Victor’s Insider Scoop on What Do You Need to Know Before You Decide to Self-Manage Your Apartments
February 20th, 2013 | top of page
(or, “How Many Hats Can I Competently Wear at One Time
Actually Enjoy the Income from My Multi-Family Investment?”)
Multi-family property investing and ownership can be highly lucrative. It can provide a steady stream of cash, capital appreciation, and countless tax incentives. However, these ownership benefits don’t just happen. The difference between a well-performing, high occupancy, cash-flowing property with healthy operating and reserve balances verses a cash-poor property with negative operations isn’t just luck. It’s almost entirely dependent on the staff at the property executing the day-to-day tasks in addition to someone overseeing these personnel.
Some owners choose to wear one or both of those hats while others choose to outsource these aspects entirely. Both avenues involve their own set up, positives, negative, risks, and physiological impact. Either way, let’s explore both scenarios starting with self-management.
Self Management Pros & Cons
I’d venture to say that most (if not all) multifamily owners and investors have thought to themselves at some point along the Decision-to-Invest-in-Apartments-Timeline, that they could easily oversee their property’s operations once it’s in their hands. Or at least oversee an individual on site they’ve hired to run it. How hard could it be? Collect rent, use those collections to pay the property’s expenses, and keep the rest: The perfect income supplement to the owner’s day job.
I’d also venture to say that this same owner has not asked himself some very hard questions about the reality of multifamily ownership and management. Let’s walk through some of the biggest items most owners fail to consider prior to diving in face-first and potentially hiring the Recent-Philosophy-Major-Grad-Who’s-Not-Been-Able-to-Put-Their-Degree-to-Use-Lately and Craigslist-Ad-Respondent that I’ll call Mr/Ms $30K.
You Own It. Now You’ve Got to Take Care of It!
Well, congrats on your new property and your new employee! In all likelihood you’ve landed somebody for $30K who’s not terribly experienced with multifamily operations who’ll require plenty of direction from you. You’ll now need to be well versed in fair housing laws, tenant laws, and have forms at your immediate disposal particular to your state (or even city) that you can administer on a day-to-day basis.
You’ll also need leases, three-day notices, perform or quit notices, eviction notices, right-to-enter notices, notice of non-renewal, etc. (just the tip of the iceberg really). Got all of that on hand? Fantastic!
Next, be ready to explain to your employee when and how to use these forms appropriately because guess who gets slapped with a lawsuit by ex-residents for a wrongful eviction or loss of quiet enjoyment when things go awry? Hint: It’s not your employee—although they will be named in the complaint and will expect you to pay for their defense!
What’s your time worth? Besides the oversight mentioned above, you’re going to have to provide direction on
- when to raise rents,
- when to offer concessions,
- what kind of upgrades to put into units as they roll,
- what renewal increases should be given to current residents, and
- you’ll also need to review all marketing material being put out to attract prospective residents.
Do You Know What You Don’t Know?
It’s almost certain Mr/Ms $30K has no idea how to properly maintain your building, so add to your list of on-going oversight a well-defined, preventative maintenance program which will require you to
- source vendors,
- assist in bidding, and then
- write all of the service contracts.
You’ve got a Rolodex full of local, reliable maintenance vendors, right?
If operations are all you want to do with your day, Welcome to Paradise!
But, be warned: it can be a physical and emotional drain! Tenants will lose their jobs and beg you for free rent. Neighbors will become enemies and insist you evict the other. A dog will run amok consistently soiling your hallways; everybody will blame somebody else, then expect all dogs owners to be summarily evicted, and, of course, threaten to withhold rent until you make it happen.
The music is too loud and the water pressure is too low. Somebody looked at somebody sidewise so what’s the process for getting a restraining order?
Sound like good times?
On any given day, you will act as psychiatrist, counselor, contractor, lifeguard, janitor, police officer, accountant, salesperson, IT technician, gardener, cheerleader, marketing rep, and lawyer, just to name a few. That’s a lot of hats! In truth, I’ve actually met some owners who say this is EXACTLY what they want to deal with all day. If that’s you, God bless!
Some Specialized Skills Required …
Now let’s move on to accounting. What’s your plan? I hope it’s not letting Mr/Ms $30K take charge? Perhaps you can get them to write a check to a vendor here and there but for the Big-Boy stuff, the
- monthly accounting,
- bank reconciliations,
- income statement/balance sheet review, and
- cash flow forecasting,
that’s all you.
And it’d better be done correctly or you’ll get thumped in a big way when it comes time to sell or refinance. FYI, nothing makes a lender more nervous than an income statement with more swings than a playground.
Sure you can always hire an accountant, but now you manage that guy too. And guess what? This additional expense has now eaten up more of the margin you thought you’d save by not hiring a property management company.
Since you’ve hired an on-site manager, you’re emotionally girded for the daily slog and you’ve cleared your social calendar for the next three years in order to have time to babysit your staff. Prior to any of this, however, what was it that convinced you you’re any good at any of this anyway?
Does Self-Management Really Optimize Your Bottom Line?
When you consider whatever analysis you completed to arrive at the decision that it economically (and psychologically) makes sense for you to take all of this on, consider for a moment, if a professional management company is more likely to
turn units faster,
rent units more quickly, and
are able to provide staff better trained to get top-of-market rents
because, if under your watch,
units take just a little longer to turn,
units sit vacant just a little longer, or
units don’t rent at the highest possible rate,
then you’ve probably just blown all those savings you were counting on.
Professional Management Not a Panacea …
This is not meant to suggest that the alternative—hiring a property management company—will ensure a stress-free ownership experience. But I do hope it provides you with insights into some very hard questions you may not be asking yourself.
In fact, you can certainly bring on a migraine by choosing the wrong company to operate your apartment. Selecting a good management company isn’t tricky, but there are definitely specific questions to ask and processes to understand to determine if your prospective management company is thin in one or two requisite aspects of your particular apartment.
A property management company with the skills to operate a Class A property with a number of high-end amenities catering to well-heeled tenants is probably not adept at handling a Class C property in a blue collar part of town.
Remember, your multifamily property is most certainly a self-contained (and hopefully self-sustaining) business complete with income and expenses, labor costs, marketing plans, budgets vs. projections, and even human resources and legal matters that must be dealt with.
Dedicated To Multiplying Your Income
PS – If you are ready to begin to thrive again by getting off the sidelines and putting your money to work give me a call at 602-320-6200. I see lots of deals and may have just what you are looking for.