Time to groom a manager...?

Question

Well, lately we feel a bit like the dog who caught the car...what the heck do we do with it now..?

We amassed 49 units in 3 years while still running my lawn care and web design businesses. It was fun, looking, figuring, spreadsheets, taking mentors to lunch, doing weatherization programs and cutting our utilities in half....now we're getting a little burned out. My wife jumped on board and is doing showings and she's burnt out (6 months of always having 3 vacancies and 3 more upcoming....no break!)

Our intention has always been "freedom" at some point; find and cultivate someone to do both management and maintenance (though we'd do the paperwork, etc.). Has anyone else been through this? Realizing you didn't want to do so much management, but NOT wanting to hand it all over to a mgmt. company at 10%?

I'm guessing for 10% of gross I can probably get someone (a "Guy Friday") to do 70% of the mgmt, quite a bit of the maintenance and some "running around" that might fall outside of those two jobs. We might have a regular painter, but perhaps our "GF" would "touch up" some paint now and then. We have a plumber, but perhaps GF would swap out a sink, or put some valves in, change a toilet now and then, etc.

We've got someone who's interested now. Very proactive, gets things done and is looking to "own" some more..... We want to have good attitudes and be happy with what we're doing but I find myself irritated WAY more often than I'm comfortable with. I do NOT want to hate this business, and I don't think I ever will, but I'm getting to that point where I'm asking, "okay, what's next?"

Thanks for some feedback!

Jon Klaus · Answer

Kenneth, a time comes in every growing, successful business when the highest and best use of the founder changes. It changes from working IN the business to working ON the business. if you handle this transition well, your quality of life will leap forward. And your business can grow like never before because you won't be holding it back anymore. It sounds like Steve L is enjoying this transition. I recommend a classic book on this topic called The E Myth. http://www.amazon.com/The-E-Myth-Revisited-Small-Businesses/dp/0887307280 Congratulations on your success! Now it's time to build a platform for the next stage.

Steve L. · Answer

Kenneth LaVoie for our business we always committed that at 60 units we would hire someone to handle management in-house. Same exact experience you said, always had 2-3 vacancies with 2-3 more coming. That gets old. We puts ads up for an experienced bilingual property manager and actually found 2 candidates that had 10+ years experience and were willing to work for less than the 8% management fee in my area. The guy started in April. My wife loves me a lot more now that my phone doesn't ring 30 times on Saturday morning before I wake up. I am actually excited to pick up the phone knowing it doesn't mean I have to run out to show a house or hear a tenant sob story. Managing the properties myself was always a "defensive" position that protected my bottom line and allowed me to achieve rapid growth with control. It gave me a great idea of what tenants want, how to determine market rents, what tenants get excited about, and what turns them from a property. Over the last 6 months I have been able to focus on buying again. That is a lot more fun and profitable. We have already passed 2011 acquisition level with 2 more months to go.

Steve L. · Answer

We run a fix and flip business too. Our laborers handle the rentals repairs. Our property management man just handles property management. We pay about half the rate you are proposing, but we keep them busy near full-time.

Joel Owens · Answer

Hi Kenneth, For triple net you do not have to wait for a year for build to suit products. There are existing properties where you can get a new loan on them or assume the loan with some equity down. It is all in your goals. Triple net the cap varies from 5% to 10%,rent bumps per year of 1.25% to 3.00%.The money down is substantial. You will need at least a few 100k to get started in triple net or you can also set up a partnership and pool funds to purchase. Your number of units and what rate you can get depends on how far these are spread out.49 units in one or two locations within a mile of each other is different from 49 units spread out in 5 or 10 miles with 15 locations. The time and logistics and economies of scale is ran differently. The person wants 27 a hour so you would need to figure out how that works. If gross rents is say 800 a unit times 49 = 39,200 at 10% = 3,920 3,920 /27 = 145 hours /4 = roughly 36 hours a week. If he bills over 36 hours a week then you come out the same with the 10@ management although you are still ahead in that you have the handyman included with his price. I don't like the word perfectionist and billing per hour in the same sentence. Sounds like this guy can get expensive real quick. Do you need someone full time or just someone occasionally to take the pressure off so you can take a vacation and recharge?? That is the key question. The numbers above is just an example and of course their will be collected rents versus gross etc. With 49 units if it was a decent area and all in one to two locations you could probably get 6 to 7%.If it's spread out more look for 7% to 8% but should be able to do better than 10% unless these are in a war zone requiring constant supervision.

Kenneth LaVoie · Answer

Steve L.@Steve L. Could I be so bold as to ask approx. how much someone like you mention is costing (I read the entry on your website about the process and I'm intrigued) I have a man who is very experienced (managed 98 units, licensed arborist, competent carpenter, plumbing and electric and roofing, intelligent, independent, etc. though he probably is a little perfectionist and might eat up some extra time that way) but he's self employed and billing at (an agreed upon) $27 per hour. this is higher than my main carpenter but he is much cheaper than my roofer, plumbier, etc. so it can even out. I'm just not sure if that rate makes sense if I offload managment duties. Your thoughts?

Steve L. · Answer

I wish we did it sooner. 5 or 10 extra units at some point it becomes nominal. You will really find more profitable things to do when someone is taking those calls.

Kenneth LaVoie · Answer

Thank you @Steve L. You sound like you've been exactly where I am now! One challenge is deciding on the # units. I am feeling a little conservitive angst now and my wife and I decided, for now, to concentrate on selling a couple of less profitable SFH's, then do some early paydown on one mortgage at a time, but .... I think we have to have a certain # of units to make "handing off" less disastrous to our bottom line. The thought of acquiring more right now causes anxiety in my gut, but I'm guessing once the pressure of day to day is off / less, I'll feel the "pull" again! I do have fun managing rehabs, especially where weatherization is concerned.

Kenneth LaVoie · Answer

Jason, My former step father has done what you mentioned. He cites quality of tenant. It scares me though ... with residential, you clean, fix up, re-rent. With commercial, (I am speaking as very green layman) don't you have to sometimes "build to suit" and often wait a year or more for tenant in some economies? I do like the idea though....in any area of life, quality usually produces contentment! And yes, I think I would have a point of negotiation having so many units. It makes us one of the larger landlords in the area and most PM in the area only have 50-100 in their mgmt. portfolio anyway. I'm sure it would be a major "kill" for any of them! I'm running the numbers, coming up with some ideas. We actually have a pretty good group of tenants, but it's the 5-6 PIA's that sour the mix. It's also the time spent showing, answering prospects calls, etc. And the fact that PM is largely troubleshooting, which I detest. "Solving problems" is not something I particularly gravitate toward, though I'm certainly compentent enough. And I think that's something a LL would do well to have in their blood, that "call to a challenge!"

Jason Lipovsky · Answer

Many of my investors have the issues you address. The problem is the type of tenants. Many investors liquidate thier units and move into NNN commercial properties. Corporate rated tenants, long term leases, and the tenants manage the properties. This way you have the freedom to live your life and have the residual income.

Kyle J. · Answer

10% seems like a lot to give up. PM fees vary by region, but around my parts 7-8% is the norm. Could probably even negotiate for a lower rate given the large volume you'd be giving them. But it sounds like you need to do something so you don't get too burned out. Even 10% might be worth it if it allows you to keep your sanity. Good luck.