5. To Manage or Not to Manage Your Properties Once you acquire properties, the most important factor in their success may be how they are managed. If you don’t believe that, ask Perrin. “The damage that a poor management can do to a property is unbelievable,” Perrin says. “You can lose ground on rents, lose residents, and have increased turnover.”
If you or someone on your team has property management experience, you theoretically should be able to run your properties efficiently. If not, consider hiring outside expertise. “If you are going to do it in-house, you need to be highly capable of doing it in-house,” Perrin says. “You need to be managing it at a high level or outmanaging your competitors.”
But everyone makes different choices. Millennium’s Greene built his portfolio by showing and painting apartments, patching floors, and returning security deposits himself. Now he’s ready to turn those responsibilities over to someone else.
In contrast, Allen, who is just starting out again, plans to sub out his daily property management functions until he achieves a certain mass. “The management business is a fairly low-margin business,” says Allen, who recommends owners build their portfolios to about 3,000 units before they begin managing the properties themselves. “You have to be able to spread out the overhead required to have a professional management organization that covers a lot of units.”
That overhead includes more than the salaries of managers and maintenance workers. Pricey management reporting and processing hardware and software costs also must be spread over a number of units to be a worthwhile investment. “It’s expensive to get up and operational with all of the accounting and reporting stuff that’s needed today,” Allen says.
Finding high-quality employees to manage a small portfolio and help grow the business also can be difficult until you own a number of properties. Many top-notch employees would look at a three-property portfolio, for instance, and wonder what would happen to them if those properties were sold. It’s much easier to attract good employees when you own a mass of properties, so that potential staffers know that a sale of one apartment complex here or there won’t affect their job security. The magic number at which Allen would start recruiting property management staff? Fifteen, he says.
Getting to this point allows you not only to attract employees but also to own a number of properties, which is what portfolio building is all about. Then you can move to the next stage: capitalizing on management and buying efficiencies and using your financial and broker contacts to evolve even more.
