Property managers are a smart investment
I will never forget the day a rather colorful professor of mine at Boston University wrote on the blackboard, “K.I.S.S.” It was in response to a question on how to write a paper on a particularly complicated economics topic. K.I.S.S. stood for Keep It Simple, Stupid. In other words, he elaborated, write what you know and don't get bogged down by elaborate asides and references that only distract and confuse you and your reader. Over the years, I've applied that simple acronym and message to my writing but also in business and life in general. Most recently, I thought of it when discussing the benefits of hiring a property manager for your commercial real estate holdings. P.M.'s make life simpler for a property owner which, in turn, allows that owner to focus his time and energy elsewhere.
I have found that most commercial property owners have other jobs and interests and use their commercial holdings as an investment vehicle for passive income. These are the folks that are well advised to hire a P.M., whether they own a multi-family apartment building, a multi-tenanted retail complex or standalone office or industrial properties. The services a P.M. provides can vary depending on the type of property and the owner's specific wishes. But the end result is, typically, peace of mind knowing your investment is in good hands.
In general, a P.M. will facilitate the day-to-day operations of a commercial building, including common-area and exterior maintenance, landscaping, snow plowing and removal, routine site inspections, capital improvement planning and repair, and serve as the 24-7 contact for tenants. The P.M. does not necessarily do all the work but, rather, will hire and contract out to third party vendors to do the various jobs needed to run a commercial property. Therefore, they are also responsible for negotiating and monitoring the overall operating expense budget for your investment.
Along those lines, many P.M.'s will offer cash flow management and handle all the accounting for commercial buildings. This would include the aforementioned operating costs and billing, but also collection of rental income and reconciling common area maintenance charges — the pro rata share of operating expenses on top of base rent tenants pay.
One of the more important roles a P.M. has is that of the primary point-of-contact for the tenants from start to finish. When an owner or his broker is negotiating with a prospective new tenant, the P.M. can fully screen the prospect's credit, financial stability, rental history, references, etc. Once a lease is in place, the tenants rely on the P.M. for any building-related issues that come up. A responsive and communicative P.M. can develop positive relationships with your tenants and keep them happy. And, of course, a happy tenant pays rent on time and will want to stay in the building long-term.
From a brokerage standpoint, a commercial property with solid management in place is usually more marketable than one without. Prospective tenants like to hear that the property will be well maintained and that there is someone available 24-7. I am always careful to reference the management status of my listed properties through my marketing materials and on physical property tours.
There is, of course, a cost to all these services. While the pricing varies, a general rule of thumb for management expense is 5% of gross rental income. That price can go up 7% to 8% if it's a high management-intensive building like a large multi-family apartment building in a rough neighborhood. On the other hand, if you have a single-tenant, quiet office building the fee may be closer to 3% to 4%. On many non-residential leases you can pass through the management expense and include it in your CAM bill to the tenant. So, in the interest of keeping your CAM expenses low for tenants, it's worth noting what your management costs are and confirming that they are in line with the market. The cost of a P.M., however, should be offset by the money they'll save you on operating expenses, helping maintain a steady rent roll (limiting turnover), and something that's hard to quantify: your free time. Whether you're a banker, a lawyer, an attorney, an artist or a bus driver, your professional time should be spent on what you know and do best.
A good property management person or company truly pays for itself. We each have strengths professionally and are best served focusing on what we excel at. Managing a commercial property can be time-consuming and challenging. So if the situation calls for it, don't hesitate to put that responsibility in the hands of a qualified manager. I'm sure my old B.U. professor won't mind if I soften his advice by telling you to Keep It Simple…Smarty.
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