Design your OWN Property Management Compensation Package

[Bill C.]

Hello BP,

I’m starting out with a new property manager who I know well. We’re trying to design a fair compensation package that aligns his interests with ours and makes it sustainable for him in the long run to continue to manage a growing portfolio.

Does anyone have any suggestions regarding the best way to design such a package?

PS: can include pay as well as equity in future deals etc....

[JD Martin]

Originally posted by @Bill C.:

@JD Martin

Yes, I plan on monitoring his activities for at least the first year and this shouldn't be hard since I do not have many units at this point.

I like your ideas about strategies to weed out short term tenants, that is definitely my goal, thank you!

What do you think of having a tiered system for property manager compensation ( I saw this recently at a large MF building in OK) where the PM makes 85% of potential for 93% occupancy, 92% for 95%, and 100% for 100% occupancy? The numbers may not be the same but that's the general idea.

The other idea I had was having the monthly fee be lower in terms of % of rent, but then giving them a slice of the cashflow of the place... this way it's almost like they are a partner in the business and have lots of skin in the game

Thanks!

There are a lot of studies out there on this, or you can read Dan Ariely's "Predictably Irrational", but bottom line is that vastly more people are motivated by loss than by gain. In other words, more people will be motivated by the prospect of losing a dollar they already have than will be to gain a dollar they don't yet have but have equal odds of achieving. Interesting studies where people who were given a free coffee mug valued that mug at far more than they were willing to pay for an identical mug. 

So I would keep that in mind as you develop some kind of incentive program. 100% occupancy sounds spectacular but not if all the tenants are bums who are destroying your property. So perhaps you structure your payments at an amazing rate such as if they have already achieved 100% occupancy with quality tenants (i.e. 700+ credit scores, or 4X income levels, or 90% without pets, or other such criteria you deem highly valuable) and require cost-sharing for anything that falls below that standard - the "penalty" I was describing above. 

People will work harder to keep what they already have than they will to get what they don't.