Theo Hicks dives deep into the themes of property management. Ensure that prior to hiring, you ask the right questions. Set expectations upfront with your management company in making sure they can accomplish the job AND have the willingness to accomplish it.
Theo unpacks the five points in dealing with property management: How often do you want to interact with the management company? What types of reports do you want to receive from them? In what form would you want to receive these reports? What metrics should you be looking at? What other things can excellent asset managers do? Listen to this episode as Theo sheds a light onto these compelling questions!
Weekly Performance Review Spreadsheet: https://www.dropbox.com/s/j17v0ib4euafbo0/Weekly%20Performance%20Review%20Template.xlsx?dl=0
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TRANSCRIPTION
Theo Hicks: Hello Best Ever listeners and welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment indications. I’m your host, Theo Hicks. In the last Syndication School episode, we talked about when to bring your property management company in-house and some of the pros and cons of that. We’re going to continue on the theme of property management company today, and talk about how to manage your property manager.
As a GP, whether the proper management company is in-house or a third party, one of your main responsibilities is to oversee them, to manage them. You aren’t going to be doing the property management duties of actually helping residents sign leases and show units, but you’re responsible for making sure that the property management company is doing those things. So I wanted to do an episode, that I thought I’d done before, but it must have slipped through the cracks, to talk about some of the best practices for managing your property management company, after you’ve acquired a deal and have assumed your position as the asset manager. We’re going to go over five questions to think about.
A theme you’ll see here is that a lot of these management duties, overseeing the management company will go a lot smoother if you set proper expectations upfront, rather than once the property is closed on, management takes over, you explain to them exactly what you want them to do, make sure that before you’re going to hire them, during this screening process, you’re asking them the right questions to make sure that they’re able to do what you need them to do after they’ve taken over management. So what are these things that you want them to do? We’ll go over that in a second.
The theme you’ll see between all of these five questions or five points is that you need to set expectations upfront with a management company and make sure that they’re actually able to accomplish these things and are willing to accomplish these things. As I mentioned in the episode about in house management, setting expectations and having the management company do what you need them to do, implement your business plan to your liking – obviously, a third party can do that but you can get more out of in-house, because it is your management company. You’re in control of that management company, as opposed to overseeing or working with a separate company.
The first question to think about when you’re managing your property management company is how often do you want to interact with the management company? Ideally, you’re going to have weekly calls with your management company. Some people might do it every two weeks; I doubt anyone does it every month, but maybe they do. I’m sure in smaller deals or smaller portfolios it might be a once a month, “Okay, is all the rent collected? Good. Okay, I’ll talk to you next month.” But for larger apartment syndication deals, the ideal is at least once a week. Especially if you’re doing a value-add type deal, or an opportunistic deal, or a deal that involves some sort of renovation to the property, then you’re going to want to maybe even have more frequent communication with your property management company. And then once the asset is stabilized, maybe you can move just to strictly weekly calls, or every two weeks… Again, maybe monthly, but I don’t think that’s probably a good idea… Or as needed. But the idea is that you want to have frequent conversations with your management company.
So again, when you’re having those original conversations, you want to make sure that they’re willing and able to speak with you that often, or however often you want to speak with them, so that you can stay on top of what they’re doing. Because during these calls, these are going to be weekly performance calls, where you’re talking to at least the onsite manager. Ideally, if you’re working with a third party, the regional manager is on this call as well, and it’s going to be, as it implies, going over the performance of the apartment over the past week. You’re going to most likely be reviewing various property reports and them any key performance indicators or KPIs that you like to track.
Which brings us into number two, which is what are these reports? What types of reports do you want to get from your property management company in order to manage them adequately and to make sure they’re doing what they’re supposed to be doing?
The main reports that your investors are going to see are not going to be the same as the reports that you are going to want to see. So like I said, for every single report that you get your management company to your investors, the best practice would be a T12 and a rent-roll. But I’m just going to go through some examples of reports that you might want to consider getting from your management company and reviewing during these weekly performance calls.
The first would be the box score; this is a summary — it might be called something different, but box score is the common jargon. It’s a summary of the leasing activity. It will include how many people moved in that week? How many moved out? What’s the occupancy status for the unit? How many are vacant, but already leased? How many are vacant but not leased? How many are vacant and not least but they’re ready to be leased? How many notices have you received [unintelligible [09:00] notice but no lease? Model units, down, other use… So just a breakdown of how all the units are being used. That’s going to be the box score.
Next, you’re going to see the occupancy reports. So this would be the physical occupancy, as well as the economic occupancy. Ideally, those are broken apart, so you know what’s the rate of occupied units, and also the rate of paying tenants of those occupied units. So collection rate, basically.
Occupancy forecasts, so what’s the projected occupancy based off of the future occupancy statuses. So in that box score, you’ll see these vacant units, but they’re also already leased. So they’re vacant now, but 30 days from now, we expect them to be leased. So our future occupancy is higher than our occupancy now. So you want to know that as well.
Then there’s a delinquency report. So this will be a list of all the residents who are delinquent on their rent, and what the amount of the delinquency is. This is probably something that is super important right now, going through the pandemic and eviction moratorium to people not paying rents.
The leasing reports – this is a summary of any leasing activity. How much traffic did they get to the property? How that traffic turned into leases. Any concessions given on those leases? How much money has been spent on marketing?
The next would be accounts payable. This would be a summary of the money that you still owe to vendors. This is going to include the money owed to the management company. This is important because there’s another report that says “Here’s how much money we brought in this month”, but doesn’t actually show all the money that still needs to go out. So that might be a misrepresentation of how the operations are performing at the property.
There’s a cash on hand report, so how much money is actually in these accounts. We have income and expense statements. This is your T12 breakdown of the income and expenses, and then compared to the projections, ideally. So ideally, they’ll add at the end of this report — so it would be each month broken down if you’ve owned the property for a year. So it’ll be a 12-month breakdown, 12 columns and then the 13th column will be the total, and ideally, the 14th column would have the projections, and then the last column would be the projections minus the actuals. That way you can see exactly how the property is performing, compared to what your projections were.
A couple of other reports – deposits, a summary of the security deposit information. You’ve got a general ledger, a summary of all financial transactions. Your balance sheet, which is a summary of assets, liabilities, and capital. Trial balance, a summary of all debts and credits. Rent roll – we’ve talked about that in this episode; this is one of the things we send to your investors. The exploration report – this is a summary of all the expiring leases. And then maintenance reports – a summary of maintenance issues and cost.
So these are things that we’re going to want to go over; maybe don’t look at the cash-on-hand report every single week, but the box score, occupancy, delinquency – a lot of things are important to know right away. Because if something were to be off, if you’re not in constant communication with your management company, constantly reviewing the reports, then you’re not going to catch the issue until a couple of weeks after it started. So that’s income lost, and then you might need to identify what is actually the problem. Maybe it involves firing people, bringing on new people… So the earlier you can catch these issues, the better. What’s even better is to catch them before they even happen. To do so, you want to make sure that you’re in constant communication with your management company and constantly reviewing the relevant reports with your management company.
Before you do any of that, you need to make sure you’re setting proper expectations with your management company, before you actually bring them on to manage your asset. Because if they’re not willing or able to provide you with these reports, not willing to get on the phone with you and talk through the reports with you, then you might actually be in trouble. It doesn’t mean the deal is automatically going to fail, but you’re not necessarily setting yourself up for success.
The third thing to think about is how do you actually get these reports. There are really two approaches. Number one, that the management company has a software. When you’re working with big unit numbers, most likely that management company you’re working with is going to have software that can pull these custom reports for you, to say, “Hey, I want a box score, I want to see the rent roll, and the T 12. A list of all the deposits, the balance sheet, lease reports,” and those reports that you want. “Can you email those to me once a week? I want these ones weekly, and these ones every two weeks, and these every month.” Then they will set that up in their system so that it automatically generates a report for you once the information has been input. When the week comes, you’d have the report in your email.
Another approach would be to actually have access to their management software; that way, not only can you pull these reports yourself, you don’t have to wait on the management company but you can also look at them whenever you want. So if you want to look at them every day, then you can look at them every single day, or probably even twice a day, three times a day. If you have access to their software, then you can very easily do that and see the metrics or data immediately after it’s been inputted.
Now, if you’re not working with a management company that has this software or if you don’t like the way the reports look, then you can create your own custom spreadsheet, and then send that to your management company upfront and say, “Hey, each week can you fill this out and send this back to me?” We’ve got an example spreadsheet that we’ve provided for free on this show before. It’s the weekly performance review tracker. I’ll make sure that I include that link to download that file in the show notes of this episode as well.
The fourth thing to think about is what metrics should I be looking at? I’ve got all these different reports, those will be analyzed every week. So a natural question will be which reports are the most important or which metrics are the most important? I’ve already mentioned one, and that would be the T12. So how the cash flow, how the income, how the expenses, the net operating income – how does that compare to your pro forma when you originally underwrote the deal and presented a deal to your investors? So you’re going to want to look at that.
So basically, just go down that variance column and any massive variance between what you projected and what’s happening needs to be looked at and focused on. So when you’re having these conversations with your management company, “Okay, let’s bring up the T12. Oh, it looks like our maintenance expenses are way higher this month than any other month. What happened? Is this a one-off event, or it is something that is more habitual that we need to address?” So just kind of focus on anything that has a really high variance.
Something else to think about, especially for value-add business plans, are going to be any renovation-related metric. The number of units that have been renovated relative to your forecasted timeline. If you’ve got 100 units and you expected to renovate all 100 units in 10 months, then you’ll need to be doing 10 units a month. If you’re halfway home, and it’s been five months, and you’ve only renovated 10 units, obviously, there is a problem.
Also, what rental premiums are being demanded based off of those newly renovated units? How does that compared to your projections? If you projected a $100 rental premium, and you’re only getting a $50 annual premium, what’s happening? Is it the management company’s fault? Was it your fault for making too high of an assumption? Did something happen in the market? Maybe marketing’s not right. But the whole point is identifying the problem and then working with your management company to understand what’s causing this problem and then what the solution is going to be.
Other metrics like leasing metrics, cap-ex costs, total income – these may vary from your projections during the first portion of your business plan. For example, the total income may be lower than forecasted after owning the asset for three months, because a lot of people move out once you buy the property and they see that “Oh, they’re making improvements. My rents are going to go up, so I’m going to get out of here now while I still have the chance.”
Or maybe you spend a larger amount of your cap-ex budget upfront because you’re ahead of schedule. Some of these metrics during the value-add portion of the business plan are going to be different than the forecasts. So upfront, these metrics of rental premiums, how fast you’re renovating, are more important than later on in the business plan, these leasing metrics, total income, and things like that. Those are more important than renovations, because renovations are already done.
Other metrics to think about and track that may be the cause of a high variance would be your turnover rate, so how quickly are people leaving. Economic occupancy, average days to lease is a good one, revenue growth, traffic, evictions, leasing ratios, and other metrics from the report that I’ve outlined below. So basically say, “Okay, the most important thing is that I’m hitting my projections. So what metrics should I be looking at that will result in a high variance between my projected and actual income and expenses?” So overall, pick the best strategies to track the variance on the income and expense reports, and then strategize with your management company to figure out any causes of high variance, and then come up with the solutions.
The last thing to think about would be what are some other things that really good asset managers do. First and foremost, I would say it’s looking at the management company as your partner. Since they are your partner, screen them as if they were a partner. Don’t screen them like you’re hiring someone to fix your toilet. They’re not necessarily like a vendor. They might be a third party, but you need to think of them as a partner. So ask the questions like, are they someone that I would want to work with for a long time? Does their track record speak for itself? What are the tenants saying about them? And how professional are they when they’re speaking with tenants? A way to find this out is to roleplay. Find out what other properties they’re managing in the area, go there, and act like you are wanting to lease a unit and see how they treat you. Are they willing to change if needed? Are they saying “I’m only going to do this. If you need me to do something else, I’m not going to do it.” Do the employees like working for the company? Are they engaged in social media? What is their web presence? Things like that.
Think of them as a partner. The best asset managers always look ahead. This kind of comes back to thinking of a management company as your partner. Don’t think about how good they’re going to be today, or in a month from now, or maybe in a year from now, but it is someone that I would want to work with indefinitely? If not, maybe I won’t consider working with them. And even though they are your partner, make sure you’re watching them like a hawk. This is one of the reasons why we do the weekly reviews, to make sure you’re always on top of what they’re doing.
A lot of people, especially on podcasts and stuff, focus on the frontend activities, the sexy activities like finding deals, sourcing capital. A lot of people focus on whether to create an LLC or not. But less people focus on the backend activities, what do you do once the deal is actually closed on, which is the longest part of the business plan, which is asset management.
A lot of the success of your company can be based off of how well you’re able to manage your assets and scale. A lot of this is going to be dependent on the property management company and their staff. So make sure you’re on top of them, make sure you’re watching them and paying attention to them like the success and the health of your business depends on it, because it really does. Obviously, if things don’t work out, don’t be afraid to fire them. I think we’ll focus on that on the next Syndication School episode, “When do I fire my management company and how do I do that?”
Another best practice to make sure you’re staying on top of your management company is to go to the property. You can see their reports, but management companies lie sometimes, or a certain staff member might be misrepresenting a report, and the site manager doesn’t even know about it. So you might think that the property is doing really well and occupancy is great, but when you go to the property you realize that that’s not the case. So trust, but verify; go to the property at least once a month. If you’re investing out of state, find someone local to go around with a GoPro on their head, on their car, and drive the property, or just invest the money and make a trip and go out there yourself. Meet with the team, meet with a few residents, drive the property, make sure everything’s operating properly.
Overall, how to manage a property management company – set up frequent calls with your management company, starting with at least weekly calls. Request the proper weekly and monthly reports to see how well or poorly the property management company is implementing your business plan. Track the most relevant KPIs like cashflow variance, number of units renovated, rent premiums, anything that would impact that cash flow variance. Make sure you properly screen the management company upfront, thinking of them as a partner and continuously evaluate their performance, and then make sure you visit the property in person to make sure that the reports match the reality, or trust but verify.
That concludes this episode. Thank you for tuning in. Make sure you check out some of the other Syndication School episodes, as well as download some of the free documents we have available. Those are at syndicationschool.com. Thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.
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