Profit Share with my Property Manager?? Good or Bad?

Question

I have a mixed-use commercial property that I had purchased last year and I had immediately given it out to a property management company to oversee. 8 apartment units and 4,000 sq. ft. in office space in one building, and 3 warehouse/industrial units in another building next door in a B class area.

It's taken much longer than I had anticipated with constant follow up and management of my property manager to get up to my standards in better occupancy, rents, maintenance, and overall management. It's still not up to where I would like, but at least the cash flow is getting closer to what I had expected when I purchased the place. There has been a bit of tenant turnover, tenant complaints, and very long periods to fill vacancies. I've tried to refrain as much as I could from micro-managing and following up on every detail, but I feel like that is what I am doing to make sure things get addressed.

They currently get 5% of collected rent, 1/2 of first month's rent for new tenants, and they do mark up repair costs since they do most things in-house, so that is how they're making money now.

I am considering proposing one of the two following compensation structures:

- 75/25 profit split (or some similar percentage)

- I keep a flat $X per month, and anything they can make on top of that is theirs to keep.

I am leaning towards just asking for a flat amount in owner disbursement each month, that way I know exactly what to expect, kind of like a salary. I will just have to make sure that they are not squeezing the place dry and ensure repairs/capital improvements are being taken care of properly.

Has anyone done anything similar, good/bad experiences? Do you see any potential issues with doing something like this?

Tyler Libby · Answer

I have not had this issue, but I wonder what the road block/obstacles are in the management company getting it up to standard. If they aren't performing, I'd just let them know what your expectation is and ask why they are having a hard time. Maybe you can help with that specifically.

Maybe find a new one?

Is profit sharing arrangement going to improve your personal cash flow? I know that's ultimately the plan, but what if they still don't perform? It seems like a lot of cajoling to get what you should already be getting.

Just a question... are you expectations correct for the area?

Ujwal Velagapudi · Answer

Thank you all for the feedback, definitely some things to think about before I make a switch on PM/structure!

@Steven Kleppin Typically 10% for residential, and maybe a couple percent less for commercial/multiple units. I think their 5% was very low, but they wanted to expand more into the city I was in, plus they wanted to get the rest of my other properties as well as my parents'.

@Tyler Libby Even for being a decent sized city, i couldn't find many commercial property managers in that area, and this was the largest one with hundreds of units and a full team. The cash flow I think will improve & stay consistent if there is a threshold since they have an incentive to make more profit. My expectations are realistic I think, I am making assumptions based off of the previous owner's (of 35 years) figures and occupancy. He did make make a visit daily and had a business in there, so definitely spent a lot more time and took great care of it himself.

@Deanna McCormick I was getting billed a bit much for snow removal, but the other costs (locks, lawn mow, trash-out, etc.) were all reasonably priced. I now request quotes with details on the repair and pictures for everything, so I do review them and have the option to go elsewhere on certain repairs if I want. Those are some good things I honestly never considered, I will definitely do some calls/site visits on them to see how their process is working! I do deal directly with the owner, but due to her wanting to engage all her owners, she is bogged down and can be late in addressing issues.

@Andrew Johnson These are all definitely solid points, I think I'm on the same page as far as having a feeling in the back of my mind on the PM's motives, whether or not anything wrong is going on. This would be my biggest concern in this structure, to having them make a decision on whether or not to make a required Capex improvement.

Of course if I could find a great PM, or even one that just does the basics, I would even pay double or triple to forget about all the hassle.

Deanna McCormick · Answer

You could try.. but they already have you tied up.

Nobody is going to manage your property as well as yourself.

So far have you figured out any numbers on costs of the maintenance up charges,, do they make sense.. are you overpaying on that part of the deal.. maybe just source them for leasing and hire a separate company for the maintenance

What's the hold up on lease ups,, are they not advertising enough or returning calls, or are busy with other clients so your leads end up being leased at one of their other property.. cross/selling... but not to your advantage... Next vacancy I'd do a shop on them,, see how long it takes to get listed online,, have someone place call that wants to see it ASAP and see how long they have to wait for return call , appointment set up and showing,, and if that person asks do you have any other properties what are they told.. its one thing if they ask,, it's another if it's offered at the first sign of well I'm not quite sure.. How hard of a sell is this PM are they having the newbies show your place??? How is it being represented at showing.. do they do a follow up call..

I worked in the rental industry for many years.. our employers hired shoppers and leasing agents were rated on everything from initial phone call. Fair Housing compliance was checked during the entire appointment, showing, guest cards, how many times they were asked if they were going to submit a application (sales closing techniques)..

Is the person you were impressed enough to handle your account, working your account or are you passed on to whom ever ??

Steven Kleppin · Answer

I'm not opposed to profit sharing, but this seems pretty darn generous (obviously depends on where that X lies in your profit margin).

If you're worried about them squeezing the place dry... you probably need a new company, not pay them more.

What's the average property manager structure look like in your area? My first PM was only taking 8% where the standard where I was living was 10%. I learned that he had to incentivize prospective clients with the lower rate, and could afford to do so, because he worked alone and didn't have a team in place. He was clearly overwhelmed and my property and bank account suffered. He has since been replaced and I'm gladly paying the market 10% for PM with a professional team in place.

Account Closed · Answer

@Ujwal Velagapudi What did you end up deciding? Did you end up profit sharing (75/25?)

thinking about doing something similar? sounds like a good a idea to create a more incentive based vested interest opportunity for them

Profit Share with my Property Manager?? Good or Bad?

Profit Share with my Property Manager?? Good or Bad?

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