Over the last several years, our buoyant economy has contributed to a run-up in prices of real estate held for investment purposes. Since good real estate deals are harder to come by, property investors are turning to maximizing the value of their current real estate holdings through quality property management. A good property management company can mean the difference between generating a healthy profit from your real estate holdings, and leaving money on the table.
It is clear: the goal of property management is to maximize revenues while minimizing expenses associated with the investment property. While this is a simple idea in principle, it's the execution of the property management company and the monitoring by the property owner that are necessary to realize this ultimate goal.
As set out below, there are some basic activities that you, as a property owner, may undertake to monitor your investment
It is a given that your property manager should be providing you with status reports (budgets, monthly financial statements, rent rolls, arrear rents, etc.).
First, you should make sure that that the reports are telling you what you are interested in knowing.
Second, you need to review the reports and ask questions. Asking questions will not only increase your knowledge level, but will indicate that you are taking an active role in monitoring your investment. Do not let the reports sit unopened.
Separate bank account and accounting records
Each building should have its own bank account and accounting records. This enables effective review of results on a month by month basis and also decreases the likelihood of the "sharing" of costs with other buildings, perhaps even those buildings with different owners that are overseen by the same property management company.
You should ask, and your property manager should be easily able to answer, the following questions:
- What are you doing to maximize occupancy?
- What are the vacancies and turnover compared to the neighborhood?
- How are the building's monthly rents compared to the neighborhood?
- What are you doing to maximize rents?
- What improvements have been made related to tenant screening?
- What activities are undertaken concerning rent collection issues?
Monthly updates should be provided by your property management company, giving you details of all leases expiring during the following three months and the progress made in negotiating new leases. You should review the rate of commission charged by the property manager on rents and the negotiation of new leases and compare the rate to the market.
An effective marketing plan in 2015 should be different from that of the 1990s (and 2000s). The use of social media and online presence should be evaluated as a component of the overall marketing plan. Tenant surveys and referral programs should also be considered as potentially useful by your property manager. Happy tenants may be your best and most cost-effective marketing activity, as referrals from current tenants can be a valuable source of new tenants.
First, you should review the annual budget prior to the commencement of the year. Second, review the budget compared to actual results on a regular basis. There should be a policy in place that requires that more than one fee estimate for larger expenditures must be obtained. As owner, you want to ensure that benefits from volume pricing are realized on your investment, not other buildings. Asking questions surrounding any larger expenditure is necessary. You may also want to test one of the larger expenditures for compliance to the policies in place. In addition, an annual review of all insurance should be provided.
Not all property management companies are able to maximize value for owners. Red flags to look out for include unit rents that are lower in your building than the local average, vacancies and/or turnover rates that are higher than average, exceeding the spending budget without your approval, and a lack of transparency by the property management company in their communications with you, which can include missing or late reports, or not providing you with the information necessary to make good decisions.
If you suspect that your property management company is not maximizing value, have a valuations expert conduct a review of the books and records in order to quantify losses, if any. Over the years, we have surveyed the economic performance of various property managers at the request of building owners for litigation and other purposes. By conducting a review, we can determine if a property manager has the owner's economic best interests in mind.
In summary, although you may be very comfortable with the increasing value of your property, there are some basic steps that you should take to monitor your property manager to realize on your investment on an ongoing basis.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.