The Biggest Lie Investors Are Told About Property Management
Like all of you guys, I receive BiggerPockets newsletters in my email box. Like most of you, I skim to see if anything piques my interest — something did! There was another article on a popular subject of gurus.
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The article was entitled “The 13 Tell Tale Traits of a Real Estate Investment Guru.” While I do not necessarily disagree with the article, I have a few counterpoints to offer. So, with all due respect, here are a few thoughts.
According to Merriam Webster, a non-religious definition of the term guru is:
- A teacher or guide that you trust
- A person who has a lot of experience in or knowledge of a particular subject
Well, hell — if the shoe fits, you know what I’m sayin’?!
I am a teacher. I know lots of stuff about this business. And lots of you guys trust me.
Like I said, if the shoe fits!
So yeah, when I see an article like this, I get a smirk on my face.
And with this, we’ve arrived at the counter punch:
One of the biggest lies in all of real estate investing is that you can outsource property management and see any success at all. Unless the project is large enough to absorb payroll, you cannot outsource PM. In fact, one of the most honest lines ever uttered on a BiggerPockets Podcast episode was by my friend and yours Serge S. in the by-now-infamous Podcast 152 with Burke and me, when Serge told anyone who’d listen in no uncertain terms — you can’t make money using property management, and he is right!
Let’s just imagine a building with a bit over $70,000 in gross top line. After OpEx, CapEx, and debt service, let’s just say that this building cash flows $18,000/annum.
Now, if you were to outsource PM, it would cost you 10% — that’s it, a mere 10%. If all you look at is that number, 10% doesn’t look or sound too bad. And truthfully, the manager needs to make money for their effort, so it’s not like plus or minus 10% is unfair either. Understand, my thesis here is not that all property managers are bad — only that bad or good, you can’t afford them!
Why? Because realizing that this tiny 10% equates to a $7,000 annual fee on a building with $18,000 free cash flow after OpEx. CapEx, and debt service. If my math is right — and I’d sorta like to think that it is — you’ve just given the PM 39% of your profit margin. Now instead of $18,000 of cash in your pocket, you are looking at $11,000 — can you afford that?! If you are buying this building and others like it so that you can replace your W2 income that’s killing you, can you afford a PM? Can you afford to give up $7,000 out of $18,000?!
I know I can’t. Not on this building, nor on any of the others. 🙂
This isn’t rocket science, guys. Like Serge said, you can’t afford property management if you are going to rely on this income.
The only exception to the rule is this:
Some of you are extremely highly paid professionals, and I am not talking $100,000 W2 income here. In this case, first of all, you are not buying buildings for cash flow — you are buying them for depreciation and whatever cash flow you can get. Secondly, your time, in dollar terms, is worth more than the actual and economic cost of PM. So, for you, yes, a PM is a good idea.
If you are not one of the folks who fit the description in the above paragraph, please do yourself a favor and find someone who will teach you every trick I’ve learned about buying the right building, which attracts the right kind tenant. And while learning this may cost you some money, I promise it will cost infinitely less than hiring a PM!
Investors: Do you agree or disagree with this assessment of property management? Why?
Let me know your thoughts with a comment — and let’s discuss!