A Busy Man’s Guide to Real Estate Management

34

I have been rather outspoken regarding my dislike of outsourced property management.

In Podcast 14, I stated my basic rationale that no one will ever care about my investment as much as I do, and that one of the advantages of real estate as an investment vehicle is precisely the notion that you can indeed manage it yourself in lieu of relying on someone…

THINGS ARE CHANGING – SOME WHAT…

Most of you know that currently on my agenda is syndication of 100+ units.  I’ve isolated the marketplace and have been working to build systems within this marketplace so as to be ready for the eventuality of finding that needle in the hay stack which is an acceptable-to-me opportunity.  As part of this process, I have in fact spoken with a number of management outfits and have isolated the people that I will be working with.

Yes – I’ve become converted!  I do believe that on larger projects self management is not a good idea for many reasons.  From pre-acquisition due diligence and acquisition of market-specific knowledge, to repositioning, to placement of on-site personnel, to financial reporting, to disposition, a good professional property management is indispensible.  I would sure as hell not want to do all of the work myself…

Having said this, however, I am still of the opinion that most of you out there do not need and should not use management for smaller portfolios.  For starters, you couldn’t afford truly professional management, and by that I mean a company with 2,500+ units under management, on anything less than about 80 units.  Secondly, if you invest the right way, you plain don’t need them!  I know that my current 28-unit portfolio definitely does not require outsourced property management…

Related: 20 Questions To Ask Before Hiring Rental Property Management!

WHAT – WHERE – HOW

And with this we have arrived at the crux of the matter – what should you own and where, and how should you manage it so that you are not driven to outsourcing management because the process is too hard or too time-consuming…

What Should You Own…

This is a loaded question.  I’ve shared some of my perspective relative to this in an article entitled Newbies Take Note: Why You Shouldn’t Buy Houses for $30,000, as well as in Podcast 61.  For now, let me just sum things up:

While most people believe that management is about the physical asset, it’s not.  What makes management easy or difficult is people – tenants.  If you attract the type of tenants who are reasonably easy to manage, then management is not hard and does not take a lot of time.  Opposite is also true…

Understand – you can not attract tenants.  Your property, where it is and what it is attracts tenants.  The ease with which you will be able to manage tenants is a function first of your property!  Extrapolate this any way you want; if I get into any more detail this is going to become an e-book…

Where Should You Own…

Several things to mention here.  First of all, the basic formula is the same whether talking about a 4-plex or a 150-unit apartment community, and it is this:

C-Class Building in B-Class Location

Past this, in order to successfully self-manage, it is imperative to own property within at most a half-hour drive from your house – you won’t go to your rental often enough otherwise.  My portfolio currently consists of 28 doors.  The farthest property I have is a 6-plex that is 40 minutes away – this is as far as is prudent in terms of self-management.

And now we’ve come to HOW – how do we self-manage and keep our sanity.  As I’ve stated in the forums and elsewhere on multiple occasions, my time-commitment on a typical month is 5-7 hours – that’s on the high side.  Naturally, my time commitment is higher at times immediately following a new acquisition and during the repositioning process.  But, relative to a stabilized portfolio my time-commitment truly is no more than 7 hours per month…

Related: 10 Ways to Help Out Your Property Management Company

5 HOURS ?!?!

I am going to tackle this by simply describing to you this month as it relates to property management.  I currently have 1 vacancy.  This apartment happens to be in the 10-unit which I acquired last February (I wrote about it in How I Bought a 10-Plex with 1.5% Down – A Case Study).  In the first six months of ownership I turned over a good portion of the units, however a few received only a light clean-up – enough to get them rented.  This reposition was fast-moving and cash-intensive, and I just didn’t want to bleed any more cash at the time than what was necessary.

Well – one of the units that hadn’t gotten much attention became recently vacated.  The unit required paint, flooring, lighting, door-knobs, etc.  The appliances are older but in good shape.  Here’s how I went about doing this turn:

My handyman stopped over by my office (which is my houseJ) to pick up rotation locks with which to secure the property, as well as the key to the existing locks.  He then proceeded to go to the apartment and began the turn-over by replacing the locks.  Next, he ripped out all of the old flooring.  While he was doing that, I had connected with my flooring guy and asked him to coordinate with my handyman a time to go over to the unit to take measurements.  Thus far my time-commitment to this process is no more than 5 minutes on the phone, and 25-minutes that it took to drive over to the property and perform the walk-out with the tenant.  Incidentally, this building is within a 10-minute drive from my house – wink, wink…

The flooring installer coordinated with my handyman a time the next day to come take the measurements.  He really didn’t need anyone to get in since there is a lock-box on the door, but I wanted my handyman there to make sure everyone is clear on the time-line…The next day, the flooring guy phoned the measurements into the flooring distributor.  The distributor has on file all of the materials I use, including carpet, vinyl, and transition strips.

Pay attention to this, guys – it’s always the same products that are used; I never change.  I don’t care if something is on sale and I can pick it up at $2/yeard less – I have a package – it looks good – materials are sturdy and easy to clean – and if I happen to need to replace carpet in one of the bedrooms, I never have to wonder what the heck kinda carpet I used throughout the unit.  It is always the same – period!  And, by the way, so is the price!  I don’t know if you are into nickel and diming, but I have a life and I have a family…there’s just not that much time left to worry about rehabs.

The distributor called to verify the order, following which they billed my account.  Done – 2 minutes of my time!  Now, when my handyman is done with the paint and all the rest, the flooring installers will pick up the product and install it.  They will bill me when done; they are not the cheapest, but they are good and I’ve been with them forever – I’ll pay…

Coming back to my handyman, he has been busy painting.  Similarly to flooring, I have an account at Sherwin Williams, where they have my mix in their computer.  And, as you probably guessed, it’s always the same paint.  My handyman (I should really call him my right-hand man) picks up whatever paint he needs and the store send me a bill in e-mail – this takes no time from me at all until I am ready to reconcile my accounts.

Finally, I have similar accounts at a few of the other stores, therefore lighting, door knobs, appliances, etc. – none of this requires my presence, at least not usually.  Only on major repositioning projects immediately following the acquisition do I ever spend time on the premises.  Everyone knows how I like things and no one is further than a phone-call away, and if I pay a little more to work with reliable people then be it – my time is worth more.

IN CONCLUSION

By the time this turn-over is complete, my time-commitment to it will have been 1 hour, if that.  And then there’s the rest of my portfolio.  This month, I had a leaky faucet, a gutter which fell off of the fascia, and water heater tank went out.  Guess how much time all of those took – ho long does it take to make a few calls…?

Some times I wish I could be like Brandon Turner who gets up on the roof and climbs inside the crawl space, and knows what to do once he is there.  But, my saving grace is that I don’t know how to do any of that stuff, so – I pay for someone else to do it.

Now, as part of self-managing my portfolio I do drive by my properties all the time, in passing.  I need to be very informed about everything that happens.  But, with a stabilized portfolio of 28 doors, or even 50, management should not take any more than 10 hours per month, and should not be an extremely emotionally-taxing process, unless you chose for it to be by either buying the wrong kind of building or trying to do everything yourself – like some people we know named Brandon Turner.

Here’s the thing – systems are key to management.  And self-managing becomes very hard very quickly when YOU are the system.  In my understanding, I am the guy at the top of the system, therefore by definition I can not be the guy on the roof or in the crawl space.  This means that I can only buy certain kind of assets which lend themselves to this type of “passive” self-management…

Does this make sense?

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About Author

Ben Leybovich has been investing in multifamily residential real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben is a licensed Realtor with YOCUM Realty in Lima, Ohio. He is also the author of Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.

34 Comments

  1. David Laplante on

    Inspiring.

    I’m at 9 doors now and until now, I have done much of the work myself but have come to the realization that if I am to grow my business, I will need to let go. This is tough because I like to do manual work but I also have a full time job so I’ll have to resort to doing manual labor on my own house only. My dad is also very handy and has helped me a lot. Every time I have ideas of giving the work to someone else, he tells me that there’s no need and we can do it ourselves and save money so that makes it that much harder to change my mentality. I’m thinking about just hiring him as my property manager/first level handyman. I don’t want him to accept just because I’m hos son so I trying to think of the correct way to bring this idea to him.

    Next month, one of my tenant is moving and that gives me a 2-3 weeks period for changing the entire flooring of the apartment. And it needs it. For the first time, I’ll be giving this work to someone else that I have good faith in. This will allow me to be with my family and to continue to work at my job. But there again, my dad wants to help so I’m going have him do various repairs like painting, repairing a few walls and other various little repairs.

    The thing is, having my dad there, working and refusing to be paid, I feel that I have to be there too. This changing of mentality will be challenging to me to say the least. :)

    • David,

      We are ultimately looking to build a business, not personal service enterprise. As such, you can not do it all. There is a critical mass in terms of number of units that it takes to get there, which is why I would advise you to consider buying more – I remember what 9 was like…

      Thanks so much David!

  2. Yeah, crawling into the attic to fix a broken water heater would not be very effective – good thing you don’t try to do this yourself.

    OK, I’m gonna let you deal with all the responses you’re inevitably gonna get about why people can’t self manage, because unlike you, not everyone has C Class property in B Class areas 30 mins from their house in their price range. Therefore, they can either not invest or they can long distance invest. Since stopping your investing career just because of location seems ridiculous to me, I’d suggest the latter.

    Having been an investor who has self-managed, used PM’s for my long distance properties, as well as owned a PM company in a foreign country, I can tell you that there is no one size fits all to this, Ben. Sorry, but yes, I’m gonna have to disagree with you for once :) If you happen to live close to your rentals, then yes, by all means, self manage (but build in the cost of a PM in case you no longer can).

    I also don’t understand your complete distaste for smaller PM companies. I have found the larger a company gets, the less responsive and organized they get. Depending on your asset’s size, sometimes a mom & pop or solo PM is the best bet. I know, I know – there’s a lot of bad ones out there, but you can say that about any industry – it’s your job as an investor to find the good ones, and there are plenty, I assure you. The key is finding a PM whose specialty is servicing the niche you are in (single family, apartments, etc.). My 2 cents….

    • Haha Good of you to put me in my place Sharon. Mark is having a slow morning, being that it’s like 6 AM in Colorado – no worries, he will make it up I’m sure…

      IN response, several points:
      1. I don’t think that buying duplexes long-distance is wise, and that’s putting it politely…
      2. Big NO to mom and pop – they don’t have the systems to achieve results we are looking for. Quality of the PM is far less important than the systems!

      Perhaps I better leave this discussion for another article. There is a lot to talk about here :)

      Thanks so much for commenting Sharon!

      • Haha, Ben, well I can’t let Mark have all the fun, now can I.

        So perhaps you need to present an alternative solution then. If someone does not live w/in 30 minutes of property that cash flows in their price range, what are they to do?

        And exactly what systems are you alluding to that are exclusive to a large PM that a mom & pop can’t do? Again, keep in mind, I stated that your PM should specialize in your niche. A mom & pop is probably not a good idea for a large apartment complex, but perfectly suitable for small multi-families, especially if they make up the majority of their portfolio.

        I’ll eagerly await your response or next post. Always enjoy pulling back the curtain to how your mind works :)

        • Sharon –

          The grim reality of RE is that we must work with that which market gives us relative to both location and cycles. If I was in an area of 4.5 CAPs, you better believe I’d be flipping. I am in an area of 8-10 CAP so I hold.

          The notion of long-distance small scale land-lording makes my head spin Sharon. Long distance = Big projects in my book. Thoughts?

        • I get where you are coming from – sure it’s better to be able to operate in your backyard for lots of reasons – but why abandon a strategy that I know very, very well (buy and hold) to undertake one that I don’t (flipping) just because my local market isn’t cooperating, when there’s plenty of markets that are. I just don’t find assembling a team in a new market that hard, especially using BP as a resource.

          As you’ve said many times, flipping is a job, it’s risk inherent, and it’s taxed as earned income-now that would make my head spin lol! Good conversation, Ben – thanks!

        • Sharon – you know how I fee about flipping better than most. Having said that, if the choice is between flipping and long distance small multi, then to me there is no choice. I believe that the management risk exposure inherent to small multi relative to on-going operations as well as liquidation is too high. Given that circumstance, I would flip…

          In a low CAP market whereby I could generate 100k profits on 500k flips, I would do it for 10 years and then go do big deals for cash flow. That’s my 2 cents… Unless, that is, you want to join forces with others on the ground :)

          Thoughts?

        • Yeah, I’d have to join forces with someone on the ground, because just like you don’t have the stomach for long-distance PM, I don’t have the stomach for flipping. BTW, have you ever owned a long-distance multi? And I assume you have some sort of exit plan for all of your small multis in your own backyard when you no longer want to self-manage, since clearly you won’t be entrusting them to those awful and incapable PM’s ;)

  3. Ben…I hate ask but what is a general definition of “C-Class Building in B-Class Location”?

    What would be a good example of this?

    Thanks for another great angle.

    • Hey Jason,

      Class A: Luxury – this is typically new or almost new construction in the most desirable location in town.

      Class B: Older than Class A and less attractive location. However, Class B structures, while older, have been well taken care of and show little delayed CapEx

      Class C: Take Class B building and add poor management and you get class C. Good guts, but mismanaged. Class C location is a place where people who really want to be in B but can’t afford to will go. Still safe and convenient, but not as up and coming or groomed.

      Class D: Those houses that they buy for $30,000 – we don’t go there.

      Ideally, we buy Class C in Class B location and we go to work on management. What we end up with is a Class B structure in Class B location – $$$. Nothing is this cut and dry in reality, but this is the thrust of our thinking. Hope this helps…

      Thanks Jason!

  4. Great article on time management Ben. If you want to create a business, as opposed to a hobby or a job, you have to have people and systems (and really the people are part of the systems) in place.

  5. Ben,

    I appreciate your insight and thoughts in this article as like most readers I have a perspective created by my experiences (both the successes and failures I might add). Speaking for myself I have also come to the conclusion that Real Estate is a hyper local business if you are self managing. Coming from the lens of self managing over 30units my reach extends over numerous states however the ones I have the most success and cash flow are the ones within 20-30 minutes of me. I have found since I started investing in 2002 that when I reach over 1hr in travel my intensity for conversion of a unit is inversely proportional to distance.

    So I agree in some parts of your “self managing” principle but must add the disclaimer that every situation may vary according to the variables at hand. To state in Real Estate that there are hard and fast rules governing your decisions upon long term holds means that the potential future opportunities are being lost for short term gain. (Forrest through the trees conceptually) We all love cash flow monthly increasing with little or no effort however that large hit every few years helps to maintain focus. Sometimes those opportunities are in markets which have not adapted as your market may have or you created a system which answers problems another geographic area needs.

    IN CONCLUSION I WOULD ADD :
    *SELF MANAGING DOES WORK OUTSIDE OF 1 HOUR BUT BEWARE THE PITFALLS
    *NEVER LOOSE SIGHT OF THE BIG PICTURE
    *CREATE STRATEGIC PARTNERSHIPS WITH THE AREA YOU LIKE TO INVEST IN OUTSIDE OF THE 45MIN RULE.

    Joshua

  6. Thanks Joshua,

    I do indeed believe that we should create hard and fast rules for ourselves. Not every good opportunity is good for all of us…

    Thanks indeed for reading!

  7. Ben,

    I’d love to see some case studies of the A, B, And C class properties and corresponding neighborhoods.

    Thanks!

    • Cameron – if you call a good commercial broker or a good property management company they will be able to point you in the right direction. RE is local!

      This is why I work with big property managers when stepping out of my market :)

  8. That is exactly what I have been doing, I was able to solve a serious pipe leak without ever going to the apartment building, I called several trades and made sure I got the issue solved in a timely manner. I save money by renting the apartments on my own, calling trades on my own and I get cheaper trades. Property management company trades are more expensive

    I started like Brandon, I learned the ropes and I am proud of it. Now I only fix stuff when it will take me less than 15min to fix and someone would charge me more than 150$ to do that simple stuff.
    I also have a property management taking care of another building because I leave the country once and awhile for long time, so I have them as backup just in case the other properties need management in an emergency besides my handyman.

    My objective will be to have all managed by a company but I will still take care of big renovations to save money and make sure things are done the way I want.

  9. Great post.

    I have 25 rentals I manage myself, and have a full time job. Great tenants are the secret to being able to do it.

    I also turned a Class D property (dangerous, Section 8, Police would not come into the complex, without double or triple backup) into a Class B property. It can be done, and increase the property value by quite a bit.

  10. Sara Cunningham on

    Ben as always an article to get the grey cells moving. You know I am going to disagree with you on this one. I agree with Sharon on this one. Firstly when I started investing again in 2006 I was dead against anyone doing management for me. We handled all the easy haha stuff like cleaning, painting, leasing and used handymen for electricals, plumbing, flooring etc. it was exhausting working full time too. Plus the fact that tenants know you live locally tends to make them think you are at their beck and call. We flipped 3 houses and kept the rest as buy and hold so have experience in both sectors of the market. However since my husband getting a promotion meant leaving to live in Italy we didn’t really have much choice but to change our way of thinking. I could of sold up I guess but why, I don’t want to buy property locally in Italy! So the solution was Property Management. I have continued to buy and hold in my market in Oklahoma City since I left since the numbers work for me. My property management companies use my own handymen for the most part so I know the kind god workmanship and the prices I pay are above board. If you own property that dictates you can’t afford to pay for PM then I would suggest you own the wrong kind of property to start with. Sometimes you have to walk in another persons shoes to really see what it’s like on the other side of the fence.

    As you say “thoughts”

    • Sara – fine; be like that, be like Sharon :)
      Secondly – Viva La Italia
      And lastly, when Brandon Turner and I were having an “argument” in Podcast 61 relative to those 2 six-plexes one of which was working and the other one was not and the question at hand was – how do you know which one to buy; remember that? My answer was neither, because while everyone get’s lucky once in a while, as a general rule…

      You are the exception that proves the rule in this case – you and Sharon. In your case, having started out locally, you developed connections and a persona which undoubtedly makes it more feasible to transition to long-distance. That is an unfair advantage that you are using effectively, but it is not available to most who chose to be long-distance landlords. Comparing you to most in this case is a bit of a case of apples to oranges – Agreed?

      • Yes, Sara, and didn’t I see you comment on Ben’s blog in the last week or two that you own and manage long distance (Italy kind of gives new meaning to that phrase) not only single families, but a duplex and a triplex too?

        For the record, Ben, I did not start long distance landlording in my own backyard. I made a research visit to Indiana, then returned to Calif, and built my team from there. I have continued to manage my team in Belize for the last four years.

        Now I would love to think that I am extraordinarily gifted and talented, as I’m sure Sara would too, but in all reality, what we have done anyone can do. I do not think it takes any unfair advantage in this day and age, unless you count the incredible network of people here on BP that can help refer you to the right people.

        And congrats to you, Sara – you are crushing it!!

        • Sara Cunningham on

          Thanks Sharon for the comments. I agree completely about it not being about super talent, brains, or anything close to it. Sure it takes, determination. focus, networking, commitment etc but thats what REI is or any other investment in time or money if you want to be successful.

      • Sara Cunningham on

        Ben, you always manage to come back with a good argument! Hence Sharon and I need to join forces. However I remember Brandon writing an article last week I think about how to use your Unfair Advantages to your benefit, and the fact that every investor has at least one unfair advantage, which would include you too right?

        But I will agree there aren’t that many people that do what Sharon and I do so to apples to oranges it is. .

        • Wayne Amundson on

          I also have to disagree with you, Ben. We live in Canada and have nine Canadian units 8-10 hours away that we self-manage, 16 units in Florida (managed by two PM companies), and a vacation property in AZ that we rent out seasonally and that we self-manage. We have no rental units in the city we live in (Calgary). Most of this inventory has been acquired in the last two years….mostly duplexes.

          Wayne

  11. Cory Binsfield on

    The key to this post is Ben’s Gem:

    “While most people believe that management is about the physical asset, it’s not. What makes management easy or difficult is people – tenants. If you attract the type of tenants who are reasonably easy to manage, then management is not hard and does not take a lot of time”

    Properties are easy, tenants are tough. That being said, if you have nice properties you attract nice tenants. It’s that simple.

    When I started investing, I made the mistake of thinking I could attract nice tenants with a not so nice property. After a year or two of managing this dumpy D property in a C neighborhood, I discovered that I could never attract a A tenant to this property and my B tenants would move out as soon as the lease expired. This left me with high turnover and worse, showing the place to lots of C and D tenants.

    I exchanged that property after a few years into 2 different B properties that attracted B tenants and still own these cash cows 14 years later.

    What a difference it makes in terms of time, hassle and management.

    In my opinion, anyone can self manage 10 single family homes in their spare time as long as the properties attract nice tenants. It doesn’t matter if they are out of state or in your backyard. However, managing more than 10 single family homes outside of your area can quickly become overwhelming and pose a challenge for the out of state investor. That’s when it pays to hire a property manger that specializes in your type of property.

    That being said, you better be managing the property manager and visiting your properties at least three or four times a year. Is this something your willing to do?

    Anecdotal proof lies in the Hedge Funds that purchased 100’s if not 1000’s of single family properties and have run into all sorts of problems trhough both self management and hiring out of state property managers.

    This is why Warren Buffet did not scoop up thousands of single family rentals during the crisis. He could not figure out how to manage all of these rentals even though he had billions on cash sitting in his coffers.

    I have been following the Hedge Fund whale trade over the years and it seems like results haven’t been pretty based upon BP stories or through the large media outlets such as Bloomberg or the Wall Street Journal.

    Currently, I continue to invest in my own backyard. I’ve looked into hiring a management company but have trouble paying them 10% plus markups on labor, materials or service calls.

    I’d rather take the management fee and buy more units and create my own management company. With the right property management software, management systems and local tradesman, I’m able to self manage 97 units in my spare time.

    As I’ve grown the portfolio, I’m always amazed how easy it is to manage my properties that I’ve renovated enough to attract solid B tenants. The key is recognizing the fact that people are hard and the right properties are easy.

  12. Mehran Kamari on

    Thanks for taking the time to share some of the methods you use to remove your self from the day to day management of the property Ben! I’m convinced after reading this article and hearing that many house flippers do the same, that using the same materials/fixtures/appliances all the time is extremely important.

    I’d have to agree that some times I also wish I knew how to physically do a lot of the work. I often feel too far removed from the equation, being out-of-state and relying on property management/partners for everything. It’s money well spent to not have to deal with or worry about issues as they come up! I’m always asking questions to learn more about these things though.

    Keep em’ coming Big Ben!

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