Don’t let property management get the best of you. Instead, get the best property management. Let’s talk about a simple technique that will help you avoid making some big mistakes.
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Buying that first rental is one of the best learning experiences you’ll have in your investing career. I remember mine—a 2-bedroom, 1 bath condo in a nice complex. I was able to purchase it from the seller with no money down using a wraparound mortgage.
Finally, reading all of those real estate “how-to” books paid off! I was a master of real estate now—I had learned tons of stuff by reading up on techniques and other people’s mistakes. Surely I wouldn’t make any mistakes of my own, because I’ve read all about what to do and what not to do.
My First Rental Property—Gone Wrong
I fixed up the condo and put an ad in the newspaper. (Yeah, I know I’m showing my age here but bear with me.) I had several showings and alas, my first applicants—two young girls getting their first place.
They seemed really nice and their credit check was clear. So, I called them to set up an appointment to sign the lease and exchange the keys for the security deposit and first month’s rent—just like I’d learned to do in all of those books.
The meeting went great. They signed the lease but forgot to go to the bank to get a cashier’s check as I had instructed. They were eager to move in, and it was getting late. Surely the horror stories in those books were exceptions—not the norm—so instead of crushing their plans and waiting a day, I made an exception to my rule (just this once!) and accepted a personal check for the deposit and rent.
The exchange was made, and I had my first tenant!
It took a few days, but sure as the sun rises, the notice came. The girls’ deposit check had bounced. Certainly, this was a mistake, so I called them but no answer. No answer at the door, either. Neither was there an answer to the three-day notice.
Months later, after the eviction was complete, I had the great pleasure of fixing up the unit again now that it had been trashed by my delinquent tenants, who hadn’t paid a dime. I started all over from square one.
Your first rental can teach you lessons about real estate, investing, and techniques. But it can also teach you lessons about yourself. The lesson I learned wasn’t about cashier’s checks, deposits, and screening, I had already learned that in all the books. What I learned was that I’m a terrible property manager.
I pulled off the nearly impossible by acquiring a property with no money out of my own pocket—but couldn’t finish the process by renting it out to a quality tenant. This was despite the fact I’d read so much advice about not letting your heart trip up your mind.
This was my first hard lesson in real estate. But a great one. I learned from this point forward that having someone else deal with tenants was the right move for me.
Moving Up to Commercial Deals
This little condo wasn’t all a mistake, however. Within a couple of years I was able to sell it and do a 1031 exchange into a 16-unit apartment building. Moving up to larger commercial deals is exciting, but it also amplifies mistakes.
I often hear people say that no one will pay more attention to their property than they will. And no one will manage it better than they can. I sometimes ponder if these are the same folks that are inclined to perform their own surgeries.
To each their own, I suppose, and I’m sure some owners are excellent managers, but this article is for those of us that aren’t. Or don’t want to be.
The success or failure of any real estate investment is highly dependent on three things: buying right, managing right, and selling right. But it is management that will dog you for the longest period.
If you are growing to larger commercial deals you might think that once you’ve raised the money and closed the deal the hard part is over. Now it’s time to sit back, relax, and cash the checks.
I’ve got bad news for you—this is just the beginning! Because the management portion is so important, let’s focus on how to do it right. And since you are scaling your business and shouldn’t be spending your time dealing with tenants, let’s talk about how to find someone to do that part for you.
I’ve heard all kinds of suggestions on how to find good property management companies. Despite having followed all of the various pieces of advice that I’ve seen, and selecting carefully, I’ve still had more than my share of bad managers. So I switched up my strategy, and afterward, I had much better managers.
The Conventional Advice
Before we get to that, let’s talk about the conventional advice. You might have heard about going to the website for the Institute of Real Estate Management (IREM) and searching their database for certified property managers. That’s certainly not bad advice; however, I suspect that there are great managers out there who simply haven’t opted to join their organization.
And my guess is that there are some bad managers that have joined and pay their membership dues but are none the better for it.
You might also think that getting a referral from another owner would separate the good from the bad. Perhaps this is true, and it might help you avoid a bad manager—but will it help you find the best manager?
Perhaps not. This other owner might have experience with only that management company and is not aware that there is a better option out there.
If you are in the market for a property manager for single-family homes, these techniques might be the best options. But for large commercial deals, there is another, far better option.
There Has to Be a Better Way
In most markets, there are only a few brokers that sell large commercial properties. For example, the Dallas-Fort Worth area is a large market with a lot of apartment complexes. But there are roughly only a dozen brokerage shops that sell most of the inventory there.
Of course, you’ll want to get to know every broker that specializes in the type of property you are looking for in the area you are looking to invest. You get a lot of bang for your buck using this simple technique.
So, here is the secret sauce: As you are talking to these brokers about the properties they have for sale and those coming up for sale, you should always ask them for their top three picks for management companies.
My script goes something like this, “You guys see the financials from every deal that crosses your desk. Which three management companies do you see producing the best reports, and doing the best job maximizing the property’s potential?”
Brokers underwrite the financials not only for all of their listings but also for properties that are being presented to them as potential listings. Having become intimately familiar with the performance of virtually every property management company in the area, they are in the best position to know who is really getting the job done. And just as importantly, who isn’t.
Ask this of every broker you talk to, and you’ll start to notice the same names being suggested. Those are the groups you should interview. You still want to screen them and ask them every question you can think of, but you have a big head start at least knowing that they have the respect of the brokers.
Time to Play 20 Questions
Once you’ve assembled your list of top candidates, it’s time to start talking. Call each of them and tell them that so-and-so broker referred you. It’s nice to acknowledge the folks that took the time to make the recommendation, but that’s not the reason you are telling them this. It’s to get their attention and respect.
You instantly go from a cold-call to a warm lead, and the conversation flows with an immediate shift of tide.
Next, you’ll want to ask about their background—the typical stuff like how long they’ve been in business, how many units they manage, and what got them into the property management industry. The last one seems like a silly question, but it usually results in a story about how their father was in the business or how they started out as an on-site manager and worked up to regional supervisor or whatever.
The objective is to get a peek behind the curtain of the person who will manage one of the most expensive assets you’ll ever own. It’s imperative to find someone who is a good match to your personality and management style.
Ask about the profile of their typical management assignment. Some groups have a concentration of properties under 100 units. Others might be comprised mostly of Class A. The point is to find a company that has experience in the type of property that you own or plan to own.
You’re looking for a company managing similar unit counts, age, class, tenant profile, part of town, etc. If yours is a value-add deal, do they have experience doing value-add (not all do), and what services do they offer (project/construction management, design services, etc.)?
What trade relationships can they bring to the table to help implement your capital improvement plan?
What is their management structure? Do they have a lot of levels or a flat organizational chart? How many properties does each regional manager oversee? Who does the regional manager report to?
What type of support staff do they have for marketing and accounting? What software do they use, and when would you expect to receive your monthly financial report?
And finally, don’t forget to discuss fees—not only the management fee but also any other fees, such as project management, leasing commissions, capital improvement oversight, minimum monthly fee, and any other fees.
These questions help to determine a match and set up your expectations at the beginning. But the real meat is in the referral. Nothing means more to me than a management company that has the respect of the brokers who look at the financials produced from every management group in the area.
Integrate this into your process, and I’ll bet that you see improved results. You might not avoid the two young girls stiffing you for the deposit and rent, but you’ll avoid having to clean up the mess yourself. That way, you can focus on managing your business, not your tenants.
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