The ins and outs of property management

When you buy property as an investment, you will be presented with a number of choices as to how it should be managed. Although it just looks like a house or unit to you, this is an asset, which needs to be managed and maintained in a professional manner.

Depending on the property type, you will most likely have a number of options. They are as follows:

1. Managed personally

Managing a property personally is often done as a way to save money. Very often it works out the other way, and new property owners underestimate what is involved in managing their property. As with all things, there are benefits and drawbacks to managing your property personally.

Benefits

You may gain cost savings as no management fees will be deducted from your income;
You may be able to keep a closer watch on your property than a property manager does, as you will probably have fewer properties to manage;
You can be sure that your own personal standards are upheld.

Drawbacks

Once you start to accumulate more and more properties, you may not have the time to manage all of them;
You may lack understanding of the laws applying to landlords and tenants and so strike trouble at some point;
The savings in costs may not be worth the cost of your time;
Interviewing tenants and uncovering their financial and rental histories may be difficult.

In reality, the costs of professional management may be a small price to pay when you place a true value on the time you may spend yourself. Remember, also, that property management fees are tax deductible, which generally reduces them to a very small percentage of your income.

2. Managed by a property manager

The success of a property management department or company can be measured not by the number of properties on its rent roll but by the percentage of vacancies it has, and the turnover of its tenants. Where turnover is high, this may be because of the nature of the particular area, or it could be due to the ineptitude or carelessness of the manager in selecting quality tenants.

Benefits

They will choose your tenant from a wider pool;
They can access credit information and rental histories of applicants;
They will carry out frequent inspections;
They often have trades people who give discounts for the regular work.

Drawbacks

True costs may add up when you consider inspection fees, letting fees, advertising costs and sundries, all of which will add to the standard percentage cost of management;
Property managers can be overworked, where there are too many properties on the rent roll and not enough staff;
Property management offices or companies can be staffed by inexperienced people or juniors, who lack the skills needed to manage conflict or other issues, or think laterally to get your property tenanted in times of low occupancy.

If you are choosing to have your property managed by a property manager, you must be sure to take the time required to choose what you hope will be an efficient manager. Don’t make the mistake of choosing a manager and then forgetting about your property, or simply opting for the management department of the agency, which sold you the property. Be sure to keep a close eye on them so that they continue to do a good job for you.

3. Management agreements

Many ‘niche market’ properties come with an on-site manager already in place, who may have been retained under a range of different arrangements. A management agreement refers to a written contract between the owner(s) of property (often as a body corporate) and an experienced operator. It will consist of a list of requirements of this manager, along with a schedule of remuneration for his or her services, typically expressed as a percentage of gross or net revenue.

Where a manager has been retained via a management agreement, and there is no associated granting of real estate or retail rights, it is usually fairly simple to terminate his or her services if the grounds are just. Ensure that you are familiar with the exit clause and that there is not a large cost to terminate a poorly performing manager.

4. Management rights

Management rights are similar to management agreements, however they are usually ‘purchased’ by the manager and involve the acquisition of some of the real estate. Typically, management rights will be sold by the developer for several million dollars and may include an apartment in the complex, plus rights over any restaurant, bar and reception area. Terminating a poorly performing manager who has purchased these rights can be fraught with problems, and very often these types of management rights are bought by couples with little or no hotel management experience.

5. Leasebacks

Leasebacks differ from other management agreements in that they involve a manager actually signing a lease with each individual owner, in order to on rent the property. Some investors feel more comfortable with this type of arrangement because it means that rent is going to be received even when there is no one occupying the property. This can be false security as, in reality, the ability of the manager to pay the lease is linked directly to his or her success in running a profitable venture. Where the venture returns less than needed to honour the lease agreements, the manager has to provide top up funds from other sources (such as the restaurant and bar that are a part of the complex your property is in, or even another establishment) or, if there is no other source, the lease will not be honoured.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Also in the Switzer Super Report