Many people believe that there is some “secret sauce” involved in successful multifamily property management. We’ve been investing in & managing heartland multifamily housing since 2006, and we can tell you with certainty that there is no secret sauce in the mix.
Instead, successful property management revolves around the ability to pay close attention to a myriad of different details simultaneously and repeatedly. Superlative on-site teams make this happen, provided that they have dedicated support from automated systems and project & asset management guidelines established by the corporate team to guide them.
Nevertheless, even with every year choreographed well in advance during the budgeting process, surprises will inevitably occur and detours from the annual plan come with the territory. The picture in the header above is a building at one our properties engulfed in flames, just as the first team of firefighters arrived. This fire spread rapidly, but thankfully nobody was hurt, mostly because the assistant manager turned her hand black and blue from beating on doors to get everyone out. Ultimately, this was a $1 million loss, and it took over a year to reconstruct the building from the ground up and bring these units back into service.
This is the kind of thing that you cannot plan for in any annual budgeting process, and it requires experience and multi-faceted knowledge to successfully manage many months of extraordinary accounting & bookkeeping, displaced tenants, building security, insurance loss adjusters, architecture & design, permitting, procurement, construction contracts, construction draws & insurance escrow accounts, and ultimately construction completion and lease up.
Successful property management is not just about collecting rents and unclogging toilets. Property management can be a complex undertaking, and a strong, experienced and engaged team is essential to success. These are the reasons why we developed our own internal property management capabilities, rather than relying on third party managers whose experience and knowledge is uneven.
Asset Management (Strategy) and Property Management (Tactics) Must be Tightly Coordinated
This post is about property management and how we do it, but before we can dive into the details of how we manage our properties and why we don’t rely on third party managers, it’s important to distinguish between asset management and property management. While these two disciplines are closely related, they are distinct.
Asset Management functions generally sit at the general partner/corporate level, and the asset managers focus on maximizing the value of the asset during the hold period. Broadly speaking, this involves executing the original investment strategy by establishing capital expenditure budgets, tenant selection criteria, and rent growth targets. Asset managers are responsible for strategy.
Property managers are on-site at the property, and they and their staff focus on the day-to-day operations of the property, including leasing, renewals, tenant relations, unit turns, cleaning, maintenance, upgrades, rent collection & vendor management. Property managers are responsible for tactics.
Third Party Property Managers: Lost in Translation
Over the years, we’ve worked with multiple third party property managers, and while we’ve learned something from each of them, the biggest lesson we’ve learned related to managing disconnects between strategy and tactics. In several cases, tenant selection criteria was completely mismatched with the market. This exposed us to excessive turnover costs and damage charges.
The root cause of this lackadaisical approach to applicant screening was a lack of alignment between us as owners and our third party property managers. Third party property managers are generally paid based on a percentage of gross revenue, not Net Operating Income. So naturally, third party managers tend to focus on occupancy and gross revenue, with less focus directed to inflated costs which reduce NOI. Ironically, NOI drives all the valuation metrics for owners, not gross income, so NOI is by far the most important KPI for owners.
We focus heavily on alignment of interests with our investors, so it was difficult to justify this lack of alignment with our property managers. In other cases, we were given on-site managers who did not know what ROI meant, how to do a market study, or what a trade-out report was. These are essential tools in a value add program, and we grew frustrated by having to train our on-site managers while paying their employers a management fee.
So, We Built An Internal Property Management Platform Focused on Risk Management & Automation
Our variable expenses per unit are routinely less than the CoStar variable expense comps in our markets. This is primarily because we focus our management platform on tenant risk management, beginning with resident screening. If we get resident screening right — in compliance with fair housing guidelines — then we can increase resident retention and reduce turnover and damages costs
Resident Screening & Security Deposit Policy
How do we do this? First, we adopt the latest technology, including an automatic income verification tool that integrates with our property management software to help eliminate application fraud. This tool, which is prospect-enabled, allows our property management software to synch with the applicant’s bank account to validate reported income by verifying direct payroll deposits to the applicant’s account. In addition to automated income verification, we also run credit reports with integrated criminal history checks. Most important, we verify previous rental history with former landlords to ensure that previous rental history was satisfactory.
For security deposits, we use an objective ranking system to determine the amount of each security deposit, and higher risk tenants are required to pay higher deposits. Residents perform their own move-in inspection with their own phone using a geo-fenced app that requires them to take pictures of all rooms and interior components on move in. These pictures are automatically loaded into the tenant ledger in our system, such that they can be compared with the conditions of the unit on move-out. This system effectively eliminates security deposit disputes. In addition, the lease contains a detailed list of damage charges that the resident agrees to in advance, so to the extent that these damages do occur, we are able to charge the resident’s security deposit for the costs.
Lease Renewal Policy & Process
Lease Renewals are automated and 100% electronic. All renewals are sent via email with scripting determining the amount of the increase for each resident. The scripted renewal percentages are set by the asset manager based on current market studies of nearby rental comps. All residents receive the same percentage increase in accordance with fair housing guidelines.
We do not use algorithmic pricing systems for either new leases or renewals. In addition to the controversies these systems have created, we have also seen instances where they are simply not accurate, perhaps because they were not properly deployed. This can lead to significant, unfavorable pricing discrepancies on both new leases and renewals.
Maintenance & Repair Policy & Process
All work orders are electronic, and we have a call center that is available for residents on a 24/7 basis. Our in-house maintenance staff are paid bonuses based on clearing the majority of work orders within 24 hours. However, not all work orders can be cleared within 24 hours, so the bonus system allows on-site staff to prioritize work orders that can be cleared quickly, while allowing flexibility for the minority of work orders that require more time.
In-house maintenance staff typically handles all light and heavy maintenance, including groundskeeping, unit turns, HVAC repair & replacement and interior upgrades & rehabs. We use contract maintenance for longer term capital expenditures, such as roof replacements, parking lot maintenance, and programmatic window & siding replacements.
Interior Upgrades
Over improvement is the cardinal sin in property management. If the market will not currently support an added amenity like granite countertops with the added rent required to fund the upgrade, investors will lose money on that upgrade. To prevent this from happening, we conduct detailed market comp studies combined with an ROI analysis on all interior upgrade programs, and these upgrades must generate a minimum 15% ROI for approval. Nothing is more cost effective than fresh, two-toned designer paint, and sometimes this is all that’s needed.
We are thorough with procurement to obtain the best prices possible. We do this by buying in bulk, negotiating exclusive contracts with vendors, and/or by purchasing items in less expensive locales like Asia. We are careful not to compromise on quality with the latter
Capital Expenditures
One of the most significant items related to corporate governance is the replacement of major property components like parking lots & roofing. These replacements are costly, which makes them subject to joint GP approval, but they are required because we know that some components exceed their useful lives during the hold period. Often, these replacements are a part of our acquisition strategy, because we also know that they will improve property performance by increasing curb appeal and rentability
At the below property, an approved programmatic exterior upgrade program is boosting occupancy to above-market levels. In addition to replacing a derelict tennis court with a brand new pickleball court, we are also replacing the exterior siding with brand new contemporary siding in fresh colors and the property’s original construction windows with brand new, energy-efficient, double-paned, vinyl-framed windows and new front doors and lettering.
These renovations boosted the occupancy at this property to 96%, the highest in 5 years. Moreover, the CoStar market comparable occupancy for this period was 91.5%, which meant we were beating the market on occupancy by over 400 basis points. Furthermore, the previous ownership group posted average occupancy of 85.81% over their last four years of ownership, which means we are beating the previous ownership group by over 1,000 basis points.
Marketing, Advertising & Leasing
We have used a variety of marketing & advertising tools over the years as new technology has evolved. Currently, Apartments.com and Apartment List are the most effective lead generators for us. Once we have a lead, we are able to qualify them using remote touring tools like Matterport.
Matterport allows prospects to tour vacant apartments virtually, so when we produce the Matterport videos, we also use virtual staging so residents see a fully furnished apartment, rather than an empty, sterile looking vacant apartment. Here is a link to a renovated one bedroom apartment that prospects can tour virtually. By clicking on the white circles, prospects are able to navigate through the apartment on their own time without ever leaving their home. This process enables us to be more efficient.
Ultimately, we intend to implement smart home technology, including smart locks. Smart locks allow for the use of temporary access codes for self showings at the convenience of our prospects. This will also allow us to centralize management and leasing such that we can benefit from much a more efficient staffing model where individual staff manage multiple properties from a remote location.
Rent Collections & Financial Management
All rent collections are 100% electronic, which almost completely eliminates the risk of theft of paper checks & money orders and keypunch errors. We do not charge convenience fees because we want to encourage adoption of electronic rent payment, not discourage it. Our accounts payable system is also 100% electronic, which further eliminates the risk of fraud.
For accounts payable, all invoices are sent electronically to a lock box where they are scanned and uploaded to our A/P portal for approval. A/P approval authority is multi-tiered, starting with the on-site property manager. Once invoices have been approved by the Regional Manager, they are ready for asset manager approval and automatic upload into our property management software. This enables electronic storage of all invoices in our property management software, accessible nearly instantly by a single mouse click in perpetuity.
All essential utility invoices are automatically uploaded directly into our property management software as well. These charges (water, electric and gas) are then automatically withdrawn from the property operating account on the due date. This automated utility expense management system (i) prevents service interruptions from misplaced utility bills, (ii) eliminates the need for property staff to manually post hundreds of utility bills per month, and (iii) it completely eliminates late fees. It also eliminates the need to store paper copies of these bills. Accessible electronic copies of utility bills makes the due diligence process for refinancing and dispositions much more efficient by eliminating the time consuming, manual task of copying/scanning reams of paper utility bills going back 24-36 months.
100% electronic rent collections and 100% electronic accounts payable make it easy for us to reconcile all bank accounts within 15-20 days of the month end close. This allows us to generate accurate financial reports (from Balance Sheet reports to P&L reports to Actuals vs. Budget reports) within 15-20 days of each month end.
Resident Relations
We regularly schedule property-sponsored events like pool parties & barbecues to build community, and we have a bonus program for all on-site staff related to retention and five star Google reviews. For the former, each staff member receives a $20 bonus for each renewal, which keeps them focused on creating an excellent resident experience with each interaction. In addition, we print QR codes on all completed work order receipts. These receipts are left inside the residents’ homes upon completion. If these residents scan the QR code on the receipt, they will be taken directly to our Google Reviews page where they can leave a review. Residents can rate us any number of stars they please, but several our properties are rated 4+ stars, which is excellent.
In addition to parties and barbecues, we also coordinate and sponsor annual holiday toy drives and annual back to school drives. Staff have also volunteered their time to help out during local and regional disasters, including Hurricane Helene in North Carolina. For the latter, staff solicited donations of food & water from residents, as well as donations at the corporate level, and then they made personal deliveries of the aid to North Carolina.
Late Payments & Evictions
Our 100% electronic payment policy gives us accelerated visibility into aged accounts receivable. We do not accept partial payments. All rent is due on the first of each month per the Lease Agreement, and residents are given a 5-day grace period. After 5 days, late residents are automatically assessed a $25 flat late fee, plus $5 per day for each day that rent remains outstanding. These fees are posted to the resident’s account automatically by our software, and late residents receive an outstanding balance letter as a warning. An electronic copy of this letter is automatically posted in the resident’s online transaction history in case it is needed to support an eviction filing in the future.
Evictions for Non-Payment
We make every effort to keep people in their homes by offering Promissory Notes and payment plans. For those residents who are non-cooperative or non-communicative, we post a 3-day Notice to Pay or Quit on their doors, in accordance with local law. If the resident does not respond with 3 days, then we commence an eviction notice for non-payment.
Evictions for Violations of Community Rules & Policies
For residents who create unauthorized disturbances, we post a 30-day notice on their door notifying of them of our election to remove them from the community for violating the Community Rules & Policies and/or the Drug & Crime Free Policy. Both of of these policies are incorporated into our leases as addenda. All Lease Addenda are acknowledged by each occupant upon move in, and these addenda are incorporated into any necessary eviction filing.
Added Risk Mitigation via Renters Insurance Policy
Evictions for non-payment and rules violations often result in damages that exceed security deposits. In these instances, we are able to make a claim again the resident’s rental insurance policy, which we require all residents to maintain. In these rare cases, proceeds from renters insurance policies almost always fill the gap between security deposits and actual damages.
Compliance with our renters insurance policy is tracked automatically via an integration with our property management software. The integration transmits policy expiration dates and payment status directly from our renters insurance carrier to our property management software, which then transmits alerts to our on-site staff for policies which are expiring or terminating due to lack of payment. Staff are then able to have residents bring these policies back into compliance before the policies terminate.
Renters insurance creates additional protection again the most common form of accidental damage: resident-caused kitchen fires. Our renters insurance coverage maximum is $100,000, so we are able to make claims against this policy for residents who cause kitchen fires. This helps us avoid making a claim under our primary physical loss insurance policy, which would cause our general property insurance premiums to increase.
Resident Communications Tools & Technology
Whatever form of communications our residents prefer, we can meet it. Typically, residents and prospects prefer to communicate with on-site staff via text message. We can communicate with these seamlessly residents via our property management system, and our software stores all text messages within each residents history in case it’s helpful for future reference.
For phone communications, we use a VOIP phone system that is integrated with our property management software such that staff can make and receive calls directly from the software. In addition, staff can make calls from their cell phones using an app which displays the office phone number to the recipient. These calls are also routed through the property management software such that every call is recorded and a historical audio record is automatically attached to the resident’s history to provide clarity and eliminate the possibility of “he said/she said” situations. If a new prospect calls and we don’t have their information saved in the system, staff can automatically add them as a prospect in our database with a few mouse clicks.
Most important, in addition to being more efficient, our VOIP phone system is a fraction of the cost purchasing phone service from legacy carriers like AT&T.
Investor Communications Tools & Technology
For investor communications, we use Juniper Square, which we believe is first among equals in investor portals & communications. Juniper Square’s mail merge fields allow us to communicate the most granular details of investor distributions by email without requiring investors to log in and read their quarterly reports.
For example, we recently made a distribution consisting of 100% return of capital, 100% satisfaction of the Preferred Return, and a pro-rata share of profits in excess of the Preferred Return. Using Juniper Square’s powerful database and mail merge fields, we were able to break all of these amounts out in a summary email.
Investors who prefer more detail are always invited to log into the portal to read their quarterly reports, which include expense benchmarking and occupancy benchmarking using third party CoStar data.
Market Information & Investment Strategy
We have been investing in our markets since 2006, and we have developed granular submarket knowledge of the neighborhoods that interest us most. This market knowledge is additive, and it allows us to be flexible when opportunities present themselves nearby.
We use third party data providers like CoStar to augment our investment and asset management strategies on occupancy and rents, as well as in person market studies. Objective, third party research from firms like CoStar provide a useful starting point for investing in these markets, and it can help inform management and asset management decisions once invested. It is also a welcome resource for us after many years of no third party research in these markets.
However, we have also seen third party research covering these markets that is flawed and/or incomplete. We like this, because information asymmetries creates market inefficiencies. It also demonstrates that third party research can be a flawed substitute for the first-person, granular knowledge of boots on the ground knowledge coming from our locally-based on-site staff and regional managers.
Legal & Compliance
We utilize both local and national legal firms on major transactions, and we use training firms like Grace Hill for ongoing compliance. Grace Hill provides online training for staff as well as mystery shoppers to make certain staff is complying with fair housing guidelines.
Fees & Costs
As mentioned above, we devote considerable amounts of time to creating a strong alignment of interests with our investors. This starts with a significant co-investment, and it finishes with minimized cash fees paid at closing and during the hold period. This philosophy is intentional because we want to be on the same side of the table as our investors. Charging large cash fees such as management fees and construction management fees during the hold period is contrary to this philosophy. Fees like these are dilutive to investors, and since we are an investors too, we are not incented to dilute our own returns.
We typically charge a 3-4% management fee depending on the size of the property, and a 2% asset management fee as a percentage of gross revenue. Charging asset management fees as a percentage of equity under management was uncommon and off market in real estate transactions until recently. The latter method results in higher fees to the sponsor, which we generally eschew.
Exit Strategy & Philosophy on Disposition Fees
We have exited four investments via refinancing by generating cash proceeds sufficient to satisfy the 8% Preferred Return and return 100% of initial capital plus profits. We’ve also gone full cycle on two investments which produced IRRs in excess of 20%, even though we held them for over 10 years. On the full cycle dispositions, we first conducted a detailed a Hold/Sell analysis to quantify the sale merits, which we shared with our investors.
We do not charge refinancing fees or disposition fees on these exits, even though mortgage refinancings and partnership dissolutions can be complicated and time consuming. We believe that we should earn our promote by generating successful outcomes for or investors, not by assessing an array of fees that would dilute them.