Why Should You Even Consider Hiring a Property Manager at All?
We have been Real Estate Owners and Property Managers going on two decades. We have seen market cycles ebb and flow in that time and have seen peaks of prosperity and valleys of burst bubbles plummeting properties to pennies on the dollar. I would never claim to know it all, but we have seen, been through, and experienced a lot.
One afternoon I found myself in the office of a long-time Realtor associate that we have worked with buying and selling several properties from our own private portfolio. The conversation reflected on current real estate market trends, to her new offices, and the value of great property management (one of my favorite topics of discussion). Then I asked her, “Why don’t you ever recommend our property management services to any of your clients buying multi-family properties?”
Her answer surprised me when she exclaimed “Your services are too expensive for my clients.” Really? I was somewhat shocked by her response. I had to think for a moment. I knew the going market rates for like property management. I knew several other managers who were in the same ballpark we were for similar services. I also knew there were managers out there charging a lot less, doing a lot less, that in the long run, cost a lot more by poorly managing the asset.
Then I started to think “Were we really too expensive?”
I began to recollect several of the properties we took under management. Some of these were challenging situations to turn the property around. If we were really too expensive, why would anyone ever have stayed with us for so long? Did we really add value to our clients? That’s what we were supposed to be doing after all. Right? Adding value?
In June of 2014 we were assigned the task of taking over the property management of a 12-unit multi-family unit consisting of 6 one bedroom and 6 two bedroom units. It was decent property with a lot of potential but it also had some warts to be removed.
The property was currently being managed by another management company the owners of the asset were not pleased with. Long drawn out vacancy periods, low rents, and lower caliber residents were spiraling this property to a C-, border line D property. Something needed to be done, and quickly.
Unfortunately, a repositioning of a rental property is like turning an ocean liner around 180 degrees in the opposite direction. The bigger the boat, the wider and slower the turn around. This was going to take some time. But was it going to be worth it?
The owner of this property had previously given us their smaller property to manage as a test run to see if we could turn that around. We were still in the process of cleaning house from more bad tenants that were currently in the building when we took over the management of the new asset.
Even though we had not finished that project for their smaller property, they liked our performance and offered us their flagship property to manage. The strange part of all of this is that they had hired two different property manager for the two separate properties. We never did figure out why they did that, nor did we ask. We accepted the 12-unit into our rental portfolio and started to analyze the situation. We performed door to door inspections, interviewed the residents, and found out what the glaring issues were at the property.
The number one complaint was not enough hot water to supply the load demand of the building. Other complaints ranged from noisy neighbors, drug use, parking issues, and late or no pays for rent when due. It was a bit of a mess.
The other glaring issue we confronted at the building were rents that were far below the average market value for this area. Rents had been on a steady rise, but the previous management had not capitalized on the trend. We also later found out that it had taken several months to fully occupy the property leaving an unrecoverable trail of more than six months of vacancies.
Recap of Value-Add Opportunities
- Existing Rents below fair market value
- Insufficient Supply of Hot Water To Meet Demand
- Deferred Maintenance Issues
- Resident Complaint Issues Non-Compliant with Leases
- Illegal Drug Activity
- Parking Issues
- Significant Fiscal Loss To Lease
The Present Value
In larger to mid-sized multi-unit properties, unlike single family homes, the value of the property is based on cap rates. Cap Rates are determined from sales comps of like properties in the same market. You can determine the cap rate by dividing the net operating income by the value of the property, and this will give you your cap rate for the market.
The first factor of the equation is to determine the value based upon comps. That part is easy, just look at the prices of what recently sold. This is the Value.
The Net Operating Income or NOI is also pretty easy to calculate. The NOI is what is left when you subtract all of the expenses form all of the income, but before the debt payment. For a general rule of thumb, a multi-family property’s expenses typically run about 40% to 50% of the gross rents. If your expenses or your income are out of sync, then that reveals a problem in the operations, or a potential reduction in the value.
Value of property based upon existing rent
- Six 1BR units rented at $645 each = $3,870/month
- Six 2BR units rented at $745 each = $4,470/month
- Total Monthly Income = $8,340
- Total Annual Income = $100,080
- Total Estimated Annual Expenses (45%) = $45,036
- Estimated Annual NOI = $55,044
- Based on a 10 Cap Rate the property is valued at $550,440
- The actual purchase price of the property was $564,000
- The property was currently underperforming based on the purchase price by -$13,560
This was a problem. The property was losing money every month under poor management and underperforming by over 10%. Losing $13,560 was a painful enough but the six months of vacancies was an added harsh reality to face. But only after confronting the problem and understanding it, can you create possible solutions.
The first item on our list was to make resident introductions to get acquainted with the property to be made aware of any deferred maintenance issues. We sent out notices and went door to door to evaluate the situation in each unit in the building. We also took this opportunity to conduct one-on-one interviews with each of the tenants to assess the climate of the existing residents population. This process gave us a better idea of which tenants would be leaving and which residents we would be willing to work with if they stayed in compliance with our house policies.
There were some usual maintenance issues that needed to be addressed which were handled by maintenance staff and independent contractors. We bid out projects to address several of the drainage issues on the right side of the property. We then procured several bids to remedy the hot water issue which was a prevailing theme from door to door in our inspections.
The first and priority issue to be resolved was the hot water. The current occupant load for hot water needed to accommodate 48 people. The building is structured as such. There are six units on the left of the building with three one bedroom units on the three front floors, and three two bedroom units in the rear three floors. The same is on the left hand side of the property. Three floors, with six units consisting of three one bedroom units in the three front floors and three two bedroom units in the three rear floors. It is a pretty big building.
The building split down the middle needed to service 18 people on each side of the property. Our report revealed that each side of the property was currently being serviced by only a 40 gallon gas hot water tank. The occupant load for a 40 gallon tank would be sufficient for a family of four, but definitely not for 18 people.
Whereas the tank per side was servicing all units above run in series, it was cost prohibitive to actually re-plumb the building and undertake a massive project splitting the hot water lines to each separate kitchen and bathroom. We quickly determined the logical solution was to replace each of the 40 gallon tanks with the biggest ones we could find. We opted to install two separate 120 gallon hot water heaters and also install a separate hot water heater dedicated to the coin operated laundry machines. Hot water problem solved.
In a property this size, fully occupied, it took several months to get into each unit and work around the residents to make the needed repairs. But one by one, door after door, we completed the task.
Next target were the no pay, slow pay and drug dealers. One by one we cleared out units one after another. We also took the opportunity to revive several original hardwood floors, and update the paint in each turn over unit. These were micro repositioning projects in each unit where we focused on minor rehabs. The biggest bang for the bucks was refinishing the hardwoods. This is where we spent the most money, but gave us the highest return.
Finally, we cleaned house of all other unwanted residents and screened a new wave of residents that were able to pay on time, care for the property, and reduce a lot of the drama we had been experiencing since we took over the project. Now that we had turn the ship around it was time to run full steam ahead with new self-renewing leases with built in 2% rent increases years after year with plenty of resigning incentive packages for our new crop of residents.
The Repositioned Value for 2019
Let’s revisit our Cap Rate conversation from the earlier. If Value (V) is a function of Net Operating Income (I) divided by the Cap Rate (R), then if we increased the NOI, we have increased the value of the property where the Cap Rate stays the same for comparison.
Net Operating Income (I) / Cap Rate (R) = Value (V), or I/R=V
Value of property based upon existing rent
- 2019 Total Annual Income = $112,563
- 2019 Total Annual Expenses = $22,300
- 2019 Total Annual NOI = $90,280
- Based the same 10 Cap Rate the property is valued at $902,800
- The actual purchase price of the property was $564,000
- The property has increased performance value $338,800
- The property is stabilized with written leases for a 2% increase every year of $2,251.26
- The property will increase in value every year based upon rents an amount of $22,513
- In 2024 the property will be worth an estimated $1,015,363
|Belaire Management |
2019 Actual Numbers
|Property Performance |
|Annual Income||$100,080||$112,563||+ $12,483|
|Annual Expenses||$45,036||$22,300||– $22,736|
|Annual NOI||$55,044||$90,280||+ $35,236|
|Property Value||$550,440||$902,800||+ $352,360|
The Value of Professional Property Management
A good property manager can see hidden opportunities in the functions and operations of your property most landlords are unfamiliar with at a glance. With a sound business plan they can implement proven policies and strategies that increase the performance of your property adding to your bottom line, thus creating added value for our clients.
What’s on Your Mind?
Do you have any other ideas on this topic you could share to help our online community?
Please chime in to share a comment or review. All feedback is welcomed!
Belaire Property Management
Regional Property Manager
(978) 448-0669 office
Belaire Property Management is now on
Facebook, Twitter, LinkedIn, YouTube, and Thumbtack