Building your team
You’ve assembled money in order to purchase your first multifamily. You know where you want to buy and you’ve pre-qualified for whichever mortgage type you’ll be using.
Now what?
It’s time to build your team.
Real Estate Agent
What should you look for in an agent? How should you approach him or her?
When we started investing again in 2011, we knew that even though we had to start small our end goal was to own large apartment complexes. Our plan always involved trading up in order to purchase large 100+ units. With this objective, we narrowed our search for a realtor to those specializing in commercial real estate. And then, within commercial real estate, we looked for agents that focused on multifamily. Searching in this niche narrowed down the potential list of agents significantly. From there, we looked at the types of listings the agent had, the events he/she participated in or was hosting and any reviews that were available.
Once you have a couple of agents you’d like to talk with, how should you prepare to meet with them? First, understand that agents get approached on a frequent basis by potential new investors that have unrealistic expectations or don’t follow through. Just like you are interviewing potential agents, a good agent will be interviewing you too. They are looking to understand if you are serious before spending any time helping you find properties. Knowing this, here’s a few ideas for the meeting.
-Share why you chose to meet with him or her.
- Ask about how he or she likes to work with investors? This is a broad question and could mean anything… which is why it’s great!
- Explain what your goals are and steps you’ve already taken. Pre-approval, research on areas, etc. Most commercial agents will require you to be pre-approved for funds prior to submitting offers.
- Ask about how the agent works specifically with new investors like yourself.
- Provide details on the kinds of property you are looking for and why. Things like size of property, purchase price, type of neighborhood (A, B, C or D) and location.
During the meeting, be open to the agent’s ideas around property types and location that might be different from your initial thoughts. Ask “why” around any recommendations. Ideally, you are looking for an agent that can help guide you -- not just sell you property.
Going back to the first agent we met with after researching our market. Why did we choose to meet with her? Some of the key items were that she focused on multifamily, was an industry veteran, hosted regular investor education events and personally invested in real estate as well.
Lawyer
For your first property, you don't need a mountain of legal paperwork. You just need a LLC and a lawyer to set this up correctly. Key benefits of a LLC are that it provides some liability protection but allows the tax burdens or losses flow to you personally. Any losses help offset your regular income and reduce your overall taxes. There are many articles on BiggerPockets about legal entity structure as well as tax benefits so I won't go into those here. What you need to know at this point is that you'll need a LLC set-up prior to closing on your first property.
How do you find a real estate attorney? The easiest way is to ask the experienced commercial agent that you are working with for a referral.
CPA
Speaking of tax benefits….When it comes time to file your taxes after purchasing your first property, I recommend working with a CPA that has experience working with real estate investors. Your agent can give you recommendations for CPAs in his or her network.
Personally, we made a huge mistake here. We already had a CPA prior to purchasing our first property and we kept working with him for several years while we were continuing to buy property. One day, I came across an article on BiggerPockets about tax benefits and realized that we had been missing opportunities to reduce our tax burden. I read the BiggerPockets book on real estate taxes and immediately sought out a CPA that could provide recommendations and advice specific to our situation. The good news is you can amend filings for up to three years from the current date but the bad news is the years prior to that are lost opportunities. Don’t make this mistake. Work with the right CPA from the beginning.
Another piece of advice in working with a CPA is to consult with him or her before you purchase any property. He or she can guide you towards the right tax-advantaged approach towards funding, entity structure and any other considerations.
Property Management
How will you manage the property? If you are planning to use a property manager instead of self-managing, this is going to be one of the most critical team members to impact your profitability and success. What are some things to look for when hiring a property manager?
Responsibilities
What will the management company handle for you? Common responsibilities include tenant communication, finding tenants, collecting rents, handling maintenance calls, facilitating evictions, coordinating regular maintenance such as landscaping and ad-hoc maintenance such as getting units ready to rent or emergency service like plumbing and HVAC. The management company should provide reporting on all of these activities. Some first time landlords may also ask the management company to handle bookkeeping activities such as paying maintenance invoices or utility bills.
Performance metrics
This is the most critical step! Please be aware! Most property management groups and owners have different goals for the property. What’s best for the Owner is worst for the PM group and the best case scenario for the PM Group is the worst case for the owner. The owner wants long-term stabilized tenant that pays on time. The Property Management Group wants a non-stabilized property that has many turnovers, a lot of call-outs, short-term leases, anything that would create a charge to the owner. I highly recommend you research how the companies get paid.
Many organizations are structured in a way that pays for tenant turnover. Commissions based on signing new leases and fees for getting units ready to rent. So look at the contract metrics carefully to align interests as much as possible.
Cost transparency
What are all the possible fees that a property manager will charge? How about maintenance? Is there incremental margin the property manager adds on top of the normal maintenance service? On the other hand, has the property management organization negotiated discounted maintenance pricing with various provides for its clients? If a company can charge you for miscellaneous fees, they will. If a tenant calls them, you could get charged. If they visit your property, you could get charged. I’ve seen $50 charges for replacing a door knob! Remember, they don’t care if you make money as long as they do.
Are there fees to terminate the contract with the property manager? Or, minimum dollar amounts the property manager enforces? Look for a percentage of gross revenue only. If a unit is vacant the property management company should not get paid on that unit!
Property Management companies can make or break your property. In our experience, we didn’t start making the profits we wanted until we decided to self-manage and put our own managers on-site.
References
Your agent can provide recommendations for property management companies but it is a good idea to ask for and speak with current client references. Some of the questions you might ask are:
-How long have you worked with xyz property management?
- Why did you choose them?
- If you worked with a different company prior, why did you switch?
- What has been the best aspect of working with xyz?
- If you could change anything, what would it be?
- What do you wish you knew prior to signing with xyz?
It’s unlikely you’ll find the perfect scenario but you can be informed about the pros and cons so that you have the right expectations. You can also leverage this information to negotiate contract concessions and understand the financial impact to your business of working with xyz.
Are there any other team members that you've considered adding when buying your first property?
