Hey @Bob Beach and @Xiao Xiao here is the post I promised. I am happy to talk more about any of this at any time. I am traveling at the moment though so you can also fee free to reach out to Ken Klingler or Jack Inman.

Also I am making up ALL OF THESE NUMBERS because I am typing from a Motel 6 in the middle of nowhere. They are representative though.

Why is my Memphis investment property losing money?

Answer, you are probably using the wrong property manager. Let me give you a quick breakdown of the problem. The traditional property management business model is inherently broken. For a successful partnership (client/provider) you want synergy. You want aligned interests. This is exactly how traditional PMs do-not-work.

Ideally it should look like this- you have a 1k a month rental and they charge you 10% a month. In a year the property earns 12k. Property manager takes 1.2k and you keep 10.8k. Great. But sometimes you lose tenants and putting in a new tenant requires work and the PM should get paid for this- they usually charge half a month's rent. So if the property turns once a year and you lose a month of occupancy (best case) it looks like this instead property earns 11k. PM makes 1.1k but PM also makes 500 for the lease up so now their annual take goes from 1.2k to 1.6k 30% increase!!! And the owner profit goes to 9.4k (1k*11-10%-500) a reduction of 13%.

This is just the tip of the iceberg but shows how right from the start a traditional PM wants a different set of things than the owner.

Now the PM is ALSO going to manage the rent ready. And say that rent ready might cost a local owner with his own team something like 500 paint, 250 carpet cleaning, 250 in miscellaneous repairs. The PM will say something like “we use our own people to get the best cost”. Instead of 500, 250, 250 it will be 475, 225, 225! Except that they will charge a 10% service fee so instead of 1k total you pay 1,018. Now wait- the property was vacant for a month- so it needs the lawn cut twice and a visit from pest control. And with every transaction the owner’s profit goes down and the PM profit goes up. It gets hairier too! Previous tenant never reported a leak issue. On the walk through mold is noticed. (btw this is a true story) so a remediation specialist is called out. Well they make their money selling moisture barriers and whatever else. You may get lucky and they say nothing needs doing- but in all probability they will come up with 3k in work that should be done. A PM should be the one to say “hey wait, do we really need to spend that money?” except that if you agree to that work- they just made another 300 dollars. 300 dollars is 25% of what they would make in a regular year in our ideal scenario.

At this point the property manager has increased their revenue on the property by 100% and the owner has lost about 35%.

So, YES it is important to think about “how much does it cost to paint” and “how often do you need to replace the flapper in the toilet”, but what is far far more important to consider is who is making money off of what transactions. A property doesn’t go from 2% cash on cash return to a loser because the paint cost 20% too much. It goes from 2% Cash on Cash to a loser from a thousand conflict of interest cuts.

Memphis, Tennessee

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