Managing & Pruning Your Team

Fundamental Principle

Building your team is not a “set and forget” exercise for investors - growing and sustaining your business requires growing, coaching, and yes - pruning your team.

Quick note: This blog touches only on certain key players in your team. We've chosen to focus on the partnerships that have proven most challenging for us over the past several years. Feel free to comment with any questions on managing your lender, attorney, etc.

Our Story

When we sat down to write this blog - we knew this would be a loaded topic that drummed up some painful memories. Wherever there is an opportunity to profit - there will be bad actors who choose the paths of dishonesty, laziness, and opportunism - no matter the industry. Operating as new investors from thousands of miles away, we were once an easy target - our education has not been without cost. In sharing our story, we aim not to defame any of our past partners (names omitted accordingly), but to serve as a cautionary tale and guide for new investors.

We shared a bit of our team building journey in our most recent blog - and "journey" is definitely the right word, as we expect it will be a lifelong endeavor. Picking up where we left off, we closed our first deal with our new agent (our first non-turnkey deal), and all went smoothly - we felt we'd found a vital player for our team. By our second transaction, we were disappointed to realize we hadn't found a partner who would advocate for our interests alongside his own.

New to the market, and lacking much of a network (or perhaps, a bit shy in tapping it), we trusted our agent to accurately represent the property and protect our interests. Instead, he dramatically underestimated the repairs needed to make the property rent-ready, while inflating the estimated rents to ensure it met our conditions. We only later discovered (and yes, it was buried somewhere in our closing documents) that he was representing the seller as well. When we finally visited the property - we were horrified by the condition and knew without a massive investment, we wouldn't feel comfortable putting tenants in the home.

Of course, the numbers no longer worked - and we were fortunate to offload this property for just a $5,000 loss. We severed ties and continued to look for the right partner - running into several agents who weren't willing to hustle and walk properties (even when we were already in the negotiation phase). We're fortunate to have finally found an agent through our personal network who is communicative, passionate, and ready to hustle right along with us - but it took some real time to get there!

Finding the right contractors to join our team has been a smoother process. We were lucky to identify a great contractor early in our journey through a fellow investor referral. Over time, we've grown the team - understanding that different contractors have different areas of expertise, pricing, and quality. Even with our regular partners, we validate the work with our inspector and get multiple quotes - no one is perfect or perfect for every job.

While we maintain several contractor relationships, we've found it helpful to have a local go-to on speed dial. Our primary contractor has come through in crisis scenarios and even helped us customize our own home on a short timeline.

By far, the most challenging roster spot to fill has been our property manager. In Indiana, we're currently with our fourth property manager (and our fifth overall), in just 3 ½ years.

We left our first property manager, who had decent systems and an established staff in place, because they weren't hungry - and were letting our vacancies sit on the market. We were a small player with <10 properties in our portfolio, and we clearly weren't a priority. We took that as a signal that this wasn't the right partner as we entered growth mode.

We met our second property manager through our network. He was a fellow disgruntled customer of our former property manager and a current agent (who eventually became our realtor too). We decided to become his first customers, and helped him to build his property management shop. Things started out well - we experienced the typical startup pains that occur when systems and teams aren't in place, but he was responsive, engaged, and willing to prioritize our business. He hustled on our behalf, and we felt energized by the idea of building something together.

Reflecting on this time with brutal honesty, we know a growing friendship clouded our judgment - and we let our partnership continue past its prime. We saw the signs: delayed payments, suspicious work orders, a drop in communication, and increased levels of stress and anxiety. We attributed it to the stress of building a business - until we couldn't any longer. We've since moved on, and with pending legal action underway, we won't say more here - but there were undoubtedly lessons learned. Most notably, we learned the importance of checks and balances. Our agent and property manager were one - and we weren't validating either with a third party - which didn't set us up for success.

We were incredibly fortunate that when we found ourselves in crisis - our investor network referred us to a new property manager who hustled (over the holidays) with a lean staff and a business that grew 50% overnight. We will always appreciate how this team showed up in a time of chaos and partnered with us to survive it. Unfortunately, urgency prevented us from performing our typical due diligence, and it didn't end up being the right match. We've since moved on to a new property manager whose style and delivery better align with our business and long term goals.

When it comes to property managers, we've faced the full spectrum of challenges: poor communication, mismanaged funds, and the inability to scale with our business. And if we take a hard look in the mirror - we're a ways from low maintenance (though we've never been fired by a property manager 😉.) Through trial and error, we've learned to invest heavily in this partnership to ensure it evolves and stays fruitful for both parties.

Managing Your Team

In case you've missed it: we'll spell it out. Your first team is probably not your forever team - and closely managing even your strongest players will help you avoid some of the landmines we've stepped on.

Your Agent

Your agent is truly the center of your team - and if you're out of state - you're initially trusting their evaluation of a property. That said, you'll want to make sure the right checks and balances are in place to ensure this commission-only team member is acting in good faith. With any acquisition, have your inspector validate the home mechanics, your contractor estimate repair costs, and your property manager project rents.

As you continue to partner with your agent, good management means staying in close communication. Your agent should be a lead source for new listings and a partner in discussing new ideas. They should be a good source of referrals for contractors and handymen and your overall local expert.

Your Property Manager

For an out of state investor, a property manager is probably the most essential member of the day to day team. That said - it's also the trickiest (in our experience) to get right. For investors seeking a truly "armchair" experience, this is where things tend to fall apart. Most property managers require some degree of hands-on management - and the further you stray from the business - the easier it is to be nickel and dimed with every work order and lease-up (which adds up fast).

We've struggled with the typical property manager fee structure, as investor and property manager incentives rarely align. For example - when a property manager marks up repairs (a prevalent practice) - they profit when your expenses rise. And in many cases, your property manager charges a higher fee for placing a new tenant than re-signing the current one, which results in turn costs for you.

We've learned (the hard way) to do our due diligence in selecting a property manager, interviewing not only the property manager - but also their current clients. We align incentives to the best of our ability and work to build a strong partnership built on mutual respect.

Our management rigor has varied depending on the partner, but our underlying practices remain the same. We keep a close eye on our books, auditing each month for anything that seems out of place. This might include unapproved expenses, missing rents, management fees on vacant properties, etc. Even if our property manager has real-time software and extraordinarily accurate bookkeeping (which in our experience is rare), keeping a close eye on our statements allows us to make smart decisions in unloading (or repurposing) underperforming properties.

When it comes to repairs, we authorize our property manager to resolve any issues under $500 without contacting us (this is for our sanity - build some trust with your property manager first). We also request photos of all work once completed - and on larger projects, we ask our inspector to validate the work that's been done. Whether it's our contractor or our property manager's, we've always benefited from having a second (and third-party) pair of eyes.

As with any scaling business, new challenges arise at each stage of growth. As your portfolio expands, you'll find that security deposits become an enormous line item - and in the unfortunate case of an immoral property manager - this poses a risk. While your property manager typically holds these funds - you have the liability. As you reach a threshold where this becomes a concern - it's worth asking your property manager if you can hold your own deposits. If that's not an option, require that their books are audited by a third party. Hopefully, you'll never see this advice pay off, but we wish we'd received this guidance years ago.

Your Contractor

We've been fortunate in identifying strong contracting partners early in building our team - and when we've found a strong player, we've stuck with them. That said (and you'll see a theme here), we don't trust any work without validation.

With any significant projects, we recommend requesting multiple bids to ensure scopes of work and pricing look similar (and hint: the cheapest option is not always the best option, though it can be). We always supply our contractor with our inspection report to ensure their bids include the key findings.

Throughout the rehab, we check in to ensure we're tracking against the original timeline (or, more typically, working catch up) - and we only pay for work completed. We ask for photos, or when we're local, we validate the job ourselves before spending a dime (excluding materials, where paying upfront may be required).

Once the job is complete, we ask our inspector to walk the property again to audit the work. In most cases, we ask our contractor to come back to resolve small findings (and he always fixes them promptly).

Pruning Your Team

Severing ties with underperforming partners has been the most challenging part of building our portfolio (and that's likely why we've often waited too long). We're far from experts in identifying which side of a fine line we're walking between "holding partners to unrealistic expectations" and "suffering incompetence for too long." That said, our current team lacks any original players, and we've learned a bit about hard conversations along the way.

Releasing Your Agent

While many investors begin their career with unrealistic expectations of their agent, certain behaviors signal it's time to move on.

1. Your agent advocates offers on properties that don't meet your criteria or misrepresents properties to make the sale.
2. Your agent is too busy to visit properties that you're very seriously considering.
3. Your agent drops the ball and causes issues during escrow.

It probably goes without saying, but before you fire your current agent - be sure to identify a new partner through your network. If you haven't signed an exclusivity contract (which you never should), it's as easy as moving on. If you have - you'll have to wait for its expiration, explore a new market, or ask your agent to release you.

Releasing Your Contractor

It's relatively easy to spot a contractor relationship that's gone sour. When bid prices go up while work quality goes down - you know you're in a dangerous cycle. That said, if your contractor has been a trusted partner, hold them accountable to fix the work - don't bail at the first sign of trouble.

You'll also spot problems in repeatedly missed deadlines. We've yet to meet a contractor who consistently completes work on schedule without any delay, so we always build in some margin of error. When delays become excessive without good reason - it may be time to explore a new partnership.

Releasing Your Property Manager

Property Management is generally a challenging and low margin business, and in understanding this, we've always tried to work with our property managers to resolve small issues before they grow. Our intent is to help our property manager grow and improve their business alongside ours - and when we've erred, it's always been in staying too long. We do know that some investors can be unrealistic - so it's worth mentioning several scenarios we'd recommend resolving alongside your property manager:

1. Making small errors in bookkeeping, which are legitimate, one-off mistakes
2. Taking too long to fill one particular vacancy - after all, they might be watching your back by avoiding problematic tenants
3. Not responding to you same-day (their first priority is resolving issues for tenants)
4. Failure to collect rents on a particular property (especially during Covid)

On the other hand, there are red-flag scenarios, such as repeated mistakes in bookkeeping, ongoing radio silence, or a pattern of failure in filling vacancies. If you determine that the relationship is no longer fruitful, you'll need to follow a specific set of actions:

1. Check your Property Management Agreement to ensure there are no prepayment or early cancellation penalties. If there are, factor those into your decision accordingly.
2. Interview several property managers, and be selective. Run toward a solution, not away from a problem.
3. Get your documents in order. This includes leases, rent rolls, and any information that will help your new property manager get setup. Their systems and staff should be ready before you fire your property manager.
4. Take a deep breath, and realize this transition will not happen overnight. It may take anywhere from 30-60 days, and you'll bear some additional expenses during this time. Trust us, it's worth it.
5. Budget time to increase your own management rigor in the short term. As your new property manager settles in, they might miss the occasional work order. Don't panic - this is not a sign of incompetence and is expected, especially if your prior property manager isn't supporting a smooth transition.

Regardless of the situation, be courteous and professional in letting go of any team member. That advice has been hard for us to follow, especially when we've felt betrayed, but it's always been the right course of action. Building a reputation of professionalism and generosity will only serve you, both in developing new relationships and seeking recourse (should it come to that).

A Closing Thought

While a great team supports you in growing and sustaining your business - they don't replace your active attention and management. We've never found real estate to be a "passive" path to building wealth - even with a high performing team around us. That said, we've found investing in relationships to bear an exceptional return - and we're always happiest when winning as a team.