Good Day All,
I have a question relating to havingProperty management and/or maintenance in house vs using a 3rd party manager.
I have about 135 units in my portfolio - ranging from SFH - Apartment buildings mainly in Rochester, with 10 in Buffalo. Currently, I have a property management company that covers both cities. As you can imagine, as my portfolio has grown so have my maintenance costs and property management fees. This year, I will spend approximately $90k in property management/Leasing fees and another $275K in maintenance (this is material and labor combined). I am in out of town investor.
I think it is time to move operations in house and hire people as there is some opportunity to save money (I think). So I wanted to get some advice on if my logic is sound and if so, how do I go about getting started. Here are some specific questions:
- Outside of the obvious cost savings, are there other considerations to bringing operations in house or or not to evaluate?
- What's the best way to identify people with the right skills to hire? Do you know of anyone is looking for a job in this space in Rochester?
- There are a number of added expenses with NY State when you start hiring full time employees. Anyone has experience in how much those costs might be?
- Suggestions on safeguards I should put in place since I am an out of town investor. Note, I do go to Rochester/Buffalo for at least a week a month
Thanks in advance for your thoughts.
Congrats. I use to attend meetings of RE clubs in NYC and they organize trips to upstate NY, because of better cash flow. But as you find now, you need a good management setup to make it work.
First of all, you have to do your own payroll, handles HR, or handle your help as 1099 contractors. I had my own business, done bookkeeping gigs for small firms and you have to arrange workman's comp, unemployment insurance besides handling tax deductions. The option is use a payroll service.
I don't know the exact mix of building types you have. My experience with building management includes PM problems with a condo building with 104 units, to when I was a kid, my dad own a commercial property surrounded by an apartment building with over 100 units, another of 75 units, 6 and 8 plexes all within a block. Based on what I saw, you have to watch employees like a hawk.
In the condo complex, there's no on site personnel. The management company charges for everything including $25.00 to change each light bulb, fees for hanging elevator walls with mats when tenants move etc. It got expensive, so finally the HOA dropped the PM, hired it's own cleaning crew, resident volunteers to change light bulbs etc. The new PM company is reduced to preparing monthly statements and collecting HOA fees.
Large 75 to 100 unit buildings in NYC usually have on site management, where they include an apartment. When it's over 100 units, the "super" has some helpers. For 6 plexes, to 10 plexes, they grant rent concessions for tenants that does cleaning, taking care of garbage etc. Usually these guys could speak a foreign language, like Russian in a Russian area.
My early knowledge of nearby building "supers" as a teen, is many of them also have daytime jobs, and/or does contracting jobs on the side. My dad who owns a mix use property often use these guys, get good quotes from them because materials are included at low or no cost, i.e. stolen materials.
Once he had sidewalks repaired, 20 new slabs, and the job was taken up by a nearby super real cheap because it was all labor. The guy's day job was in charge of security at the 1963 NY Worlds's Fair, got the cement from there, and the rest of the materials from the building where he worked. My dad felt where they got the material is not his problem.
Another time, my dad had to paint a hallway, bathroom and storage area. One of these guys offered a quote when they use the paint from work if my dad doesn't mind the color. He was one of the "super's" helpers. He dad agreed figuring he's using paint for some apartment. Turns out the color was dark grey and my dad asked where the paint came from. The man said he was painting the "Queensborough bridge" at the time and swore it's good paint.
Having watched this, I decided to self managed as an investor, and invested locally. If you have an honest to goodness PM, the fees may sound high, and you may get scammed somewhat. But if you bring the operation in house, paying salaries, you're out of state, unless you have a manager who is not corrupt, or you keep tight control of expenses, you still have problems.
Some years back I attended real estate seminars, and a speaker addressed the issue of investing out of state, and finding help. His shtick is if he has properties in the area, he goes to the area, posts help wanted ads on church bulletin boards, and church publications. His theory is, you definitely get someone local and honest this way. Furthermore, he picks retired people on social security to supplement their incomes since they won't have the need to scam you.
Being a out of town Boss you might not carry a big enuf stick.. meaning even a once a month appearance isn't really hands on enough to figure out how fast, what your staff is up to.
Your 90K in management fees is about equal to 1 full time manager- leasing agent and another part timer and you could office in a apartment but loss of income on that unit then. If you figure maintenance labor you'd probably need 2 full time guys to do the basics.. you'll either need for them to use a car / van between sites... and a place to park parts / shop area to be based out of and then you'd probably have to hire out painting and turn cleaning work.
I've worked for several LARGE companies with big 2500 units or more portfolio's and employees are a hard lot to manage if you don't have a big presence.
Right now you average cost per unit to have everything done is $2703 a year a unit.. to me that's extremely high, and I would ask first how to retain to keep tenant's longer what's needed, and to try and get a real first hand look on turn expenses your paying.
Management fee's are about $666.00 a unit.
The maintenance needs to be recapped as to labor first and then supplies to know what's up with that, to get a tighter hold on that breakdown.
You have no payroll headaches, no vacations, no sick pay, no HR issues.
Good luck lots to consider.
There are several things from an Insurance perspective that you will need to review with a good agent and attorney:
1. Will the management company be a separate entity from the owner? If so, will that company work for other property owners? If yes to both it will need its own coverage for:
- Professional liability
- General Liability
- Workers Comp.
- Dishonesty bond (possibly)
- Business Auto (possibly)
- Cyber Liability (possibly)
- Employment Practices Liability (possibly)
Even if the management company is only dealing with the units you own it may need Liability (could it get named in a suit by the tenant?)
2. Liability and Workers Comp. from Contractors/Subcontractors
You have to decide who will be doing the work. If you are using subcontactors for any of it you need to establish and document that relationship. The State, Feds, etc. are looking at those relationships to make sure that employees are not misclassified as subcontractors. Some things that they look at are:
- who directs the work
- how are they paid (based on the job, hourly, weekly, etc).
- do they work for anyone else
- are their contracts
- who supplies the tools and materials
Once you establish that you've set it up correctly, you need to track the contactors insurance to make sure they have Liability and Workers comp at a minimum.
There are things that your attorney can advise you on as to whether to incude them in your contract with the sub:
- additional insured
- waiver of subrogation
- Hold harmless and indemnification
- primary and non-contributory
Hope that the info is helpful.
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