Are you in the landlord business or the apartment owning business?

I was thinking about that this morning when I was watching the latest video report by Mike Scott of Dupre + Scott Apartment Advisors called Who gets quantity discounts. The main point of the report was about sales pricing between the different sizes of properties but one chart caught my eye:

Mike was showing the actual per unit expense budgets for the different size properties in the Seattle market area. Counter to the title of the report, the smallest properties show the lowest per unit expenses which implies no volume discounts by property size.

As Mike points out the real issue is that many of the small properties are operated by the owner who typically doesn't charge their time to the property. But if you are landlording to save on expenses the workload doesn't change, you're just doing the work for free. That means less time with the family, less to work on your next deal, and then there are the actual out of pocket costs that slip between the cracks.

This is a real cost to your real estate investment business. If you had a board the members would want to know why you as CEO (and you are CEO of your own business even if you don't claim the title) are out mowing lawns, unclogging toilets and patching leaks instead of growing the company, the portfolio and the returns.

To put this in perspective let's run some numbers on it. The first one is your hourly rate as CEO, $__________. Hmm, what to put in for that? Well according to salary.com the median (Half make more, half make less) is $738,533. And that's just base pay, no bonus or benefits so we're being conservative here. If you figure 50 weeks at 60 hours a week that's $246 an hour.

Well you might think, we're a small company I'm not worth that. OK, let's put it at the bottom 25% of CEO pay which is $560,067. At those same sixty hour weeks with only two off a year that comes to $186 an hour. If you went all the way down to the bottom 10% pay of $397,583 that's $133 an hour, your plumber might be making that much so let's split the difference and say the value of your CEO time is $150 an hour for round numbers.

Next we'll use a small 10 unit building with $800 average rents and 8% vacancy. We'll figure the cost of fully loaded property management at 9%. I know the 'sticker rate' often quoted is 4-6% but on every property and every deal we've done, once you throw in all the extra fees, charges and costs it's between nine and ten percent.

If you want a copy of this calculator shoot me a message.

So property management would run about 35k a year which is 234 hours of your CEO pay and averages about 20 hours a month or 5 a week. That seems about right. But for the same cost you could be healthier (less stress), have a happier spouse and family and free up more time to be looking for the next deal. And that's where you make the big bucks right?

Good hunting-

P.S. Dupre + Scott is probably the best apartment data service I've seen in the country, especially for properties smaller than 100 units. They have a 1-19 unit report that covers single family, plexes and 5-19 unit properties. Unfortunately they only cover the greater Seattle area market but even if you're not in that market, I highly recommend getting a free subscription to Mike's weekly video updates. You'll be getting a MBA level education on the apartment business... and some pretty corny humor from time to time too.