Why the Best Real Estate Deals Are the Worst-Managed Ones

Ask anyone who’s ever purchased a business, and they’ll tell you the key is not only finding the right business, but finding one that hasn’t been managed up to its potential. The worse it’s been managed relative to its potential, the better. In fact, if you can find a business with positive cash flow that is poorly managed, you’ve found the right one. Why is this? To put it simply: if the business generates cash with poor management, imagine what it can do with good management? It’s like adding rocket fuel.

Most longtime real estate investors know how important property management is for their success. That said, good management is getting harder and harder to find—just like quality investments. This, however, shouldn’t be the case for savvy investors who know what to look for. From 2009–2015, I purchased multiple investment properties within multiple partnerships and increased NOI by 65 percent. How? I made one simple change from the previous owner: management.

Finding Management

Finding quality management with the know-how to make the right changes is more difficult than ever. If you self-manage right now, you may find your long-time employees leaving for easier and higher paying jobs. If you hire a management company you may find that they have to start charging you more because their expenses are going up by trying to retain their top talent. This leaves you in the driver seat to find the worst managed properties — the proverbial diamond in the rough — needing only the right management to really take off.

This, then, begs the question: How do I find a good property that isn’t being managed up to its potential? It’s actually simpler than you might think. Here’s my approach:

Job Postings

If an owner is trying to replace an underperforming manager or maintenance technician, that may be a symptom of a greater problem: larger-scale issues with management or maintenance. Both are opportunities to buy a property right. Your first step is to identify the market where you want to buy and start looking at the property management employment ads. You’ll find plenty of them right now. It won’t take but a few calls or emails before some owner who is beyond their capacity to own/manage this asset is begging for someone like you to come along and get them out of a horribly managed property.

Management Companies

As the CEO of a national property management company, I know how challenging it can be to manage residential real estate assets. Most other property management companies do as well. Build a relationship with these hardworking people. They can be of great value for management or knowledge of local real estate and purchase opportunities. Talk to them to find out if they are managing for owners who may be in over their heads or ready for an exit. If a property management company is draining all their resources to make an owner happy, and it isn’t working, you may be able to help solve both of their problems.

Vacancies

In the current rental environment, vacancies have been at all-time lows on the national level, and most expect this trend to continue. Once you’ve identified the market you’re interested in, a quick online search will help you find units with either multiple vacancies or long-term vacancies. You’ll find their phone numbers and emails right on the ad. Reach out and make a deal!

Can you make money in a tight rental market? Without question. It just takes a little extra effort. But a little effort just might translate into a lot of equity. Just make sure you don’t repeat the seller’s mistake — hire the right property management company.

What do you think? Do you have experience with poorly managed businesses?

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.