Let’s face it, there are a lot of things to consider before deciding whether to manage your property yourself or hire a property manager to manage it for you. While many owners have found success in self-managing to cut down on the cost to hire a manager, they are also surprised at the time and investment in takes to manage the properties themselves. Here are a few things that should be considered when weighing the benefits of hiring a property manager or self-managing:
One of the most basic, and time-consuming, functions of property management is handling building maintenance, including routine and emergency repairs, as well as preventative maintenance. It is important to take the time to create a detailed scope of work for your maintenance contracts to ensure that you are receiving and paying for only the services you need or desire. Determining the right size scope of work for each contract requires knowledge and experience - and vetting the marketplace through a competitive bid process for all contracted services can be a time-consuming process, but in the end, these steps will ensure that you are getting the best value for your money.
Establishing and implementing effective preventative maintenance programs can significantly increase the useful life of building components and reduce total life-cycle costs on your building equipment. Regular monitoring of the market for gas and utility rates will allow you to lock in the best per kWh for electricity and can significantly reduce the total electric expense for your property. These measures take time but are well worth the effort.
In any business, maintaining good relationships is extremely important. Establishing an ongoing rapport with tenants can often lead to better management of your property. Good communication can uncover issues before they escalate and help ensure things are working properly and the property is performing at its best.
Proactive management and setting reasonable service level expectations for response times go a long way toward keeping your tenants happy. But it takes more than a well-maintained building to create a positive tenant experience. Consider going the extra mile by investing in and hosting tenant appreciation events that will enhance the tenants overall experience.
Even properties with the best tenant retention program in place will experience vacancies. Because maintaining a high occupancy rate is critical to your investment, it is important to establish a solid leasing and marketing plan to attract and maintain a list of prospective new tenants. Today, a social media presence is expected, and while it requires a strategy and a little bit of effort to keep your posts fresh and interesting, you won’t regret it.
Of course, there are also the basic administrative tasks involved with filling a vacancy beyond just advertising the space and putting a sign up – be prepared to manage a high volume of phone calls, showings, screening of new tenants, and the associated administrative tasks including drafting leases and negotiating lease terms and rates.
Good tenant screening is paramount, and you may want an experienced leasing team that can assist with pulling credit reports, looking at a potential tenant’s history, and verifying income. Qualifying good tenants offers the best chance of having a long-term tenant that pays rent in a timely manner.
You’ll want to ensure that you have a good financial reporting system in place to stay on top of rent collections, timely payment of real estate taxes and mortgage payment, insurance, and payment of all other operating expenses such as water, electricity, etc. Factor in the time spent reconciling your bank statements, preparation of income statements and balance ledgers, and at the end of the year, tax return preparation. Other time-consuming financial tasks include rent collections and preparing accurate common area maintenance billings in accordance with lease terms to ensure that you are collecting all funds to which you are entitled.
Beyond the day to day accounting functions, you may want to take the time to benchmark how your property is performing against other commercial properties in your region on a price per square foot basis. Keep an eye on your real estate tax valuation and be sure to file for an abatement if you find it is out of line. Thousands of dollars can be spent unnecessarily if you are not paying attention.
Consider the volume of business you’ll be giving to your vendors and suppliers, and whether you have the purchasing power to leverage better pricing on goods and services vs. a property management companies with a large portfolio of properties under their management.
Self-Manage or hire a Property Manager?
So, what does it cost to hire a property manager? Typically, a management company would charge 5% of Gross Operating Income. When compared to the time investment of self-managing, it can be money well spent. In fact, you may find that the value proposition of outsourcing goes far beyond the direct expenses that can be eliminated such as salaries, benefits, payroll taxes, worker’s compensation premiums, tools, equipment, etc. Often times, the amount saved by a professional management company far exceeds the management contract amount.
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Buying commercial real estate is often a complex process. You will need to hire a skilled commercial real estate broker to help with some of the steps, as well as an accountant, a lawyer and a mortgage broker. Fortunately, as a buyer or tenant, the brokerage fee is often paid by the seller or landlord. Therefore, the buyer or tenant often has professional representation for free. If the property is more complicated, you may also need other specialists like tax experts, notaries, appraisers, engineers, and/or environmental specialists. To begin, here are some starting questions to ask yourself.
What kind of property are you interested in purchasing?
Where do you want to be as far as location? Is there a certain City or Town you are interested in being in?
Do you need the building for your own business use or are you purchasing it as an investment?
Do you have the cash for a down payment? Do you know how much that will be? If you finance, do you have a bank that would lend you the money?
Are you partnering with someone else or purchasing it by yourself?
What’s your risk tolerance?
Will you be managing the property yourself or hiring someone to manage it for you?
Are you familiar with the role and responsibilities of being a landlord?
If this is an investment will you look for value/upside, multi-tenant or single tenant property?
A commercial real estate broker can tell you what is available in your desired location. They can also set up tours of the properties you may be interested in seeing, assist you in learning about each property, and guide you on price, location, and uses.
Here are more questions to consider for each property you may be interested in:
What is the property currently used for?
What can/can't it be used for?
What is the zoning?
What kind of rent/income does the property currently generate per year?
What kinds of taxes are there on the property?
What things will need to be replaced or repaired soon?
Why is the owner selling?
How is the area around the property doing?
Any major upcoming changes?
If you are like most people, you will need to get financing to help purchase the property. Keep in mind that there is more than one way to finance a commercial real estate purchase. Answer the following questions as the first part of the financing process:
What type of banks, credit unions or other home mortgage company could you use?
What kind of credit do you have and what kind of interest rate could they give you?
If traditional financing methods don't serve you so well, could you try a more creative method for financing/purchasing the property?
Would the owner/seller be willing to help with financing?
It is always a good idea to get educated and reading up on things like seller carry back, subject-to, second mortgages, and lease options to help you get a better understanding about different financing options is helpful.
When you find a property that does make sense to you, you should have a lawyer look over the offer. Your lawyer will have you sign a letter of intent (LOI) about the property and all the contracts involved. The LOI outlines the basic terms of the transaction. Your lawyer will make sure the LOI is not binding in case something goes wrong down the line with the contract and should explain all details of any written agreements so you know exactly what your rights and obligations are throughout the sale process.
Once a purchase agreement is signed, you will begin to inspect the property, and to secure financing - this is called Due Diligence. You will generally need to get an American Land Title Association (ALTA) survey ordered, which may be ordered by the bank you are using for financing. An ALTA survey provides valuable information such as boundary lines, location of the main building, including improvements, location of secondary buildings, the identification of easements (which are access rights by different service companies such as water, gas, telephone, railways and other utilities). As a buyer, the Due Diligence period can be viewed as a “free look” opportunity because the purchase and sale agreement will protect your deposit in case you find an issue while investigating the property and securing financing.
You and the seller will need to find an escrow officer who will be a neutral 3rd party overseeing the sale transaction. This is usually one of the attorneys or the broker. The attorneys will help with the transfer of deeds and funds, and the “closing” documentation and transaction. They will make sure both parties are protected in the transaction.
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