Incentivizing Property Managers

[Joseph S.]

I'm new to BP and am considering doing a 1031 exchange on one of my 2 SFH in order to get a multi-family property (likely a duplex/triplex/quadplex). I currently am an out of state landlord and feel that I have managed my 2 SFHs with some success, but I definitely would want to use a property manager if I did a 1031 exchange for a multi-family property as I would likely be an out of state owner again.

Has anyone gotten a property manager involved in their actual buying process? Here is my thought: Because I work full-time in a corporate job, I'm thinking about getting a property manager involved so that as I look at prospective properties, he/she can use their expertise to advise on the kind of rent/maintenance/repairs they would expect at such properties so that I can make informed offers. Also, I would want them to have some skin in the game, so instead of just paying them a flat fee (say 7 - 10% of gross rent), I would prefer to pay a smaller flat fee, but give them a bonus if the property each year generates a profit above a certain threshold (say give them 30% of profits above a 5% cap rate).

As someone who doesn't know as much (yet), I feel like this kind of partnering makes sense to align my property managers incentives with my own. That way, he is incentivized to find quality people to make necessary repairs and to get the best rates possible, instead of just hiring his buddy who gives him a kickback. I know this may sound distrusting, but I'm a big fan of aligning incentives so that everyone can win.

Has anyone else tried this? Would potential property managers go for it? What do you all think about this approach?

[Dave Foster]

@Joseph S., Pretty smart thinking.  The last real estate downturn caused two huge phenomena of this type.  Turnkey property companies and broker/property managers have both become popular because you can align interests very well with everyone.

The key is a lot of due diligence.  Many of the brokerages have one side of the business as sales and one side as property management.  The two will not necessarily be equal in performance.  So you need to vet both sides.  Turnkey companies are easier to vet since one structure handles all acquisition improvement and management.  @Steven Gesis, can give you a great tutorial how good turnkey's operate.

Pick your areas and start googling.