All Forum Posts by: Steve Cook

Hi BP!

Happy New Year!

I'm an investor from San Francisco with a portfolio of investment properties in Indianapolis. Over the holidays I had some Family members express interest in the business and I'm now in the process of raising a Friends and Family round of capital to purchase 25-30 additional properties. I am targeting a capital raise of $625K in equity $1.875M in debt for a total raise of $2.5M at 75% LTV. I'm currently seeking a lending partner who can lend at a competitive rate with 25 - 30 year fixed terms.

To provide some additional background, I'm currently focused specifically on C+ and above assets in Indianapolis that generate 10%+ returns. I do not operate in war zones and all my properties are professionally managed by a PM with 300+ units under management. Across my PM's total portfolio, he sees ~5% vacancy. The DCR across my portfolio is 1.3. I have a assembled a very strong team in my inspector, Property manager, broker, and insurance provider. Finding a lender is the final piece of the puzzle.

Does anyone have any solid leads?

Happy investing,

Steve

@Robert Gilstrap

Respectfully, I disagree.  I'm an investor and my expertise is in investing and finance, not construction, maintenance and repairs.   This is a business, and in business I've found it prudent to retain a healthy dose of cynicism.  All things equal, people are usually going act in accordance with their own best interests.  

With your example, how do I know what a fair sewer repair costs?  Now you're telling me I have to call 5 other vendors and get bids just to determine if my property manager is pulling a fast one on me?  And if that sewer repair actually cost $1,500?  Just because market rate is higher, my PM is entitled to pocket the difference?  At that point, you're not running a PM business you're also running a construction outsourcing business within your property management company.   

Like @Michael Bowman previously stated, I am completely comfortable paying a set fee to cover administrative costs as long as that fee is reasonable, established upfront and the PM is seeking to negotiate the best rate on my behalf. What I'm not okay with is the PM pocketing the difference from their discounted rate and the market rate.  Even if they are both cost neutral to the owner, at the very least it creates a conflict of interest and encourages PM's not to negotiate better rates for their clients.  

Spoke with two new PM's and will be moving over my properties to one of the two in the short term.  Both have 300+ properties under management and retain in-house maintenance. 

@Michael Bowman

Not exactly. I'm fully aware that the vendor discount negotiated by the PM potentially wash out the markup.  I'm not disputing that.  What I am disputing is that this type of fee structure doesn't incent shortsighted PM's to negotiate better deals, because they take a mark-up off a higher price.  While you clearly don't do that, it does introduce ethics into the equation and clearly not all managers are created equal.  

Furthermore, let's take your example one step further.  Let's say that next year your service calls to your HVAC provider increase by 50% and they in turn cut your rate from from $3,200 to $3,000.  Your tenant would then be paying $3,450, not $3,800, which is awesome because you're passing on the savings to your clients.  In my situation, my PM is pocketing the incremental savings for himself because that is 'market rate'.  There is a fundamental difference between charging a flat fee like you are to cover administrative costs and running a maintenance arm out of a Property Management Company that encourages discounting work so they can recognize an additional revenue stream. 

Based on my personal experience, owners seems to evaluate two primary cost criteria when comparing PM's, the monthly fee and the placement / leasing fee.  Some PM's charge 10% and 50% first months rent, some charge 8% and 100% first months rent, there are a ton of potential combinations.  

What this thread has revealed to me is that I've been omitting an important number, the mark-up on maintenance, which isn't readily advertised on Property Manager's sites, but it can be just as large if not larger than the monthly fee.   

If I had $9,800 in repairs in a given year and you're charging me 15% mark-up on my repairs, that's $1,470.  My total property management fee was only $2,300.   I've learned that this figure should be front and center when evaluating PM's.  

At the end of the day, I understand that you're offering is somewhat less competitive on paper if you were to charge 12% instead of 8%, but assuming cost is neutral in both scenarios, as an owner, I will always opt for the agreement that doesn't place the PM in a potential conflict of interest with the owner.  

Happy to see that you are up front about this and that it's in your agreements.  Lesson learned.  

Thank you for all the responses, this has been very informative. 

My next steps are to determine the specific rate of mark-up, understand why it isn't in the contract and why it wasn't disclosed at the outset.  

Fundamentally I don't like this arrangement as it creates an incentive for the PM to have side arrangements with vendors and not negotiate better rates on behalf of owners.  If administrative costs are increasing due to the volume of total properties under management, then the monthly fee should increase across the portfolio to ensure there is no conflict of interest between the owners and property managers.

As you can see in my 2015 financials below, I paid $9,876 on repairs.  I had a couple big things go wrong across the portfolio.  Slightly further down you can see a "Vendor Discounts" line at $3,669, which is attributable to the mark-up on the repairs or 37%.   They are making more money from mark-up on repairs then their management fee "Commission Paid" at $2,280. 

Hi BP!

Happy new year!  I own three investment properties in Indianapolis that are professionally managed.  I was on the phone with my property manager the other day and he said something that caught my attention.  He stated "My properties perform better than yours do because I'm not paying any mark-ups on my repairs."  This immediately struck me as odd as I wasn't aware of any form of compensation to the PM for any maintenance related activities, just 8% of gross rent and 1-month of rent to lease the property, per our contract.

Naturally I wanted to understand the nature of this arrangement, specifically how much mark-up is being charged, so I referenced a specific sewer repair bill from 2015 that was $2,600 and asked him if he could provide the vendor invoice so I could understand how much the vendor charged and how much revenue the PM recognized.  He came back and said that discussing price discounts that he's established with vendors wasn't appropriate.  This was a huge red flag for me. 

So now my questions are,

1. Is this normal?  Do PM's typically take $ of the top of repairs after they have negotiated lower rates? There is nothing in our contractual agreement that acknowledges this type of arrangement. 

2. If this is normal, is there a typical industry standard mark-up?  5%, 10%?

Overall, this feels wrong to me.  Fundamentally I'm paying a property manager to protect my investment, not pocket money on the side from construction arrangements with vendors.  Even if he has negotiated lower rates with vendors, I would expect him to pass that savings onto the investor and not pocket the difference.  

Would love to solicit the community's thoughts. 

Happy investing!

Steve

Great input @Account Closed.  

Hi Jeb, 

I do own 3 homes in Indy, but by no means am an expert on Indianapolis geography, B to C to D areas can vary every couple of blocks, you really need someone on the ground.  I'd recommend hiring a broker that works with investors to help you scout the area.  It might be a little more out of pocket, but the peace of mind is totally worth it. 

Hi Guys,

Primary issues would be tenant quality and vacancy.  

Point is, if an SFH is $50K and a Duplex is $50K, the SFH rents for $800 and the Duplex rents for $550 / side, naturally you want to favor the Duplex because the returns are higher. I'm assuming that this is the reason you want to invest in a Duplex? If not, I'd be interested to hear what your rationale is.

As a fellow out-of-state investor investing in Indy, I wouldn't recommend chasing paper returns, especially on your first investment.  I would suggest hiring a broker and soliciting input from a Property Manager to determine if the property you've identified is in a good area and fits into your investment criteria.  

I previously sent my Property Manager examples of two duplexes I thought had good numbers, he said they would not even be willing to manage those properties due to the area they were in.  

That is not to say that good Duplexes aren't out there, they are.  This is verbatim from my Property Manager "On paper, you may see higher cap rates, but the vacancy and associated costs with lower value doubles are up there. If you buy a double, get it in the right area. The right house in the right area does not come up often."

There are a lot of challenges with out-of-state investing, and I would encourage that you really take your time and perform the right research for your first one, Lord knows I made a ton of mistakes on my first one.  You want to leave with a good taste in your mouth so you feel confident when you buy your 2nd, 5th, 10th, etc. 

I hope that helps. 

Hi Jeb, 

Please feel free to message me regarding a PM. I'm also from California and own 3 homes in Indianapolis and love my property manager. I'm not sure what type of research has led you to a Duplex, but I would advise you to move forward with caution. On paper, Duplexes often look stronger from a CAP rate and return perspective, but they can come with other challenges not found in SFH's.

Steve