Can you hire a Management Company and Still be Profitable?

21 Replies

My dad owns a 24 unit building, and 2 four family buildings in NJ. He has always managed it himself, performing most of the labor, but he’s getting to the point where he does not want to do that anymore.

He has always said that it is not cost effective to have a property management company take care of this real estate. Therefore, it appears that the only option is to sell it.

I would like to take over, but I have a full time job and feel I cannot do both. I would be happy to quit and run the real estate full time, but my parents insist it is not possible to own these buildings without also holding a full time job. For as long as I can remember, all my parents have done is work full time for an employer, work on issues with the buildings, and sleep.

So I ask the small time owners with a similar number of units, is it possible to have a management company for this sized portfolio, or does everyone in the same situation also do all the work themselves? Of course, my parents need an income from these properties. How large does a portfolio have to be for it to make sense to hire a property management company? 

Most property managers will charge 8-12% of the gross income from the rent. Obviously depending on the area/property. Can you spair 10% in gross and still profit? You could most likely raise the rent over a year or two at renewals to cover the cost. 

Ryan Dossey, Real Estate Agent in IN (#RB15001099)

I am an owner of a management company, but I think hiring the right management company can exceed your profitability.   Also, at least in Minnesota the above listed percentages seem extremely high.   We typically grow revenue by up 30% by understanding the market and lower any unnecessary expenses by constantly making modifications and watching for waste.

Operate in GRACE - Growing Revenue and Controlling Expenses

Michael Tempel, Broker

Although I manage my own units - my work allows for the flexibility to do so - I will agree with @Michael Tempel that most landlords that manage their own units are often under rented, sometimes significantly - myself included. 

Maybe you can take the time to interview a handful of PMs in the area, find a couple you like and see what would happen to the bottom line if rented at market, with management, and putting value your fathers time - I think he will find the units worth keeping.

How about instead of hiring a management company, find a decent handyman who can do most of the labor your parents do themselves, then you'd just have to focus on screening tenants, which isn't that bad these days with postlets, email and online screening services.  If you have a ton of turnover, then it might get annoying, but screening properly should weed out a lot of the problem tenants.  My husband used to think we had to do it all ourselves, too, and then would get frustrated when he had to work on rentals after a long day at work.  It took a while to get him to agree to use management, and we still self-manage the easy ones where I have a good network in place for repairs.   Do we make as much?  No.  But they still cash flow, and we're much happier.

I'd definitely research it to make sure it couldn't work well with a slight rent increase to cover the cost of hiring a PM  or at least a good handyman to ease the workload.

I agree with most of the posters.  I've also found that part time owners are not charging market rents and maintenance tends to be lacking.  A full time job and life just get in the way of managing a portfolio efficiently.  I started to invest in real estate because I wanted passive income.  I found my properties, completed due diligence, completed updates and repairs, and then managed them.  There was nothing passive about it.  I've since hired a property manager and am much happier.  If you can swing the fee, I'd turn it over to a professional manager.  Just keep a close eye on everything.    

Here is a good example of what can happen with good management. This is just a small 12 unit property, but this case study gives a fast example of the overall picture involving purchase, management and renovation/repositioning work and how it increases the owners ROI. This was self managed prior to purchase.

Bottineau on the River, 2219 Marshall St. NE, Minneapolis MN 55418 - 35% ROE

12 unit building acquired in December 2012

Total investment: $720,000 (purchase + renovation)

100% occupied at time of purchase

Post renovation rents are 30%+ higher than prior levels

The Manager returned 62% of initial equity to investors within the first 18 months

The Bottineau posted a 35% Return on Equity (ROE) in 2014 from rents alone (does not include additional unrealized capital gains)

Property website: http://www.thebottineau.com

Michael Tempel, Broker

@Robert Marek

I would definitely look into hiring a management company. I'm guessing your dad has been growing weary of managing for a while, so it's possible he's let some maintenance slip or hasn't kept units rented for top dollar as well as they could be. Adding a quality management company might more than compensate for the added cost because their full time job is to keep the place maintained and rented for top dollar. I would get some referrals for good management companies from other investors and call them and let them know your situation and see what they can do before making a decision to sell. You might be pleasantly surprised. 

I agree with the above posters about owners under charging for rent and often deferring maintenance and other things. A good property manager will get you market rent, keep on top of maintenance and make your rentals profitable. 

A perfect example: I just started working for a homeowner that was charging $700 per month rent and managing it herself. Luckily the tenant just moved out. I told her I could easily get $1100 to $1200 per month for her. I just signed a lease today for $1200 per month. So basically she hired me and is making way more money than before, even with my management fee. 

If you have the time and know how to manage yourself, go for it. Otherwise you will be better off hiring a professional. 

for me it's about the debt. While I owe on my properties, we self manage. When we get them paid off, then my kids will manage them full time. Until then, I have to self manage.

I am a believer of "leaving professional work for professionals" and property management is definitely a profession. You pay for their service, and if you choose them wisely, it will definitely help you down the road. Remember you have only 24 hours a day and property management can take a lot of hours if you have many doors and the number may be growing in the future. Even if you pay some amount for each door, the overall revenue will grow.

But it is important to find real professionals, because many property managers out there are not.

What Account Closed just said worked as well for us.  The PM we hired in that state actually earned more than his fee over what we thought initially, actually told us that we'd get better tenants if we raised the rent as our house was worth it, then proceeded to prove it and got great tenants within a month of signing with his firm, and have definitely paid for their fee ever since.   When I get a repair bill from them, I am always thinking, I could have done that for less, but I'm not there actually doing it, and the fees they charge aren't objectionable.

Thank you for your thoughtful responses. Many of the posters are correct, the properties have become neglected. He also not collecting market rent and in some cases partial rent as he prefers to do that than evict someone and have to re-rent it. I think if a management company can come in and at least collects market rent that may pay for the service fairly quickly.

I appreciate the responses, and if anyone else has any thoughts I would love to hear them.

Robert

I have a professional job where I deal with people directly all day long.  So while I could probably make some good judgement calls on selecting the right tenant, I DON'T WANT TO.  I'm willing to give up what the property manager is charging so that I don't have to waste time (away from my family or my primary occupation) doing the following

- playing phone tag with tenants and/or contractors

- arranging repairs

- doing work myself

You should still be bringing in money after paying the manager.  As others have said, the property will be rented better, and kept up better.  In your situation this may even increase the value to a point where in a few years, you could sell it at a better price.  

I bought my first property (a 7 unit complex) while it was in forclosure so it had a bank appointed mgmt team.  I decided to keep them on after talking to them.  They charge me a flat rate of $500/month.  Its not a big money maker but it makes decent money...anyway, my mgmt team takes care of nearly everything and I still get good money.  So I think finding the right one is very useful

Originally posted by @Robert Marek :

Just weighing in here, but it looks like the property is in NJ and you live in VA? I will echo most of the others that PM has been good for me. Although I'm in SFRs, I live on the other side of the country. I look for B properties that tend to have minor (sometime major...ugh) maintenance. My PM stays on it and we can have animated exchanges at times over what needs to be done. Overall, I trust him for the 3 years we've worked together. The points about getting FMV rent and good tenants is crucial. Not sure about Multi-Family, but for long-term SFRs, tenant screening, background checks, and finding folks that will stay seems to be a good deal of work. Especially for passive income as I work a full-time job too. I guess you just have to determine whose boots on the ground you want there: yours or a PM.

Zach

Well I live in Virginia, but my parents and their properties are in NJ, this is about their situation...

The only way to know if this is workable for your particular property is to start talking to local PMs. They'll probably be happy to look over your property and your financials and tell you what they would change (or not) about how the place is being run, and what kind of profitability they think they can achieve. A lot of the good ones don't advertise that much because they don't have to. I suggest driving around and looking for similar type properties the area that appears to be well maintained and running smoothly. You can usually get the management company info from a sign on the property.

Jean Bolger

One thing I did not see above is to consider refinancing them. Perhaps they can't support a PM because the payment on the debt service is out of line. If so, refinancing should be part of your plan.

I would never hire a PM company. I hire a manager for each property and manage my managers. 

Your dad doesn't own apartments as much as he owns a job running apartments @Robert Marek . From what you say he is a storybook example of a tired landlord, something that we as opportunistic value investors are always looking for. Depending on the location, a bit of rehab and upgrading the tenant base driven by bringing in professional management could have the property performing nicely and be a good long term hold, or even a flip.

Not picking on your dad because it's a very common scenario (thankfully for us). It's really the same in any small business, starting out the founder wears all the hats and toils away 24/7 first to launch the business and then make sure it survives those first critical years. But every founder has a limited amount of 24/7 in them especially if the business (an apartment building in this case) is in addition to their day job.

Burnout happens as surely as night follows day and when that point arrives, or hopefully before that point arrives the founder has to decide whether to grow the business enough to support bringing on other people to reduce their workload or allow the business to whither to the point where the founder can still handle the volume of work post-burnout. Unfortunately with an apartment you can't shrink the workload short of selling the building.

Bringing on people doesn't have to mean hiring employees with all the associated overhead that entails because you can outsource certain tasks. In the case of property management (and the related building maintenance) you can hire professional property managers who do nothing but manage properties just like yours. Yes they need to be managed but that's a lot less work than doing it all, every day, all day and night long.

You hear people complain that property managers all suck and that they as the owner can do a better job. If that's truly the case then why aren't these complainers already in property management, if they're as good as they say they'd clean up (Note that as apartment investors grow their portfolios, owning a property management company typically becomes more efficient than hiring outside companies). The other thing is that this is own-a-job thinking and it will limit your success. Especially if this is your second job are you really as good as the pros?

Do you belong to IREM? Do you hold a CPM designation? Do you belong to the NAA and have a Apartment Maintenance Technicians Certificate (CAMT)? Do you network with fellow property managers and regularly attend continuing education classes to stay up to date on the latest techniques, technology and products available?

My dad was one of those DIY guys and it was great for learning as a kid growing up and helping on the weekends. But my aunt and uncle had a similar property with a property manager in place; my cousins got to spend a lot more weekends goofing off and their property did just as well as (if not better) than ours.

What I learned from all that was that a good property manager more than pays for themselves with increased NOI and if that's not possible it's because the property was bought wrong in the first place. Some people restore cars as a hobby but they don't make any money doing it, the returns all come from playing with the cars. You can be a hobby property manager too but you should expect the same financial results as the car hobbyists.

Good hunting-

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