Let's thread about Property Management...

[Michael Klinger]

Some thoughts that have been brewing...

Back Story: I went from 0 to 64 apartments about 15 months ago (C class), as I 1031 exchanged from an owner/user office building in Los Angeles to remote control of Multi-Family in Cincinnati. I also now spend more of my time on the the East Coast and remote control a smaller version of my Los Angeles business. But I’ve been remote controlling that for several years. I now also have the three properties in Cincinnati with property management. Due to geography though all in Cincinnati, 2 properties (42 units) are with one management company and the third property (22 Units) with a second.

My Los Angeles business is a cocktail of deeply technical and slightly creative but also with an intensely high level of client service. So my relative perspective on multi-family, is that it is a much “easier” business to understand and lends itself to many operational advantages and predictability that can be systemized better than my other ventures...

Nevertheless, I think constantly about the continued under-performance of my properties as I intended for them to be: buy-and-hold cash-flow investments. So seeking ways to whip these things into shape. I’ve been patient for over a year with the effort of management to have the time to pull it together. Time is up.

I would say that relative to my thoughts and expectations about what “property management’ should be are really far apart from what it is. I really started cracking heads after a 6 month period of getting stable. The first 60 days were very cloudy and I gave them space to do their thing. About 90 days in, I started to unravel numerous lame management practices and then really started persistently telling both companies to pull it together or else. Since then I am nothing more than a pain in the butt to both companies who have both responded to me by effectively telling me that I am welcome to walk away — if that’s what I want. I’ve considered it and interviewed options, but conclude that it would be disruptive and probably just more of the same — just different, with a backslide during the transition. One company has gone from beyond awful to barely adequate, while the other company from awful to adequate but still lame in too many ways.

The short answer on what the issue is that it all relates to finding and retaining good tenants. Sure, some of the expenses were high and that has been addressed, but really a distraction from the real issue which is keeping the units filled with happy paying tenants. Period. This circles back to LAME property management. Period.

End of my back story.


With that here are my observations/food for thought around things related to owning apartments:

1.) Why is so little is discussed about property management specifics on blogs, websites and podcasts that I have voraciously consumed? Whenever I hear information about property management, the answer is quickly brushed off with some kind of non-insight like “you need good property management” rather than actually digging into actionable steps. With my small business background Its clear that me that there ARE steps for owners, even if they fully intend to use third party property management… to at least set a level of expectation on the tone and company culture of their small businesses.

2.) I hear endless pointers on “building relationships” all geared to relationships with brokers, banks, property managers, hard money lenders, potential partners, syndicators etc. Yet, I hear very few conversations about building relationships with our customers the tenants or excelling in customer service. Have we forgotten that these are our clients? These relationships are the one's that generate the rent that create the NOI that justify the CAP rates, that make for a solid deals that create profit and wealth. Is anyone else on this page?

3.) Why is there such a tone “Us-versus-Them” vibe regarding tenants from owners? Are we forgetting that tenants are our clients? Yes, I too have experienced quite a bit of tenant bad behavior, but they are still my customers. I think this is toxic.

4.) Why are more people not self managing? I’m not specifically saying literally personally, but just as I do with my other business ventures, I hire people and then manage them and also pitch in, to run my operations. I am already managing my management companies more than I could have ever imagined would be normal but I don't get the response I would expect from a direct employee. The problem with this is that it is very frustrating because I don’t want to have to fit their mold (because their mold is lame). I want them to fit my mold and adhere to my standards and my company culture. So every operational tweak that I thing is smarter, more efficient and geared towards better customer service is pulling teeth. It’s always a compromise and it’s always less than what I want for the properties or my customers. Which means I’m pretty much mildly-to-moderately frustrated with them all the time. Meanwhile the result is not to my satisfaction and the investments miss their rational potential.

5.) Self Managing Part 2: My gross rent is about $35K a month for the three properties. If I had a store-front pulling $35K a month in gross sales, I can’t think of ANY circumstance where I would hire a separate company to handle the daily operations and staffing of my storefront. Yet with multifamily hiring a company to do this is the go-to approach. Maybe if my storefront was my brand that I franchised to a separate company, then that could explain another company running it. But otherwise there is no example I can think of in any other small business arena where this approach makes sense. Yet that’s what many apartment owners do. Even those with lots of doors.

6.) Self Management Part 3: I think that the “norm” on the handling of the books 180 degrees off. Why do we think it’s okay to be limited to monthly statements and restricted view of our business accounting? I had to do some serious teeth pulling from both of my management companies to have more than just the standard 3 week delayed monthly statement with limited additional detail on request provided with reluctance and not always with success. As the owner of any of my small businesses, I need/want have a top down view and the MOST detail available on the transactions. Meaning, summaries are great, but… I should also be able to see a summary and then drill down as deep as I want to If anything catches my eye. Down to the original line item on an invoice or utility statement or whatever. Since nobody else seems to be catching mistakes on the cellular level, I want to be able to. How did we get here in this sector with this nonsense?

In all fairness to any great property management companies out there, I think my two companies are particularly untalented as basic bookkeeping. I find mistakes ALL THE TIME in their ledgers. Some big. Some small. It drives me bonkers. Partly because if I could dig in myself ,many would be so easy to fix  but I can’t. I have to request these changes and sometime the dumbness of some of the mistakes and stupidity and misunderstandings of non-fixes becoming further mistakes that go in circles. Also it’s a bit infuriating because it’s just not that hard in the scheme of bookkeeping. 60 odd “sales” a month to enter and no more than 30 bills to log, a task split between two companies making a mess out it. Some of which are set up for auto-pay or collect online. If they can’t enter basic rent / bills and pay things without making a mess of it, how are they to actually perform on the real issues.

7.) Self Management Part 4: Where (really) is the real long term accountability in a third party property manager — short of keeping an owner happy enough to keep them as a client? After all, if we are honest with one another, the best interest of the owner, and the best interest of the property owner aren’t really aligned. The owner benefits from highest rents and lowest expenses and the least turnover. The property manager benefits from monthly management fee percentage of rents and the least amount of hassles that the tenants and owner demand. But they can also benefit from turnover in the form of leasing commissions and from some profiting in the maintenance and make-ready work on apartments being re-leased. They lose a little from a vacant unit, but if I have a $700 unit go vacant for 2 months, there is far more for me to lose ($1400) than their $90. It makes me think that there should be a certain amount of compensation (or all of it) that is profit based, rather than gross rents based. Why is this not common?

8.) The limit of the “model” as a business: Clearly the model is different than a lot of business. It’s kinda like school where you start with an “A” of 100 and then get marked down to your final grade through the semester to your final grade. On any given month, aside from major investments to raise it’s place in the market, an apartment building has a effective maximum ceiling rent that is realistic at that given time. From that you get marked down from your 100 percent by expenses, vacancy, delinquents, evictions, catastrophes, etc. Before you know it you have a "C" average. You can’t make up for it with extra credit, such as longer business hours, or taking on extra projects you might otherwise turn down, you can’t have a blowout sale. You can’t work extra hours. You can’t really expand in any measurable way by pairing your service with companion services. And so on. So month in and month out, you can only do what you can to get as close to that ceiling as possible. Raising the laundry machine's price doesn't move the meter. 

Thanks for listening. I welcome a thread.