Risks to Success
Will every project lead to cash flow? During my time in this business, I have run into investors who have lost everything, including personal savings! When I hear these stories, it always ends with the same root cause; poor management! Management of income properties is the only contributing influence that allows you to be successful or destitute. After everything has been put in place during the startup period; never underestimate this crucial operation!
So, the questions that should be rattling around in your noggin at this point is should you property manage yourself or hire a 3rd party? The other is what are the steps to success in maximizing your profit while reducing your risks? This is what we are going to cover! Stay planted, don’t leaf the pages and we will get there momentarily!
What is Landlording?
Perhaps before going any further, we should figure out what exactly does landlording mean? Landlording, A.K.A. property management, is the business of protecting and growing one’s real estate investment through the careful placement and oversight of tenants. Below are the distinct functions associated with the role.
From this description, we can deduce that landlording is a business and as such it is scalable; the number of properties involved is irrelevant. In addition, it mentions ‘protecting’ your investment, which means landlording is an integral part of the investment and a role that can yield success.
Unlike the stock market, where no real management is required, success in real estate is not dependent upon the relatively slow variation of the market,but the expediency of the landlord. That’s right, you could start in the dirt and end there all the same if you fail in your maintenance of said investment.
A good property management strategy is to continually improve both the physical state and financial standing of the property being managed; this adds value to your investment, not just maintain it. While passive and natural wealth creation occurs through appreciation, active cash flow can be generated through increased rents and reduced expenses for the property. This can also be further optimized through automation and enhanced workflows.
A good property manager knows when to extract more from the property to help the investment produce better returns, yet slackens off when dire times demand tenant retention to pay overheads.
An additional consideration is property managers must find the best potential occupants of the rental property and control their behavior towards the property and local residence. Property Managers set and enforce the constraints of what the tenant must and must not do while considering both the well-being of the tenant and the well-being of the Owner and their investment.
Manage a Property Yourself or Outsource to a Professional Management Company?
While you could automate and semi-automate the processes of property management through the appropriate use of web applications, applications and other proprietary software, it will cost you. If you think about economies of scale, you may think that taking the costs for implementing systems as well as the time needed for you to upskill it may be beneficial to get some help from professionals that you can partner with.
The benefits are that you are outsourcing your risks for these activities and instead just taking the role of an owner. This can give you more time to do other things, such as finding other opportunities or spending time with your family. You do not need to essentially do any of the work, including meeting the tenants and handling maintenance activities.
Property management fees can differ depending on location, but typically you’ll be looking at between 8 to 12% of the rent in a monthly fee and a one-off large fee each time the property is rented. For large multifamily buildings, 5% of the gross rent plus additional project management fees upon renovating are applicable. For owners who don’t have a lot of cash flow, property management can quickly turn a good asset into a negative cash-flowing investment. Conversely, by allowing a property manager to look after a property, the investor can do value-adding tasks, such as buying more income properties.
Now, by taking the rose-tinted glasses off for a minute, we realize that if you do hire anyone as a property manager, how do you know they will work their best for you? You could find a good-hearted individual or a slacker. Furthermore, even if they are of good stock, what experience and education do they have that is actually usable; the path to hell is paved by good intentions, and you have a mortgage to pay. In addition to the property manager, what about their team, who are they using, are they good?
The market is therefore abundant with property management companies and property managers who have no idea what they are doing who may be detrimental to your venture. Some possibly are reading this book now to help them to get better. For those that are trying to improve themselves, it is noted, so please exclude yourself from the following generalities.
Bad property managers are terrible at getting properties rented, terrible at communication with the owner and tenant, and slow at getting repairs. Also, they may be lax at enforcing the house rules or enforcing them disproportionately. Some may also be unprofessional in their behavior towards tenants, which again will lead to the investor hemorrhaging money from vacancies and new tenants due to a bad reputation.
Property managers that are good at what they do still should not be left to their own devices by the Owner, there is work to be done to manage your management company. After all, you don’t know them or what quality or standard they are actually working on or if they are any good at project engagements needed for renovation activities.
Large property management companies with hundreds or even thousands of properties under their management are likely to do a better job for you; due to refining their workflows and automating systems for convenience. In addition, by the fact, they stayed in business long enough to get enough doors, they likely have good feedback from investors and tenants that you can research before deciding if working for them is a good idea. But wait! Your property will not stand out to them from others. When they have 30 empty properties at any one time that they are trying to fill; how is the priority assigned? Will it be yours or a more expensive property or someone they have dealt with for a longer time? Conversely, larger property management companies will have a wider marketing reach and more potential tenant applications per week than smaller operations.
Note how we mentioned marketing here. Marketing is a complex field; some describe it as gambling due to either having a great advert but displayed to the wrong demographic or vice versa. Unless you operate in the marketing field, no matter what you think you know about marketing and generating appropriate tenant funnels, odds are you have underestimated the granular detail required. The best practice when you start out or have a small number of properties, get a specialist to handle marketing; and this is where property management companies earn their merits.
If you do decide to hire a Property Manager, how do you find one that is good and that can run your rentals? You can ask other local landlords for referrals, and interview as many companies as you can. However, there is no guarantee. As such, you shouldn’t fear cutting loose a bad property management company.
Note that throughout this chapter, software or web applications have been stated as being useful for automation. The underlying key here is to use software that can be integrated with each other. Take a look at the current trend in business software integration to give you pointers here and ensure it matches your needs above; if needed, ask a consultant to offer advice on options and costs to see if it is viable for you now even if you don’t advance it until you are big enough to manage your own properties. Remember, if you get it right or wrong, you and others may be stuck with it longer than some of the properties you manage.
Managing is a skill that needs to be learnt. If you hire a property manager, take the time to look and learn and see if it aligns with what you are learning in this book. Make notes and ask questions when you can. For now congratulations, you have passed Chapter One, advance to the next section where we start looking at things in a little more depth.
