Are my calculations wrong?

Question

My fellow landlord invited me to help him with his units in Chicago as he has more than 100 units and managing them became a full-time job for him. It is not something the Landlord expected to be busy with.

I am exploring how to make this process more efficient. I have an idea to get some help from property managers. After several meetings with potential property managers, I am a bit discouraged to learn of the reality and make some financial calculations.

• I  have got an idea of the general expenses of a landlord for PM`s help:

• 1 full month rent cost when PM to lease it

• 3-5 weeks to rent a property (1 month's rent lost on vacation)
• 
• 10% of the monthly rent to "manage" it... essentially collect the rent

By these calculations, this means that 3 months have to go by before the property owner ever sees any of the rent.

So let's do the math for a 1-year breakdown on an imaginary property that rents for $1000/m and would bring in $400/month in cash flow before property management.

Costs:

$1000 (no rent while vacant)$1000 (cost to lease)$1200 (10% management fee for 12 months)

$3200

+ $4,800 (Annual Cash Flow Before PM )

- $    1000 (Lost Rent during Vacantcy)

- $2200 (Paid to Property Manager)

$1,200 (Actual Annual Cash Flow for Landlord)

... and this is true if the Property Manager

never does anything except collect the rent!Is this really the reality...

that way a Property Management Company makes more than the property owner?

Drew Sygit · Answer

First, a PMC has no ownership in a property, so once you factor in appreciation and equity, owners should make far more than a PMC.

2nd, every owner thinks that PMC's charge too much, yet they expect excellent service! They only look at their back of the napkin calculations of what they pay a PMC, assuming it's 100% profit, because they NEVER consider what expenses a PMC has.

Since you like to crunch numbers, why don't you calculate how much it would cost for YOU to hire people to do the following:

• Inspect a property to make sure it's ready to market
• Take marketing pics
• Publish and refresh for rent ads
• Take all the phone calls from ads
• Schedule showings
• Chase applications, process & screen
• Get deposits and sign leases
• Collect rents, chase delinquencies & evictions
• Handle maintenance requests, which are never handled fast enough for tenants, or cheap enough for owners
• Chase tenants for lease renewals
• Coordinate MoveOuts, damage charges against security deposits
• Get RentReady bids to owner's satisfaction
• Follow up with maintenance to make sure done on time and done right
• Start the cycle all over again
• Provide accounting services for all of the above, including owner reports and payments, annual 1099's, etc.

Don't forget to factor in payroll taxes, employee benefits, company office space cost, company insurance, equipment, phones, etc.

Once you do all that, you'll quickly find that PMC's are NOT making more than owners.

FYI - this is why investors should always factor in 10% PMC Fees, 10% Vacancy and 10% Maintenance when running numbers on a potential rental purchase. BP goes even further and recommends factoring out 50% of gross rental income.

John Warren · Answer

@Oleksey Goncharov this is the main issue. A good property manager will focus on retention, and you want to make sure your units are not churning and burning! If you are able to retain great tenants, then this business is really fun! You can then focus on the little repairs that come up, the ongoing CapEx planning involved in owning apartments, and the monthly cash flow.

As an owner, you have to make sure you are not buying a building based just on mythical percentages in a calculator. The tenants that stay 3, 5, 10 or even 20 years are the ones that make this such a great business. Some of my tenants here in the Berwyn area have been in place for almost 20 years. I remodeled the units, re leased them to these tenants and hope that they will stay for 20 more (with basic cost of living increases).

Crystal Smith · Answer

The original question posed in your post- "Are my calculations wrong?" The answer- Yes your calculations are wrong.  There are 3 mistakes in your calculations- The first- With over 100 units your colleague should be able to negotiate a better rate than 10%.

The 2nd mistake is the biggest- Your calculations are for one unit and does not consider the actual % of units that turn over every year. Our average turn over rate is 50%. Some years it's 25%. We'd like it to be 0%. If your friend has 100+ apartments and his turnover rate is 50% or less then all he's paying is the monthly management fee for the remainder of his units.

3rd mistake- You have not considered the value of your individual time. I won't say the $ amount we put on our time other than to say its a ton & spending that time working on strategies to grow, or with family & friends or..... is much more valuable than managing a property. We don't hire property managers to collect rent. We hire them to manage the headaches.

Steve Maginnis · Answer

Hello @Oleksey Goncharov.  Yes, your calculations are wrong.  $4800 less $3200 is $1600, not $1200. :)   If the $4800 number is accurate, then you also need to consider this is net profit(before management of course), so $1600 times 100 units would be $160k per year to do nothing, if the PM is handling everything.  And of course this does not factor in depreciation on the properties.  The management fees would be tax deductible as well.

@Drew Sygit makes a valid point. The total paid to the management company is not their net either.  They have significant expenses as well.  After paying all expenses, they can expect to make about 20-30% of charged fees as profit.

If you were bringing me 100 units to manage, I would handle them for probably 5 or 6% instead of our typical 8%.  And you can likely find a company to cut you a break on the leasing commission as well.  We only charge 40% of one months rent, for example.  To be picky, your numbers reflect a full 12 months of management fees, but you allow one month of vacancy, so it should be 11 months of management fees, unless the company charges a full fee when vacant.  All of these details add up to improve the bottom line.  You do need to be aware of any other fees such as marketing fees, site inspections, initial setup fees, etc. You get what you pay for, but there are good companies who will offer discounts for bringing in that size portfolio.  Best of luck.

Bill B. · Answer

I would find a PM that doesn’t charge a full month’s rent for new tennants, I don’t want them to make way more on turnover. I pay $300 commission on new tenants, $125 for lease renewal. The PM makes almost as much for having current tenants sign a piece of paper as they do going through the work of finding a new one. Second, 2 weeks between tenants is an eternity, nobody wants more than that. Contact tenant 60 days before their lease ends. If they’re moving out, start advertising, Less than a week to clean/make ready, another week to move in now tenants. I pay a pretty standard 8%, but that’s not where the savings really are.

These are all B class SFR so maybe 60% of the work of c-d class mfr? On a dozen properties, in a year, there might be a vacancy or two, maybe not. There will probably be 4-6 repairs. And MAYBE 1 late payment total. “ALL” their value to me comes in finding and screening the tennants, and staying up on the rental/tenant laws while not violating any fair housing laws.  I’d be willing to do most fo the rest of the work.

Jonathan Klemm · Answer

@Oleksey Goncharov - I feel like all properties are different and it really depends on where the property is, what the tenant class is, how old the building is etc.

I don't think a PM should ever be making more than the owner.....unless it's just a very poorly managed building that has a ton of repairs.

Probably the best person I know to help evaluate your numbers is @Mark Ainley

Account Closed · Answer

A good PM has invested in processes and systems that scale over thousands of units. This is rarely cost effective for small landlords with a handful of units. These are systems for listing, showing, screening, maintenance, bookkeeping, taxes etc etc. So to some extent you are paying for that also. But as you correctly inferred from your albeit erroneous calculations, is that vacancy kills. You should not incur vacancy costs every year. On average though you will every 18-24 months.

In order for a rental to be profitable with PM you really need better than 1% rent ratios, closer to 1.5% or so. You can still make money on mortgage pay down and appreciation but not on cash flow.

Drew Sygit · Answer

@Alex Goncharov

Really depends on the local market, type of property, target tenant, rent amount compared to ave market, etc.

So, not something I can answer for another city.

Alex Goncharov · Answer

Drew, thanks for such a detailed reply. Looks like you are quite deep at this theme and have a good understanding.

Could you please clarify for my understanding how much this part cost?

How many contacts leasing agent needs to do to have showings?

How many showings usually you need to do to have the leasing agreement signed?

• ======
• Inspect a property to make sure it's ready to market
• Take marketing pics
• Publish and refresh for rent ads
• Take all the phone calls from ads
• Schedule showings
• Chase applications, process & screen
• =====

Are my calculations wrong?

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