Keys to Multifamily Asset Management for Investors
Do you try to find out if they have experience managing a property of similar size to the way you have?
Yeah. It’s not just about the size too, it’s about the classification. Because, as you’re well aware, Todd, there’s A, B, C and D classification of properties. Well, somebody who’s used to managing an A Class property and you want to hire them to manage a C Class property, chances are they’re going to fail.
And you might say “Wait a second, why would they fail? They’re already managing an A Class property. That’s a really nice property.” Well, typically in an A Class property, the people who are renting those properties, the apartment units, they know that they’re supposed to pay their rent on time. It’s very rare for one of those property managers to have to go, you know, knock on the door and say “Hey, your rent is due.” There’s a lot more of that that happens in C Class properties because people want to wait until the last second to pay their rent. And property managers have to be more proactive. They have to go after the residents. They have to potentially work with them on payment plans. Some A Class property owners don’t get that. Some of the C Class property or property managers don’t get that. Some of the C Class property managers don’t understand that you don’t have to be as iron fisted with an A Class property, where you’re always going around and bugging and harassing your residents to try and get them to pay on time. Nicely, of course, but it’s a completely different animal. So it’s not just about the size of the property, but it’s also about the classification of the property and what that manager is geared towards managing on a regular basis.
And then what about like their fees? Like what kind of things do you look for with their management fees and their late fees, all that kind of stuff?
Yeah. Well, so real quick, regarding the late fees, one of the things you want to read in your management contract is who gets the late fee? There are some management contracts where the property manager figures “Well, if we go out, we’re able to get them to pay the rent, then we deserve to get the late fee.” I don’t necessarily argue that with the the property manager. I just want to know who actually gets it. Because whether they get $15 or $25 or $50 or whatever it is, in some cases it’s $100 or more, I’m fine with them getting and paying them what they’re worth and the money that they’re earning.
The other thing, too, is regarding their fees. I don’t look at necessarily how much they’re trying to pay. Because here’s one of the things that I’ve heard from some of my students and I actually dissuade them from doing this. They’ll go in and say “Well, the manager was going to charge me 8% and I got them down to 7% or I got them down to 6%.” Well, you have to take into consideration that, if they have, let’s say, 300 units that they’re managing and you have a ten, twelve unit building or a hundred unit. Well, if you have 100 unit buildings, completely different story because you’re going to have an onsite manager and usually your management rate is going to be lower anyway, just because you have an onsite manager, you’re not going to be paying seven 8%. You’re probably going to be in the three to 4 to 5% range. But what they do is they try and talk them down from 8 to 7 and they’re like or 8 to 6. “Oh, I did a great job. I negotiated it down” and I tell them it’s like “Well, so you have 12 units and they manage 300 and let’s say they’re getting 8% from all those other 288 units except for your twelve. Which ones do you think they’re going to fill up first? Those at 8% or yours at 6%?”.
Technically, what a manager should be doing, if they have multiple properties, is they should be taking the residents around. If there’s a bunch of smaller properties that they manage, take them around and show them a couple of different properties and let the resident decide which property they want to move into. But there are some that will push people to a particular direction because they might get a higher percentage, they might get a higher what’s called a leasing fee, right? So, at one property, they get, let’s say, the full first month’s rent. But your property, you negotiate it down to a half month’s rent, on that first month when they move in. Which one do you think they’re going to push first? So I don’t necessarily look at what they’re charging, what I mean, I do, but what I’m more concerned about is what’s reasonable and customary in that location, because not every city or property management firm, from coast to coast, is going to charge the same amount, whether it’s a percentage or a fee to lease the unit or a fee to release the unit. So, a year down the road when somebody signs a new lease, what kind of fee do they get then? Is it any fee? Is it 50 bucks? Is it 100 bucks? Is it 200 bucks? Is it another half month’s rent?
So I want to see when I interview property managers, I want them to tell me, I’m not going to argue with them about what their fees are because they’re worth it. A property manager will make you or break you very, very quickly. And if you’re trying to nickel and dime them, they’re going to try and make up for it some way.
Yeah, I see. You want to kind of align your interest then, theirs and yours, and make sure there’s incentive to for them to do a good job then.