Why Your First Investment in Real Estate Should Not Be Real Estate!
My partner Steve and I get asked this question all the time.
What’s first? I’ve’ studied, I’ve researched, I’m learning the process, I have a mentor but what is really the first thing to spend time an effort on?
Well our answer may surprise you, and I can tell you without reservation, if you would have asked this question years ago when we started it would be different. Today there is no doubt!
What do you spend the majority of your time and efforts on before investing in multi-residential property? Intuition tells you it’s a no brainer, the property itself of course!
Obviously you want a sound investment, but surprisingly that shouldn’t be your number one concern. How about a great lawyer or accountant? Sure really important, but not the most important!
The answer is … your Property Manager!
Hiring an excellent – not simply decent or good – property manager is essential for even the most seasoned property owner. The reason is relatively simple – your PM is your front line, dealing face-to-face with your tenants on a regular basis. Your PM will have intimate knowledge about your specific property that even the best lawyer couldn’t possibly ascertain. While hiring a sub-par accountant can be problematic, hiring a mediocre property manager can sink your investment ship faster than the Titanic.
We went into our first multi-residential investment with a complete and thorough understanding of the ‘numbers’ aspect such as return on investment, and fixed and variable costs, yet we had very little understanding of the ‘people’ aspect such as actually running the building and effectively managing tenants. We got lucky and hired a fantastic property manager right out of the gate. However, it wasn’t all luck. Our property manager came highly recommended and had over 20 years’ experience; we did our due diligence and concluded that he was the perfect person for the job – lucky for us we were right!
So what differentiates an excellent property manager from a mediocre one? In our experience, here are the qualities you should look for when hiring your property manager:
• Fiscally responsible – spends money on items that have a direct correlation to tenants’ happiness and property improvement
• Has an efficient system for regular and accurate reporting.
• Thoroughly understands the Residential Tenancies Act
• Able to thoroughly analyze repairs and renovations, identifying the best course of action and price
• Availability – always available to take your call and answer your questions, i.e. they know what’s going on in your building
• Highly knowledgeable regarding the local rental markets
• Constantly looking for ways to increase monthly rents
• Has the required sales skills to rent vacant units
• Can effectively deal with difficult tenants and collect outstanding rent
• Understands key components of the building
• Has a decent understanding of construction materials and can ensure renovations are visually pleasing, durable, and priced right
The majority of these traits will be hard to ascertain in an interview – who isn’t going to claim they’re reliable and highly knowledgeable – but dig as deep as you can, speak with other owners that your PM has worked for, ask a good mix of situational and behavioural questions concerning situations the property manager is likely to run into. We include situational because this gives those that may have less experience a chance to truly showcase their problem solving skills. More experience doesn’t necessarily equate to a better hire and sometimes it can be beneficial to have someone with a fresh perspective, unencumbered by an indoctrinated process of how things ‘should’ be done.
However, above all else, ensure you have absolute, unwavering faith that your PM will act in your best interest. Remember, they are essentially acting on your behalf and how well – or poorly – they perform is directly correlated to how your investment will perform.
The PM is the captain of your investment ship and a good one will keep you off the shoals in the safety of the main channel. Make sure you hire carefully. Oh and by the way, make sure you compensate them accordingly; this is absolutely no place to go cheap.