Things to Consider Before You Buy That First Multifamily Building: Managing Property Management

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This three-part set of blog posts looks into the factors that you ought to consider before you buy your first multifamily rental.

Part I (Click here to read was about the fundamental economics of the purchase: will it make you reasonable money within a reasonable timeframe?

Part II (click here to read) was about the property & people you expect to live in your rental: are they the kind who make good tenants? And today, we’re getting into the final details: who will run this place?

Property Management

There are two basic choices for property management: you can do it yourself, or you can hire a property manager that will be responsible for the property in exchange for a cut of the profits.

The advantage of doing it yourself is that you get to pocket all of your profits — the disadvantage is that unless you have a decent amount of time & experience managing property, you’re going to have a lot of painful lessons in store for you.

Property managers — at least, those that have been in business for any respectable amount of time — have dealt with a huge variety of situations that you haven’t even conceived of yet.

They have a comprehensive set of policies and rules in place that will get you through most of the hairy bits with a minimum of fuss.

The biggest advantage in hiring a property manager, however, is the ability to expand.

If you’re doing your own property management, every property you add to your portfolio multiplies the amount of time and energy you have to put into keeping your properties operating smoothly. With a property manager, you simply pass the responsibility onto the PM with each new property.

It’s likely that the property already has a property manager working on it — interview them in as much depth as you can. Not only can they give you a lot of information about the property, but you can also decide whether or not they’re worth retaining.

Find out their policies and procedures, especially those related to rent collection and evictions. Ask how they decide on rent increases and about their marketing and screening for tenants.

Related: 20 Questions to Ask Before Hiring Rental Property Management

You may be tempted to replace them just for that ‘fresh start’ feeling, but keep in mind that switching management companies often results in tenants leaving because they feel unhappy with the processes, procedures or even the personnel of your new PM.

Economies of Scale

The best part of buying a multifamily building to rent out is in economies of scale.

If you have a single family residence as your only rental — or just a few — every purchase you have to make to repair anything or upgrade anything is a unique one, and can be pricey. If you can purchase 40 of the same door because you know you’re going to need them within the year, you can get bulk discounts.

If you have just a few families, you’ll be inclined to deal with them individually and give each one treatment you feel like they deserve — if you have fifty families in three different places, you learn rapidly to create one set of rules and enforce them fairly across all comers.

That’s one of the reasons why property managers are so effective: they’re already operating on the economy of scale, because they already have several (or several dozen!) houses, apartments, or other structures. Even if you are a one-building owner, they can take advantage of the economy of scale in a way that you can’t.

The All-Important Marketing Plan

The final critical detail you must have in place is a marketing plan. You’ll want any vacancies filled quickly and with the right tenants. The property manager, as mentioned above, will have resources and probably even a plan in place — but don’t leave it to them!

Get involved, and understand what they’re doing and why — and offer ideas about how you think they might better target the kinds of tenants you want. It’s amazing how much a fresh angle on a marketing campaign can get more — and higher-paying — tenants for a relatively small investment in money and energy.

Related: Easy Step By Step Plan For Creating Real Estate Marketing Magic

This is especially important if you’re buying a property that’s been under-rented and/or has dated décor. You’ll want to target a different type of tenant than what’s been targeted before, so you’ll want a solid plan ready to go and a PM selected that can execute it, before you buy.

Purchasing your first multi-family property can be an intimidating process. The multi-family realm offers a path to some serious profits — but like any investment, it pays to know what you’re getting yourself into and requires thinking ahead to be successful.

Hopefully, this series has explored some issues that will make your first venture more successful.

What was the thing you got most out of this series?

Be sure to leave your comments and insights below!

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About Author

Drew is the manager of Royal Rose Property Management, a fairly high-tech solution for Detroit Metro area property owners & investors.

8 Comments

  1. You’ve touched on something I’ve been wondering about for a while. When you have vacancies, you are pretty much trusting your PM to fill it with the right kind of tenant, as fast as practical, within what the property will attract. A PM I spoke with recently told me that pretty much the only way to attract a different type of tenant is to make the property more desirable to that type of tenant. So I’m not sure how just marketing to tenants that normally would not live in this type of multi anyway would make a big difference in getting the tenants I want. It seems I’m stuck with what I am able to attract until I make some upgrades and then market it differently. Thoughts?

  2. Paul – you can’t really sell icecubes to an Eskimo, at least not consistently. So, the property needs to match the target tenants. What we often find though, is that many PM’s don’t bother, or don’t do enough, research to figure out how to better market properties to change the type of tenants they have. Sometimes it’s as easy as changing the marketing. Other times relatively inexpensive improvements give a fantastic ROI (especially when you factor in the less headaches with better tenants!).

  3. A multifamily landlord has to be a better landlord than a single family home landlord. You can poison a building with one bad tenant.

    And no one needs a property manager, they need a tenant manager. Most PM’s do not even own rental property, many are failed Realtor’s. Hiring a PM may help after you get several properties, but it will take 20%+ of your cash flow.

  4. Drew:
    The economies of scale and freedom of time are huge for me plus I plan on using real estate income for passive income for retirement. I won’t be retired if I just change jobs to be a property manager ( a job I don’t want anyway). I have 218 units in 6 locations and am probably going to add another 100units before I’m done and there is no way to scale like that and self manage. Good management is critical for success and you can’t be afraid to change companies if they aren’t doing the job. If you get a good one they are an invaluable partner in your real estate success. Thanks for the article.

  5. I was looking forward to this article, but I feel that there are a number of issues missed; cost of management, refrences, fees, etc.

    I just feel that this article left a lot to be desired.

  6. Seth – In Part I we stated we wouldn’t be covering numbers, as many others have already. We appreciate your thoughts and hope you still got something out of reading our posts:)

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