Deep Dive Into Property Management - EP02

"A good property manager is worth their weight in gold. Why? Because they allow you to be an investor. An investor is somebody who identifies a good asset, buys and holds it. Investors make decisions on a high level, based on the numbers. Ideally, these decisions are not based on the emotions that come from a clogged toilet... a bad tenant... A good property management service takes all that stuff out of the equation for you as the investor so you can evaluate deals and make better decisions." - Steve Olson, B2R Show

Episode Highlights:

• Benefits of a Lease Back Rental Option

• Hiring Property Managers for Build-to-Rent

• Reasons to Fire a Property Manager

• Relationships Between Builders & Property Management

• What do Property Managers do? How much do they charge?

• What to Look For in a Property Management Company

• Why Investors Should Use a Property Manager

Steve Olson: Today we're here to talk about property management as it pertains to the build-to-rent industry.

I want to talk about a couple of properties that I own as a lead into today's topic, which is property management. Property management is a great and terrible topic. We have a love/hate relationship with property management. So do the property managers themselves probably.

I've got a couple of properties in the Indianapolis Indiana market. And they do pretty well for me, but they're actually quite different. One of the properties is a duplex. And I intend to hold it for a long, long-time, because it just kicks so much, but it's doing great. And I've got a property manager on that they charged me 10% of the rents that I collect, they handle the maintenance problems that you know, it's expensive, but it's out of sight out of mind, I don't have to really worry about anything. I've got two other properties, though, that I have to worry about.

I actually want to because I self-manage those properties. And the reason I chose to do that is that both of those properties are rented out on lease options. That lease option, meaning the tenant is paying me rent, but they have an option to buy the property for a certain amount of money before a certain date. If they don't exercise that option, they don't have it anymore, they don't have the right to buy it.

Now, what's interesting about this is I'm playing a little bit of a game because they have a lease option, they kind of view these properties as they're, they're like the owner because they've got that option in place. So they want to treat it really well. So in my contract with them, maintenance is not my problem, right? And I have no management fee, these people take a check to the bank, and deposit it for their rent every month. If something is broken, I don't hear about it.

But it's a unique situation. Because even though it's not my problem, really at the end of the day, it is my problem. And I say that for two reasons. One reason being one time, one of the tenants sent me a text message, and there's this giant tree on the front lawn of one of the properties. And they told me Hey, just for here, info, this tree is looking like it's about to fall over and they sent me pictures, the roots are coming up out of the ground, it's leaning.

This is a massive, massive tree in the Midwest, it's been there for a bajillion years. And was that tenant equipped to deal with that situation? Right, even though the maintenance is their problem? Can I just leave that thing, I wasn't ready to take the risk. And so I just had a tree removal company come out there and it costs a good chunk of money, they had to take it down in pieces and then and then pull it out.

I had to kind of cross that line from you know, maintenance isn't my problem too Well, except if it's big enough, it is because I have to preserve my asset. Yeah, what if that tree would have fallen over on it?

Yeah, what's gonna happen to the lease option? Right? They don't care, they're not gonna exercise the option.

So another problem I could potentially have here is what if they don't exercise the option, and they move out? Now I'm now I don't have a property manager, somebody's got to go over there and check this place out. You know what, it's probably going to be a dump. Because I've not been handling maintenance. I don't know what they've been doing.

Maybe it's the gold standard. Maybe they've taken perfect care of this property all this time. Or maybe it's just completely trashed. They lost that pride of ownership, you know, over time, the desire to buy it just kind of faded, right? So there's that risk. However, what if they do buy it?

What if they come through, I get a good bump, I haven't had any maintenance or management fees all along the way. They're going to pay, you know, the way you incentivize somebody to do this, as they're paying slightly below retail than what they could get on the open market. That's going to be an absolute Grand Slam. So in this case, a property manager wasn't necessary. Now, most of the people listening to this podcast are probably doing a build for rent or considering a bill for rent strategy. Because they really do plan on the long-term ownership of an asset.

They're not doing some kind of a lease option gimmick, but I've been able to see the difference between having a property manager and not having a property manager. Now I can tell you this, what if those two lease option properties What if I did have maintenance in there, and it was gonna be I had to make tenant and I had to put up with those calls of the faucet is leaking...we got some mold because the water tap in the refrigerator broke the line back behind the wall... flooded, some stuff got all moldy, it was kind of a mess, like $2,900 in repairs, it cost me.

If I was having to orchestrate that I would have lost my mind. There's no way I want to handle that stuff. So, property managers, a good one is worth its weight in gold, because they allow you to be an investor.

An investor is somebody who identifies a good asset and buys it and holds it and they make decisions on a high level based on the numbers. Instead of the emotion that comes from the toilet is clogged. This happened, we got a bad tenant, the tenant next door is a nightmare. Right?

They take all that stuff out of the equation for you so you can evaluate it. So we're here to talk about property management as it pertains to the build for rent space here today. So would you want to give us an outline? What do property managers charge? Typically, knowing it can vary, give us the range? What are they going to do for what they charge because right now somebody listening to this that has a vacant lot next to their house, or wants to build a 30 unit building?

And they're wondering because I've met guys that live on-site, they manage a 30 unit building themselves. So what are you going to get charged? what services are you going to get if you engage your property manager?

Sherida Zenger: Okay, I'll start with this. So usually you're going to see anywhere from 7-12%, depending on the market. Now there are times where there's going to be just a flat fee, right? We've experienced that in Arizona, there are a few companies that will just do a flat fee. And then they'll do a lease-up fee. So you're also going to have a lease-up fee more than likely anywhere from $150-495. Somewhere probably in that range. Or first month's rent sometimes. Going back to Texas, for example, most of the agents are getting their start doing property management or helping buyers or tenants find a lease. That's very common in a lot of places.

As far as a property manager, they're going to help screen the tenant make sure that that tenant qualifies, obviously, there's going to be a range of things there as far as what qualifying means. And every property management company has seen slightly different, they're going to help with the move-in, most of them will do some kind of a walkthrough midterm. Sometimes that's an additional fee.

So if they want if you want them to walk through and check on the property, but if they're managing a community, they're going to be on-site quite a bit to be able to look at the exterior and the project as a whole. And then deal with the move-out and any maintenance. So if the tenant has maintenance issues, they're going to be contacting property management, not you as the owner.

Chase Leavitt: Then on the move-out, property management will go in there and assess what needs to be done to the property if there were damages, does that come out of the tenant's deposit? Or is that something that normal wear and tear and an owner has to contribute a portion to that? That's usually what a property manager is going to do? They'll advertise it, obviously, you know, and that's how they're gonna find the tenant. That's what I've experienced.

So lease-up. Finding tenants. Management is managing the property once it's filled, for that 12-month period, sometimes shorter, sometimes longer. And then the expenses for repairs, what are they charging? to handle that if repairs need to be done?

Sherida Zenger: Sometimes they'll charge 5-10% markup on that just to oversee that and make sure that those repairs are done in a timely manner and are acceptable.

Steve Olson: You have to consider legal too. Sometimes have to go to court for you if there's an eviction or something like that.

You have to understand it. Because when you interview a property manager, they're just going to give you the highlights of what they charge and what they do. But there's more.

There's more behind that. It's called your property management agreement and will outline what they're supposed to do on your behalf. And we gave some ranges. That I would say there's kind of a continuum.

The cheapest, the lowest cost property management is for big buildings. Multifamily buildings where it's 2-4 percent. But there's also a base payroll that they charge because they've usually got somebody on site. You've also got marketing dollars, it's kind of more all a cart.

There's the very basic management for a low percentage, but you're also going to have to pay us to do you know, place ads and handle all this, that and the other, right. And that's advantageous for somebody that owns hundreds or 1000s of units. That's the kind of model that you would want to be on because it literally is a full-time, a full-time job just on one property in many cases.

So then from there, you kind of go into the typical single-family manager, right? As you said, tennis person, it's anywhere from five to 10%. And then you've got some, some lease-up fees in there. And then some court costs, you know, other up charges based on what they have to do. And then at the absolute opposite end, is the property manager for vacation properties, right?

That's very intensive, I was talking to a neighbor that owns one down in Destin, Florida. And they pay close to 40%. Right? Because that is intensive, they're always finding new tenants, there's always clean, there's always work that has to be done. So a lot of people just opt out of the assignment, I manage my own vacation property, well, that's great for you. But if you're going to scale, you're going to run out of gas really quick, right? You have to have a management company handle that kind of thing.

Sherida Zenger: Once having to do that across the country. That's not fun, either. I mean, you're going to have to have somebody there, you're not going to want to fly back and forth. For example, we live in Utah, you don't want to fly to Florida, and make sure that everything's right for that property for the next tenant to come for the next week or whatever.

Steve Olson: It has to be a market that you know, and that you're comfortable with...which could be across the country. But it takes time to build that foundation.

I have a friend who owns a property in Hawaii, and his wife does all the vacation, leasing. And they have a very trusted cleaner that they use, and she charges him a flat fee for every cleaning. But she does all the advertising, you know, they do really, really well with that property. Because really, it's just cleaning costs.

They're not having to give up that 30 to 40%. So it's actually cash flowing on a property in Hawaii, which I didn't think was possible to do. Probably the only guy doing it. Yeah. So but how scalable is something like that? And I think that really is the heart of the question is, is scale? How much do you want to be involved is owning three or four properties free and clear. And you're your own manager enough? That might be if you own him free and clear, you don't have management fees?

That's a living for somebody, but somebody you know, we talk in real estate all the time about the highest and best use? What's the highest and best use of your time? Is it calling a plumber? So they can go over and look at you know, whatever's going on? Probably not? I don't think most people that are listening to this, are planning on that being their highest and best use.

Chase, I have a question for you. This is going to happen to an investor. You're going to fire a property manager eventually. Why would you do that? What kinds of things are happening over and over again, that make you say, this company's lost their edge and I got to get a different property manager? What should you look out for?

Chase Leavitt: When getting a property manager, the key question that comes to my mind is, how valuable is your time. Time is valuable, right? And so that's why a lot of investors want a property manager, I, my time is valuable, I'd rather be doing other stuff, family work. And so I see value there.

When it comes down to it, it's understanding the PMA property management agreement, what's included in their services, and then seeing if they execute that or not, and holding them accountable for what they promise they're going to provide.

Sherida Zenger: It's just understanding what they have to offer upfront and then seeing if they can execute that or not. And if they're dropping the ball over and over again, or if the communication, which is huge, if that's a little bit clunky, or if that's not being delivered. And that's something to really think about

Or if they're not getting you the rents. So in your PMA, you're usually saying, this is where we want our rents to be. If they're not getting the rents, then obviously, that's going to be an issue.

Or if it's taking a lot longer to lease-up, than you anticipated again, there's some of that time period where you need to stabilize the property if there's a lot of inventory coming on the market. But are they taking a lot longer? I don't know. Maybe they are. Maybe they're not.

Are they executing what they agreed that they can provide for their services?

Steve Olson: One thing that gets me, and management companies that I personally use have been guilty of this...is if I have to drag every piece of information out of them. If I have to go retroactively, look at my statement and say, Why did this happen? And they don't know.

We want to know these things.

I personally have observed that many management companies can keep it together, owning up to like 500 doors. A generally competent person could operate that company, they hire somebody to answer phones, they got a maintenance staff, they got some people on the payroll, and they could competently manage up to 500 properties.

You start to notice managers that are more remarkable that can get up to 1,000 or more and not have a drop off in the quality of service.

Then, of course, you've got these nationwide behemoths like Greystar with 1000s and 1000s of units with giant offices in every major Metro. And you know, they're, I think they're publicly traded, they should be right. That's obviously an excellent company that knows how to manage properties.

However, if you're, you know, an entry-level investor, and you're thinking about hiring a property manager, I think it's important to understand how many doors they manage and what staff they have on tap.

We met a property manager recently in Mesa if you remember. It's just him and his dad, they manage about 300 properties. And their philosophy is "we're not getting any bigger". And their clients love them because it's two very competent guys who are well paid.

So when an investor calls and is mad or upset about something, they get the full attention of somebody that is on the ball. And by the time that phone call is over, the investor is happy, they're satisfied, they get it. These guys believe that if they go bigger than that, we're just not going to be able to provide quality service. Right. So we're very selective on what we take. So that's a challenge that in the build for rent space, who's going to be your property manager.

Sherida Zenger: One other thing, because you just said, you know, once they get off the phone with the investor, they've usually come that investor down. Even with a tenant, you want to make sure that whoever your property manager is, how can have good communication with the tenant as well, because that's key in either keeping that tenant, I think it makes it an easier process if you have somebody that will communicate,

Chase Leavitt: And finding a property manager that really cares can be tough. Because if you think about it, why don't people get into property management? Well, it's a tough job. You got people, tenants, a lot of complaints, a lot of negativity, in that care that they want to be had their personality could change a little bit or shift. So if you can find someone that really cares about doing a good job in being efficient in providing value, not only to the investor but also to the tenant. That's huge.

Steve Olson: When you fly somewhere, you check your baggage, and you get off the plane, you go down to baggage claim, and all the airlines have those offices down at baggage claim. And that poor agent is sitting back there behind the Southwest counter. That's real estate's version of property managers. Usually, when somebody is coming through the door, it's not to say, "Hey, my property is rented, and it's doing really well. And I'm so happy".

The same goes for tenants. When a tenant calls a property manager, something is wrong. They're not calling to say, "what's your address, I have a Christmas card for you". Something is broken. So it takes a unique person that's willing to absorb that and deal with that day in and day out. I think that's why it's so hard to scale. Oftentimes getting above the ownership of the property management company, those people just simply aren't motivated or not paid enough to be willing to deal with that day in and day out.

Sherida Zenger: It takes a unique personality, in my opinion, someone has thick enough skin to be able to lease it up, rent it up, provide the service, the investors looking for talk to a tenant, how they should be talked to. Sometimes it needs to be a little bit firm, sometimes it needs to be nice and respectful.

But takes the right personality, which isn't always easy to find, yeah, thick skin, but also someone that cares, and that that really cares about that tenant or the investor.

Chase Leavitt: I think we can all agree that property management is not something we want to get into any time soon. So it is a thankless job, in the sense that they are they're the whipping boy, they're the ones that hear all of the crap. So it is tough, but you want to get someone like Chase that that has thick skin and a backbone. But they can also have that soft part of them.

Steve Olson: I think the market is begging for more property managers that are really good at their jobs. In defense of the industry actually can be quite profitable. It doesn't seem that way. Because they're making, x-percentage 5-10% of that lease every month. You have to stack a lot of those up to make a dent.

Then you've got all your staff and your overhead and your marketing costs above and beyond that. But when you do get a good book of business, as a property manager, somebody is going to want to buy you. You're legitimately building a business with cash flow. So if you're good at it, and you understand the big picture of what you're working towards, it's a valuable business to be in and people will want to work with you.

I think it's just one of those businesses where it's super, super easy to distinguish between the good and the bad because it becomes apparent very, very quickly. It's unique to building chairs.

When we're building a new unit up out of the ground, how does it apply? What would you look for?

Sherida Zenger: Somebody, It has good marketing because obviously, you want to get those units out to tenants. So somebody that's going to market somebody that's a go-getter, somebody that's not afraid of rents, obviously, if you're bringing a lot of inventory on, we had talked about in an earlier episode that you may want to offer some kind of an incentive at the very beginning, because we're bringing 50 doors on, right.

But if you have that set with the property manager ahead of time, I think that's key, but then for them to know when they can bump that rent up. And when they can't kind of play that game, you know, let it ebb and flow.

You're gonna want somebody that's a little bit aggressive, has good marketing skills, and then can communicate with you because I think, again, we've talked about this bad news is better than no news. So as long as they're telling you something, right?

Chase Leavitt: Even if it's not that your unit's lease, but they got some other leases in the project if you're in a whole project, or maybe they only got you one lease this month, and you were planning on two or three, some communication, just keeping people informed.

Steve Olson: Proactive communication of, "Hey, this problem happened. And this is what we're doing." A bad property manager is somebody where you have to find out if there's a problem. They might not even know, and then they don't have a good solution. I mean, that's a problem right there.

In the build-to-rent space, involving a property manager early is crucial. How much are you going to build? And where? Why? What kind of floor plans work? Get them to know the builder, there has to be a rapport there. The builder is going to turn this unit over to the property manager who now gets to walk tenants through it and explain how everything works, field maintenance calls.

Do you think that the property manager and the builder are going to have to interface are gonna have to get along? Absolutely. Do they always get along?

Not always no. In fact, they rarely do. One thing as a property manager that popped in my mind is that would be tough. It's a little bit of a juggling act when you're leasing up new development or a new property because you have investors that want to get as much for their unit...and they're expecting a certain amount that was projected in a proforma.

But they also want to get leased up as fast as possible. And we know if you lower the rents, or maybe offer some discounts or incentives that could help with that.

So going back to understanding property management, there's a little bit of a juggling act if you're a property manager, in trying to not give it away too much, but also maximize the rents when you're trying to lease up or stabilize. And I think I'm not a property manager. Obviously, I don't I don't want that job, but I think that would get a little bit tricky.

Sherida Zenger: Set that expectation. Look for somebody who's going to shoot you straight, and it may not be what you want to hear, but if they're going to tell you something that's going to take a little more time--I feel a lot more comfortable, someone like that than someone that says, "Oh, yeah, I'm gonna get this lease job. Give me a month, I don't have this whole fourplex leased up."

Chase Leavitt: Going back to your question with the builder, property manager, do they get along? No, not always? Rarely.

It's a tricky situation, the fact that there are certain things when they build a new property that maybe they need to fix or certain things that the property manager doesn't agree with? And so a lot of times there could be some head-butting there. And it's good to have someone involved to help that conversation.

Steve Olson: The temptation is there. Where these two worlds meet. You're talking about two different businesses, yes, you're the build for rent owner, you hired a builder slash contractor to build a house, an apartment building, whatever.

Now, at some point, that is not going to be the builder's responsibility anymore. It's the property manager's responsibility. And it is very, very tempting for them to throw each other under the bus. That's what we say around here.

Let the scenario be, for all those of you that are thinking of doing this, this won't be the last time this comes up for you. And you've got a really short circuit this with your builder and your property manager ahead of time, and talk about how this will come up. And when it does, here's what I need you to not do. Right.

So for the builder, it's, you know, when there's a concern that property managers are too stringent, they don't get building code. They're not a builder. They're just crazy. They do.

That's them getting out of what could be a legitimate problem. Or maybe it's not. Right now, the property manager really easy for them. If lease-ups going a little tougher, maybe they're having a harder time hitting those numbers. Well, how easy is it to blame the builder? The builder really didn't do this right. And that's why I'm not performing.

Now that's maybe true. But that's what's so frustrating about it is it's this middle ground where you don't necessarily know they're, they're sacrificing one another to look better to you, the client, so be prepared that can and does happen. And you've got to address it. That's why it's good to involve the property manager at the beginning.

So what kind of the scope of work? What finished level? What floor plan are we doing here? So when later down the line, they're squawking about, hey, you are okay with this, right? You've got to, you've got to be able to have that kind of a productive conversation because share it, I mentioned something that's, it's a hard balance to walk, we want somebody who's going to be aggressive, who's going to go out there and get high rents, and do the best they can.

But also, that property manager needs to impress you, they need to fill units. And so you don't want to get to the point where they're, they're lowballing just so that they can keep the heat off of themselves. Right, there's a line that you walk between, let's get little units leased. leasing velocity is what they call it, versus Are we leaving money on the table? Right? I don't have a great answer, but you need to watch for that. Because it can, it can definitely be an issue.

Chase Leavitt: Like how you brought up, bring in a property manager early. Because if you have a good property manager that understands the market, bring him in early with the builder with the team and understand that it's a team working together to make it happen all the way from start to finish. And by bringing them in early, maybe you can fix a couple of things within the floorplan, tweak a couple of things that might help a little bit to get higher rents, or whatever the case is. So yeah, I liked how you brought that up.

Steve Olson: Your ownership structure is key here, you're going to buy your build-to-rent property in one of a couple of ways. You buy it, right, you're funding it all cash, and maybe it's a small property, a house or a duplex, right? That's the easiest you answer to you, you're all cash, this begins to get more complicated as we go increase in Project size, we go to 20 3040 units, guess what you're answering to lots of people.

Number one, you're answering to the bank, you need to get those leases in the books so that you can get your final refinance done, because build for rent typically involves a construction loan, which is not a long-term loan. So you got to get those leases going. So you're kind of shooting for that to like, Hey, I got to work with my property manager to get me leased up so that I can get my final refinance done, walk that line between getting those done, and sacrificing possibly higher rents, at least in the short term.

Now, that also begs the question of Well, what's your ownership structure? Is it just you? Are you selling these units to other investors? Are you a syndication? Do you report to a large group of investors that you answer to because that manager, they're going to be the one that delivers the goods, and if they're not getting units, least, you have to get out ahead of that and advance and provide a solution because nobody wants to be hearing about how units aren't renting, or we're having to take big, big cuts, involve that manager from the very beginning so that you're working in sync with them?

Whether you answer to your own bank account or the bank account of your investors in a syndicate, this is probably where the rubber meets the road the most. Right? in many of these other issues. We had some bad construction, well, we can fix that. Right? Well, we had maybe the area that we invested in isn't super great. That's harder to fix. But usually lowering rents is going to deal with that and tell the tale. Incompetent property management has gotta go.

Chase Leavitt: Just do your homework, and maybe even ask them what are some of the properties you manage go drive-bys, properties that they already managed. So you can kind of see what does that looks like? I mean, some of that may be that the tenants taking care of the exterior of the yard or whatever, but kind of give you a good idea.

Sherida Zenger: Some of them may even give you a referral or two of some of the investors that they're currently managed for, and you can chat with them and see what their thoughts are. Sometimes people are a little more open with you.

Steve Olson: Well, you can also look at reviews of properties that they manage. And I would do that with a grain of salt. Tenants complain. They're gonna complain no matter what. But it's the nature, the frequency of those complaints, you can read between the lines, you know, if it's, "they wouldn't give me my security deposit back". I'm not so sure that's a bad thing. It might be the property manager holding somebody's feet to the fire. But if there are 100 people and "they never answered the phone", that might tell you something.

Chase Leavitt: Interview a couple of property managers. I've seen some investors or groups that have a list of 80 questions that they ask a property manager or several of them to interview them. See if they meet your criteria.