Archive for January, 2012
The primary purposes of offering property management services can be simply outlined as below:
Alleviate the property Owners from the day-to-day hassles of managing their own rental property.
- Give your Owners peace of mind that their property is being managed competently while they are receiving a tax benefit!
- Provide accurate accounting records for your Owners’ rental properties which they may use as backup for the preparation of their income taxes.
- Do all of the above in such a way as to provide a positive experience for your Owners . . . as well as yourself.
No one will be able to achieve all of the four items above all of the time. If you don’t think you can provide these for your Owners as well as yourself at least 75% of the time, then perhaps a different career path would be a good thing for you to explore. As with anything, if you aren’t passionate about what you do, it will show . . . and it won’t necessarily be pretty. Others will pick up on your motives and your lack of passion for what you do. Many times they will end up going with someone else who exudes the passion for what they do.
Now, I am not saying that you have to love what you do or no one will use you . . . not at all. But if you don’t at least enjoy it, the equation doesn’t work for anyone; you should be doing something more close to what you were created for and others will feel more confident with someone else. Enough about that!
Property Management – Minimum Requirements
There are many things that you will need to do if you are going to manage properties for someone other than yourself, and we will cover most of those in the chapters to follow. But there are a couple of requirements you will need to fulfill before you go any further. Without these your operation will be illegal (at least in most states) and you will be opening yourself up to living a very complicated life. All right, already, you say . . . what are these requirements? Here they are:
It is a requirement in most states that at least one of the Owners or principals of a property management company be a real estate broker or an attorney at law in that state. Now let’s not be confused here, when I speak of a broker’s license, I am not talking about a real estate agent which, in most States is the first license you get. A real estate broker’s license can only be received after a person has been a real estate agent for a certain number of years and taken and passed many more hours of instruction, and taken and passed the State real estate broker’s test. From the State’s perspective, a property management business is no different than a real estate office . . . in fact it is a real estate office!
If you are not a broker or an attorney, there is one more option; you can hire a broker to be the broker of record for your property management firm, but you will need to be careful. This also applies if you have a property management business and want to open an additional office. Check with the real estate board in your state for the applicable laws. Most states require that the broker of record (this includes the attorney) oversee all of the daily transactions of the office for which he or she is the broker of record. Again, you will have to check with your state’s real estate board to see just how this would apply to you and how stringent they are going to be about it.
That is the requirement for the ownership of a property management business. But what about the company’s property managers? Almost all states require that property managers be licensed real estate agents . . . unless . . . they are full time employees of the property management firm. If a property management firm hires someone as a full time employee, as a property manager, that is legal in most states. But if you are doing contract work as a property manager, say, for several different property management firms and you are not a full-time employee, you will need to be a licensed real estate agent.
If you are looking to start a property management firm, as you can imagine, there are even more legal requirements you must follow. We will touch on some of them, but, if you truly are serious about this, you would be well served to consult with an attorney who is familiar with the real estate law in your state. The main requirement besides being a broker or attorney is that you set up and maintain a Fiduciary Trust Account. What the heck is that?
Fiduciary Trust Bank Account
At no time may you co-mingle your operating funds of the property management business with the funds being collected and disbursed on behalf of your property Owners. You will always need to maintain a separate account for running all of the income and expenses of your Owners. At no time should any of your own business funds (which would be your management fees), or payments for office rent and office electric bills, etc. ever touch this trust account. This was the case with us. We managed over 320 properties and we had a Fiduciary Trust account through which all of the income and expenses from all of those properties flowed. We were not required to have a separate account for each property or Owner but we did maintain meticulous separate records for each and every property we managed. Check with the FDIC on this also, regarding their insurance coverage for your Owners’ funds. There are some very substantial protections afforded your Owners’ funds when you structure your accounts this way.
This posting is an excerpt from our brand new book: “Manage To Make Money . . . with a Career in Property Management” available at our Manage To Make Money web site.
So what drives the property management industry? Let’s talk first about what property management is: basically, it is managing a real estate asset for the owner of that property. It is driven by that owner purchasing a property, whether it be a commercial, industrial, institutional or residential property, and then hiring someone . . . a property manager, to do all the things necessary in order for that property to continue to be a viable and income producing asset.
At any given time, there are a certain number of properties out there in the marketplace which are in service and being managed by a property manager. That number is going to change very little. If anything, though, over time, the number will tend to increase.
What creates income property or rental property as you might call it? The commercial, industrial and institutional markets are driven by new buildings being built or sold. In the residential market, which is the primary focus of this book, a change in use or a sale of property are primarily responsible for creating rental properties. Another, very minor contributor to the rental property market is new construction. Depending on your locale, new homes or condos may or may not be at a price point to compete with the resale of homes.
Our experience with our owners was that most of them created new rental property by purchasing a home for the specific purpose of creating a rental property investment. Others would purchase a new home for themselves and move out of their old home and put it in service as a rental.
OK, I went through all of that rigmarole to say this; with my background in home building and land-development, I have been through some pretty gnarly economic times. Consequently, I tend to view things through my worst-case glasses. So when I look at the residential property management industry I ask; so what will cause this industry to slow down or crash? In home building the vitality of that industry is tied primarily to jobs and interest rates. If people are not secure with their jobs or if interest rates are too high, they don’t buy as much. But what about property management? Do people quit renting when the job market gets sucky (sucky is a technical term!)? Not directly. But if the job market is horrible, as in, jobs are moving out of your area, then rents will slow down and the rental rates will trend downward. But the real story is that if the job market gets sucky, people are less inclined to purchase a home, but they will rent instead. What about interest rates? Same story. People are more inclined to rent a home and wait out the interest rates. Remember . . . they have to have a place to live.
The two places where we have seen vulnerability in the property management business are: softening of rental rates when the job market is soft and a sell off on the backside of an economic downturn. What the heck does that mean? Picture this scenario; property owners are continually buying and selling their rental properties . . . for various reasons . . . life happens. When the economy gets nasty and property values take a nose dive, owners (unless they are in dire circumstances) stop selling their properties. This is due to a couple of reasons: 1.) They are upside down on their property . . . they owe more on their mortgage than the property will sell for. 2.) They don’t have to sell and to sell in a down market causes them to lose money. They will simply wait the market out. And wait the market out they do!
Our experience is that once the market returns, or at least starts to improve (the backside of the economic downturn), owners who chose not to sell earlier are now incentivized to sell. It is a sort of a mini pent-up demand for selling. Property values are now finally high enough that they can sell and pay off their mortgage, or, their loss will be less.
In a recession, in which at its worst, property values dropped 25 to 28%, we experienced a 10% sell off of properties on the backside of the downturn. Not great, but had we been the owners of all that real estate, we would have been looking at much greater losses.
The key: continue to increase your business with the static market during the downturn. That way, if you do experience a sell off, you can hope to end up where you were prior to the economic downturn. If not . . . you have 10% more business . . . WOO-HOO!!
MANAGE TO MAKE MONEY . . . With a Career in Property Management
Managing properties for someone other than yourself.
The following post is an excerpt from our new book: “Manage To Make Money . . with a Career in Property Management”. I will be posting various excerpts from it as it is a great resource for re-tooling your career for one in residential property management.
The property management company which we owned and operated was started back in the early eighties. It wasn’t necessarily a deliberate or planned event . . . it was more by default. The woman who started the company was a real estate broker and was selling homes and condos around The Orange County, California area to the many professionals there. After a few years, these professionals began to move up the corporate ladder and their companies began to transfer them around the country and the world. Knowing that if they sold their home in this expensive and forever appreciating market, and ever wanted to come back and buy another home it would be very difficult for them. They contacted the lady who sold them the home in the first place and asked her to keep an eye on their property for them and keep it rented while they were away for the next two or three years. They agreed on a fee and the company was born. Now, this was a one-at-a-time sort of deal. But over the years, with her doing the excellent job she did, her reputation spread throughout these companies, and as more and more people were transferred, they sought her out. After several years, her property management firm was managing 120 privately owned homes and condos!
As I said, the start up of our firm was clearly by default. Little did Lynn, the founder, know when she started managing properties that the area which she was operating in had two very key elements present that are very helpful for a property management firm: 1.) the area she was operating in has one of the highest education levels per capita of any major metropolitan area in the county and 2.) this area also has the highest percentage of non-owner-occupied homes (Owners who don’t live in their property) in the State. As it turns out, those proved to be a couple of very important ingredients to her success. Now that doesn’t mean that you have to have those ratings in order for your property management endeavors to be successful, but . . . you will want to be sure that they are at least, present in your demographics. The more they are present, the better the chances for success you will have.
If this positing has been helpful or interesting to you and you would like more to discover at your own rate, the book “Manage To Make Money . . . with a Career in Property Management” (along with many other resources) is available at our website: http://www.ManageToMakeMoney.com