How to manage SFRs without a property manager.

[Account Closed]

When I began investing out of state, primarily in Austin and Dallas, I hired property managers to help manage my SFR properties.

When investing in SFRs, you're dealing with very small numbers. For this reason, (1) understanding all of the risks involved and developing creative ways to manage them and (2) developing methodologies to micromanage expenses are critical. My target is $400 in monthly cash flow, a 10-12 COC, and a 20%+ IRR. If I don't feel that I can generate this kind of cash flow/return, I will not acquire the property.

After a few years of investing in Austin then in Dallas, I found that while property managers were charging me 7% of monthly rents, they were not providing significant value outside of helping me locate a qualified tenant.  This was because I was buying quality properties in good locations so I was able attracted good tenants.  The work involved in management was minimal...still I was paying 7% a month, every month, to my property manager.

To saving money and boost my return, going forward I decided to hire leasing agents to help me locate qualified tenants, then I would manage the properties myself.  Leasing agents charge 50% to 100% of 1 months rent.

What you are building is an efficient "cash flow generation system" and it only works if all the systems work well together... The components of the system are (1) acquisition/the property, (2) financing, (3) property management, (4) people/relationship management, (5) dispositions.

For the last 7 years, I've been self managing my properties in Austin, Dallas, San Antonio and Charlotte.  Here are some essentials of my strategy:

+ Identify your target customer.  Treat your investment as a business because it is...you are providing a product (rental home) and you have a customer (tenant).  What type of tenant will you focus on?  What are their demographics?  What type of properties do they demand?  Are there other types of products/services they might be interested in?

+ This only works if you are investing in great properties that can attract well-qualified tenants (ex. if you're buying properties in Detroit, Michigan for $30k a door you probably don't want to self-manage unless you're ex-military without wife and kids and are okay with sleeping less than 4 hours a night).

+ Buy newer housing.  Newer housing is generally less costly to maintain (plumbing, electrical, etc.).

+ Develop a network of contractors in each of your markets that do good work for a fair price.  You are not looking for "cheap".  You are looking for a fair price, a good "value". 

+ Pay contractors quickly and make sure they know you're a serious investor that can provide consistent work for them.

+ People will work with you because (1) they like you and (2) it is profitable, so make sure you treat them well and that they are "fairly" compensated if they work with you. 

+ Learn how to manage people.  Seek to understand them first, then how best to work with them.  What is their carrot?  How can you ensure they are honest?  Build checks and balances to ensure people do not steal from you.

[Richard C.]

Originally posted by @Nate Garrett:

@Account Closed 

Thanks for the responses. I do have some follow up questions.

According to this article by Financial Times, Warren Buffett has generated a compound annual rate of return of 19.7%. No doubt you are a talented and intelligent investor, but do you really believe you can beat Buffett's record over any meaningful length of time?

In re: property management, my property management company performs all of the functions you mentioned above in return for a modest monthly management fee. Our average monthly management fee is $85.50 across our portfolio.

You said it takes you less than 3 hours per property for management. Let's call it 2.5 hours. That would mean that you would be paying me a little over $34.00 / hour to manage your property. Would you agree that a good property manager earns his or her keep?

Regards,

Nate

 While I don't want to get in an extended debate about the common business model, if you charged a per hour fee of $34 for provable hours worked, that would probably be fine.  But a percentage fee allows for a great deal of obscuring of the actual underlying effort.  I try hard to make sure there is complete transparency in all my numbers, which is why I try to avoid percentage or commission based deal wherever possible.