Turning The Property Around And Installing New Property Management
Congratulations! You found a profitable deal with upside, you got private lenders to fund the cash needs of the deal, you got a bank loan, and successfully navigated the closing.
You are now in possession of your financial freedom vehicle.
Now it’s time to:
1) ‘realize’ the upside in the property and turn it into real value, then,
2) hand off day to day management of the property to the property management company and enjoy your financial freedom.
With your turnaround plan you improve the outside appearance of the property, do any deferred maintenance, and rehab the vacant units to bring them into ‘rent ready’ condition.
With rent ready units you can start aggressively leasing the property at market rent and increasing occupancy to 90-100%.
Increased income means increased cashflow and increased value.
The sooner you get your Turnaround Plan executed, the sooner your reach your financial freedom (that is: have enough passive income coming in each month to cover all of your bills, whether you go to work or not). So time is of the essence here, and it deserves your full and undivided attention for as long as it takes to get the job done.
Decide About on-site Manager
Even though you’ll be bringing in new management after the repair work is done, because you need someone to competently manage the existing tenants during the turnaround you’ll have to make a choice about whether to replace the on-site manager straight away.
You should have learned what quality of on-site manager you had while doing your due diligence during closing. Was the on-site manager enthusiastic about running the property, brimming with ideas on how to solve problems and run the property more effectively? Maybe he/she was being frustrated by the previous owner who didn’t want to make changes or spend any money on repairs?
On the other hand, did you stumble across some dirty little secrets, like the on-site manager reporting a unit or two as vacant but renting them to friends and pocketing the cash, or some other variation of this?
Usually your best course of action is to fire the existing manager and make a fresh start with a new on-site manager. There may be the odd occasion though where you find an on-site manager who is a real asset, he/she knows all the problems with the property and how to fix them. If you feel sure this is the case, keep your existing on-site manager and brief them your turnaround plan.
If this is not the case though, give the existing manager his notice the day after closing, and then hire a new on-site manager.
Create A Turnaround Plan
The time to start assembling your Turnaround Plan is while doing your Due Diligence during the buying process. This is the time you are going through the financial records with a fine tooth comb and inspecting every physical aspect of the property trying to discover what the real situation with the property is.
You are seeing the unvarnished truth about the property, in all it’s humble glory. All of the faults and needed improvements are right there in front of you.
What better time to put together your Turnaround Plan!
Your Turnaround Plan simply consists of a listing of everything that needs to be done to bring the property up to excellent condition so it can be fully leased and stabilized. It’s not complicated.
While doing your Financial Due Diligence you are looking for and identifying vacant units, units that are being leased at below market rents, vendor contracts that can be renegotiated. You are also looking for expenses that are unusually high, like water, electricity, maintenance, landscaping, personnel, that can be brought down to the lowest level possible without impacting the service you receive.
While doing your Physical Due Diligence you are looking for items that need repair, upgrading, or flat out replacing. The Inspection Report you compile while doing the formal inspection of the property, preferably with property inspector in tow, will be the main source of this information. Carrying a video camera with you during the inspection is a good idea. What ends up on this list are things like, roof repair, exterior cleaning/painting, tuck pointing, landscaping, resealing the parking lot. Rehab involved with the individual units like, plumbing, electrical, new bathroom, kitchen, fixtures fittings, paint, carpet.
You make an exhaustive list of everything that needs to be done. When your list is complete, then break it down into work groupings, the different areas of work that can be done by people with the appropriate skills. Then assign those areas of work to the appropriate contractor, or employee. The create a schedule for the work to be done.
Exterior cleaning: Contractor A Start: Day 4
Roof Repair: Contractor B Start: Day 1
Electrical Repair: Contractor C Start: Day 1
Plumbing Repair: Contractor D Start: Day 1
Painting: Contractor E Start: Day 5
Misc. Unit Rehab: Contractor F Start: Day 7
Implementing The Turnaround Plan
The objective in creating the Turnaround Plan is to have an organized sequence of the repair work to be done, assigned to people who are able to competently carry it out, who are ready to swing into action the day after you close on the property.
If you are replacing the management company you should have been talking to property managers before closing and have one who you have interviewed and hired, subject to closing on the property. On the day of closing you issue notice to existing management that you are the new owner, their services are no longer needed, along with the timeframe for the on-site manager to vacate the property. Your property management company transitions into the property.
The objective you charge management with is to increase occupancy as much as possible, as quickly as possible. This is dependent on having quality units available for marketing though, so getting the needed rehab done, starting on the very next day after closing, is key.
Once you know the deal is going to close it is time to start lining up contractors so they will be ready to swing into action, per the schedule you have created the minute you own the property. If you have contractors you already work with, this will be a matter of simply calling and scheduling. If you are really organized, they can attend the physical inspection of the property with you, so they know what work is involved.
Some management companies with organize the contractors for you, as a value added service. Property managers are paid a percentage of gross rents collected so it is in their interest to get gross rents as high as possible at the earliest opportunity. This “can” work out very well. As with all things related to property management, make sure the written agreement related to this states they are to be paid based on performance, and not just a flat fee that goes to them regardless of a successful outcome. If there is a project manager involved, any compensation to that person must be minimal during the project, have motivating deadlines, and bonuses paid upon successful meeting of those deadlines.
Warning! If you do not incentive project managers for performance, you will pay them a lot of money and the work will not get done! This is not debatable. This is human nature, and highly predictable. If you want the work done, on time, as agreed, pay only costs during the job, and all of their profit upon successful completion. This applies to contractors you work with directly, and project managers organizing contractors. Ignore it at your peril.
Increasing revenue by improving the units and getting them filled with quality tenants paying market rent is the first aspect of your Turnaround Plan. The second aspect is cutting costs.
Doing your Due Diligence when buying the property you will have been provided with a Profit and Loss Statement outlining all of the expenses currently being incurred to run the property. You probably have unnecessarily high costs here which created the opportunity for you in the first place. Once you have access to the property’s records it is time to go through each line item and see if it can be reduced.
Property taxes need to be contested, regardless of what they are currently. A cursory investigation will uncover many companies and attorneys will do this for you, with them being paid a percentage of the savings they achieve for you.
For each Vendor who is providing service to the property, give them notice you are canceling their current contract and putting the job out for bid in the open market again. They can either renegotiate with you based on what other vendors are quoting, or let another Vendor take the work. This will apply to maintenance companies, landscaping, plumbers, electricians, and any other contractor providing any service on an ongoing basis. You are not trying to rip anyone off, but you are trying to get costs down to what is fair for the service being provided.
This application of financial discipline actually applies to the property management company as well, as their whole modus operandi is predicated on their ability to be efficient managing of all aspects for running the property, for about 6% of Gross Rents, which in the larger scheme of things, isn’t much money. This requires a property management company to be rigorous about efficiency, and systemized in it’s processes so that every penny of it’s budget is maximized. The truth is most property management companies aren’t up to the job and don’t create the efficiencies needed to provide good service at a profit, and consequently resort to unethical practices like padding bills and charging fees for absolutely everything they do, instead.
It is important to choose the right property management company in advance, make sure the agreement you sign with them ensures they are paid for results, and then monitor their work monthly to ensure they are delivering the results promised.
When starting out with a property management company, no long term agreements. Having a monthly agreement with them is best; where you have the ability to terminate their contract if they are not living up to their promises. At the very most, allow a three month contract, renewed quarterly, but no longer than this.
When you find a good property management company, one that really understands the job, and does it well, you have a large piece of the puzzle taken care of. Good property management companies surprise you, with all the extra services they provide, not with extra unannounced bills.
Now you have your property turned around and stabilized and being run at peak efficiency (hopefully 100% occupancy) by a competent property management company. If your turnaround was a large apartment building, you have probably achieved your financial independence and are receiving a five figure monthly positive cashflow.
Welcome to your new life!
If you bought a smaller property that doesn’t quite get you to your financial independence number, no matter, there are plenty of deals out there. Time to raise your sights a little and take aim at a larger number of units. Or, do the same sized deal again and add it to your portfolio. The heartening fact is, when you buy properties with value plays and turn them around so they are producing $50-100 per unit fully stabilized, it doesn’t take that many units to replace your current income. Once begun, you will be startled how little time it takes.
I hope you have enjoyed the SMART Guide To Apartment Investing. Implement what you have learned here and you are on your way to paying off every debt you have, and having enough passive income to do anything you want, any time you want, what ever that may be.
All the best,