Managing property effectively and profitably is not accidental, nor easy. In fact, many savvy investors look to invest in property that already has the profit factor built in that the current management cannot realize. Ideally, a good Property Manager can evaluate a property for potential profit prior to making the investment, and then upon purchase, set up the management structure to extract that profit. However, existing investments can be made to deliver more profits with better property management. Effective property management is a skill that can be acquired.
Contrary to popular belief, certification in property management or real estate, while definitely useful, is not a prerequisite to managing property. In fact, most Property Managers are property owners with an desire to protect and manage their investment. The idea that property management could not be that difficult is a notion many new real estate investors hold. However, as the reality of managing the property sets in, it does not take long to realize that property management is not just the process of collecting rent checks from tenants. Many ignorant property owners soon find the challenges of property management so overwhelming, the idea that property management is easy soon disappears and they start thumbing through the phone book for property management services.
Hiring professional property management maybe the best strategy for many investors, but some owners simply want to know how to manage their property more effectively and learn the necessary skills. Property management companies simultaneously, encourage staff to learn the skills of effective property management to ensure they offer value to their clients. There is a learning curve to property management which can be significantly shortened with training, mentorship, and the right mindset.
Property Management is basically a strategy for evaluating and extracting the profit potential of an investment property/properties. The business of managing property can be very lucrative especially when the former owner or management team failed to identify those profit potentials and hand off the property to another more effective team at the 'get rid of it' price. Property management should start with an intense due diligence prior to investing in that property, however, if the property manager has inherited a lemon, then an effective strategy can probably turn that lemon into lemonade. There are many ways to make an investment property more profitable, or less expensive to hold, and effective property management will systematically, and continuously find ways to do so.
The skills of effective property management include: Due diligence prior to the purchase, or the start of new management. This means a detailed research and study of all the related expenses of that property, the cash flow, and all strategies used to date in managing that property. This step should not be overlooked or poorly done. This information will provide the raw data for comparative proof that the new property manager has made effective changes that increase cash flow. Thorough property inspection. Unless a property manager has property maintenance skills, this step is better left to a professional building contractor. Cataloging a detailed document about the condition of the property from foundation to roof and all in between can identify potential large expenses in the near future, or help to avoid them. Property maintenance expenses can cut very deep into property cash flow so avoiding or minimizing these expenses are high on the list of effective property management. An effective marketing strategy. Reviewing the information from the due diligence will be helpful here. Has advertising already been done? If not, should it be and how? Will a cosmetic face lift help the property increase rental rate potential? Will a promotion help and what will be an effective promotional incentive to draw potential tenants to a property tour? Property managers must have a way of tracking any marketing strategies for their effectiveness to creating property tours. An effective budget. This is the bottom line. What rental rate will bring the property to break even? To profit? Can the property command this rental rate? Can we reduce costs? Are all vendors offering the best price or value for services? Are there any additional income streams that can be created - such as installing coin laundry or vending machines?
The following SAMPLE includes both the costs to review when evaluating a property for investment potential, as well as evaluating a property for current cash flow calculations. Once the existing numbers are entered, a property manager can then review those line items to see if they can find cheaper resources, or increase cash flow through increase rent rates or income streams to improve the bottom line. Cash put into the property: down payment closing cost repairs / renovations Income analysis: rental income (number of units x 12 months x rental rate) less vacancy & loss (usually 5% of rental income) Expenses: property taxes and insurance supplies repairs/maintenance utilities and garbage legal and marketing landscaping management fee (usually 10% of rent) Cash Flow: total property income less expenses Operating Income: net cash flow less reserves for incidentals (eg. 6% of net cash flow) * less loan payment (eg. 30 year mortgage at 8%) Net Operating Income / Sale Price = Capitalization Rate Annual Cash Flow / Total Cash Investment = Cash on Cash Return Effective Property Managers will review each area to see how costs can be reduced, or income can be increased to improve the cash on cash return for the investment.
The skills of property management go beyond the desk and calculator. Property management means dealing with tenants and that also requires people skills. Some tenants can be nightmares and screening tenants prior to signing rental agreements is another skill property managers need to have. Once the tenant is in the property, keeping them happy so they make lots of referrals, or renew upon expiration of the lease is easier said than done. Most tenant complaints have to do with property maintenance so property maintenance is not only a line item on the budget, but also a key component in creating property value and marketing highlights.