A few of my clients acquiring apartment buildings in the $3-M range have chosen to manage their properties themselves. After all, property management isn’t rocket science. And there doesn’t seem to be that much to it especially if you own property in a market like Whatcom County where in most areas we enjoy sub 1% vacancy rates. All you have to do in a market like that is keep your apartments competitive, post the occasional vacancy on Craigs List, screen new tenants carefully, and arrange for unit turnovers. Definitely doable, and very part-time for most people, even fully employed people. And then you can pocket the 5-9% per month it would have cost you to hire a property management firm to do the work. OR, will it actually end up costing you more?
In my professional experience I have seen it cost my clients more to forego professional management. And one of the primary reasons is that your property manager will keep your rents at market rate. And they will keep your rents coming in on time.
Don’t get me wrong. I’m all for having great relationships with your customers. But if you enjoy being the management contact directly with your tenants, it’s important to remember that you’re running a business. And running that business well means offering a great value proposition to your tenants, and marketing that product at a fair and reasonable rate. It also means ensuring that the rents come in on time and that the tenant respects your contract with them.
Landlords that self manage have a tendancy to fear raising the rents like they should each year to keep pace with the 3% inflation in this area. They may fear creating disgruntled tenants that don’t take care of the apartment, or just causing tension and awkwardness with their customers, or the possibility of having to contend with a possible vacancy as a result of the increase. Sometimes it’s because the landlord has developed a personal relationship with those tenants, and feels that he or she is already getting enough for the unit. They have lots of equity in the property and they’re happy with the cash flow the apartment is already bringing.
The important thing to keep in mind is that keeping your rents competitive with market rates impacts more than just your monthly cash flow; it impacts the future resale value of your property and your property’s appreciation. It can also impact your ability to use your property for it’s maximum leverage if your goal is to acquire more property.
Keeping your rents current means knowing what the comparable rents actually are, and that’s not as simple as it sounds. Not just any apartment is a comparable; many factors come into play of course beyond SF and number of bedrooms and bathrooms, including location, washer/dryer access, parking, proximity to services, and how up to date your building is. In general though, your apartments should be priced at least on par with the area’s average rents, and possibly should be higher, depending on the amenities and finishes you offer.
Understanding what other comparable apartments are currently renting for does take time and effort. That’s where your real estate broker can help. A great commercial real estate broker will know the inventory, will have been physically present at the property(s) you’re interested in, and should know off the top of their head what kind of cap rate thoses properties should sell for.
The time will come when every building owner will want or need to liquidate a property and when that time comes, hopefully that property will be valued at market rate. You may wish to buy another property, to diversify your portfolio into smaller properties making it more liquid and lower risk, you may wish to just get out of the apartment business altogether and enjoy your cash. And even if your goal is to never sell and instead to will your property to family members, it’s always important to have an eye of the resale value. If any of these events happen and your property is not getting it’s full income potential, and especially if it requires a big leap forward to get your units up to market rate, there’s simply no way your property will get what it’s worth should you decide to sell. Because most weight in any bank appraisal is given to the income property approach. If your income on the building is soft, so too will be your offer price or your appraisal at time of valuation.