When you decide to invest in a multifamily property, you will be dealing with many types of people. One of the people or groups who will be most influential on the outcome of the condition of the property is the property management company.

 

The deal sponsor has probably already selected a new property management company or has chosen one with whom they already have a relationship. Still, you want to make sure you double-check that this company has a good track record and handles properties to your standard before you invest your hard-earned money.

 

Managing real estate in alignment with a business plan can be a high-stress, high-touch profession that necessitates a distinct set of skills and the ability to react quickly in an emergency. As you vet a property management company, you’re making sure this particular property management group is specifically in tune with the class and property type of your investment and that they have the proper skill set to manage the asset well. 

 

So, you might be wondering – How do I ask the right questions? What red flags should I be looking for?

 

Here’s how to get started.

 

Vetting A Property Management Company

 

When you first begin your research on a particular property management company, some of the easier, top of mind-type checkboxes include how many doors they currently manage, the number of units they operate, where those units are located, and what type of units they generally have under management. 

 

This information will give you some brief insight into their experience, and a quick Google search will bring up some property reviews often written by tenants. If you see anything that doesn’t align with the way your investment property needs to be managed, you may want to take note.

 

The property management company used on a particular asset can have a significant impact on occupation/vacancy rates, tenant satisfaction, on-time rent payments, property condition, and even resale value! If you do not agree with the way they handle certain situations or if you don’t get a warm fuzzy feeling about the folks who will quite literally be the boots on the ground, you may decide that a particular investment opportunity is not the right choice for you.

 

Class Familiarity

 

Speaking to the sponsor about the property management firm they’ve chosen plus doing your own research to find out the asset classes in which they’re most experienced is always a significant first step. If you invest in a class C minus property, for example, you will want to ensure that the company has experience with the challenges and tenant profiles those properties tend to attract.

 

Different property classes will have different types of tenants and require management styles and tactics to address complaints, maintain safety, and keep tenants satisfied. You will want a management company equipped with the right tools to handle the property class you wish for them to manage. 

 

Screening Procedures

 

As a passive investor, you are likely looking for a hands-off investment experience where you can be confident your capital is being put to good use. But, you still want to make sure the property will be well occupied and well managed.

 

The tenant screening process implemented by your property management company is essentially the “gatekeeper” – allowing qualified tenants to sign leases and turning away those who do not fit the bill.  If the property management company has inadequate or no tenant screening process to implement at your potential investment property, that could be a red flag. 

 

The allowance of unscreened or unqualified tenants leads to issues with late rent, no rent, building damage, crime, and other problems.

 

Lackadaisical tenant screening processes reflect a generally low level of attentiveness to the property overall which could quickly escalate into problems around cash flow, reputation, resale value, or even capital loss.

 

Some of the things you should make sure the property management screening checks are: 

• Credit History
• Criminal Background
• Eviction History
• Employment History

 

Depending on the class of your property, these procedures may be more or less extensive. One unscreened tenant could end up costing investors tens of thousands of dollars, so just imagine how important the screening process is for a 300-unit multifamily complex.

 

Active Lease Renewal Approach

 

Once tenants reside on the property for the length of their lease, they will need to renew or move away.  A good property management company will be on top of lease renewal and will often get ahead of the game by notifying tenants when their current lease ends, suggesting they tour a remodeled unit, and even by emphasizing the benefit of renewing their lease early.

 

Everybody hates moving, so a great property management company will make sure they work cohesively with the tenant to get their lease renewal arrangements made ahead or on time and orchestrate prompt execution of paperwork and payment.

 

One way a property management company can really demonstrate its value to the sponsors and investors is by retaining tenants and either upgrading or maintaining their lease & payment arrangements. The management company can make a positive impression on tenants by ensuring maintenance requests are addressed quickly and appropriately, landscaping is done, trash removal is consistent, and any other demands are met.

 

While researching the management company, watch out for companies that let leases lapse or go month to month with no process in place to retain them. If you’re able to see that the churn of tenants is constant, then that might mean people aren’t happy living there and leave the first chance they get. It could also mean that management simply isn’t doing their part to make renewing a lease easy.

 

Late Payment Procedures

 

As the investor, You’ll want to make sure the management team has a plan for and a process in place to handle late rent payments. This policy MUST be the same for all tenants, and they must enforce it for ALL tenants. We will talk about problems around leniency with tenants next. 

 

The sponsor or property management team should have a firm grasp on how late fees are calculated. It may be a flat rate or a percentage of rent with a strategy behind their choice. The assignment of fees on late rent payments is pretty standard practice, and typically landlords charge about 5% of the monthly rent price or require a flat rate close to that percentage. Late fees are something you’ll want to discuss when talking to the sponsor with whom you might invest.

 

Leniency & Where The Line Gets Drawn

 

Every tenant needs to be treated the same. If property rules say no smoking, then no tenant can smoke. If it’s in the contract that pets are not allowed, no tenant can have a pet. The management company needs to stay consistent and not be lenient with one or a few tenants. 

If it seems the management company is lenient with one tenant, but then more firm with the next one, this is going to cause a stir among management and residents.

 

One tenant can’t be allowed to pay rent ten days late with no consequences while another tenant is assigned a late fee on day eight. It may not seem like a big deal, but, this type of leniency can cause trouble with fair housing laws.

 

The property management team should have a solid set of rules, a plan for enforcing them, and predetermined penalties for when those rules get broken. Furthermore, those rules should be enforced across all tenants, no playing favorites.

 

Accounting Practices

 

As an investor, you know how significant proper financial management is. The property management company being used should have the proper systems and structure in place to collect rent, assign fees, renew leases, pay vendors, and more. 

 

Don’t be afraid to ask questions about their accounting practices, software, and bookkeeping, because the way they treat tenants and the money flowing through the property are the top two things that are going to impact the value of the property moving throughout your syndication’s hold period.

 

How Maintenance Requests Are Handled

 

The last thing you want as an investor is for your tenants to experience difficulty or frustration with repair requests. When renters feel ignored, unimportant, or like they don’t matter, they won’t stick around – it’s just that simple.

 

Maintenance calls are probably the largest, most important portion of the job description when it comes to property management, and they aren’t going away. As you do your research on the selected property management company, you’ll want to make sure they can manage a decent number of repair requests, tenant complaints, and maintenance issues no matter the day, the week, or even the weather. 

 

Having a system and the manpower in place so that requests are addressed promptly fosters a positive, trusting relationship between the property management team and the residents who live in your units. And, as I’m sure you could guess, a lack of manpower and systems to handle the renters’ requests for repairs or maintenance will fuel a fire of distrust and disconnection, driving tenants away.

 

On-Site Landscaping and Trash Management

 

Although this may be one of the last things that comes to mind in the property management realm, it’s on the list nevertheless. It is vital to have a plan for how lawn maintenance and trash removal will be handled. These are things that need to be scheduled on a recurring and seasonal basis. 

 

It can take months to turn around an unkempt property. If the landscaping is out of control and the grass and weeds are up to your knees, it’s going to be hard to find new tenants. 

 

The deal is the same with trash removal. Once your property gains a reputation for consistently overflowing dumpsters or trash bags being left outside the units, it will be a never-ending uphill battle to conquer vacancy rates. The property manager should have a waste management plan for everyday trash and for oversized or seasonal items.

 

Danger, Fraud, or Criminal Acts

 

At some point, the hired property management team may come into contact with risk, fraud, or criminal acts while managing and owning properties. It happens more often than you think, and you need to know the property manager has a plan to deal with any of these instances on the property.

 

This could include anything from a disgruntled tenant trying to do damage to the property, to an employee stealing money or goods from the units. The property manager should have protocols in place for how they will deal with these types of situations and how they will keep you updated on what is happening. This goes back to having systems and procedures in place – you’ll want to know that the property manager is doing everything possible to mitigate any and all risks.

 

Your Property Management Decision 

 

Although you, as a passive investor, aren’t directly responsible for finding the perfect property manager or management team, you want to make sure your sponsor has done the legwork and found the right property manager for this particular asset.

 

As part of your due-diligence process, after you’ve explored the market, defined your preferred asset class, vetted your sponsor, detailed the deal structure, and researched the lender, you want to make sure you ask the right questions and get the correct information from your sponsor before you decide to contribute your investment capital. The items above are just a few of the issues you can bring to the table, and there are many more. 

 

Performing due diligence on a property management company may seem like overkill, but it’s an essential step in ensuring your real estate investment goes off without a hitch. By researching how they handle financials, maintenance requests, landscaping, and potential danger, fraud, or criminal acts, you’ll be able to invest with confidence in your chosen property management company. In the long run, having a great property management team on board will make you money.