By Linda Day Harrison, theBrokerList, Chicago, IL

You want to make a purchase, but what is driving that decision? Is it cost benefit analyses, the idea of getting more bang for the buck, impulse, or is it a high return on investment? And what does this all mean to us as property managers?

When you are a property manager, one of the biggest roles you play on behalf of your client or property is purchasing! You purchase utilities, light bulbs, labor, services, marketing media, copy paper (hopefully less each day!), equipment, tools, professional services, and capital improvements or repairs.

Each time a purchase is made it impacts your Net Operating Income (NOI). The NOI is the key ingredient to the value of the asset. Investors look to that number when valuing the asset, so it is very important to know that each purchase chips away at that number. But guess what? If the income goes up, the chip is worth it. So how do you measure each chip you make?

There are many ways to look at purchases. It shouldn’t be emotion, reaction, or impulse. It needs to be grounded with cold, hard, numerical fact. In other words, you need to know the bottom line of that purchase.

Some purchases are super simple to analyze, while others take a more complex analysis, and may even require experts to help you so you are measuring things properly. There are many ways to look at numbers and anybody can present those numbers to you in different ways. The most important thing to remember when performing the analysis is common sense and logic.

For instance, if you are purchasing marketing media, the #1 measurement is traffic! There is no other way to measure it except results. So if you place an ad or do a promotion, what is the result of that effort and expense? Notice I said effort. Effort = labor and labor = dollars. In other words, your time is money, and this is actually one of the largest and most critical pieces of the property expense pie.

If you are spending X number of hours doing a task and the result is a $0 return on the property, you must immediately stop doing that thing. It is that simple. If you ask your building engineers, administrators, or vendors to perform a task, ask yourself how that will bring a return to the property. Most things you do are valuable to the property, like preserving the structure or preventative maintenance. Those are no-brainers. However, there are things we do sometimes that we are not measuring accurately, like marketing efforts, or energy-efficient products and equipment. You might be surprised when you measure all of these components and determine how much money you may be able to put back into the income. I call that getting the “biggest bang for the buck”!

If the item saves labor or brings me tenants who lease at my property, that is quantifiable and clearly a bang! Just remember with each purchase to really think about your decision. Make sure there is value and evaluate the labor as well. Value is key because it is a test of quality and price, NOT just price. Do not fall into the rookie trap of just following low price. More property managers get in trouble buying for the lowest price than if they go with the middle price, for instance. Time and time again, they are not measuring. It just appears to be so low that they feel like heroes, when in fact they are being fooled. Now in some scenarios, this may not be the case, depending on the purchase. However, usually the low price is a low price for a reason. For instance, with a contractor it may mean they are not insured, they are non-union, or they do not provide all of the benefits and tools needed to perform the task properly. So now the hourly rate of $35 looks great compared to the guy charging $50, but it will take the $35 guy longer.

Always remember to ask for a budget or a not-to-exceed cap on purchases, if possible. The only time that a not-to-exceed cap is impossible to predict is if the scope of the project changes. In other words, if the scope is controlled by the service provider, they need to cap it. If the scope changes due to unforeseen circumstances, it is not always a fair compromise. Both parties need to face the risk. However, there are many service providers who have such a strong command of their business that they know alternatives that make them superior providers, and they can in fact give you a not-to-exceed. They also may be willing to do this to gain your loyalty for future purchase decisions.

Just remember to think things through. Do not buy in haste, as haste makes waste and every penny counts. Remember to always measure it! Even if it is not obvious, there is always a way to compare a purchasing decision.

A guest post by Gabriel Knight, Mortgage Fit, Chicago, IL

While rental property investment might look like a rewarding and positive venture, managing both tenants and properties can be overwhelming. As such, you may need to hire a professional property manager to make your life easier. This is an especially good idea for rental property owners who have no experience or don’t want to spend their time managing a rental property on their own. With a property manager, you’ll be able to ask mortgage questions if you run into any trouble with your property. Here are some reasons why you should hire a residential property manager to manage your residential property properly.

Set the right price – You can look online to see what the other landlords are charging for the same kind of property to get an idea of the rent you should charge, but a good property manager will do a complete analysis of the market to choose a rental sweet spot. You’ll have the right balance between increasing your monthly income and preserving low rents.

Search for the right tenants – An experienced property manager can help you find the right tenants. The property manager also takes care of all the details related to your property, like sorting through legal issues, evaluating credit reports, verifying employment, performing security checks, and checking references. You’ll wind up with the best fit between property and tenant.

Collect and deposit the rent payments – If you have any experience in billing, you know that collecting payments from customers is not an easy task. Property managers have efficient systems to collect monthly rent from tenants in a timely manner. This is important when you’ve reached the threshold of properties that makes collecting rent too time-consuming.

Proper marketing of your property – An experienced property manager knows exactly where and how to advertise and market your property. He also knows how to time advertisements so your property can be rented quickly, thus avoiding long-term vacancies.

Maximize profits – Hiring a property manager will help you maximize profits on your rental property. A property manager usually receives a percentage of your property’s monthly rent in return for their services. This rate ranges between 6% and 10%, which is usually less than what you’d pay to hire a team of professionals to handle the things the property manager will handle/streamline.

Landlord/Tenant Relations – In addition to finding good tenants, a property manager will stay on top of things to maintain a good relationship between the tenants and the landlord. The property manager takes care of routine inspections and deals with every situation that comes up.

By hiring a good residential property manager, you’ll successfully reduce the risks involved in the real estate game. This makes the things much simpler and more enjoyable for you.

By Jo-Anne Oliveri, ireviloution intelligence, Brisbane, Australia

I’m sure you are beginning to understand the vital importance of an operational due diligence being conducted prior to your offer to purchase a rent roll becoming unconditional. Once that contract is unconditional you are bound to proceed with the purchase regardless of how inferior the business is that you are purchasing. Yes, I understand that in most purchases there is a retention period, usually three months (again, this is a time period I do not agree with) whereby you have the opportunity to not pay for any managements that you may lose in this period. But, under normal rent roll contracts it’s fairly standard that a percentage of the purchase amount is usually withheld in a solicitor’s trust account and is released when the retention period has expired. Some agents believe this period is their safe guard. Well, I’m here to tell you that you must not be lulled into a false sense of security and, with that said, I feel another article is worthy of this subject.

This post focuses on what I refer to as the “critical factors” that need to be investigated when conducting an operational due diligence. These critical factors are:

• Average management fee
• Average distance to property ratio
• Average weekly rent
• Management splits (percentage of houses and apartments)
• Number of owners against properties under management and how many are multi owners (including details of each owner’s actual number of properties)
• Percentage of fixed term leases
• Monthly disbursement methods and timing
• Arrears management

In each of these factors we are seeking information that tells a story. It tells a story of risk factors and that’s exactly what operational due diligence is all about. What risks are you facing if proceeding with the purchase of this rent roll? How could it affect your current business operations?

I could write an article on each critical factor as each show a different set of possible risks or benefits to your current business operations. This post will focus on the average management fee.

The management fee is the determining factor that places the dollar value on your business. The value is normally multiplied by what I refer to as the “market multiplier” – the annual management fees multiplied by the current market value multiplier. Just by virtue of the fact your business is valued on your income generated through management fees, it is critical that management fee income is protected and never discounted.

When conducting operational due diligence it is not uncommon to find the management fee varies by as much as 4 to 5% in most rent rolls. Whilst this may be justified at the time to win business (new managements) the overall impact on your business value is disproportionate as it decreases the dollar asset value of your business, the business value in comparison to market average, and also the income generated from the management.

For example, if the current market value multiplier is around $3.00 per dollar income. Due to the fact that the operational due diligence uncovers significant management fee discounting and a high variation of management fees being charged, the value is much lower than market average based on risk factor and ongoing management. In turn, this affects the value of your current business. All of these factors MUST be considered.

As mentioned, whilst conducting operational due diligence I look for stories about the rent roll. These critical factors in question tell me a story about the current managing agency. Have they have built this rent roll fast, to then sell it off, or do they not back their business up with a high performance and knowledgeable team, or do they discount to get the business and therefore there have no client loyalty, or simply all of these? So, is this business worth what the current market value multiplier determines? The answer is no. In this case the advice is – offer a lesser amount than the current market value multiplier.

It is all too common for rent roll purchasers to pay far above the real value of the business because an operational due diligence has not been conducted. The amounts we are talking about can be hundreds of thousands of dollars. Would you buy any other business on face value? Would you invest hundreds of thousands of dollars without first investing a few thousand dollars to have an operational due diligence carried out? I would think not.

So, I hope you understand the vital importance of an operational due diligence being conducted prior to your offer to purchase a rent roll becoming unconditional. Don’t you agree it makes more sense to research the business you are considering investing in before making the decision to invest?

By Linda Day Harrison, theBrokerList, Chicago, IL

Today more than ever, many people do not have traditional sources of employment income. With the job market shrinking, many of us are working for ourselves and are creating jobs by starting businesses and new ventures. With that being said, how does a self-employed individual purchase a residential or commercial location with the stringent financing requirements currently in place?

Simple! Look at properties with owner-financing. What is owner-financing? Owner-financing is when the seller of a property is in a position to act in the capacity of a lender. The seller accepts a down-payment and an agreement for repayment.

The advantages are tremendous and can be a win-win for both parties. Advantages include:

1. More favorable rates and terms.
2. Easier qualification process.
3. Able to sell a property in a depressed market.
4. Seller can get a much higher return than other vehicles such as a CD.
5. Seller can receive a substantial down payment.
6. Tenant can now become an owner.
7. Less closing costs.

Now like anything, there are many pros and cons depending on each seller and buyer’s tax consequences and personal financial situation, including whether or not the property is held free and clear. Owner-financing should definitely be a serious avenue to consider when selling a property and when evaluating your lease vs. purchase decision on residential or commercial property.

An attorney is needed to assist in the process and as a buyer, you should still do your homework, via a due diligence period. Whether buying or selling, always evaluate the pros and cons of owner-financing and its impact on your next real estate opportunity.

By Jo-Anne Oliveri, ireviloution intelligence, Brisbane, Australia

Sadly, when carrying out due diligences many agents buying a rent roll are not sure what they are looking for. This lack of understanding means most pay a hasty glance over files and computer reports. On the surface they all look fine, but it’s a bit like an iceberg, we need to understand what looms below.

We are all in the industry because we are good sales people. Ultimately, isn’t this industry all about our ability to sell? Yes, we promote the best features and benefits of our products and services, but as selling specialists we also need to understand that whilst it looks good on the surface, there may be landmines below. I’m not saying don’t buy rent rolls, just be aware of what it is you are purchasing.

So, the first thing is to understand due diligence. There are two kinds of due diligence – financial and operational.

When purchasing rent rolls, financial due diligence is undertaken by a valuer. In many instances, the valuer is engaged by the bank to conduct an evaluation of the business prior to lending. If you are not borrowing for the business, I recommend a financial due diligence be conducted nonetheless.

Operational due diligence is the second type. This is just as critical as the financial due diligence. Not having an operational due diligence prepared would be like buying shares in a company that is on the verge of bankruptcy and hoping a healthy bottom line and large profit are miraculously going to be uncovered so you make a mint (not going to happen!). Buying a rent roll and believing that all is just as they say it is, is usually not the case. There are risks and with these risks the stakes are high!

So, what are we looking for in an operational due diligence? We are seeking information on what I refer to as the “critical data” – critical numbers, critical factors, and critical measurements. For example, historical information about the business processes, and client loyalty such as the average number of years a client has had their property managed by the selling agency.

When conducting the due diligence the true story about the business unfolds. How much should you really pay for managements that have been secured within the past 12 months? Why pay top dollar for clients who, by this stage, are generally not loyal to the selling agency?

By conducting due diligence we are seeking information on the history of the longevity of the current properties under management. This information is essential to understanding the risk factor in relation to retention of the purchased managements. Why? It is important to understand why these clients have engaged the services of the current agency to manage their property. Did they go through a thorough selection process? They may have interviewed the buying agency and decided against them. How likely are they to transfer across if this is the case? The client may be annoyed that they have signed up their management with the selling agency. Or they may feel deceived that they were not advised that selling was an option in the near future.

When purchasing a rent roll, the due diligence needs to have information in relation to the history of the average number of years the properties have been under management along with a breakdown of the percentage of number of years managed. If the highest percentage is in the 12 months or less percentile then the risk factor is high. Remembering though that operational due diligence provides information on risk factor and is not a valuation. In saying that though, following your due diligence you are in a position to re-evaluate your current offer and either collapse the offer if the risks are too high or decide the initial offer is far too much.

It is important to remember that a due diligence is carried out as part of the conditions of the contract to purchase. The purpose of the due diligence is to provide factual information as to whether the purchase is a sound investment. Due diligence forms part of the conditions of the contract and needs to be finalized within a certain time period. This means that just like a property purchase that is subject to a building inspection, if the due diligence uncovers areas of concern you have the option to crash the contract. Likewise, taking into consideration the information that the building inspection has uncovered, you could renegotiate another price. A due diligence on a rent roll is no different.

I look forward to uncovering more of the story behind the operational due diligence in upcoming blog posts. In the meantime, if you are considering purchasing a rent roll, don’t get caught up in the hype of purchasing as quickly as possible or the need to buy out your “opposition”. Tread carefully, diligently, and at a pace that you set and not the broker selling the rent roll to ensure you avoid the landmines!

By Jo-Anne Oliveri, ireviloution intelligence, Brisbane, Australia

Recently, I have been involved in the sale and purchase of a rent roll. I had the rare opportunity of consulting for both the buyer and purchaser. Let me say, this was the smoothest and least stressful rent roll transfer I have ever witnessed!

Now some might say there is a conflict of interest by consulting to both the seller and the purchaser, and yes, I would agree! I definitely had my reservations about consulting and advising to both of them, but I discussed my dilemma with both parties. They both agreed they would retain me as the consultant and adviser through the negotiation, transfer, settlement, transition and retention period. In fact, I even conducted the inspection and overview on the selling rent-roll, and prepared the due diligence report.

This was a tremendous lesson for all concerned (including me)! The offer and settlement process lasted for several months. The buying agency is now in the midst of the four-month retention period. The selling agency must continue to cooperate to ensure all clients (both property owners and tenants) are happy with the new managing agent. Both agencies must not become complacent or lulled into a false sense of security until they are clear of this retention period.

For all intents and purposes the first goal of the buying agent is retention! The second goal is to build on the managements that they have invested in to encourage the investor to buy more property and recommend their services. That’s how a business owner should focus their attention to build on their investment. Principals need to understand and monitor their ROI (Return on Investment).

The amount invested alone should be kept at the forefront of the mind. The managements that transferred with the rent roll should be tracked with the historical information. Performance should also be logged and recorded. This ensures that not only the investment was solid and worthwhile, but also that future investments in purchasing rent rolls are made with factual historical data.

It’s important to understand the impact the previous purchase had on your business, good or bad – and that is just the financial investment! What about the investment of time, the years the principal has invested in developing, growing, and nurturing their own brand, and their personal and professional reputations?

Too many principals purchase a rent roll and never have any way to track the performance and ROI of the investment. Too many principals that decide to sell their rent roll believe once the contract has been agreed and is unconditional that their job is all over. They believe it’s just a matter of transferring the files over on transfer (settlement) day. Nothing could be further from the truth! Some principals even make sure the new managing agent employs their current team to continue managing the properties. They believe property owners will feel more secure with the management continuity and familiarity, therefore have a greater chance of retention. Once more, nothing could be further from the truth!

So, before you decide on buying a rent roll or selling your rent roll, please ensure you are informed. It’s not just a matter of signing a contract and employing a team. Oh no, there is so much more than meets the eye. More thoughts on this over the next few blogs!

By Salvatore Friscia, San Diego Premier Property Management, San Diego, CA

As we look forward to 2012 and say goodbye to last year, many new real estate investors will forgo using a property manager in lieu of becoming landlords themselves for the first time. It may even be one of their yearly goals to acquire an income producing rental property. The fast and lucrative lifestyle known as real estate investing, a dream which yields hoards of money overnight and comes with a fully loaded German-engineered luxury vehicle, is just a two bedroom rental condo away from reality.

To some that may be true and I’m not knocking the idea of a PM business starting small. I have personally witnessed the power of real estate investing, but with all kidding aside most new real estate investors who plunge into managing their own rentals find themselves at a disadvantage early and often when it comes to entering the game know as landlord versus tenant.

The rules of the game are fairly simple and most of the time both parties play by them. Overly simplified, the landlord’s duty is to supply a safe and temporary inhabitance for the tenant, who in turn pays an agreed upon rental rate for the right to occupy the dwelling for a contracted amount of time. The objective of the landlord is to bank or reinvest the cash flow (amount in excess of the mortgage payment and operating expenses) from the rental unit(s) each month and build wealth. The disadvantage begins when the new landlord places a tenant who doesn’t play by the rules of the game, throwing a monkey wrench in the whole building wealth formula.

The battle scarred and seasoned tenant alters the game to their advantage with rule changes that may go something like this; initially the rent is a couple of days late, then a week late, and then a request to change the rent due date because “They get paid later in the month”, then a phone call stating that their hours have been cut or that they will be a little short this month and can only pay a portion of the rent, then finally no return calls and nothing but silence.

News flash: if it gets to this point in the game you may have already lost. Though truthfully, you have been losing the whole time. At this point you are owed a couple months’ rent and need to start the eviction process while hoping that your property isn’t totally destroyed. There is no guarantee that having a professional property management in place would have stopped this from occurring but odds are an experienced property manager who is familiar with these trends would take fast action to limit the downside risk in these situations.

In property management it’s not if these issues will occur but how you deal with them when they do that makes you successful. Start the New Year off right and let one of your real estate resolutions be to add a professional property manager to your team.

A guest post by Ashley Halligan, Analyst, Property Management Software Guide

Short-term rentals, of all natures, have become a hot commodity – and a controversial one at that. Short-term rentals can include vacation rentals and temporary housing, often sought by vacationers, business travelers, or people who have recently relocated while seeking long-term living arrangements. Either way, it’s become an ongoing topic of debate and an attractive investment opportunity for property owners and managers. In comparison to traditional rentals, short-term rentals can charge significantly higher rates given their nightly and weekly availabilities. Some property owners have earned as much as 25% of their mortgage in a single night. And during special events or peak rental periods in a given area, potential rental rates can be very attractive to property owners. Because of the income short-term rentals can procure, the opportunity for profit potential may be exponential – but there are several considerations that should be kept in mind.

First and foremost, it’s essential to keep the added costs of maintaining a short-term rental in mind. These rentals can be subject to Hotel Occupancy Taxes in certain cities, while other cities require specific licensures and inspections not required of traditional, long-term rentals. Penalties for not abiding by short-term rental laws in your city may result in hefty fines. There can also be increased insurance costs. Additionally, the cost of regular upkeep and maintenance, including utilities, should be calculated. In order to continually attract tenants, your property must be kept in prime condition, both functionally and cosmetically. From a marketing perspective, this could include offering unique amenities like sporting equipment or movie libraries, all of which are additional expenses. On the flip side, the regular maintenance of these properties has been credited with helping to increase neighboring property values.

Legal issues are another important consideration given the ongoing public debate and subsequent restrictions arising in many cities. Some city officials and neighborhood associations oppose short-term rentals for many reasons including a fear of transient tenants potentially bringing chaos and crime to communities, noise and parking complaints and a failure to fall under the same standards required of local hotels. Because ordinances, zoning limitations and overall restrictions are popping up all over the country, it’s necessary to be aware of the possibility of your property being restricted by new laws. New York City, for instance, has recently banned all rentals under 30 days. Though San Francisco has a written law of the same nature, it’s instead levied a 15-16% transient occupancy tax that reaps millions of dollars in revenue for the city.

Aside from the considerations that should be kept in mind, there seems to be a well of favorable reasons to contemplate short-term rentals. Short-term property managers prefer these rental types for many reasons, and for reasons other than the revenue potential. Property owners who have a sentiment for a home they’re renting on a short-term basis claim it allows for a more feasible preservation of a home, allowing regular entry and ongoing maintenance and beautification that isn’t typical of long-term rentals. Other claims suggest that short-term rentals promote tourism in communities, particularly communities who may not have optimal hotel capacity during peak visiting periods. And lastly, there’s hefty tax breaks that are sometimes associated with the maintenance costs of operating a short-term rental. Advertising and maintenance costs as well as high-ticket improvements can also be tax deductions.

With all these things in mind, it’s important to calculate both the pros and cons associated with short-term rentals before diving into the deep water surrounding them. See the full guide here.

By Salvatore Friscia, San Diego Premier Property Management, San Diego, CA

Property management is all the buzz these days, as it is becoming the saving grace of the real estate industry. Across the country, real estate agents and realtors who are unable to maintain consistent listings and sales have turned to property management as a steady income stream until the market “picks up” again. This increase in competition for property management accounts by quasi real estate agents/managers has lead many who want to build their property management portfolio to take on any and all assets.

Many new to the industry agree to manage dilapidated properties from slumlords at management rates sometimes as low as three or four percent, and welcome the unrealistic rental rate demands from new investors trying to cash flow on properties that never will. However, by far the most common mistake made by these new entries into the business is taking on accounts that are located just too far away from their own area of operation or expertise.

We have all seen the marketing signs before – “Countywide,” “Citywide,” or “We service all areas.” Now, please understand that many well-structured property management companies large and small can accurately market this way, as they have the means, systems, and staff available to handle distant accounts across larger serviceable areas, and do so in a professional manner. That’s not always the case for single parties handling a few accounts here and there. Saying “no” to a potential account, or offering to refer that client to a reciprocating property management company for a referral fee, seems to be a hard thing to do in a struggling real estate market.

In my experience, the successful property managers know their limits, and would rather deliver exceptional service than risk blemishing their reputation on a property they should have referred. Nothing will destroy the will of a new property manager faster than having to drive clear across town numerous times a week to show a property that maybe difficult to rent. The more trips the manager makes across town to the property, the more evident the profitability of the account comes into question, and things like drive time to-and-from, gas expenses, and vehicle wear-and-tear start to take a toll. In the end, the owner is usually unsatisfied with the results and the property manager is just glad to see the property go. Unfortunately, real estate property management is based on relationships, and saying “no” maybe the best way to go when dealing with a property outside your area of operation or expertise. Besides, there’s nothing wrong with getting a referral check and keeping your clients.