It's true, Management IS Everything
Tuesday, January 3, 2012 at 11:26AM When I first got into real estate, I naively thought that a property manager is someone who just put people in leases and took maintenance calls and dished them out to the property maintenance men and collects the money that everyone will be dying to pay you. It has been seven years since I really started managing on a large scale and I have gone through so many managers on so many different properties, it has, at times, made me wonder if I made the right decisions. I have, through experience, confirmed to myself that once I find the right managers, I have decided to do what it takes to keep them (within reason of course)
This post is kind of a “Deal of the Day” merged with my topic of finding good managers and what to look for in good managers. Do I really believe management is EVERYTHING? Well, yes and no. If you don’t buy a deal right, it doesn’t matter how good management is, you will still not do well. And if you buy a deal at the right price (as is my example below), bad management can still make you money. It’s a combination of both, but in my experience, getting out of less desirable deals is much easier with good management.
In May of 2007, I purchased a small 12 suiter in Columbus off of Holt Avenue. Not the best area but definitely not the worst. Twelve two bedroom units and there was only one occupied unit. The owner had inherited the property from her mother and had a manger in place (the one occupied unit) who clearly had no idea what was going on. So she had to sell and we were able to buy it for a great deal $194,000, but we had to close in two weeks and with cash. We did our property inspection and everything came out about where we thought it would and we bought the place.
We, at that time, had about 130 units in Columbus so we had a management team there who was handling our bigger properties. We asked them to do us the favor of managing this and I give them credit for doing it even though it was definitely NOT part of their business model, so I can’t really blame them for how it went. It is just too hard for a large management company to efficiently run a small 12 unit building. They filled it up quickly and it did OK. And when I say OK, I mean we eeked out a few % points per year in gains but our real value was in the real estate long term, which goes against my principals of buying real estate for future value. I knew we needed to start making some bigger bucks on the property. It was good, solid, clean and had all 2 bedrooms, which is very big in the real estate world.
Three years later, a good friend of mine in Cleveland decided to move to Columbus because her husband’s company was being relocated. She had some real estate in Cleveland and we had been chatting so I asked her if she would be interested in managing this property. She loved the idea and jumped on it. So I thanked my then management company and told them the burden was off of them and they were actually relieved. My friend took over in September of 2010 and here is how it went…
From Jan 1 2010 thru August 31, 2010, we collected an average of $4120 per month in rent. For 2011, a full 4 months after my friend got her feet wet and got her tenants in there, she collected an average of $4600 per month in rent. That’s over one less vacant or uncollected unit per month by my friend. That’s equal to 8.33% LESS vacancy. She ran a financial occupancy of 84.2% (and this is after evicting a few bad previous tenants), which doesn’t sound great, but the year before, we had run 75.9% financial occupancy. But here is the best part…my expenses have gone down and we have actually had less maintenance issues because with the extra cash, we were able to put more than $15K into the property this year in capital improvements which included new driveway, new gutters, new security cameras, new foyer tile, and brand new wodden back stairwells for all the units. This is huge for the look and feel of the property.
As part of my full disclosure (and remember, these numbers were altered to protect the actual amounts made), in 2010, the property had profit, before debt, of just $6100. In 2011, the profit was over $26,000 (before debt)! The property went from a 3% return in 2010 to over a 10% return in 2011 AND the property is currently getting refinanced at a value of $392,000. I will get all my money back on the investment and then some AND have a great cash flowing property because my interest charges will only be $800 per month. We can EASILY afford that interest charge when we are making $26K in profit per year and growing rents.
So what made my friend so much more successful in managing? Was she more experienced? Absolutely not! She only had a few rentals in Cleveland and the first few months of her running this property for us, I got almost daily phone calls with questions on what to do. Even today, when it comes to a difficult tenant, I sometimes have to make a phone call for her, but it’s ok because she does a great job and she will continue to get better. Right now, we collect $452 per month in rent but we are bumping the rents up to $499 this year because our demand has been strong and we want to get better tenants (better tenants want to and are willing to pay more in rent). So 2012 should be an even better year than 2011.
It was the same property this year as it was last year. Nothing had changed except the manager. I have several other examples of this across our portfolios but just remember, when I talk about turning a property around, it has involved two major factors…rehabilitation of the property from a physical side as well as new managers that understand the process of managing or are willing to learn the process from us.
Reader Comments (2)
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Thanks for the comment and for reading!