By Don R. Campbell
Much like the dysfunction that has developed in the relationship between tenants and the average landlord, the relationship between owners and property managers (PM) is so often fraught with disappointment, unspoken expectations, and confrontation. That creates a situation where it is impossible for either party to win. Or is it?
I am here to tell you that allowing that old pattern of thinking is costing you thousands of dollars a year and it is up to you, the property owner, to take a leadership role and change it immediately. It’s time once again to change the paradigm.
Once you understand that owning a piece of real estate is the equivalent of owning a small business you quickly discover how many energy and cash leaks occur in the old way of thinking. For instance, bad general management, poor capital employment choices, and poor time leverage strategies all get hidden in the average real estate portfolio.
These leaks occur in all real estate portfolios but because real estate is so inherently profitable, the leaks often go unnoticed until it is too late or they become too large. The strategic investor understands that even if they aren’t personally managing their properties, they are still responsible for the overall management and thus overall profitability of the portfolio.
The King Can’t Abdicate But Should Definitely Delegate
As you acquire an increasing number of properties for your portfolio, you will quickly realize that it is financially worth your while to find a professional to take care of the day-to-day management of the properties, thus allowing you to focus on what you do best for your business. In most cases that will be finding properties, writing offers, finding JV capital partners, and working with banks, all of which put more money in your pocket than collecting rent, painting units, and dealing with noise complaints.
For beginning investors it is hard to give up the apparent cash flow by paying a property manager approximately 10% of your rent. In some tight markets it can be the difference between a positive cash flow property and a break-even. And, if you don’t initially understand the importance of quality property management, it makes paying the fee even more frustrating, especially during those months where it seems they aren’t doing anything. However, once you realize that they are just one cog in your business and your job is to maximize the profitability of the overall business by working on the most profitable areas, you will quickly understand when I say “Many Investors Step Over Dollars to Get to Dimes.”
Even when you find a quality property management company to work with, you as the property owner are still ultimately responsible for the results they create for your business. In other words, you must manage the managers; you can’t just abdicate all responsibility.
Help your Property Manager Help you Succeed with your Business
The most important thing you can do for your business and your relationship with your property manager is to state your expectations and get clear on what theirs are. This is in addition to a professional property management agreement. By clearly outlining everyone’s responsibilities, what type of, and how frequently, you expect communication, in what situations you would like them to use their discretion, and when you expect a phone call, you will begin the relationship with a clean slate. In other words, there will be no unstated expectations waiting to explode at the first bump in the road.
Profitability Comes from Clear Communications
Make your communications with your property manager clear at all times. In your emails number your questions so that they are easily identified and responded to. Keep all correspondence with your property manager in its own email folder for future reference. Give your property manager some time to respond to your requests for information or action. If you phone and email multiple times a day you take them away from time that could be spent getting things completed. Don’t be a pest but do hold everyone to the same standard as you would be comfortable with in your own business.
Be friendly in your dealings. In the beginning, give people the benefit of the doubt and remember that the property manager is a part of your team. You chose them after doing reference checks and an interview. You are on the same side with the same goal of filled rental units with undemanding tenants or at least that is in the ideal in a perfect world.
You will want to watch out for recurring patterns in their actions, especially if those patterns consistently cost you time or energy. Don’t let a small problem or a pattern of negative behaviour grow into a situation of deep frustration. Discuss it early on and continue to discuss it until it is resolved. Waiting for it to fix itself is a fool’s game.
Be sure to give positive feedback as well as constructive criticism. The way people get better is through feedback. If you help your PM get better, the ultimate beneficiary will be you. Every time you run into a situation where you feel something went wrong, ask yourself “Could I have had something in my lease or property management agreement to have prevented this from happening?” If the answer is “Yes”, make a revision in your dealings.
You Are In Control!
The property portfolio is your business - you set the standards, you set the policies, you set the rents (in discussion with your PM), and you review the advertising. That is your job. The property managers job is to do their absolute best to manage your ‘business’ in the manner in which you wish it to be and to treat your money as well, if not better, than they would if it was their own. It is up to you to set the standards and ensure they are adhering by them. If they aren’t willing to, then it may be time to look for one that will.Know the Winning Formula
Buy good property in good areas. That will make your life and the life of your property management team much simpler and overall more profitable. However, if you decide to buy in a transition area with the ultimate goal of higher than average appreciation, then you also have to expect higher than average vacancy and management costs that may be associated with an often more transient tenant profile. Your trade-off in equity appreciation may be partially mitigated by an increase in overall operations and vacancy costs, not to mention the increased stresses these bring. Just be aware of differences and be clear with your property management company of your expectations and understanding of the reality of the situation.Understanding the Economics of Your Market
As the owner, it is your responsibility to stay on top of the ever changing economic dynamics of your target market. A rental market is always in flux and yes, it is one of the property manager’s responsibilities to actively manage how the property adjusts to market conditions. It is also still very much your responsibility to provide direction and leadership.
A market’s economic conditions and prevailing vacancy rates are only statistics and neither you nor the property managers should use them as an excuse for poor management. Instead, use the market conditions to adjust your approaches, enhance your advertising, or increase your rents. You must find ways to attract customers to your business in great times and in slow times. There is never a point where you can just abdicate responsibility to market conditions. Actively managing is the only way to truly make it perform optimally.
You Win When They Win
Your choice of Property Management companies is critical to your bottom line success, not particularly because of their management but because it frees your time up to focus on more profitable actions. If you are working on your business, not IN your business, you will bring stronger and more sustainable profitability to the financial legacy that your portfolio will provide you.
You may opt to go with the lowest price for a property manager, which in many cases ends up costing you more in the long run. But no matter whom you choose, start the relationship with clarity of expectations then keep a keen eye on the operations helping them to win so you win.
Don R. Campbell began his investing career in 1985 with a house purchased in Mission, BC. He is Founding Partner and Senior Analyst at The Real Estate Investment Network and currently owns nearly 200 doors in BC and Alberta. A seven-time best-selling author, Don’s expertise and passion for teaching Canadians how to create wealth through real estate are far-reaching and have made an impact on the lives of thousands.