Which Came First? The Chicken or The Egg?
And what does this have to do with real estate investing you may be asking. There is an old axiom in real estate investing that your success is determined at the closing table. Certainly, there is much truth to that, but it’s only half of it.
Effective property management is THE key contributing factor to long term investment success. Think about it for a second…. You buy a great investment property (on paper) at a great price that should pencil out some pretty nice returns. But over time, due to extended vacancies, poor resident screening, high turnover costs, etc… your returns (if any) are nowhere near where you thought they’d be. This is compounded by the fact that investment properties derive their value primarily from the cash flow they produce, which means you’ll not be able to sell for a premium either.
Hmmm…. So, really, just how good of an investment was it?
Before you ever buy an investment property, you should know who is going to manage that property for you (if you plan to farm out your property management). You should know what they are going to charge you that is both seen, and unseen. For instance, the management fee is an example of a ‘seen’ cost. It’s spelled out right in the property management agreement you sign. What isn’t seen is how much they markup any maintenance their vendors perform (for making a phone call or two) on your property. That alone can amount to 5% or more of your gross income annually.
Direct costs of management (leasing commissions, maintenance markups, and management fees) can easily add up to 15%-20% of your gross when you add them up. That essentially makes your property manager an equity partner in your property without any of the downside risk you have. When you add in indirect costs (extended vacancies, poor resident screening, high turnover costs, etc.) that percentage can soar much higher, and we haven’t even discussed your fixed costs such as taxes and insurance that you must pay.
As you can see it’s very important to approach property management with your eyes open. The point of this article is not to scare you away from using property management, but rather to help educate you on what to look for when choosing one. Indeed, a good property management company (and there are more than a few) is a valuable asset and team member will help drive your long term success.