Building a Real Estate Investing Team

by Posted in Business Management, Real Estate Tagged , , , , Leave a comment

If you are going to invest in real estate, you are soon going to learn that you cannot do it alone. There are simply too many moving parts to deal with, and too many specialized things to learn. This is not to say that you shouldn’t learn as much as you can about some or all of the moving parts, but don’t expect to become an expert in them.
In the following paragraphs, I’m going to discuss the above in more detail. Specifically, I will hit upon these two main topics:

  • Why do you need a real estate team?
  • Who should you include on your real estate team?

Why do you need a real estate team?

This may by turns have the most and least obvious answers. The obvious answer that may come to some peoples’ mind is that, “I don’t need a team!!”. When you are starting any sort of a business by yourself, or even with one or two other people, it is generally a tight operation, with people performing multiple jobs, and generally needing to be involved everywhere. On the surface, it seems that this would work equally well in a real estate investing business. Give it a little time of trying to be a jack of all trades, and you may very well run smack up against the first reason for building a team:

Laws and Liability

Real estate, both on the purchasing and the management sides, is rife with rules and regulations that have to be followed. At some point, you are likely to have work performed on a property. If that work goes well, perfect, if not, the question of liability may arise. Who is responsible for whatever went wrong?
In the first case, a real estate attorney and/or a realtor, are going to have a far easier time keeping up with the laws related to buying, selling and managing a property, than you will. This is partly because they have more time to learn the information, but also because there are similarities with other parts of the legal world that cross over, whereas you would have to learn everything. The liability question is simple. If you signed a contract with some for them to provide a service, and there was a problem, it becomes their responsibility and thus, their cost, to rectify the situation. It is a question of time and money.
The next topic is closely related to the issue of time.

Efficiency

I think there is a tendency when starting any business to feel like you have to do it all. As you get busier, part of reclaiming your time is by starting to batch similar tasks together. There are efficiencies inherent in this batching process. This ties into building a real estate team because each of your team members is going to be a specialist, thus what the do are similar tasks all the time. This is far more efficient than you trying to learn a lot of different topics that you may only need to engage in infrequently with your business. This is not to say you should completely forego learning about these topics, but you should focus your knowledge on overseeing work that the specialists are doing. The best examples of this concept are with lawyers and real estate agents. Much of the interactions these professionals have with real estate is through buying or selling transactions which are very standardized. This means they likely have procedures in place to handle these operations quickly and more efficiently than you could on your own.

Organization

The last real driver for building a team to help you is simple organization. When you first start out, with only one or two properties, keeping track of everything that is going on may seem simple. As you add more properties, tenants, and volume, it will become more difficult to keep track of everything.
The larger your business becomes, the more important it will become for you to focus on managing the business, as opposed to managing the day to day specialized tasks. Knowing who to go to for any particular task, and ensuring that others know this as well, means that you do not become a funnel that everything has to pass through to get completed. While it is true that you are responsible for everything that happens in your business, trusting your organization to do their part is integral to your success.
As well, the longer you are involved in this business, the more likely it is that a question will arise that you don’t have an answer too. At that point, your team will become an invaluable resource.

Who should be on your real estate team?

  1. Realtor – Obviously you are going to need someone to help you find investment properties. This is going to need to be someone who lives and works in your area of interest. They need to have many years of experience with a focus on finding properties for investors. There are many differences between what a homeowner will be looking for in a house, and what an investor will look for in a property that they intend to rent out. Having a realtor who understands this up-front is going to save you a lot of time, as they won’t be sending you out to properties that are not good matches for you.
  2. Tax Adviser – I do my taxes by myself. That being said, there have been times when I’ve had questions about various items. It is good to have someone to turn to in the event there is a question you can’t find an answer to online, or you simply need an interpretation of a law by a professional who has likely come across it before. There are likely going to be times when transactions are going to make your tax situation more complicated than the year-in, year-out, income/expense calculations. Buying and selling property brings in capital gains, and accumulated losses, etc., that can be a real bear to figure out. Some years, it just might make sense to take your data somewhere and let someone else do the legwork. Lastly, if your intention is to increase the number of units that you own, and build a larger portfolio, it is going to become more complicated as you go along. For efficiency sake, it may make sense to let a professional handle this aspect of your business because they can do it quicker, and within a set time-frame. It is their job and is scheduled, as opposed to you having to take an increasing amount of time every year. Ideally, this will be a relationship where you can learn strategies for minimizing your taxes that may help you plan your activities for subsequent years.
  3. Attorney – Inevitably, you are going to run across a situation where you need a legal opinion. This could be simply having someone go over the purchase agreement, or sales agreement for you, to reviewing a lease, handling an eviction, or even walking through a foreclosure/short-sale situation. There are a number of services online like Legalzoom, that have many forms and documents you can use, and are appropriate in many cases. Sometimes, however, what needs to be done is a well-phrase letter on the letterhead of a law office needs to be sent to someone to force action on their part.
  4. Property Manager – I will write a more in-depth post about what to look for in a property manager later. The fact is though, that if you are going to purchase rental property that is not close to where you live. A good property manager will handle finding tenants, maintenance of the property, etc. Some items that are variable between property managers are their willingness to pay bills, and utilities. This may be an option for an additional cost. As your unit count increases, it will become more vital to have a property manager you can depend on, as they will be able to ensure that you have good tenants, and that the vacancy rate is kept as low as possible. Quick things to look for are responsiveness, good accounting practices, both for individual properties and as a whole, list of reputable businesses they use for different tasks. Average compensation is about 10% of income, inclusive of rents, late fees, etc.
  5. Contractor/Electrician/Handyman – At some point, you are going to need to have work done on your property. Your choices for this are to do it yourself, find a general handyman, or to find a general contractor. In this case, you get what you pay for, and in fact, what you get may cost you. Due to liability issues, I would recommend only doing basic work, such as painting, drywall, etc. by yourself. Anything beyond that, especially where it includes plumbing or electrical, should only be done by someone licensed and bonded. If you don’t do this, you put your investment and your personal finances at risk, if there is a problem. Find a contractor who comes with a good recommendation, get a list of properties they have worked on and visit them to see their work, etc. Do your homework. A good contractor can save you a lot of money, a bad one can cost you, big time. I list other professions because sometimes, you have one project that you need to have done. If it is specific, like installing a light, or an outlet, no sense paying double for the contractor and electrician. Similarly, for smaller jobs, like painting a whole house or other projects, a handyman can be useful. Take into account the time factor of doing it yourself, vs. paying someone who may be able to get it done faster due to experience. The money you save doing it yourself is spent by the time and possibly extra time it takes you to do it right. They key in all of these situations is to find someone reputable, who is licensed, bonded and insured. This gives you recourse if a job goes wrong.
  6. Real Estate Investing Mentor – You are not going to know everything on your own. Find someone who has been doing this for years, make friends with them, take them to lunch, pay for lunch, and pick their brains. They will have knowledge about tips for finding properties, maintaining them, finding good tenants, contractors, THE LAW, etc. Understand and respect that their time is valuable. Don’t just expect to ask them questions all the time and receive an answer immediately. They are busy, and if successful, will have a lot going on.
  7. Someone with a truck: I say this jokingly, but sometimes, if you are working on a property close to you, having someone with a truck can be a godsend when it comes to moving something, or bringing in supplies. Make it a win/win for them. Don’t expect someone to always help out of the goodness of your heart. This is a business after all. Offer to pay for gas, and/or their time if need be. If they decline, so be it, but always make the offer, it shows that you value their time and assistance.

I am sure there are other people you should have on your team. Hopefully these give you some insight into people you should probably find and try to work with, and learn from. If there are others, ideas are most welcome.

Evaluating a property manager

by Posted in Property Management Tagged , , Leave a comment

The Need for a Property Manager

When you purchase rental real estate, you will shortly realize that you have to manage the property. In many cases, you may choose to do this yourself. In some cases, including but not limited to, if the property is a significant distance from you, or managing personally does not fit your current work-flow, you are going to need to find and hire a property manager. This could be an individual, or a management company.

My Property Management Experience

When I first became involved in real estate, I truly had no idea what I was doing. Firstly, I was working with properties that were out of state. Secondly, the property manager that I was using was the family of a friend who also owned real estate in the same city. This worked out well for a while, but when the going got tough, the gaps in experience were exposed, on both of our parts. I went through another individual and then a company before ending up with the company that I use now. There have been some definite growing pains and lessons learned in this process.

Evaluation Criteria for a Property Manager

What I’m going to discuss now, are some of those lessons learned, in the context of what to look for when hiring a property manager. Here are the evaluation criteria I have come up with:

  1. Responsiveness – When you contact them, they should get back to you promptly. If there is a problem on the property end, you should be notified quickly with potential solutions.
  2. Proximity – They need to be close to your properties. If they are not close, they will not visit them, and your properties, and thus your profits, will suffer.
  3. Professionalism – In interactions with you and with tenants, handle problems at a high level, be polite but firm when dealing with problems. If there is an issue, you need to be informed promptly.
  4. Real Estate Knowledge – They need to be experienced in the business. Finding tenants, rent collection, accounting, construction estimating, able to prioritize repairs.
  5. Pricing – They should match what the local market is for management. From what I’ve seen, it is usually 10% of the income, including rent, late fees, etc. when they handle leasing a unit, there is generally a fee of the first months rent. There is a lot of variability in what people offer. I think the best is when people state something up front, and them stick with it. Much as it might be frustrating to ask for a change and have it refused, there is something to be said for a company that knows what works for them and is willing to stick to their guns.
  6. Communication – the most important thing, bar none. If they won’t talk to you, or respond to you, find someone else. If you don’t understand something, ask. You should expect a logical answer. If they are legit, they will have one. My best experience with a company was when I had a series of requests that were denied and I didn’t understand why, I called them. Just getting on the phone an being able to establish common ground, helped a lot.
  7. Business Relationships – When you own real estate, you are going to have to have work done in one form or another. A lot of this may fall in the handyman category: basic repairs, cleaning, etc. Sometimes you are going to need a plumber or electrical or some other more specialized work done. Sometimes you will need work done outside of business hours. In all of these situations, you are going to have to rely on your property manager to find someone to get this work done. The more relationships they have with a network of contractors, or handymen and other specialists, the easier this process will be. A larger network also means they are more likely to know who provides the best quality service.

Finding a Balance

Upon reading this list, I’m sure the next questions is going to be along the lines of how important and what precedence should be given to each topic. The easy thing would be to say that this is going to be unique to each investor, dependent on their individual preferences. While this may be true to a degree, I expect that none of you came here looking for some half-baked cliché about what will or won’t work. Here is what it boils down to:

  1. The company or individual you hire has to be close to your property. It is the gravity model of real estate; the further away, the less impact it has on them and the less they think about it.
  2. Property management should be their primary focus, and they should have significant experience at it. I would shy away from a company that offers management as an add-on service to a realtor’s business or some such. When the going gets tough, they will focus on their primary business and your property will be left hanging.
  3. Having a professional organization. This follows closely with number 2 in that having experience likely means they have work-flows and procedures in place to handle both standard activities and unexpected occurrences. If it seems like they are reinventing the wheel, run away fast!
  4. Communication is key. This might be number one in that if they are slow getting back to you when you are first contacting them, it is a red flag.

What did I miss?

There you have it, my best ideas for what you need to evaluate a property manager. As I said, people have different ideas and needs. You might think some or all of these are great, or just the opposite. There may be, it is likely even, that there are qualities I didn’t even list that are deal-breakers for you. Either way, I want to hear what they are, so please, leave your thoughts in the comments.