Unit 3A’s dishwasher is flooding, most likely because the tenant put liquid dish soap into the dispenser (again). While you’re debating the cost of bringing in your local plumber to clean up the mess, you receive an email from unit 24B, who is having an issue with wasps on their balcony. You make a mental note to purchase some wasp spray at the hardware store when you’re there negotiating for the new window that’s going into unit 4C. As much as these are unexpected circumstances, somehow you’re not surprised at all. Such is life when you’re managing an apartment complex.
Many current investors came to CWS after getting tired of dealing with the headaches of property management. With renting (as opposed to owning) on the rise, it is natural for property owners to expect to earn a strong return on their investment. However, maintenance problems like those above (in addition to the high opportunity cost of taking care of them yourself) can significantly impact your profit margin. For instance, you can expect to pay anywhere between 35-60% of your total operating income in operating expenses. On top of that, you’ll be spending approximately 1% of the property's value on annual maintenance expenses.
After taking care of one such property, you quickly come to understand the crux of the issue: You simply do not have time to babysit 20 or more units per complex when you plan on expanding your entire portfolio. Having a designated property manager can take away the stress burden and may even help increase your ROI—especially if you choose your management firm carefully.
The Real Cost of Maintaining an Apartment Complex
As the manager and owner of a rental property, you’re the go-to for all tenant issues—meaning that everything from pest control to malfunctioning electric breakers comes directly out of your pocket. Part of the costs associated with maintenance will be offset by your tenants in the form of non-refundable move-in fees and rent, but the rest is absorbed entirely by you.
As an experienced investor, you’re probably used to allotting additional funds for situations of this nature. However, it’s easy to neglect the time and opportunity cost that goes hand-in-hand with managing an apartment complex.
If you act swiftly and intelligently, you should be able to keep your investment viable—but managing an apartment complex can be a full-time job. The average vacation home rental owner spends more than eight hours per week managing their property. That’s just for one unit. If you don’t have that kind of time to diligently respond to all tenant maintenance issues, or you don’t live close to your rental property, a property manager can really help ease your burden so that you can focus on your other investments.
How a Property Manager Benefits You
Other than saving you time, property managers are in the perfect position to save you money as well. Having a property manager handle the daily grind can provide unexpected benefits for you as the owner:
- Instant access to contractors. Especially if you’re not local, knowing the right contractors to trust can be a nightmare. A property manager usually comes with a network of contacts that they rely on for quality work and quick service—meaning that you no longer have to rely on Yelp reviews and crossed fingers.
- Lower maintenance rates. An important side benefit of having established relationships with contractors is that your property manager is likely to be the first to get a good deal. Some contractors offer a specified number of free inspections per year to priority customers for a retainer fee. Many property managers are priority customers because they call on the same contractors for multiple properties. In addition, these contractors will often offer a discount on repairs too, which can significantly impact your ROI at the end of the day.
- Higher tenant satisfaction. Living in my very first apartment, I relied 100% on my local property manager. He was there every single day doing repairs on the property and just keeping an eye on things, and he was a major reason why I decided to renew year after year. Instant response to maintenance requests produces happier (and better paying) tenants.
Choosing the Right Management Firm
By this point, you’ve probably identified the biggest potential downside to this idea. It’s true, property management fees themselves could cut into your potential return. In general, if you hire a third-party property management firm, you’ll likely see fees in the range of 5-10% of rental revenue. So, on a building that produces $800,000 in rent annually, you can expect to pay between $40,000 and $80,000 on management fees. Depending on how much you’re already spending on maintenance (and how much you value your time) this may seem like a significant expense.
However, third-party firms aren’t the only way to go. When you work with a real estate investment firm that also offers its own property management services, the interests of the investors are better aligned with the operators.
Investors who have owned individual investment property know that time is an expense that is often overlooked. Many investors, especially those who seek the freedom from everyday management, look to investing with a real estate investment firm that specializes in local markets in which they invest.
Working with an investment management firm that is vertically integrated means that they handle almost everything involved in the investment process, including property management, asset management, financing, information technology, capital projects, acquisitions and dispositions, accounting, risk management, and transactions closings.
As a passive investor, you invest your capital with a firm, which invests your funds into a real estate property that you will not have any direct responsibility for managing while instead allowing your money to work for you. An additional benefit to being a passive investor is your ability to net the property’s cash flow distributions with its depreciation expense, which may result in you paying little or no taxes.
That’s where an experienced firm like CWS Capital Partners comes in. We help you with every aspect of your apartment investment—from acquiring the property to managing and maintaining it. We believe that having a hand in the management of properties, rather than relying on a third party, makes us even more capable of helping our clients identify and acquire the best investment opportunities and achieve strong returns. Contact us today to get started with your real estate investment strategy.
The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.
All investments involve risk including the possible loss of principal. You should familiarize yourself with all risks associated with any investment product before investing.
Advisory services are provided by CWS Capital Partners LLC, a registered investment advisor.
Securities offered by CWS Capital Partners LLC are through an affiliated entity, CWS Investments. CWS Investments is a registered Broker Dealer, member FINRA, SIPC.