Plano, TX · Member since 2013 · 226 posts · 156 votes
I've been looking for a 60+ unit apartment complex that would afford 3rd party management in the DFW area for several months without much luck. I've recently had a 32 unit deal basically fall in my lap and I've decided to move on it. It is a solid deal if self-managed, but the returns just aren't where I (and my investors) would like them to be with a PM company involved. I also like the idea of truly learning the business from the bottom up before moving onto bigger properties where I'd be using a PM co. The Ken McElroy podcast reinforced my thinking when Ken said he puts his new people at a property to learn the basics.
I'm looking for input from those of you who have owned/operated similar properties, and how you did it. I know many other owners of these smaller properties and have discussed resident managers, part-time professional staff, partnering with owners of nearby properties and sharing staff, etc. Our budget includes payroll for a PT maintenance person and PT mngr.
All of these have pros and cons, but this is a huge step for me, and I guess I'm just looking for reassurance that others out there are successfully doing this. I've got a great deal of support locally from experienced people, but BP was much to valuable a resource to ignore...
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y
Tom the number of units is not only key but also the rent per unit mix door.
You could have 50 units 1 bed getting 400 a month rent. The extra bookkeeping and turnover involved would make it hard for one handyman onsite to keep up.
Conversely you could have 40 2 beds at 800 a month and much more income with less turnover and might be able to afford a full time handyman. The problem with a low number of units is that the handyman needs more income in most cases that I have seen than a small property can provide. This makes them do multiple jobs for other people and your stuff on the side. The result is your property doesn't maintain itself like it should and repairs take a long time and tenants get disgruntled.
A full time repair person onsite knows layouts for turnover like the backs of their hand. They can spot and repair issues faster for existing tenants knowing parts brands and sizes and where to get them etc. Some buildings are older and you really have to improvise to fix things as those parts are special order or no longer made etc. so you have to wing a lot of stuff unless you want to replace the whole thing which costs a ton of money.
I owned 20 units before and had a manager but was over there 3 to 4 times a week handling things to do with repair issues etc. I will never do this again and will buy a much larger property where I can automate everything and the cost is built in. The tenant base makeup will also dictate how hard you will work for your money and management collecting rents. Professionals tend to hold down salary jobs with more stable income. Lower income tenants come with a host of issues and problems and takes special managing to keep them on top of paying the rent. Their income isn't as stable as typically they might be working 2 jobs and the 2nd job fluctuates in hours and pay putting pressure on consistently paying the rent every month.
I hope this helps because like others I have been in the trenches myself at midnight working on vacant units getting ready to re-rent. The experience is over rated in my opinion.............. : )
Maastricht, The Netherlands · Member since 2013 · 131 posts · 18 votes
12y
In Belgium, it's against the law to self-manage anything 10 units and up. And you need a lot of credentials to become an accredited property manager (3 years college or similar and 1 year internship). There's good reason for this.
Self-managing a 32-unit is basically buying yourself a job. There are a lot of examples of people trying their hand at it and coming back on the decision a year later.
How are your numbers not working out with a property manager? They're not that expensive and if your margin is this small, then property management isn't your problem.
Closing part of the value-adding chain through your own companies like Ken McElroy does is übercool, but you're first and foremost starting a business in that case. If you were to make that decision, your priority should be a business plan. Remember how he said in the podcast that he tries to automate everything in his business model?
Then again, if you would be able to start a PM business and include this complex as inventory, that would mean you're close to break even from the get go. Depreciation and other write offs would make a lot of sense as well by placing the property in an LLC and the management in a C Corp.
Investor · Cincinnati, OH · Member since 2013 · 2k+ posts · 1k+ votes
12y
@Tom Lafferty - depends on the #s. Ideally you put a seasoned property mgmt company on it because you have investors involved and now isn't the time to be learning on the job. I think that is way too much risk for them. There's just too much involved in tenant/landlord process - in my opinion. That said, if you do decide to essentially create your own property mgmt company on this deal then I recommend having your manger live on site. That way things can be addressed at a moment's notice.
Real Estate Investor · Member since 2013 · 866 posts · 487 votes
12y
The first apartment building I bought is in Tukwila, WA. I put a handman in one of the units as the p/t manager/maintenance guy. I paid him an hourly wage, did the required withholding and it work out really well.
Where I made a major mistake was a couple of years later. I was so proud because I had reached critical mass with that building and two in Renton nearby. I hired an outside management firm and stopped using the p/t on-site guys.
Biggest single mistake I ever made.
Put someone on-site and pay them a reasonable wage for the work you need them to do.
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y
Tom the number of units is not only key but also the rent per unit mix door.
You could have 50 units 1 bed getting 400 a month rent. The extra bookkeeping and turnover involved would make it hard for one handyman onsite to keep up.
Conversely you could have 40 2 beds at 800 a month and much more income with less turnover and might be able to afford a full time handyman. The problem with a low number of units is that the handyman needs more income in most cases that I have seen than a small property can provide. This makes them do multiple jobs for other people and your stuff on the side. The result is your property doesn't maintain itself like it should and repairs take a long time and tenants get disgruntled.
A full time repair person onsite knows layouts for turnover like the backs of their hand. They can spot and repair issues faster for existing tenants knowing parts brands and sizes and where to get them etc. Some buildings are older and you really have to improvise to fix things as those parts are special order or no longer made etc. so you have to wing a lot of stuff unless you want to replace the whole thing which costs a ton of money.
I owned 20 units before and had a manager but was over there 3 to 4 times a week handling things to do with repair issues etc. I will never do this again and will buy a much larger property where I can automate everything and the cost is built in. The tenant base makeup will also dictate how hard you will work for your money and management collecting rents. Professionals tend to hold down salary jobs with more stable income. Lower income tenants come with a host of issues and problems and takes special managing to keep them on top of paying the rent. Their income isn't as stable as typically they might be working 2 jobs and the 2nd job fluctuates in hours and pay putting pressure on consistently paying the rent every month.
I hope this helps because like others I have been in the trenches myself at midnight working on vacant units getting ready to re-rent. The experience is over rated in my opinion.............. : )
Rental Property Investor · Scottsdale, AZ · Member since 2010 · 390 posts · 599 votes
12y
@Tom Lafferty I would advise posting the numbers to your deal to get some feedback from the BP community. There are many key factors that will help determine your answers such as age of complex, unit mix, vacancy, etc.
I own a 32 unit and have gone from using a PM, self managing and managing with onsite help. My complex is late 70s with consistent maintenance. I did not enjoy the experience of having a full time PM and I created a PM company to self manage this and all my other units. In fact I would say that I spent more time correcting mistakes, questioning bad decisions, marketing, etc. I was paying top dollar (10%) yet results were definitely lacking.
You need to understand that no matter what route you take, a 32 unit will not be very passive for the owner. An onsite maintenance guy and resident manager is a must. I now have both and manage them and have found this to be the ideal formula. Find a local person that has been in the town for some time and this will help with screening. Have a process and software in place so that they are in a position to succeed. They will look to you to set the tone and if your not confident or show indecisiveness they will not succeed on their own. Pay them appropriately so that they have the right incentives. I pay a small draw weekly in addition to a bonus structure in place to align incentives such as $100 lease up bonus, etc.
Finally a word of caution - there are some multifamily properties that simply have no chance of ever cash flowing no matter what you do to them. The typical profile of such a property is over 50 years old, owner pays for majority of utilities and low income tenants. These properties often seem like great deals and I have seen some that I literally would not take for free. These are liabilities any way you spin it and believe me, the seller will spin it. A complex of such size can certainly be rewarding but do not think it will be a passive cash cow without much effort and if your not experienced make sure you get serious second opinions on your deal. Best of luck.
Where I made a major mistake was a couple of years later. I was so proud because I had reached critical mass with that building and two in Renton nearby. I hired an outside management firm and stopped using the p/t on-site guys.
Biggest single mistake I ever made.
Can you elaborate? Why was this such a big mistake?
Where I made a major mistake was a couple of years later. I was so proud because I had reached critical mass with that building and two in Renton nearby. I hired an outside management firm and stopped using the p/t on-site guys.
Biggest single mistake I ever made.
Can you elaborate? Why was this such a big mistake?
Sure, because the PM didn't take care of things as well as the on-site guys did and they cost me MORE than the on-site p/t help.
Maastricht, The Netherlands · Member since 2013 · 131 posts · 18 votes
12y
Anthony Chara (and others) have often said not managing your property manager is the single biggest mistake with apartment investors. The trick is to have performance reports and compare them to the pro-forma without them getting fidgety about you "telling them how to do their jobs".
I don't see how the property managers I know would cost more than an on-site handyman.
Plano, TX · Member since 2013 · 226 posts · 156 votes
12y
Thanks @Thierry Van Roy . Its not as if this deal won't work with a PM co. Its just that my investors and I are looking for around a 100% total return over 5 years, and with a 5% fee which is around $1000 a month, it doesn't do that. It would still make money, but not near the returns we're looking for.
As I mentioned, we are budgeting for part time on-site personnel, just not an asset manager. I know many property owners around DFW doing the same thing, and they've all had a great deal of success using the same model.
Hard Money Lender · Sea Girt, NJ · Member since 2012 · 125 posts · 37 votes
12y
As a broker, what I've typically seen in a property that cannot support a full time staff (such as this) is the use of a super. In lieu of rent you can hire the super to perform any basic maintenance, do apartment turns, possibly even show units and clean common areas. You can work out whatever part-time or full-time arrangement you want. Obviously if he is full time he would probably get a free unit and some extra income as well. That would just leave you to do the bookkeeping.
Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes
12y
@Tom Lafferty I apologize in advance because I know you were looking for advice from others who have done a deal this size and I've never done a deal of this size. However, this strikes me as a property that is in a sort of RE purgatory. Big enough to be a royal pain to manage (unlike SFRs) too small to justify onsite, professional management. I've got 18 units under management now, and the thought of managing 32 units (where everyone is sharing a wall) makes me cringe. Plus, the only people who will want to buy a property of this size are those who want to self manage, which I gotta imagine is a pretty small pool. I listened to Ken McElroy's podcast, too, and I don't think that this is the type of property he would buy (or try to cut his teeth on). I say all this only because I had lunch with you, and you had very compelling and convincing reasons for buying bigger than this. I'd stick with your original plans if you can.
Plano, TX · Member since 2013 · 226 posts · 156 votes
12y
Good advice @John Chapman , I appreciate it. This was not a decision I made lightly. Believe me, I wanted to stick to the search for a 100 unit property, but for a lot of reasons this one makes sense. As I mentioned, I've spent a LOT of time talking to others who are running similar properties, and am confident it is worth pursuing. I also did not want a fully rehabbed property, which this one is, or mostly anyway. Again, in talking with experienced owners who have started with small properties and moved up, a big rehab would be too much to take on.
As far as sticking to my original goal, its very likely that without getting a track record going, it wasn't going to be too likely. With all the competition here, it is very difficult to compete with cash buyers, or highly experienced buyers who get the good deals.
Remember that my schedule is such that I have a great deal of free time, and flexibility, which I'm sure I will need! The other great thing is the team of investors that want to join me. A few of them are very eager to help and live near the property, as do I. I know there will be many frustrations, but I'm confident that the purchase is a smart move.
Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes
12y
@Tom Lafferty , you definitely do your research, and your reasons seem pretty valid. I absolutely agree with you that a big rehab would be quite an undertaking, and what you say about getting a track record makes sense. Good stuff. Are you going to post some details at some point? Would love to hear some numbers, unit/'mix, etc.
Rental Property Investor · Northville, MI · Member since 2013 · 263 posts · 183 votes
12y
Tom,
I'm curious (and doubtlessly other BPers are too) to learn more about the details of the deal, and to see what you decide regarding pursuing this deal. It sounds like it has the potential to be a good investment, provided you're going in with your eyes wide open on the time commitment you'll be taking on, which it sounds like you are.
We have 18 apartments, which we self-manage, and spend between 5 and 10 hours a week on apartment-related activities, more when there is a vacancy and the unit needs to be prepped and shown. It's a great hourly rate when dividing monthly cash flow and principal paydown by hours worked, but it just wouldn't work if I didn't have the time to devote to it. In the beginning the time commitment was significantly greater, as we dealt with evictions, light rehabbing, and maintenance issues deferred by the previous landlord, but now it has dropped down to the hours mentioned above. Longer term, we'd like to eventually acquire more apartments and then include these 18 as part of an overall management package, but for now self-managing is working.
Plano, TX · Member since 2013 · 226 posts · 156 votes
12y
Closed on the property yesterday, and I'm sure this will set off a storm of "what have you done!" comments, but as requested, heres some more info:
1964 YOC, 32 unit property. Paid $1.1M with a 75% ltv 4.5% 5yr note. Bank is also financing $63,000 in rehab. Seller put a great deal of money into the property over the last 2 years, so we're basically continuing some interior upgrades, various exterior items, sewer jetting, and roof repair.
Property is ABP, has a chiller and boiler that were replaced last year. Currently only 1 vacant unit. Rents are currently $625 for a 1/1, of which there are 20. The market strongly suggests $660 is very easily attainable.
Here's what happened on the management option. After meeting with the manager of the property next door several times during due diligence, I (and other investors) decided we wanted her involved with our property at all costs. I made contact with the owner, and he was very interested. Now before everyone goes crazy and tells me I'm nuts because she'll always rent her units first, heres what we gain. Full time, on site, professional, tough, and very experienced manager. At best, we were going to have a part time, fairly inexperienced person for which we budgeted $15k/yr. We're getting this one for substantially less. Both properties are currently full, and there is quite a bit of demand in the area. If occupancy starts to soften, we would likely have to make other arrangements. Hopefully we will add other properties and this one will be part of a managed portfolio. For maintenance, we found a tenant at the property next door who is highly experienced with all aspects of apt upkeep, as well as unit turns.
Regarding Serge S comment about no way a property would cash flow given 50 yrs old, utilities paid, and low income tenants -- we're all three, and it is currently cash flowing. Things could change, but I guess we'll see.
One other bonus for us is that since the manager is now technically off-site (but about 20 ft away from our office) we are likely going to convert the office to an efficiency which will probably rent for $500, adding $75000 in value to the property. If we need office space in the future, there is an add on that could be very easily converted into office space.
Yes, I'm going to be crazy busy for a little while, but I cannot tell you how thrilled I am with the management arrangement that I ended up with. She is seriously AMAZING. She doesn't even start until Monday, but she already found a tenant for our one vacant unit.
Plano, TX · Member since 2013 · 226 posts · 156 votes
10y
I ran across this post while searching for something else and cannot believe its been almost two years since purchasing the 32 unit property. Given all the advice that came in from my original question, I figured I should add some information in case others read this.
I've been self-managing since Feb 2014, and while there were times in the beginning that were a little crazy, it has been great. When I say self-manage, I don't mean I'm sitting there every day writing leases or fixing toilets. We have a manager and a maintenance guy, but there is no property management co to pay the bills, hire staff, direct contractors for rehabs, etc.
We have rehabbed about 20 of the 32 units, increased rents dramatically, and the property is still 100% full with a waiting list, so they need to go up some more.
I mainly wanted to say that I am extremely glad that I made the leap on this one. I was scared to death to do it with no real estate experience whatsoever, but it has been an incredible learning experience. I had an amazing group of investors who trusted me, so that was obviously key in this. I would NOT invest in something like this myself if I weren't very very comfortable that the person running the deal was either very experienced, or working with someone who was. In my case I have a great mentor who helped me buy the deal, which could have been a disaster had I tried it on my own.
Learning the business from the ground up has given me a great insight into the business, and I've even invested in several other deals where people were doing the same thing I did, but now I get to be the totally passive investor! I am invested in over 500 units now, which I think would have been much harder to do without my hands on experience.
The property is now under contract to sell. We bought it for $1,137,500 and our sale price is $1,475,000. Our initial equity was about $325k, so with the cash flow during our ownership as well as the capital gain on sale, our investors will get approx. a 100% return on their investment, or a 50% annualized return. Our goal was to double everyones money in 5 years, but we can hit that now, so they voted to sell.
I will also add that having a great staff (even if its only 1 part-time person) on site is absolutely critical. I know some other first-time apt owners who are doing the same thing I am, and are doing extremely well. They did have challenges getting the right person on site, which took a ton of their time, and was very stressful. I simply got lucky that the woman who we had from day one is an absolutely AMAZING person. Without her this may not have been as successful. Just wanted to say you CAN self manage successfully if you learn all you can before jumping in, and have good people around to help you.
