We are looking at our first out of town property, a 12-unit building about 5 hrs away.
A local RE guy said his company would manage it for the “industry standard” of first month’s rent + 10% from then on. This sounds a bit high to me.
I am trying to come to grips with trusting a management company to take care of the property well. I can think of so very many ways a PM can hose an out of town owner. I spent some time on a landlord’s forum and read horror story after horror story. But, I know there are thousands and thousands of buildings being handled by PM all over the country, so obviously it does work.
How do you make sure the PM will treat the building like you would? This is a smallish town with a very limited supply of PM to chose from.
I would find a local real estate club in the area and speak to the members and who they recommend. I have a good friend who is a property manager for about 400 units with 4 different properties and they charge 10% of the gross income. I would not pay first months rent and 10% there after. Also, beware of the word industry standard. By law there is no standard. It’s just like the 6% brokerage fee, the realtors will state it’s standard, but by law they can not set a commission rate. The standard he is talking about is what he is willing to do it for. I would look around and negotiate from there.
I would find somone locally that has access to the property with easy. I don’t know if I would trust someone so far away to do the kind of job I like to have done. The answer may be to drive a hard bargin with the realtor/broker.
The vast majority of apartment buildings will NOT cash flow (using real world numbers) if you have to use a paid manager and therefore paid maintenance. Also, as Sean said, I certainly would NOT pay 10% plus 1st month’s rent! That only encourages the manager to get lousy tenants for you so that he can keep churning that first month rent! Plus, and this is VERY IMPORTANT, one full month’s rent is how many month’s profit. On a $500 per month rental that was bought VERY CHEAP, your monthly cash flow might be $100 max. If the manager gets $500 to put in a tenant, you just lost more than 6 months cash flow (5 months at $100 per month plus the first months when you got NADA!) OUCH! With the way apartment dwellers are, you might as well just file bankruptcy now and save the hassle!
Hey Mike… Thanks a lot for the advice and after buying and reading your great book this evening…ahem… GREAT book… I really have a better appreciation of why what you said is true. Although, I do believe that there is a breakpoint with a larger apartment complex…and I’m not sure now where the point is, but I think somewhere between 50 and 100 units…where the thing is generating so much gross rents that it can support a professional PM.
I think you all have talked me out of going after an out-of-town building, especially for the first property and without a war chest built up yet.
We live outside of Gettysburg, PA. It’s really a small town and I have combed through all of the currently available deals. There are only two “commercial” properties and 8-10 multi-family (Old) houses that really don’t interest me.
I had set a personal goal to try to have our first property by the end of the year, but that doesn’t mean to jump on something that really doesn’t make sense just to jump.
I’ll keep trolling and keep reading and learning… thanks for everyone’s advice!
You are certainly right about a larger apartment complex being able to support a manager. In fact, many states REQUIRE that any complex in excess of a certain number of units must have an onsite manager. That’s one of those differences between SFH and commerical that Sean eluded to in one of his posts. Obviously, such a manager would not be getting a percentage of the gross, but rather a free rental unit and probably some pay.
I have not gotten to that level yet, although I am currently looking for a larger project. However, I am looking for a project at a big discount. I have a project that I have placed offers on twice, but the owners are just not desperate enough yet. I am confident that we’ll get there, it may just take a little time.