REAL ESTATE INVESTING
Manage the Manager
By Mark Hulsey, Managing Broker
Real estate investors measure their success based on return on investment, ROI. Seasoned investors know what gleans the greatest ROI of all – experience. Once we cut our teeth in this business, our efficiency in managing our portfolio for a better return becomes easier with each passing year.
To be a successful real estate investor you need to be a property management professional. Now, I know what you’re saying, “but Mark, I don’t need to be a property management pro, I’ll just hire one. Then, I’m off the hook.”
Nope. If it were only that easy, right?
I’m going to cut to the chase. Here’s the takeaway: YOU MUST MANAGE THE MANAGER!
For instance, for a beginner investor in multifamily, they should be a hands-on property manager for the first 10 units they own. Once they learn the basics and have quality properties with quality tenants, most individuals can handle managing their first 10 units. I’m not suggesting they need to do it forever. However, if they’ve never done it, then I highly recommend being hands-on right out of the gate.
Why? Two reasons. First, the experience of doing it yourself is absolutely invaluable. What you’ll learn from doing, instead of hearing about it, will have a big impact on your long-term success and sustainability. Second, if you do not have any first-hand knowledge of property management and hire a manager or company, how in the world will you know how to manage the manager?
Like all industries & professions, there are really good property managers and not-so-good ones. An excellent property manager or company has established people, systems, and tools that make their business hyper-efficient and reporting to their clients best-in-class. It’s the reporting to the clients piece that is extremely important. After all, if you’re not the owner of the property, it’s usually no skin off your back to overpay for a plumber to fix the leaking toilet in Unit 4 for the fifth time in six weeks!
Let me be clear here. If you’re thinking, I don’t need to manage the manager because they are so good, been doing it forever, and I’m too busy with my life, work and family, you could be headed down the wrong path. The results of your investment portfolio performance could suffer greatly. In fact, there could disastrous ramifications by letting someone run with your properties while you give them unwarranted control and authority.
When you manage your own properties, you learn about all of these issues by being on the front lines. It’s the best place to be. By the way, lenders also appreciate investors that understand property management, run tight books, are fully compliant, and factor reserves for repairs and maintenance.
If you don’t understand the difference between a toilet that needs a repair versus replacement, and only follow the direction of a property manager since you don’t know the right questions to ask, you are at a major disadvantage. The same holds true with tenancy, city inspections, or large capital improvements. Plus, once you’ve managed your own properties, not only will you be in a position to manage the manager, but you will be able to truly appreciate their work and challenges.
Owner-managers learn resourcefulness quickly. We must or we’ll go bust. Keeping a piece of real estate in good working order, fully compliant, and with happy tenants takes money. Trying to be a cheap Landlord can be the kiss of death. That’s why I always question real estate investment gurus telling people they can build a solid real estate portfolio with little or no money.
You might be able to buy real estate with very little money, but that does not mean you can operate it effectively with little to no cash in your pocket. I know this first-hand having bought dozens of properties back in the day with very little out of pocket. Nothing wrong with that in theory, as long as after you buy it, you’re prepared to reach deeply in your pocket to fix the roof, replace the broken sewer line, or evict the non-paying tenant after months of stress. There are countless little expenses most of us can swing pretty easily. It’s the unexpected big ones that can kill us.
One of my least favorite aspects of being a real estate investor is being a property manager. But, that’s just me. Some investors thrive on it and I did too in my first five years or so of hands-on management. Being a property manager is not the most glamorous position out there. Just ask a property manager, they’re usually the first to tell you.
When it comes to real estate investing, I’ve been on all sides of the fence for 30+ years. I’m still a small investor today and previously owned & managed 50 units of residential housing with commercial mixed-use. As a Managing Broker of our commercial investment firm, we represent income-producing assets large and small, simple and complex. We’re fortunate to work with sophisticated investors every day. I love to be able to talk cap rate one minute and how to replace a wax ring on a leaking toilet the next. Experience = ROI.
There’s a cliché in the real estate investment world that goes way back: No one manages a property better than the owner. Yes, there are exceptions to this old adage, but for the professional investor, it nearly always holds true.
We’re selling a multi-tenant retail building right now for an owner who’s a highly successful, veteran investor who works his properties everyday. He could easily afford to have a management company oversee them and take their percentage cut of the rents. In years past, he did too, like most seasoned investors.
Ultimately, he realized taking back full control with in-house management was the best solution for his portfolio. That’s when the investor builds his own management team to effectively handle all duties and responsibilities 24/7 with the right people at the right price and retaining full control of their asset portfolio.
Real estate investing has been and will continue to be one of the best means of building wealth in a lifetime. It can be a pleasure or a pain. Property management is usually the biggest part of the pleasure/pain equation. Back-up your investing knowledge with management experience so you can maximize your return for cash-flow today and wealth building tomorrow by properly managing your real estate portfolio.
Then, if you hire a property manager you will be prepared to manage the manager, really start to grow, and enjoy the journey!
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