Often, investing in commercial real estate is described as a way to earn passive income. But this is a bit misleading. Managing a commercial asset is anything but passive, and there is a significant amount of work that must be done to keep the asset in good working order. When it comes to earning passive income, one of the only ways to make it passive is to outsource property management activities to a professional manager.
In order to understand what a property manager does, it is first important to understand what they are.
What is a Property Manager?
A professional property manager or property management company is an individual or firm that is hired to manage the day to day operations of a real estate asset. Depending on a property’s size and type, the commercial property management firm can be one or two people, or it can be a large team that works onsite.
For example, a multifamily property likely has a team of people who work onsite because this property type requires more active engagement from management. On the other end of the spectrum, an industrial property may not require an onsite presence at all.
In short, the property management firm is the owner’s representation, and many tenants may not realize there is a difference between the two. Their presence is what allows a property owner to continue to grow and scale their portfolio without worrying about day-to-day property operations.
What Does a Property Manager Do?
For simplicity’s sake, a property manager’s responsibilities can be divided into two buckets: operations and finance. NOTE: The responsibilities discussed below are for a major institutional quality asset.
A property manager’s operational responsibilities are all about keeping the property running smoothly on a day-to-day basis. Depending on the property type, this could include things like:
- Developing and executing a property’s preventative maintenance plan. This includes activities like routine inspections and replacements of lighting and air filters, while ensuring that the property’s landscaping and trash are always taken care of.
- Scheduling and executing property upgrades and maintenance. As a property ages, routine upgrades must be made to HVAC, plumbing, and electrical systems. This will extend the useful life of the property and ensure it remains in good working order.
- Maintaining and replacing landscaping. For many visitors, a property’s landscaping is the first thing they see. If it is well maintained and inviting, it can create a positive first impression. This is particularly important for multifamily and office properties that must make a good impression.
- Managing tenant issues. If a tenant has an issue, needs a repair, or has a specific request, it is the property manager’s responsibility to take care of it.
- Responding to emergencies. Unfortunately, emergencies happen—a pipe bursts, a storm causes damage, or the power goes out. The property manager is responsible for responding to these types of events and keeping the owner updated about the status of necessary repairs.
- Managing tenant occupancy. A good property manager is constantly aware of what lease agreements are expiring, which ones need to be renewed, what the market rental rates are, and potential new tenants looking for space in the area. In short, they manage all leasing activity to ensure the property stays full.
- Staffing the property. If the property requires full time staff, the property manager is responsible for finding and training the onsite management team including an assistant property manager, maintenance staff, and accounting staff.
- Evictions. If a tenant fails to pay rent, the property manager is responsible for notifying that tenant of the default, and managing the tenant’s eviction if it comes to that.
The best rental property managers do all of the above activities—and more—with efficiency, a tenant relations mindset, and an eye toward ensuring the profitability of the asset.
The other major bucket of responsibility for a property manager is overseeing the property’s finances. This includes activities like:
- Rent Collection and processing. The property manager is responsible for ensuring that each tenant pays rent on a monthly basis. The manager collects the rent, credits the tenant’s account, and makes bank deposits as necessary.
- Late payments and other fees. If a tenant is late on rent or owes some sort of ancillary fee, it is the property manager’s responsibility to issue and collect on these.
- Reporting. Because the property owner is not present on a day-to-day basis, the owner relies on the property manager for financial reporting. These reports include things like expenses, capital expenditures, budget vs. actual analysis, delinquencies, bank reconciliations, and cash reserve balances. Typically, these reports are created through the use of property management software.
- Budgeting. Each year, the property manager is responsible for setting the property’s operational budget. To do so, they need to work with the property owner to ensure that the financial performance of the property tracks as closely as possible to pro forma financial projections.
If the property manager does his or her job well, the manager will deliver the cash flow necessary to support the asset’s investment performance.
How Much Does a Property Manager Cost
In most cases, a property manager is paid based on a percentage of the property’s gross rent. Depending on the size of the property and the complexity of its operations, the percentage can range from 2% to 10% of gross rents. For example, if a property manager charges 5% and a property produces $1,000,000 in gross rent annually, their base fee would be $50,000. But this isn’t the only fee—they may also charge for things like maintenance calls or even each signed lease.
Professional property management services can be expensive. They typically work on multi-year service contracts, and their cost can have a significant impact on a property’s cash flow. As such, it is imperative that property owners understand the cost and manage it as necessary. In our case, we are a vertically integrated firm. We believe that our properties and investors are best served by bringing all property management functions inside and managing them ourselves. We have an in-house team of qualified commercial building managers and they manage all of our portfolio properties. At the time of purchase, one of the ways that we quickly add value is by bringing the property management function inside, which can provide significant cost savings to the property and an immediate boost to Net Operating Income.
What to Look for In a Property Manager
A good property manager can be hard to find. Making the wrong choice can be expensive in terms of both money and reputation. To avoid this, there are a number of things that property owners and investors should look for in a qualified property manager:
- Experience: The best property managers have a significant amount of experience in the field. They should be able to identify other properties that they have managed and how their stewardship impacted the property’s bottom line.
- Certifications: Qualified property managers have industry recognized certifications. For example, they could be a Certified Residential Management Company or an Accredited Management Organization.
- Association Membership: The most qualified real estate property managers should be active in trade associations like the National Association of Community Managers.
- Licenses & Education: Potential property managers should have a minimum of a high school diploma, but a bachelor’s degree is preferable. In addition, they should have the requisite real estate licenses to prove their subject matter expertise.
- References: If a property manager is under consideration to be hired, they should be asked for references that include other properties that they managed, and should provide contact information so these references can be consulted.
Property manager jobs are hard, and it takes a special individual or company to do the job well. When done right, the property management person or firm can be an important partner and a major contributor to a property’s bottom line.
Interested In Learning More?
First National Realty Partners is one of the real estate industry’s leading private equity commercial real estate investment firms. We leverage our decades of expertise and our available liquidity to find world-class, multi-tenanted assets below intrinsic value. In doing so, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you are an Accredited Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or email@example.com for more information.