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Today Theo is covering how to manage the property management company. This will be a vital part of how good or bad your deal performs over its lifetime. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.
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 to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks.
Each week we air two podcast episodes, as well as video episodes that are part of a larger series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we offer some sort of document, resource, spreadsheet, template, something for you to download for free that accompanies that series. All of these free documents, as well as the past Syndication School series episodes – podcast and YouTube videos – can be found at SyndicationSchool.com.
This episode is going to be a continuation of a series we’ve started the previous two weeks. This is gonna be part five, and this series is entitled “How to asset-manage a newly-acquired apartment syndication deal.” If you haven’t done so already, I highly recommend listening to parts one through four. Again, those are at SyndicationSchool.com.
At this point in the process you’ve done everything up to the point where you found a deal, put the deal under contract, did all of your due diligence, raised all the capital, closed on the deal, and now you are in the asset management phase. The last step after that is going to be closing, which will be the next series. So this is going to be a series focused on everything you need to know about asset-managing the deal. Now, in parts one through three we actually started off by discussing a general overview of what you’re going to need to do as an asset manager. In parts one and two and three we went over the top ten asset management duties. As a reminder, the person who is the asset manager may have also been the person – and is likely the person – who also found the deal, underwrote the deal, and managed the entire due diligence process. Then the other partner raised the capital.
So during this asset management phase, as I discussed in parts one through three, the asset manager is going to be doing the majority of the duties, but the person who raised the capital also has some responsibilities as well, so it’s a team effort.
Then also you’ve got your property management company, who’s actually going to be the boots on the ground, doing the day-to-day management. So it’s a three-person team; or if you’re a GP, it involves multiple people raising capital, multiple people asset-managing, so then it’s gonna be more than three people… But overall, it’s a team effort. Make sure you check out episodes part one, two and three, because we went over in extreme detail – those ten asset management duties and who’s responsible for what and what you’re supposed to do.
Then in part four we focused in on one of those duties, which is to maintain the economic occupancy at the property. We went over 19 ways to market a rental listing, so definitely check out that episode as well.
As a refresher, your property management company should be implementing the best marketing practices, but if for some reason they are not, then these are 19 things that you can recommend that they do.
Now, I mentioned in that episode (part four) that one of the reasons why you might be more involved in maintaining the economic occupancy is if you hire the wrong property management company. And I told you that we’re gonna discuss how to go through the process of letting go and firing a management company, which we’re going to talk about in tomorrow’s episode.
In this episode we’re actually going to focus on how you actually manage the property management company. So whether the company is good or bad, these are the things that you need to do in order to manage them either forever, or until you find a new property management company. So part five is going to be all about how to manage your property management company, how to interact with them. Some of these things are going to be a repeat of what we’re discussed in parts one through there. The reason why they’re repeats is because they are extremely important and they are things that you’re going to want to keep top of mind when you are asset-managing your deals… So let’s jump right into it.
So it’s going to be broken into five different parts. First we’re going to talk about how often you should interact with the management company. At an absolutely minimum you’re going to want to have monthly performance calls with your property management company… But as I mentioned in parts one through three, you are going to want to set up a weekly call during the value-add phase of the project.
I’m assuming you’re a value-add investor, which means you’re buying deals that are stabilized from an occupancy perspective, but for some reason or another the income or the expenses are not actually optimized… So either the rents are low, the unit interiors are outdated, there’s some sort of operational expense that’s too high, and you’re gonna go in there and you’re gonna fix that, with the purpose of increasing the net operating income and therefore increasing the value of the property.
As I mentioned in parts one through three, the property management company that you hire ideally will help you with the renovations. If you’ve got interior renovations, exterior renovations, and then also maybe some operational improvements, your property management company ideally is going to help you out with this.
During that time – it could be a few months or it could be up to 2-3 years – you’re gonna want to perform weekly calls with the property management company. Then once you’ve stabilized the property, once the renovations are completed, the operational improvements are implemented, at that point you can either continue doing weekly calls, or you can change to monthly calls, or you can just have calls on a as-needed basis… But at a minimum you wanna talk to them at least once a month; and at a minimum you’re gonna talk to them once a week during the stabilization period.
Now, during these calls, who should attend? Well, the asset manager on your team obviously should attend. That’s you or your business partner, or one of your business partners. Then you also want to have the on-site manager on the call as well. That’s the person who’s at the top of the food chain at the actual property. Ideally, you can have the regional manager on the call as well, assuming that you are working with a large property management company, that is located in more than just the market that you’re in.
Typically, how property management companies – if they’re national companies, they’ll have national headquarters where they’ll have the CEOs and CFOs and things like that, but then they’ll have regional hubs. For example, for the East they might have a regional hub in Miami. So you wanna have the person who’s the regional manager who’s in charge of that Miami office on those calls as well; maybe not every week, but at least once a month.
Then during those calls – we’ve already talked about this in parts one through three, but we’ll go over it again in the later parts of this episode… You’re gonna want to review property reports, and then review your key performance indicators (KPIs) during these monthly or weekly performance calls.
Number two is what reports should you expect from the property management company. If you go to parts one through three, we gave away a free weekly performance review tracker, which has all of the important KPIs on it, for you to track. So you send that to your management company upfront, obviously setting expectations and letting them know before you close that that’s what you want to do – you want them to fill out this tracker. You send that to them once, and then you ask them to fill it out each week before the call.
Now, here are a few other reports or a few other things you’re going to want to get from your management company. All of these should be on that weekly performance review tracker that we gave away for free; if they are not, or if you want to get these as an actual separate document, as opposed to filling out the template, here’s what you can ask for. Number one, you can ask for a box score. The box score is a summary of the leasing activity at the property, including the number of move-ins and move-outs, the unit occupancy status – out of all the units at the property, which ones are vacant, but are re-leased, which ones are vacant and are ready to be leased… Maybe a unit has been given an eviction notice, but you already have that unit leased, or you don’t have it leased… It’s a model unit, it’s a down unit, it’s being used for something else… All these different codes you can have for the unit to describe its current status. So you’re gonna wanna do all that, and that should be included on the box score.
It’s not gonna be a list of every single unit, it’ll just be a list of “Okay, out of the 100 units, this many are vacant and leased, this many are vacant and not leased, this many are models, noticed but leased etc.”
Next you’re gonna want an occupancy report, so you wanna know what the physical occupancy is at the property – the total percentage of units that are occupied, as well as the economic occupancy… So of those occupied units, what is the rate of paying residents. These are likely going to be different; typically, physical occupancy is going to be higher than economic occupancy. Let’s say you’ve got 100 units, and 90 of those are occupied, but only 80 of those are actually paying rent, and then 10 aren’t… Well, then your physical occupancy is going to be 90% and your economic occupancy is going to be 80%.
You’re also gonna want an occupancy forecast. This is similar to the occupancy report, but this is projected. So by the end of the month or by the end of the next 30 days what’s the projected occupancy based on, as I mentioned in the box score, the units that are vacant but already leased, the ones that have a notice to be evicted but they’re already leased, and then obviously on the other hand the units that are down, so the units that are actually vacant, and you know they’re gonna be vacant at the end of 30 days. Expiring leases as well, things like that.
Next is a delinquency report. So if the economic occupancy is lower than the physical occupancy, the details of that will be listed on the delinquency report. So it’s a list of all the residents who are late on rent, or other fees you’re charging them, and then what those amounts actually are.
Then you’ve got your leasing reports. This is a summary of the actual leasing activity. These are things like what’s the traffic at the property, what’s your current leasing information, your current concession information, marketing information, projections… Essentially, all the information you know about what’s being done to lease the units.
Another report you’re gonna want to see is accounts payable. This is just the amount of money that you or the property owes to your vendors, and that’s including the property management company.
Then lastly you’re gonna want to have a report about cash on hand, which is essentially the liquidity at the property – how much money do you actually have in your bank account.
Now, here’s some other reports that you’re gonna want to receive… So those reports are what you want on a weekly basis, just because if something is off on those, you need to catch it sooner rather than later. These reports are things you’re gonna want to get on a monthly basis. We’ve talked about this before, but you wanna get the income and expense statements, the profit and loss statements, the T-12, however you wanna call it… This is the detailed monthly report with all of the income and expense line items listed out in extreme detail; all of your income line items, all of your expense line items, and then the dollars associated with each of those, as well as a final column that has the variance of the actuals compared to your budget. That’ll be something important to track and we’ll discuss that here in a little bit.
You’re gonna want a report of all the deposits. This is just a summary of the security deposits information – the current balance, any forfeits, any checks that were returned, any tenants who moved out and were refunded.
You’re gonna want a general ledger, which is a summary of all the financial transactions for that month. Any money that went out, it’ll list out what that was spent on. A balance sheet, which lists out a summary of all the assets, liabilities and capital. A trial balance, which is a summary of all debits and credits. The rent roll, which we’ve talked about before, which is a summary of all the unit information – for each of the unit what’s the occupancy status, market rent, current rent, when are they going to move in, when does their lease start, when does their lease end, what other fees are they being charged, what’s their security deposit and what’s their balance.
You’re also gonna want to see the expiration report, which is a summary of the expiring leases, and then finally a maintenance report, which is a summary of the maintenance issues at the property currently, as well as the costs associated with fixing those issues.
That’s a lot of reports, and all of these reports are essentially allowing you to track the performance of the property, and make sure that your actual expenses and your actual incomes (and your actual future expenses and incomes) are on point with your projections. If they aren’t, then you will be able to catch those by reviewing these various reports.
Now, these are a lot of reports, and obviously, your property management company may or may not send you all of these, which is why it’s very important that – I’ve mentioned this before, and I keep mentioning it over and over again – you set expectations with your property management company before you close on the deal, and ideally before you even have a deal. So you initially are interviewing property management companies – say you interview ten management companies – and one of the things you wanna bring up is that “Hey, I would like to receive weekly and monthly reports. Is that something you guys can do?”, and they say yes or no. The ones that say yes, you end up hiring them.
After you hire them and you’re starting to look at deals or you have a deal under contract – at that point you wanna send them an email, “Here’s a list of the reports I want on a weekly basis, here’s a list of reports I want on a monthly basis, and then can we have weekly performance review calls to go over these reports during the stabilization period? Once we’re done, we can go to monthly calls.” If they say “No, we don’t do any of that”, then you might need to find another property management company. If they say “Well, we can do this, this and this, but we can’t do this, this and this”, then you have to decide, “Well, do I wanna continue with this property management company or do I need to find someone else who will actually send me all of this?” These aren’t all the reports you can request, these are just ones that are pretty common, and since they are common, the property management company should send you these, they should have some sort of software, which brings us into number three, which is how to actually obtain these reports… And the best way would be to ask your property management company to just create some sort of custom report in their management software that automatically sends you these reports on a weekly or monthly basis.
So someone at their company types in all the information for the property anyways, and then based on all that, they should have some sort of option to say “Hey, I want a general ledger, I want a balance sheet, I want a rent roll, I want a maintenance report; I want to send the delinquency report, occupancy stuff, every single week.” That way it automatically sends you an email; they have to set it up one time and that’s it. That’s the best way to go about doing it, which is why it’s nice to have a management company that actually has their own software, and they’re not just sending you a scanned piece of paper with all of this written out; ideally, it’s in PDF or Excel form, so you can open it up and easily see all the information that you need to see.
Another way to find these reports is to actually get access to the property management company’s software. That might be another good question to ask your management company, “What software do you use, and will I have access to the software?” That way all they need to do is input the data each month and then you can go in there and download each of those reports on your own.
Now, if your management company does not use a software, or if you don’t like the way their reports look for some reason, then the third option is for you to actually create your own custom spreadsheet. Essentially, you use that weekly performance review template that we provided in parts 1-3 and ask them to fill that out on a monthly and a weekly basis. But overall, you’re gonna want a management company that does this, and if they don’t, you need to know before you close on the deal… Because then if you end up closing on the deal and you realize they’re not gonna send you this information, you’re gonna have a hard time tracking the performance of the deal. So that’s number three.
Number four is “What metrics should you focus on the most?” I’ve mentioned 10+ reports, and on each of those reports there’s probably 100 different KPIs to look at, so which ones are the most important? Well – and I’ve mentioned this before – the most important is to track the cashflow coming in relative to your cashflow projections; those are the projections you offered to your investors when you were securing commitments from them. So you’re gonna wanna take a look at the income and expense report that you get on a monthly basis, and you’re gonna want to look at that far right column, which is the variance, and see how similar or how off your forecasted projections were compared to the actuals.
For each line item there’s going to be a variance number – a positive or a negative number – and you wanna focus on the items that have the greatest variance, or at the very least that have the highest magnitude of variance. So if you expected to have an income of X and the other income is Y, and X minus Y is $100,000, then you’ll probably wanna focus on that, as opposed to something that’s maybe a $10,000 or a $5 variance.
So if you get your monthly report and you see that there’s a massive variance in your income – well, then you’re gonna want to create a strategy with your management company during your weekly performance call on how to bring that line item back on track.
For the value-add business plan – again, that’s you doing some sort of improvement to the income or expenses in order to raise the property value – the number of units that you projected to renovate each month, relative to what you’re actually doing, is something else that you want to focus on, especially during the first 12-24 months, which is most likely going to be your stabilization period. And not only that, you’ll also want to make sure you’re tracking the actual rental premiums that you’re getting for those renovated units, compared to what you projected. So those are the two things you’re gonna wanna focus on, and all the reports will help you identify why those are off – why you have a high variance, why your rental premiums are off.
So you essentially wanna look at those two reports – the reports of the income and expenses and the renovation report – and if something’s off, that’s when you wanna go through all of your other reports and see if you can identify exactly why that is off. Obviously, there’s other metrics like leasing metrics, capital expenditure cost, total income and others that may vary from what you projected during the actual value-add portion of the business plan, just because you’re doing renovations… And just because there’s a variance doesn’t necessarily mean there’s an issue.
For example, let’s say you’ve got your cap ex budget broken down by month, and you realize that month six your actual cap ex expense is way higher than the actual budget; well, it doesn’t necessarily mean that you’re spending too much money on the renovations, or your renovation estimates were too high… It could just mean you’re ahead of schedule; it could just mean that instead of renovating 10 units a month, you renovated 15 units a month, so over the six-month period, that’s [unintelligible [00:22:19].26] so whatever that cost is is gonna be your variance. So every single variance isn’t necessarily a problem, unless obviously you don’t have the cash to be ahead of schedule. That’s just one example.
Another example could be that your total income at the property may be lower than you forecasted, because during the first three months you had a higher number of move-outs than you anticipated. So if that happens, then you need to ramp up your leasing and rent those units back out. That’s something that may happen when you buy a new deal that’s kind of outside of your control; it isn’t the end of the world, but obviously, if for example you projected a rental premium of $150 and all you’re getting is $50, then that’s a pretty big issue and you need to figure out what went wrong and how to fix that… Because $100/unit across all 100+ units is a huge variance in cashflow.
As I mentioned, the key metrics that you wanna focus on are going to be the forecasted versus the actual rent premiums on those renovated units. Other metrics that you can track that may cause a high income/expense variance are a higher turnover rate than expected; take a look at your economic occupancy rate, take a look at the average days to lease a unit, take a look at the revenue growth assumption that you had versus what’s actually happening, take a look at the traffic of potential prospective tenants coming in, take a look at the number of evictions, take a look at your leasing ratio and other metrics in those reports I’ve mentioned above… And just make sure you work with your management company; if there’s a variance, they should help you out.
And then lastly, number five is what are some other things that the best asset managers do. I gave a list of ten of those in parts 1-3, but here’s just a few other things I wanted to briefly touch on. Number one is that you wanna look at your property management company as an actual partner. They’re not just someone who’s working for you, but they’re a partner in the deal, because their actions have a very strong impact on the success of the deal.
When you are initially screening them, as well as on an ongoing basis, ask yourself questions like “Is this company someone that I would want to work with for a long time? Does their track record speak for itself?” What are the tenants – either your tenants, or tenants from other properties – saying about them? How professional are they when they’re speaking with a potential tenant, which you can determine by actually role-playing (or have somebody you know roleplay) as a tenant and see how they interact with that person. Are they willing to make any changes? Do the employees that work for them like working there? Are they engaged on social media? Things that you would want a partner to do are things that you want to determine on an upfront basis and on an ongoing basis with the property management company.
Next, the best asset managers also always look ahead. I mentioned this in parts 1-3 about those ten asset management duties. You should always be evaluating the market, you should always be evaluating the competition to compare your property to them, you should be tracking and maximizing the income growth and expense decline on an ongoing basis, and you should ensure that your tenants that are living there are actually satisfied, by checking your reviews, checking what people are saying about you on social media, as well as hosting community events.
For the community events – we will talk about that probably next week, a list of different events you can host for your residents to maximize their satisfaction and your retention rate.
Also, just like you would a business partner, since your property management company is your partner, you want to watch what they’re doing like a hawk, in a sense, or like a snake, or some other animal that has amazing vision… Because a lot of people for the apartment syndication investment strategy focus on the front-end activities. They talk about how to find deals, how to find money, how to know whether to form an LLC and when to form an LLC, thought leadership platforms, building a team, securing funding from lenders. Obviously, all those things are very important, but the asset management side of the syndication is not focused on as much, because it’s not as sexy… And also, it’s something that you’re gonna be doing for years or even decades, whereas you’ll be looking for deals for six months to a year; you find a deal, and that particular deal you’ll be asset-managing for a long time. And so much of your company and the asset’s success is going to be dependent on the property management company and their staff at the actual property. So if you don’t watch them like your career depends on it – because it does – then you’re not going to be able to scale as quickly as you want, and you might not be able to scale at all.
Tomorrow we’re gonna talk about exactly what you need to look at, and then depending on what you see, if it makes sense to actually fire the property management company… Because firing a property management company and going through the process of finding a new one and maybe having a few down months is going to be way better than having a really bad property management company for the entirety of your career, no matter how short it will be. So we’re gonna talk about that tomorrow.
The last thing I wanted to mention before we wrap up is make sure you’re visiting the property at least once a month in person. If for some reason you just can’t make it out one month, a good strategy is to buy a GoPro and have someone that you know in the area – or maybe even someone on your property management company – drive the property and walk the property with the GoPro and then send you the video so you can look at it. Obviously, not the best approach, but better than not seeing the property at all… Because again, I’ve said this before in the previous parts – you can look at all the reports in the world, but they always say a picture says 1,000 words, or however the saying goes… You need to actually see the property in person to know exactly what’s going on. Maybe there’s some issue on their report that you have no idea what the problem is, and then you visit the property for five minutes and you identify exactly what the issue is; and if you didn’t visit the property – well, you never would have known.
Those are the best practices for managing your property management company. As I mentioned, tomorrow we’re gonna talk about – okay, so you’re managing your property management company, watching them like a hawk for six months, and identify that they’re doing this, this and this, and you want to fire them. We’re gonna talk about what this, this and this are, as well as how to actually fire the property management company. We’ll talk about that tomorrow.
Until then, I recommend listening to parts one through four, I recommend listening to other Syndication School series on the how-to’s of apartment syndications, and download the free property weekly performance review tracker. All that can be found at SyndicationSchool.com.
Thank you for listening and I will talk to you tomorrow.