Can someone clear this up?

Question

Good morning, I saw 2 investors going back and forth about airbnb management fees. Both investors put in 25k and splitting all expenses 50/50. One investor said he’ll manage it for a additional 10%. The other investor thinks since it’s a expense it should be taken out of the profits, 5% and 5%, instead of him paying the full 10%.  It’s a little confusing to explain/understand but I do get what he’s saying. What do you think?

Justin Hoggatt · Answer

Yes, I would say that's an expense.  It comes out of the cash flow of the property to pay for the management.  The benefit of investor 1 is that he gets that 10% for management before any profits/distributions are paid out.  If investor 1 is willing to do the management, then think of it as a bit of a savings as well because otherwise he's paying for the management out of the income and he wouldn't ever see that.  I don't have AirBNB but I'm pretty sure management fees are higher than 10%

Brent Coombs · Answer

Oops, did I get my Investors mixed up?  Should I have said "My concern is whether 'Investor ONE' has the experience/personality to take on Managing an AirBNB gig"?

ie.  Is your "proven track record" Investor the same one who has offered to manage this for 10% more of the profit?  (Otherwise, my concern remains).

Nonetheless,  I don't think any PM should be charging 20% of income to manage, even if it is for BNB.  ie.  Half should be less than 10%.  Cheers...

Benjamin Enriquez · Answer

@Brent Coombs investor 2 has a proven track record. Investor 1 won’t enter a deal without investor 2. Investor 2, doesn’t need the other investor to acquire the property.

Brent Coombs · Answer

@Benjamin Enriquez, certainly, "Investor 1" should not agree to pay a full 10% PM (or whatever actual) fee out of their own profit, regardless of who is doing the Managing, but just half, like every other expense.

My concern is whether "Investor 2" has the experience/personality to take on Managing an AirBNB gig.  Anecdotally: Not for the faint hearted, and yes, likely to cost more than 10% for a proper BNB Manager.  Good luck to them...

Nathan Gesner · Answer

It's an expense, just like utilities, furnishings, and maintenance. Split it 50/50 like everything else.

Joe Splitrock · Answer

Determining what is fair is very simple. Get quotes from third party management companies to determine what is fair. If they could find a third party to do it for 5%, then10% isn't fair either way. If every third party is charging 20%, then the 10% is cheap for investor 2, but not fair for investor 1.

The point use a third party to determine what is fair for both parties. Investor 2 may end up paying more in the end, because maybe the 10% is a good deal.

I am not commenting on what is or isn't fair, I am just pointing out how to determine what is.

Tony Kim · Answer

It depends on what the first investor means by doing it "for an additional 10%", but it kinda looks like their disagreement is actually about doing the exact same thing.

In both scenarios, 5% and 5% will be taken from each investor. The only thing is that 10% off the top will be going to the investor who will be managing the property (hence, the doing it for an additional 10% phrase). Doesn't matter if the investor manages in-house or if they outsource.....10% will still be coming off the top for management fees no matter what. Syndicators that are vertically integrated do the exact same thing. They charge their mgmt services directly to the fund before calculating the net distributable earnings.

Anna Laud · Answer

@Benjamin Enriquez

Hi Benjamin!

You bet and yes, I do get that logic to it, which is accurate. In some cases you can have the wrong deal, at the wrong price, in the wrong location, at the wrong time, and it still work out well over time if you've got the right PM/PM Group. Just as in some cases you can have the right deal, at the right price, at the right location, and the right time for a PM or PM group to run it into the ground.

I guess that was my point too in that yes, it's basically costing investor no.2 this 5% more, but it may not cost 5% more overtime in level of PM quality that transpires. If it's truly a situation where investor no.1 would be providing a level of care/attention to the property as they have more invested than an independent/for hire person or group, it still might be worth it.

But yes, see both sides here to what each investor is saying = )

Benjamin Enriquez · Answer

@Anna Laud investor 2 views it as well I have to pay double for you to manage it when we can hire someone else and we’ll both pay 5%. But thanks for your response!

Anna Laud · Answer

@Benjamin Enriquez

Hi Benjamin!

Well it sounds like this is not maybe an ideal JV in terms of finances but I would say (unless I'm missing something) that investor no.1 is correct.

A PM fee is usually around 10% depending on where you're located of course. So the 10% isn't out of the realm of reasonable. Having said that if investor no.2 is paying 5% out of the profits, it's basically investor no.1 doing this at a 5% discount.

As you said in your message here, investor no.2 is willing to pay 10% (in total) and sees this as a reasonable amount, yet only willing to pay 5% to investor no. 1 to do it.

Why would it be of any benefit to investor no.2 to do this for 5% and take on the extra work of the PM role, when he/she could pay out this same 5% out to hire it done without any of the responsibility?

So investor no. 2 will be out 5% no matter what here and the VAST difference between the level of care/diligence of a PM with skin in the game vs someone hired to play the PM role would (in my book) be worth the extra 5% to be paid to investor no.2

Having said all of that, it doesn't make sense for investor no.1 to do this for 5%- they are out 5% no matter what if a PM is hired, so why take on that extra work for free basically?

Unless I'm missing something, it wouldn't make sense to me to proceed as investor no.1 for 5%

Hope that helps!

Can someone clear this up?

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