We Improve What We Measure
Whether you manage your own investment portfolio, or hire a property management company to manage your investments, there are key metrics to track and measure if you want to truly find success. Any two real estate investors will define success differently, especially when it comes to property management. If you follow on-line forums dedicated to real estate, you will notice heated arguments on the merits of using property management companies as opposed to do-it-yourself management. So this is not a topic that has a lot of, let’s just say, agreement!
Before listing the metrics I suggest you track, I will caution you that I leave a lot off of this list. Many of the traditional metrics and numbers that you see quoted by property management companies such as vacancy rates, are not going to be on this list. That is because my company was not built from the mold of traditional property management companies. At least, not as real estate investors have defined them. As of this AM, my company manages 1,317 properties in Memphis and an additional 32 in Dallas. We are currently adding roughly 40 properties a month to those portfolios and each of those is owned by passive investors. Why is that important? Operating a successful property management company that is growing is not easy in today’s investment environment. It requires doing thing differently. It requires measuring things, differently…
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Metrics to Measure & Questions to Ask Your Property Manager
Much of the argument you read on-line against using property management revolves around a lack of trust on the part of investors and a very poor reputation as a service industry on the part of the management companies. That is why tracking traditional metrics ONLY should not matter to management companies, and investors should be digging deeper and asking different questions when deciding if using a management company is the right route for their portfolio.
So this is written as advice for both property management companies and real estate investors and I make two very general assumptions:
- All business people want to be truly great at their business
- All investors want to be profitable investors
I realize that those are extremely general assumptions and, to all of our amazement, there are actually business people who could care less if their company is great as long as they make money, and there are real estate investors who clearly don’t care if they make money or not. But let us not digress – here is the list.
What percentage of your management portfolio do you rent each month?
Taking the number of closed rental contracts by the last day of the month and dividing it by the number of properties under management on the first day of the month will measure this metric. As an example, if you entered the month managing 200 properties and rented 10 properties by the end of the month, your percentage would be 5%. This is a very quick way for a management company and a prospective investor using the service to measure the average length of stay. A very quick and unscientific way! If you average renting just 8% of your management portfolio each month, which you would think is a relatively small number, then you rent roughly 100% of your portfolio each year. Your average length of stay is 12 months, regardless what the marketing material or any other websites say. Measuring this metric gives you a very quick look at length of stay, specific to that management company.
For a management company this is very important for you to internally measure how good your service is to the tenant. It also helps you to pinpoint areas for improvement. The reason for measuring end of the month contracts against beginning of the month portfolio is that it allows you to account for properties you rent in the month that did not exist in the portfolio at the beginning of the month. When you have 12 consecutive months of activity, you have a consistent metric and any anomalies caused by a growing portfolio are addressed.
For investors, this metric is important for obvious reasons. The longer the average length of stay, the lower the holding costs are over time. As investors, we should be striving to develop a consistent portfolio performance and knowing these numbers can help us make a decision on whether a particular management company is going to help us get there. It also allows you to have an independent metric that applies to a company more than it applies to a market, so it is therefore helpful in evaluating companies side by side. Unfortunately, many companies make a lot of statements in their marketing that may not be true. This is a great way to determine length of stay and then compare back to the answer you get when you ask that question. This comparison should also quickly address whether or not you can trust that company to know what they are talking about and give it to you straight!
Do You Charge A Maintenance Fee? If So, How Many Dollars Do You Collect Each Month?
Let me say right up front that I think this is a vital charge for successful management companies, provided that they have the proper structure inside their company. There should be a dedicated person or persons whose only responsibility is operating an on-going maintenance department. From answering tenants calls, to determining which calls require immediate attention and even which calls are the responsibilities of the tenant. But the job description does not stop there. This department should be following up with contractors to make sure the work is done properly and then with the tenant to make sure they are satisfied. IF that is the way a maintenance department is set up, and I realize that is a big IF, then a nominal maintenance charge is certainly warranted.
This number is important to investors because it gives a quick indication of how much deferred maintenance occurs each month and what percentage of a portfolio requires work. Again, is it very unscientific, but provides a fairly accurate picture of the business climate in a company. I will use the same 200 home management company above to illustrate this metric along with two more numbers. The first is average rent of $1,000 and a maintenance fee of 15% of the bill. If a company collects $10,000 in fees in a given month then they are billing clients for $77,000 a month in maintenance. On 200 properties at an average of $1,000 per property that is a whopping 33% a month in maintenance costs for investors!
If you didn’t follow the math on that calculation, here it is – $67,000 in maintenance and $10,000 in fees (which is 15% of $67,000). A number like this would not only be astronomically high, it would point to a company that absolutely generates maintenance fees as a revenue provider. A company that is able to keep maintenance costs at below 10% of collected rents, as opposed to the 33% in this article, is a company that is working hard to help investors make money on their portfolios.
As an investor, you get this number by knowing how many properties a company manages, what their average rent is and the fact that they have a maintenance fee on each bill. All you have to ask is how much do they collect on that fee monthly. If they do not track that number, then they cannot tell you how to properly predict what your future maintenance costs will be. Even worse to me is the fact that they are not able to tell you how they are working to hold down your future costs!
Are Rents Rising or Falling
A lot of property managers who have approached us for mentoring from around the country have said very similar things when we ask them this question. They all say that they “feel’ like rents are going up or they “think” that rents are holding steady. This is not a number that management companies need to rely on “feelings” and conjecture when giving an answer.
Investors should also be very wary of a company that cannot give concrete data that show rent trends for their particular company. Again, it does not matter what Zillow or any other online aggregating company says is happening with rents in a city or even zip code. What matters to investors and what a management company should be measuring is what is going on in that particular management company’s portfolio.
Two numbers that are easy to track and give you an idea of not only where rents are going in a zip code, but also an exact neighborhood are rent trends on existing properties and rent trends for new properties in a portfolio in a zip code. A management company should be able to tell you how many properties they rented each month. On those properties, they need to know how many were first time rentals and how many were re-rents on existing properties within the portfolio. Next, how many of those re-rents were above, equal to or below the previous rent? In what zip codes were each of those properties going up, even or down located? How do those numbers coincide with the number of new properties rented in those zip codes? Were the new properties rented above, even or below the rental average for that zip code?
This is the data that an investor needs to determine if a management company is working to improve rental rates or simply taking the first and often lowest rental offer to fill a property. It also alerts an investor to a critical piece of data about areas to invest in. If rents are trending upwards both for new properties coming on the market and existing properties in a particular area, then an investor has a critical piece of data for where to buy.
Measuring Move-Outs & Resigns
How many properties go vacant in a given month within a management company. This is different, but ties directly into the number of properties a management company rents each month and average length of stay. There are two key metrics for a management company to track and an investor to understand in these numbers.
The first metric is how many properties go vacant in a month and you want a management company to be able to break those down into how many fulfilled a lease and how many broke a lease early. I should not have to explain how important those two numbers are and how an investor should be looking for low percentages when compared to a portfolio out of each of these metrics. It is a great measurement of a company’s ability to be responsive to tenants needs and their ability to keep tenants happy.
The other metric is how many properties were re-signed into a lease extension during a given month. I believe strongly that this is a direct reflection of a management companies’ ability to communicate and connect with tenants, which in effect, is the second client in a management scenario. The first is the investor and in order to perform for the investor you need to recognize and work to satisfy the second client. A tenants’ willingness to re-sign a new lease, is a great indication of a management company that is operating the right way.
The amazing thing about metrics is that two similar companies can have completely different performances in a market and every management company should be driving to improve and separate from every other competitor. As an investor, this data is critical to your decision-making –not only decision making about using a management company or not, but which markets, which areas of particular markets and even which management company is going to help you achieve a maximum return on your investment. There will always be those who tell you to never use a management company and they may well have a horror story to tell you. Most will not admit to their mistakes, but if they did, they would tell you that they paid no attention to these key metrics to see if a management company had any idea of how to help them be successful.
If you choose to use a management company, be sure to push past the hype and the marketing and dig into the company. Get the details and ask the questions that will reveal how well the company is run. If you are a management company, turn the mirror inward and take a look at how you are operating. Begin measuring and tracking things you’ve never thought of before and always prepare to get better.
We improve what we measure!