From DoingSuccess.com

Management
Manage and Learn
By Ken McElroy
May 11, 2006

Professional managers follow systems and procedures
for every property they manage.
Independent rental owners who plan to manage
their own properties need to do the same.

Independent rental owners often ask, “When is it appropriate to use a professional property manager?” The question indicates how much education many owners need about the benefits of using a professional property manager. This question usually is posed by a less experienced owner, one who thinks that the only requirements of the day-to-day management of real estate are to fill vacancies and collect rents.

Time is the most determinant factor on whether to employ a property manager. If the owner has the time to dedicate to managing the property effectively, then he or she should do it. For those who do not have the time, using a professional company can save a tremendous amount of money and time. Experienced real estate investors, especially those more interested in finding new deals, are focused on their use of time. They know the far-reaching benefits and advantages of using a professional management company.

My company, MC Realty Advisors in Scottsdale, Ariz., has a staff of 200 and has an ownership or management hand in 2,000 communities. We are primarily focused on investment. Each community in our portfolio is owned by a separate partnership that can include one, two or more persons.

MC Realty Advisors recently assumed the management of a property in Phoenix that was in serious trouble because of poor management practices by the ownership. The Seattle-based owner had decided to self-manage the property from Seattle. The resulting negative financial impact was irreversible and eventually led the owner to sell the property at a significant discount.

Pitfalls of Self-Management

In deciding to self-manage the property remotely, the owners ignored some basic management practices, such as conducting criminal and credit background checks on all prospects. Many of these residents decided not to pay rent, and many more created serious problems in the community that resulted in police intervention.

The occupancy on this property slid from more than 90 percent to less than 70 percent in less than one year. When the good residents moved out, the income dropped accordingly, and so did the cash flow. When there is no cash flow, bills do not get paid. Soon, the property began to show signs of deferred maintenance.

When this owner finally decided to turn to a local professional property management company, the owner literally was not aware of the extent of the damage.

Crunching the Numbers

The cost of using a professional property manager or management company can vary, but typically a reliable firm charges about a 10 percent leasing commission of annual rents.

This may include marketing costs the firm assumes to get a property rented. It is recommended that independent owners run the numbers to see if enlisting professional management is worthwhile.

For instance, if rent is $800 per month, an owner will pay approximately $950 a year for management services. Put another way, the effective rent receipt for that property is $720 each month. That expense, plus unexpected maintenance issues, could put one in negative cash flow territory.

What you don’t want to do is get a friend to manage your properties for free. You may be in violation of the law and it could be an expensive experience if that friend errs. — Jeff Young

When my company took over the management, the property had a high delinquency rate and was collecting about 65 percent of the rent—not enough to support the operating expenses. During the course of the next several months, it was necessary to evict several drug dealers and residents who were creating problems as well as not paying the rent. There was also a murder at the property just one week after assuming the management duties.

All this obviously made it very difficult to retain existing residents, much less attract new ones.

Not properly conducting criminal and credit background checks had cost the partnership more than $50,000 in property damage, $200,000 in negative cash flow and upset many financial partners. The partners eventually could not pay all their bills and sold the property for a discount.


Questions to Ask

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The following are questions to ask before hiring a professional property management company:

> How long have they been in the business?

> What professional designations do they hold?

> What continuing education programs do they offer their employees?

> May you call their existing clients for a reference?

> Do they manage properties in your area?

> Do they have a policies and procedure manual? Is it up to date?

> What forms do they use in managing the property?

> May you obtain a sample of the management agreement and review it?

> What costs are included in the management agreement and what is extra?

> How many accounts have they lost in the past 24 months?

> How many accounts have they acquired in the past 24 months?

> How many employees are in the company?

> What is the turnover rate of the employees and why?

> What kind of reporting software do they use?

> How many employees are in the accounting department?

> Who will be the main contact? How long have they been employed?

> What cost saving techniques do they use in managing properties?

—K.M.

Learn From These Mistakes

These stories are common among my peers in the real estate management business. Unfortunately, inexperienced rental owners seem to want to go through this learning process and think that the local market place will take care of the ongoing management.

Real estate investing is a business and should be treated as a business. It is not just an investment. There is an entire management process that must be followed to maximize the return that investors look to achieve.

Professional managers follow systems and procedures for every property that they manage. Anyone who plans to manage their own property must do the same.

The best place to look for a qualified property manager is to start with the National Apartment Association (www.naahq.org).

This is the second in a collection of articles from owner/author Ken McElroy, who wrote “The ABC's of Real Estate Investing,” which was released in September 2004 and became No. 1 on the BusinessWeek best seller list in December 2004.
See the first article in this series: “Investing in the Right Market”.




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