JF1549: How to Build Your All-Star Apartment Syndication Team Part 2 of 4 | Syndication School with Theo Hicks
Today Theo is covering how to find a great property management company. This is a huge part of your business, to be a successful syndicator you’ll need a great property management company that you can count on to do outstanding work without you having to micro manage. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the apartment syndication school, go to syndicationschool.com, so you can listen to all the previous episodes.
Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series – a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks.
Each week we air a two-part podcast series – in this case, a four-part podcast series – about a specific aspect of the apartment syndication investment strategy. For the majority of the series, we will offer a document or a spreadsheet or a resource for you to download for free. All of these free documents, as well as past and future Syndication School series podcasts can be found at SyndicationSchool.com.
This episode is part two of the four-part series titled “How to build your all-star apartment syndication team.” In part one, yesterday’s episode, you learned about the four core team members and the three secondary team members that make up your seven-person company team. We talked about the six main ways to find prospective team members, and then we discussed the process for hiring a business partner and a mentor.
This episode, part two, will focus solely on the process for hiring a property management company. Now, just to reiterate, the most important aspect of apartment syndication — I guess the most important aspect of a successful apartment syndicator, is their ability to execute a business plan. The best deal, in the best market, means nothing if you and your team cannot execute the business plan… Keyword there, for our purposes right now, is being “team.” So the team is one of the pieces that will help you implement your business plan, so it’s very important that you find the correct team members.
For the property management company, their primary responsibility is to manage the property after closing. So once you’ve closed on the deal, the property management company will replace the old property management company, and they will be responsible for managing the day-to-day operations: fulfilling maintenance requests, maintaining the occupancy, things like that.
Now, additional services that property management companies may or may not provide based off of the company are [unintelligible [00:06:05].08] for the pre-deal, and they might advise you on what neighborhoods and submarkets to look at. Once you have a deal, they can help you confirm your underwriting assumptions… So your expense assumptions after you take over the property – they can let you know if those make sense based on how they’ll operate the property, and the market, as an example.
Once you have a deal under contract, they can help you with the due diligence process, helping you manage the inspections and the appraisals that happen, and all the audits of the current owners, find historical financials and rent rolls, and help with finalizing the budget… So finalizing your proforma, as well as your renovation budget.
Once you have the deal closed, aside from their primary responsibilities, they could also help you manage the renovations, help you host residence appreciation parties, help you implement the best marketing strategies, and things like that. Typically, and especially when you’re starting out, the property management company is going to be a third-party. So you’re not going to want to start your own property management company when you’re first starting out, because you’ve got a lot of other things to deal with and learn about, and you don’t have time to focus on that particular aspect of the business plan.
But as you grow, and get your portfolio to a certain size, which people differ on which size you should actually bring on your own in-house management company, you can bring the management company in-house and run it yourself, or continue on with a third-party. It’s really up to you.
Now, how do the property managers make money? Well, typically, they will charge a management fee, which is a percentage of the collected income at the property. In general, this could be anywhere between 2% and 10%, but since we’re dealing with apartments, you’re gonna be looking at the lower end of that range, because 10% is for single-family homes, 8% is probably for duplexes… So once you’re over 100 units, you’re looking at around 5% or lower.
Other ways that management companies might get paid are through various fees – lease up fees, renewal fees, eviction fees, application fees, marketing fees, referral fees… There are a lot of different fees that they can charge. Again, it depends on the management company and the size of the property. And you might also run into a property management company who is willing to help you manage renovations at a cost, which is the construction management fee; it’s typically a percentage of the total rehab budget, anywhere from 3% to 10%, with the larger rehab budgets falling on the lower end of that range. For example, say a million dollar rehab and they are charging you 5% – well, then you’ve gotta pay them $50,000 out of that budget, so that’s just 50 additional thousand dollars you should raise at the beginning of the project.
Now, let’s get into the important aspects, which is how do you qualify the property management company? Basically, you’ll use one of those six ways to find a property management company – you’ll create a list, you will reach out to them, and you will — first, what you wanna do is introduce yourself, and when you’re doing so, you want to 1) tell them what you’ve done or what you’re in the process of doing that’s getting your closer to closing on a deal. So I would call them up and say “Hey, my name is Theo Hicks. I am from Tampa, Florida, and I am actively working with real estate brokers right now to find deals. I’ve underwritten this many deals.
Right now I’m just looking for a property management company to bring on. Are you willing to spend five minutes to speak with me, so I can learn more about your company? And you can learn more about my business, as well.” Because, whether you know it or not, this is actually a two-way street; they’re actually interviewing you as well, because they wanna be confident that you are able to satisfy their business needs. Their business needs are obviously to make money, and the way they make money is to manage deals, and the way to manage deals is to work with investors who actually can close on deals.
At the same time, they also want someone who has realistic expectations of what a property management company is supposed to do… So you’re gonna have to prove your worthiness before asking them for additional services that I went over, like coming with you to property tours, and helping you confirm your underwriting assumptions.
Before we go into how you should prepare for this interview, let’s go over the types of things you should be asking and figuring out from the property management company to qualify them. First, how long have they been in business? A pretty simple question.
A couple things about these questions… 1) Don’t just call the property management company and ask all these questions in order like a robot; ask them sporadically, but do your due diligence beforehand and see how many of these answers you can find.
How long have you been in business – you can find that online, on their website, pretty easily. This is a list of questions that you need to ask either them, or ask yourself and find the answers to, whether that be on their website, through someone else, or through them directly… Because if I was talking to someone and they asked me a question that was front and center on my website, I wouldn’t find them very credible.
So you wanna know how long they’ve been in business, because the longer they’ve been in business, the more experience they have, which in turn likely means they are more credible. You also wanna know what areas they cover. 1) Do they cover the areas that you’re targeting? Pretty important… But you also wanna know if they are focused on a handful of target markets, or if they are spread out across the nation. Again, not a disqualifier, and it really depends on the size of the company, but if they’re focused on too many markets, then they might not be able to give you the attention you need, and they might not be as big of experts on that actual market, because they cover so many and it’s impossible to know everything about every single market.
You also wanna know if they’re actually located in that market. Ideally, they are. Ideally, they say that “I’ve been in business for 20 years. I cover the Tampa Bay market, and that’s where our headquarters are located.” It just makes things easier for you, and it kind of indicates their knowledge of that particular market.
You also wanna know how many units they manage, so total number of units. If they are, for example, the biggest in the market, or at the higher end in the market, that’s a positive, because that indicates that they are credible… But at the same time, you might not get the attention that you want, because they’re working with big-time investors and you’re kind of a little fish at this point in time, and you might not get the attention that you want.
On a similar note, you also wanna know essentially what’s the biggest unit they manage, what’s the smallest building they manage, and what’s the average unit count. You wanna make sure that they are able to manage the size of property that you are interested in investing in. So what you will realize is that when you talk to property management companies, they either specialize in, obviously, single-family homes or smaller multifamily; then you’ll find companies that specialize in that 10 to 50-unit range, buildings that don’t need on-site management. Then you’ll find other companies who specialize in the 100+ unit range, or maybe even 1,000+ unit range, and then everywhere in between.
You wanna find a property management company who aligns with your current business plan. If your business plan is to buy a 20-unit, then you’re gonna want to find a management company who specializes in those smaller multifamilies… But if you were looking at a 100-unit, then that same property management company would not be a good fit. And I’m telling you, when you talk to them, they will try to convince you that they are a good fit, they’ll try to convince you that they’re interested in moving into that market, or they haven’t done it before, but they’ve got the processes in place to do so… But at the end of the day, you don’t want someone else learning on your dime. You wanna find a company who has experience doing that size of a project.
You also wanna know what types of properties they specialize in. Similarly to the unit size, you also wanna make sure that they are able to execute, or at least manage, the business plan that you plan on executing… So if you’re going to buy value-add apartments, you want to make sure that you find a property management company who has experience with value-add apartments.
You also wanna know how many apartments they personally own or their company owns, because that could be a potential conflict of interest. If they own apartments in your market, and a unit goes vacant at your property and a unit goes vacant at their property, which unit do you think they’re going to fill first?
You also want to have them describe to you what their process is for managing a moderate renovation. Again, this is for value-add syndicators. You wanna know how do they track the work, who are the contractors – are they in-house GC’s? Do they find sub-contractors for everything? Who manages these contractors? Who approves the work before the contractors get paid, and then what fees will they charge? Essentially, you want to know what to expect during the renovation process from them, what types of updates that you’re going to receive, who’s actually doing the work, is the work being checked, how much does it cost, how long is it gonna take? Things like that, because those are all going to factor into your underwriting – how long is it gonna take, how much is it going to cost.
Then also you want to plan ahead and figure out exactly how to approach your performance reviews with the property management company, and so now you’ll know “Okay, well the work is tracked this way, so I should expect information presented to me in this way”, and know exactly who the contractors are, their in-house contractors, who they’ve worked with in the past, their sub-contractors… “It’s gonna cost me this much, and it should be done within 12 months.”
You also wanna know if they offer any due diligence services, and what the cost is… So will they help you deal with the due diligence process ? Will they perform a lease audit? Will they perform a financial audit? Will they look at the bank statements of the property? Will they help you perform the inspections? Will they walk the appraiser through the property? Things like that. And then you also wanna know how much that costs. Will it be free, as long as you close? Will it be free if you don’t close, or will they charge you money if you don’t close? All things to think about.
You also want to get your hands on a list of nearby properties that they currently manage, so then you can go look at these properties and confirm that they are the type of property they say they specialize in, you can see how well the property is maintained, the area, and kind of get a general feel for the property.
You also could ask what special trainings their managers receive from their company. Again, this one right here is not a deal breaker, but if you’re down to two management companies and one has a very specialized training for their managers and the other one doesn’t, that could be the deciding factor.
You also wanna know how they manage the property’s online reputation. I think it’s something like 80%+ of people search for rental homes online, so the first thing that a prospective resident is going to see is likely gonna be the property’s ranking on Google, and Apartments.com, and places like that… So you wanna ask them, are they doing anything to make sure that they maximize that rating? And again, this could be a deciding factor between multiple property management companies.
You also want to know who the point person is going to be to you. Is the point person going to be the site manager (which is ideal) or is it gonna be some lower-level employee?
You also wanna ask them what they see as the site manager’s duties. What do they expect out of the site manager, and does that align with your expectations of what the site manager should do? You can also ask if you can interview and approve the site manager before hiring them.
You also wanna know what kind of relationship they expect their site manager to have with the owner, so how often do they expect the site manager to contact the owner, and when they do contact them, what types of updates will they provide?
Another important thing to think about is what maintenance issues will require approval? Is there a certain dollar amount that if it’s under that dollar amount, then they’ll just take care of it; if it’s not, they’ll come to you and ask for your approval. And you also wanna know how accessible they will be. If you call them, will they answer? If not, how long do they say they’ll get back to you?
You also wanna ask you if they’ll provide you with a written management plan. Will they provide you with a renovation plan, and a marketing plan that they plan on implementing once you’ve closed on the property?
You also wanna ask them about what fees they charge, and what is actually included in the monthly management fee… Because sometimes you’ve got the management fee and then you’ve got all these other fees built on top of that, but you only accounted for the management fee in underwriting. You also wanna ask them what type of property management software they use. Really, you wanna make sure that they’re using one…
You also want to ask how much time it takes to typically do a make-ready. Once a tenant moves out of a unit, how long does it take for them to get that leased again? Depending on the market, it could be a couple of days, or it could be a couple of weeks… You’re going to want to know what the average is in that market and what they are committed to doing… Because again, the longer the unit is vacant, the less revenue you are bringing in.
You also wanna know what types of rent payment methods will be available to the residents, and make sure that that aligns with the renter demographic. If you’re in a low-income neighborhood, then not collecting cash or not taking cashier’s checks might be an issue… Whereas if you’re in a higher, more affluent neighborhood, then not having the ability for them to submit their rent via direct deposit might be an issue.
Also, you wanna ask them if they require you to list the property with them upon sale, because some property management companies will put that in their contract. You also wanna ask if you can have the cell phone number of the site manager, the regional manager and the national office, just in case you need to get a hold of them… And if you can’t get a hold of the site manager, you can go up the chain of command to the regional manager, if you can’t get a hold of them, you can go to the national level.
And then lastly, you can ask them for contact information for a few of their current clients who have buildings that are similar to the types of buildings you will be investing in, so that you can go to those references and check things out.
Now, again, don’t just go through this list of questions and ask them in order, like a robot, to the property management company. Take a look at this list, do you research to see if you can find the answers to these questions yourself, and the ones that you can’t find, scatter them out naturally throughout the course of the conversation.
Now, as I mentioned, you are not the only person that’s doing the interviewing here. The management company will also be interviewing you, because they want to make sure that you are able to satisfy their business needs, which means that you’re able to close on a deal… So there’s a few things that you can do to win the property management company over to your side.
The first one is to be prepared for the interview. There are going to be questions that they’re definitely going to ask you, and if you don’t know the answers, then you’ve kind of ruined your opportunity to present yourself as a credible investor to this management company. That’s why what you do is make sure you know the answers to these questions before you even speak with a management company.
Number one, who is your broker? Who is your real estate broker? They’re gonna wanna know that you are actually looking for deals at this point in time, and that is accomplished by telling them “Hey, my broker is John Doe, from John Doe Academy.”
Next, they’re going to ask you if you’ve purchased an apartment before, and obviously you haven’t, if you haven’t before; if you have, you have. If you haven’t, this is where your mentor or partner comes into play. If your mentor or partner or someone else on their team has completed a deal before, then you can say “I haven’t completed a deal before. However, I have a partner who’s done XYZ, and a board member who control 300 million dollars in apartment communities, so we’ve got that covered.”
They’re gonna wanna know what types of properties you’re looking for, as well as what markets and neighborhoods. Again, this shows that you know what you’re talking about, if you could spit off and say “Well, I’m looking for apartment communities built after the 1980’s, that are 100+ units, that have the opportunity to add value, but aren’t distressed. That are in Tampa, Florida, Ybor City, Temple Terrace, these particular submarkets.” That sounds a lot better than “It doesn’t really matter. I’m looking for an apartment in Florida somewhere.” Those two things sound completely different. The first method shows that you’re active and that you know what you’re talking about, and that you’ve done your due diligence, and also that they can confirm that they cover the market that you are actually investing in.
They’re also gonna wanna know what your business plan is. Again, this will show your credibility and expertise, as well as let them know if it aligns with their specialty. So if someone asks me what my business plan is, I say “Well, I want to buy a value-add property, take 12-18 months to turn over and stabilize the asset with my renovations, that will probably be about 5k-7k per unit… As well as some exterior renovations. We’ll hold onto the property for five years, and then after those five years, we will sell and rinse and repeat.”
They may also ask you how you actually found them… It’s not really important, but I have heard that some real estate brokers, for example, don’t like it when you say “I found you on LoopNet”, but again, I don’t think this one here really matters too much… But they might ask you that, so be prepared.
They’re also gonna ask you if you’re working with any other property management companies, of course, because they wanna know if there’s competition. They also are gonna ask you what expectations you have for a property management company. So now, after listening to this podcast, you know what their primary responsibilities are, as well as the additional duties, so when they ask you this question, you can explain to them that ideally you’d want the additional services, but you know that you’re gonna have to prove yourself first… So it’ll kind of start there, and start with them just managing the property, as well as the renovation budget, the renovations after close, and then go from there.
They’re also gonna want to know how you actually underwrite the deals, and more particularly, they’re gonna want to know what assumptions you actually use, and are those assumptions going to be realistic. So if you tell them that you do the 50% rule, then you’re not going to look very credible, and they’re probably gonna not want to work with you, because since they’re the one managing the project, they’re gonna want to confirm the assumptions, and if they can’t confirm the assumptions, they’re not going to want to manage the project.
They’re gonna want to know how you’re gonna fund the deal. That’s the debt and the equity… So what mortgage brokers are you talking to? What types of debt can you get? What LTV, interest rates, recourse vs. non-recourse, is it a Fannie Mae/Freddie Mac? Is it a bridge loan? What types of debt are you going to get? And then your equity – how much equity are you able to raise? Who’s it coming from? Is it your money? Is it from investors? How many investors? How do you know these investors?
Again, this is gonna show your ability to close on the deal, as well as show if you’ve done your due diligence. If you have no idea how you’re gonna fund the deal, it’s not gonna look too good.
And then lastly, they might ask you for biographies on you and your business partners, so you might want to have those handy; at the very least, have information on your business partners handy. For example, if they ask you “Well, have you done a deal before?”, you’ll say “No, but I have a board member who has done a deal before.” Then they go “How many deals has he done? How long has he been an investor for? Where does he invest?” They might ask you questions like that, so be prepared to answer them.
Besides obviously being able to answer their questions, there’s a couple of other things that you can do as well to win over a property management company. One, which is something you’re already going to do, because you asked them for a list of their properties — but I actually go visit those properties in person, and then provide them with feedback. For example, let’s say you get a list of five properties; you go to all five properties, and maybe a few of them are pretty distressed, and there’s a couple of issues that are concerning to you, but then one property looks really nice, and is exactly what you would want.
Well, you can go back and say “Hey, I visited the properties. Here are the pros and cons of each, and the questions I have. For property ABC, I went there and realized that some of the roof shingles are missing, and the gutters were falling down, and it looked like it hadn’t been painted in a while, and it looked like the lawn hadn’t been mown in a while… What’s going on? Is that management issues, is that owner issue? Are they not giving you money? What’s going on there? I also saw XYZ property – immaculate condition. What’s the difference between the owners of those two properties? Why are they so different? Is it the owners, is it the market? What’s going on there?”
This shows that you’re interested, it shows that you’re actually out there doing things, that you know what you’re talking about and you truly want to learn and put yourself in the best position to complete a deal.
Another one would be for you to send them your proformas for deals that you’re underwriting. Again, don’t expect them to fully underwrite a deal for you. What you wanna do is say “Hey, I’ve underwritten this deal. Do you mind taking a look at my underwriting assumptions and give me your feedback on them?” Typically, they might not send you a 1,000-word response, but they might give you a couple pointers and tips; you’re just building more rapport.
And then lastly, and this is kind of overall, is to have timely follow-up. After you do a property tour with them, make sure you follow up and ask them, “Okay, what were your thoughts on the property tour? Can you help me with ABC? Can we create some kind of cap-ex budget? What types of rents do you think we can get? What are your thoughts on the rent comps provided?” But don’t wait a couple of days or a couple of weeks to follow up and ask those questions after the property tour. Show that you’re serious, that you’re putting forth the effort to close on the deal.
And then really after completing any task that brings you closer to completing a deal, let them know. “Hey, I underwrote this deal. I’m gonna go visit it in person next Tuesday.” Or “Hey, I just talked with this mortgage broker and got approved for an additional one million dollars in financing”, things like that.
That is the overall process for hiring the property management company. We talked about what the property management company actually does, how they’re compensated, and we talked about what you need to do in order to qualify a property management company, but also what you need to be prepared for and what you need to do in order to win them over to your side.
Winning over the property management company to your side is gonna be important, because all of those additional services that they can provide to you, that would be an immense value to your business. But they’re not just gonna do that for any random person who calls them up on the phone and says they found them on Google and wants to become an apartment syndicator. You have to prove your worthiness, and we’ve gone over multiple tips on how to accomplish that.
Now, as I mentioned, this is a four-part series. Next week will be part three, and we will discuss the process for hiring your real estate brokers. Now we’re getting into the fun stuff, which is how to actually find deals. To listen to part one, and other Syndication School series about the how-to’s of apartment syndications, and to download your free team building document, visit SyndicationSchool.com.
Thank you for listening, and I will talk to you next week.