1. Failing to charge enough cash
To invest successfully, you need to set high-income goals, whilst simultaneously minimizing your costs. As far as property management is concerned, investors want to find the best deals — and this involves incurring the lowest management charges possible.
However, there is an issue with reduced management charges. It is an undisclosed obstacle that might not become evident, until several years or months down the line.
Here’s what occurs when charges are not high enough
- Reduced management charges equal lower profit for property management companies
- Reduced profit equals insufficient funds to pay employees
- Insufficient employees/cashflow equals not enough people to manage all the propertiesLet us assume that a property manager deals with twenty different units, with a $1000 average monthly rental value.
-$1000 per month multiplied by twenty units, equals $20,000 per month rental income
The majority of property managers charge a certain percentage of collected rents. This can range from four percent to ten percent, or even more. Assuming our property manager charges six percent, that means…
$20,000 per month multiplied by six percent, equals $1200 per month management charges
And this assumes that all the rents are collected successfully every month.
Although six percent might appear high for many investors, this is not sufficient to operate a property management company with just twenty units. This approach could only work if the owner and/or his relatives carried out all the tasks, and we’re just adding to their income from property investments.
All businesses (including property managers) have overheads — the costs needed to run a company. With an income of $1200 per month, it is not possible for a property manager to hire employees on a full-time basis.
If the number of units increased to forty, which boosts the income each month by 100 percent to $2400, this is still insufficient to hire even one full-time staff member after overheads are paid.
Property management companies that try to gain your customers with low rates, and that manage just a small number of units, should be viewed with caution. If possible, find a different company with higher fees. I realize this appears illogical to investors. However, you will get superior service, and the company should be around for long.
2. Insufficient employees
Consider the following scenario…a small sized property management firm (run by a married couple) has grafted for years to build their portfolio up to fifty units. Their costs are kept low, they offer a customized service to tenants and landlords, and their financial reporting is excellent.
Investors start to hear about how good their service is. Then, they are contacted by an investor who has a significant portfolio — more than fifty units.
By gaining one new client, this small company will increase the number of units it manages by 100 percent! This pleases the owners, who jump at the chance to make more profit.
On the face of it, this property manager has doubled his turnover with a single client. And initially, that is precisely what occurs.
However, after a brief period, it becomes clear that they have double the workload. They have more than double because extra work is required at first to deal with a new customer, with new tenants and properties.
Consequently, the quality of management drops for the other units. Requests from tenants are not handled in a timely fashion; landlords are not telephoned back immediately, etc. Complaints start to flood in, which makes the company owners more stressed.
All experienced property managers know it requires a certain quantity of people to efficiently manage a particular quantity of properties. If not enough manpower is available, then the management quality suffers.
Therefore, in this example, let us assume that they collected a $1000 per month rent, on average, for 100 units – and that an eight percent management fee is charged.
-100 units multiplied by $1000 per month, equals $100,000 per month rental income, multiplied by eight percent equals $8000 per month management fee
That is sufficient to hire a full-time employee and still offer an income for the owners. Excellent! Solution found…kind of. While a new employee has been recruited, it still might not be sufficient to deal with the workload.
Don’t forget…the workload has increased by over 100 percent. However, the staff has only increased by fifty percent. As a result, the owners’ workload is still larger than it was previously, which might negatively impact the quality of management.
3. The number of distributed units is too high
Put yourself in the shoes of a property manager, and ask yourself what you would prefer to have:
- 100 properties for single families, or
- A multiple unit building that has 100 units
- The majority of investors would just take the most profitable option that fulfills their investment targets.
Nonetheless, as far as property managers are concerned, it is a far higher workload to manage 100 single family properties, compared to one building with 100 units.
Why is this? Picture traveling to 100 properties, situated in different locations throughout a city for tasks like:
- tenant problems
- collecting rent
- inspections (e.g., boilers)
- general maintenance
- emergency repair work (e.g., leaking pipes)
Now, compare that to traveling to one multiple unit properties, and just getting in a lift to do the same things.
It is clear that when smaller property management companies focus on small multiple unit properties or single properties, they have a higher workload. Consequently, they will not be able to offer the same level of service as a company that can just visit one big multiple unit properties to manage everything.
Most people who set up property management companies start from scratch. Consequently, although they might have managed properties in an investment portfolio, they might have little experience in operating a property management company. This can cause problems because every successful business relies on several areas of expertise, all of which take time to master. Phoenix AZ property managers are no exception to this rule.