How to scale the landlording business

Question

I originally was going to send this as an email to a couple of investors I know that may be encountering the same issues or have already overcome them, but I realized I would be missing out on some potentially great advice from the BP network so I decided to post here also.

I've been thinking about this for a while, mostly for a way to free up more of my time. Since both my wife and I still work full time jobs, it would be nice to have someone handle the day to day operations of the business. Additionally:

- If we ever want to go on a vacation, somewhere without phone & internet is not an option, and even with those things it is still tough.

- Donald Trump, or any other big time investor, doesn't answer phone calls from tenants and coordinate with vendors. If you want to get that big you have to find a way to remove yourself as the bottleneck and have systems in place so that things run without you in the picture.

The things that I find bogging us down, preventing us from doing the important things like finding money and deals, and that I plan to hire out are:

-Day to day phone calls about Maintenance, Rent payments, Lease questions

-Listing and showing properties

-Drafting & signing leases

-Generating and mailing/delivering 7 day notices

-Entering bookkeeping into Buildium

-Water billing

-Occasional Bank Deposits

-Occasional other errands like dropping off checks or materials to contractors

I think the first one will be the toughest, as I never know what will be on the other end of the phone line and many questions I get require discretion and careful handling. The rest should be pretty easy to document procedures and train.

Next comes the issue of implementation. We are managing 50 units currently and growing a few a year, which I hope to increase. I don't feel that the above listed duties require a full time person, or justify full time pay. Unfortunately the business hours require availability much beyond 40 hours per week, most of that is sporadic.

As for location, even if we had an actual office, I can't see having someone sit behind a desk all day waiting for a couple phone calls to come in. Also, we need someone to be responsible for answering phones from 8am-8pm 7 days a week (this can be done from almost anywhere).

This is what I have come up with:

We will hire someone to be responsible for the above duties. Allow them to work from wherever they like as they go about their day, just try to answer most of the phone calls and promptly return messages for the occasional missed call. Showings, lease signings and errands will be able to be scheduled around their own schedule at their discretion. Bookkeeping can be done weekly, possibly from our home office? (Still trying to figure out if that is reasonable/professional enough) basically this person will be able to set their own schedule for almost everything as long as they have a reasonable amount of availability. We plan to pay $1,000 per month (about 3% of gross rent) to start. I realize that doesn't sound like much, but there is probably less than 10 hours per week of work on a busy week.

What are your thoughts? I would appreciate any honest feedback.

Thank you,

-Josh

Ron Thomas · Answer

@Josh Sterling

My initial thoughts reading your post were in line with what you and I have discussed a few times before.  Scale seems to be the biggest hurdle, but as you basically said above, you are more or less there.  At least enough so to justify a part time person.

I like the list, seems to be the exact things I would need as well.  Though with only 11 units, these aren't task that trouble me and Sam too much.

Have you considered pairing with a couple other local investors, then, as a group, finding a qualified person to handle all of the collective properties?  Each investor could pay a part that represents their portion of the total properties handled.  It would be a better deal for the sub-contractor (person you hire) and cheaper for each investor.  I actually have a person or two in mind that may work well in this kind of position, a stay at home mom like @Brandon Turner suggested.  I'm not sure if the person in mind would want the job, but she seems like a prime candidate.

In my normal business, had I never stepped out of my own way and trusted other people to be competent, which they were because I paid them fairly, I would be a bottleneck to this day.  Sure, I've had to fire a couple people and there have been a couple hurdles along the way, but none of it was too big a deal.  I'd be much worse off if I would have continued to micro manage.  I think, what exactly this person gets paid, and if they screw up a call or two every now and then, are the smaller picture issues that aren't even worth your worry to be honest.  I think there is an opportunity cost situation here, that may be hard to quantify, but is very real.  For example, if, tomorrow you spend the day showing a unit, posting a unit, painting something.... whatever, you may save yourself the cost of paying someone to do that.  But, lets say, rather than that you paid someone else to do those tasks and instead you spent the day looking at deals and found your next apartment building.  How much would what you do tomorrow, in this example, have made you in a year?  Lets say you still own the building in this example 20 years from now.  How much by then?  Ray Crock didn't flip burgers and Donald Trump doesn't plunge toilets.  I have tons to learn about real estate, which is why BS-ing with you is fun because you know a lot I don't.  But one thing I found to be very true is that time is a finite resource.  Maybe the only finite resource.  When you spend your time doing things that are drastically beneath your pay scale, you are doing yourself no favors.  One of my good friends once told me that 'money is the physical form of time'.  (he's pretty much broke which is ironic and beside the point, but kinda funny)  I like that metaphor.  If someone is willing to sell you their time for $500 or $1000 a month, I think you should jump on it sooner rather than later.  Whats 10 or 20 more hours per week of your time worth to you?  If they work 20 hours per week for you for $1000 per month, you are essentially paying $12.50 per hour to buy your own time back.  Sounds like a great investment to me.

Joel Owens · Answer

So you have 50 units.

What is the mix of these units?? Houses, to quads, to apartment buildings ( 5 plus)??

What is the tenant base there and average rents?

How far apart are these properties located??

Personally I think 3% of gross is laughable. They could do better working fast food. I think managers work for very little as it is. As mentioned if they come work for you as an employee you have to figure in other costs.

Brandon's situation I discount because it's a family favor and rare to put something like that together. I think investors in their mind talk down how much work is involved to justify the low fee. If it's that easy and nothing to it then WHY not just keep on doing it?? There is a reason and it is a point that detracts from freedom in life to do what you want.

Even if you find someone you still have to " manage the manager ". I wouldn't trust my whole business and what I had built up over the years to a stranger on Craig's list. That just sounds nuts to me.

I don't do leasing at all but if I did I could manage commercial retail centers at 5% of gross with mainly corporate tenants where I don't have to worry about hardly anything and have normal business hours. The rents are also very high per sq ft in one location. Your not going to find a competent licensed professional working for 50 units for 1,000 a month.

For apartment buildings the property managers charge based on if the property is all in one location and the quality of the location, tenant base, unit mix, and size of the rents.

If it's a super nice area with say rents at 1,000 a door typically you have a better tenant base. If it's a rougher area with low income tenants at 400 to 500 a door the collections are more intense, bookkeeping is heavier, more repairs and turnover and work to fill units.

A nice area you could get for 50 units all in one spot about 5% to 6%. A rougher area up to 10% in the shady areas and only certain PM companies that specialize in that kind of thing will take it on.

Another option you can do is sell out tenants, toilets, and termites and move to the commercial space with a 1031 exchange of some or all of your properties. This would reduce workload and change your portfolio holdings to be more hands off and free up time. It all depends on annual cash on cash pre-tax expectations.

For example with a retail strip center you can find a quality asset that throws off 13 to 18% COC annually pre-tax going in. For that type of asset that is great. If you go triple net single freestanding the best you will hit is about 10 if lucky but hit some rent bumps annually of about 2%.

At some point investors want to enjoy the fruits of the labor as they get older. They don't want to increase a management intensive portfolio or do not want to own it. You can owner finance to step away but even then you have to worry about the buyer defaulting down the road and handing your properties back ran into the ground. At that point you take them back and either sell for a loss or spend a couple of years getting them back to their regular glory.

I hope you find someone great that fits your profile. My thought is they couldn't survive off of 1,000 a month so even if you found someone they would be looking for another job immediately that pays more and take yours as a stop gap.

Brandon Turner · Answer

Hey @Josh Sterling

Here's my thoughts:

Yeah, everything you wrote there is exactly what my person does. I was nervous about the answering of phone calls, but I find it actually works out really well. Rather than 10 calls a day from tenants, she takes them all, handles the easy ones, and the 2 or 3 that require special handling we talk about once a day, after she has had time to think about possible solutions. This way, it becomes a 10 minute per day job for me, not more.

The thing with my lady... is she's family. She's my wife's mom. She comes from a customer service background (she worked at a shoe store for years) and is perfect for those tasks.

We pay her $500 per month, plus $100 for each unit she rents out. This way, since the part that takes the most time is the tenant turnover, she is paid extra for that extra work.

Honestly, I think I underpay her. I think $1000 is probably much more in line, because she's probably working at least 20 hours a week (though... a lot of that is just chatting on the phone with my wife about issues/training). BUT there is no reason you couldn't start at $500 and work up from there, giving them a raise if it's more work than anticipated.  After all, like you said, the job allows them to work anywhere, anytime, which is a HUGE perk for some people.

My recommendation would be to put an ad on Craigslist and keep an eye out for stay-at-home-moms (I don't think you can advertise for that, but that's the demographic I would look for. I know being a mom is the busiest job in the world, but timing-wise, it's flexible.)  I know a lot of those who are raising a couple kids at home and struggling financially while their husbands work all day in a regular job. This kind of gig is perfect for them.  And for someone like that - $500 a month would be amazing.

The most important thing is to REALLY screen for the best person upfront. Training is a huge investment, and finding the right person will make all the difference. Put the time/work in upfront.

You'll have to be careful about setting it up as an "independent contractor" agreement, not an employee, if possible so you aren't responsible for taxes, withholding, etc. The free nature of the job makes this easy to justify in my opinion (please consult a CPA though), just be sure your person knows they are a contractor not an employee.

But I think you are onto something. It really is wonderful to have outsourced that part of things ... I wish I would have done it a lot sooner!

My last thought: have you considered just renting out one of your units in exchange for all this work? A "resident manager" so-to-speak? That might be a good way to go also. Thoughts?

Amanda Hensley · Answer

I tend to agree with @Joel Owens on this one.  And please, be very, VERY careful about how you screen / interview your prospective employees as now that you've posted a job position you will want to make sure you're not breaking any employment fairness / discrimination laws.

I think the licensing component aspect is also important - I'm not a CPA, but I don't think this person can be an independent contractor, if they are going to show homes and draft leases.  Unless they're licensed on their own...?

Tread carefully :)

Jonathan K. · Answer

@Josh Sterling

I think what @Ron Thomas suggested might be the most effective way to go, almost analogous to a cooperative:

"Have you considered pairing with a couple other local investors, then, as a group, finding a qualified person to handle all of the collective properties?  Each investor could pay a part that represents their portion of the total properties handled."

Joshua Lawrence · Answer

Hey @Josh Sterling

First off, I really enjoyed listening to Podcast #64 and hearing about your Real Estate Ventures. I listened to it a few months back and appreciated your insights on living below your means, in order to have more money to invest in Real Estate. Since then, I have actually moved to the Detroit area from Valparaiso, IN.

It sounds like your decision on whether to hire someone to assist in your rental business is a good problem to have.

I am working with a company called Beka Management. Let me know if you ever have any property management questions, I would be more than happy to assist. I got started in the business in 2012 when I bought my first rental units.

Take Care,

-Josh Lawrence

Bob E. · Answer

In addition to the stay at home mom crown I would target retires for this kind of position.  We had problems getting certain things done (pool maintenance)  at some of our rentals and hired a friends recently retired father to take over.

He is super reliable and always gets the job done.

Ramon Jenkins · Answer

" Rent payments " :

I am been strong advocate of online collections of rent.

" Occasional Bank Deposits " :

I would suggest turning this responsibility over last.

Hire an individual on temporary assignment.

Every 35 days evaluate is the person trusty worthy,

good for your business, and asset to your team.

Josh Sterling · Answer

@Joel Owens  thank you for the reply.

Our unit mix is currently 26 SFRs and a 24 unit building.

Almost all SFRs are within a small 1.5 mile radius and all properties are within a 10 mile radius of each other.

Rents are about $1,000/door on the SFRs and $600-650/door on the apartments. We have a pretty good tenant base, with occupancy above 99% for the last 3 years on the SFRs (some turnovers were accomplished without I incurring a vacancy). The apartments are about 96% occupancy. Most of our leasing comes from adding new units (averaging 6-10 per year so far). Otherwise we probably have 4-5 turnovers per year. So leasing would typically be 1-2 units per month. Usually we have enough overflow applicants on a single available property that we can roll some to an upcoming available property if we can project it in advance. This saves a lot of time.

Does this change your opinion or give you any additional insight?

Josh Sterling · Answer

I didn't mention in the original post, but we did put an ad up on craigslist last week. We were blown away by the results. We received over 100 resumes and many more phone calls over 2 days. We now have a task on our hands which we did not anticipate to sort through what seem to be a good selection of qualified candidates. We plan to have that completed this week.

I am also working on creating an operations manual for the things we do on a regular basis (water billing, bookkeeping in buildium, drafting leases, posting ads, 7-day notices). A couple candidates have some property management experience, which may be a plus, but we are more interested in someone who is very professional with an excellent customer service mentality.

@Brandon Turner  do you have some type of formal activity log so you can be kept in the loop of what's going on? In the book you recommended 'How to manage residential property for maximum cashflow' He has a sort of summary sheet to cover the days/weeks events. I think it might be helpful to have something that ensures nothing will slip through the cracks, especially in the begining.

@Ron Thomas I appreciate all the points you make. That is a philosophy I'm working to adapt into, and bouncing ideas off of you is a great way to get there. I am trying to approach it like I did with the first rental, just have faith.

@charlene

@Charlene Ball @Chris Martin  I agree, I was under the impression that this person would be an employee, not a sub-contractor. I will verify with the account to make sure. In Michigan someone can engage in the act of leasing real estate without a license as long as the employee is only leasing properties for the owner of those properties.

On a side note, my other plan to scale the business is to start a property management company. I recently obtained my Broker's license for this. We are also purchasing a mixed use building this month which would provide office space if we decided to use it that way. It might take a while to build up a size able business properties to manage for others, but starting with our 50 units should help offset the cost. At this point I realize I would also need a real estate agent for leasing of properties for others, but since I don't have the property management company officially running we are focusing on the part time employee for now.

Thanks again for all your responses.

-Josh

How to scale the landlording business

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