the Capital Expense Budget and Recurring Replacement Reserves?
We typically find it much easier to fund the capital expense budget when putting together the funding to buy the property. If you are raising money from investors, it is almost always easier to raise this money up front, rather than trying to go back after closing to put this money together. The recurring replacement reserve is funded out of the operations of the property on a monthly basis. For example, if you have a 40 unit apartment complex and a $300 per unit replacement reserve per year, you would take the $12,000 per year and divide by 12 months, setting aside $1000 per month to fund the recurring replacement reserve out of the monthly operations of the property.
Having a capital expense budget in addition to a capital replacement reserve before submitting an offer can help you account for all expenses and necessary capital required to close up front, allowing you to meet your investment return goals. If you do not account for these expenses up front it can leave you scrambling for more cash when large repairs and expenses are needed on your property, falling short of your investment goals.

Keys to Getting Started in Multifamily Apartment Investing

by Spencer Cullor on January 12, 2012

inShare12

“I want to start investing in apartment complexes. How do I get started?”
If that is a question you have asked yourself recently, you are not alone. It’s something I hear on a weekly basis from both new and experienced real estate investors. They all want to know the keys to get started in multifamily investing the right way.
If done correctly, investing in multifamily apartments can be one of the most rewarding and best ways to grow your net worth and increase your income. However, one of the most important things you need to do when getting started is avoid making big mistakes that can take you years to recover.
It is important to get started right.
Below are keys to getting starting in multifamily apartment investing. You can start doing these things today to shorten your learning curve.
Educate Yourself
The most important thing you can do as an investor is educate yourself. Find out all you can about multifamily investments. Learn how they work. Learn how value is determined. At first it’s like learning a new language, but with a little practice it will become second nature. If you are serious about being a successful multifamily investor, it is important to build a strong foundation. That foundation should be built through your investment education.
Evaluate Properties Every Day
After you have educated yourself on the basics of the industry, including how to evaluate properties, you are ready to take the next step. One of the best ways to learn about commercial real estate is by actually evaluating as many properties as possible. Determine what they are worth. Evaluate the areas they are located in and what needs to be done to fix them up. Figure out what you would pay for them to get your desired return. My first year in the business, I personally evaluated over 100 investment opportunities, and what I learned was invaluable to my current investment career.
Start small, build a strong base, and grow
This is where my advice might differ from many of the gurus out there. We’ve all seen the excited investor run out of a seminar and start telling people how they are going to go out and buy a 150+ unit apartment complex without ever owning a single multifamily property. It does happen, yes, but that is definitely the exception to the rule.
Don’t get caught up in the numbers game. Start small, where you are comfortable, and grow as you learn the business. Investing is not a sprint, it’s a marathon. Build a strong foundation stepping up a little in size with each investment and you will grow your business the right way.
Getting a good investment education, evaluating properties every day, and starting small will help you get started in multifamily investing the right way. These steps will cut your learning curve dramatically and help you to avoid making big mistakes. Once you build a strong foundation, you will be on your way to building wealth and massive cash flow.
See you at the top!

Create True Passive Income & High Cash Flow with Apartment Investing

You can truly create high passive income and high cash flow through investing in apartments.  ANd for the same investment you can make so much more than you can over single family homes.

Let’s look at a simple example:

Imagine if you were to buy a $250,000 single-family rental house. That $250,000 house may rent for somewhere in the neighborhood of $1,500 per month. The underlying mortgage on that house may be somewhere between $1,000 and $1,400 per month. So you may end up getting between $100 and $500 per month in positive cash flow.

Now, let’s take a look at a similar investment from a commercial standpoint. That same $250,000 investment may end up getting you a 10-unit apartment complex, which comes out to $25,000 per unit to acquire the property.

Let’s say each of those units were two-bedroom apartments, which could rent in most areas of the United States anywhere between $400 and $600 per month. For simplicity’s sake, let’s use an average of $500 per month. At $500 per month times ten units, you’re bringing in $5,000 per month – more than triple the rent that you could expect to get from that same $250,000 single-family house. Your underlying mortgage payment would be very similar to what you would expect on a residential property; for this example, let’s use $1,400 per month.

Your cash flow on this 10-unit apartment building will be $3,600 PER MONTH ($5,000 per month income, minus $1,400 mortgage payment). Now that will make a difference in just about anyone’s life!

In fact, if you wanted to GIVE AWAY one apartment to an on-site property manager, and maybe pay them a few hundred dollars a month for part-time help, you’d have your property working on auto-pilot and you’d STILL be making thousands per month –- true passive income!