How to Invest in Commercial Real Estate

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Episode #066 - What to Look For in a PROPERTY MANAGER!

by Criterion, Braden Cheek, Brian Duck
June 13th 2022

Today our hosts Braden Cheek, Brian Duck and Joel Thompson from The Criterion Fund discuss what qualities are needed in your next property manager and what protocols you should be taking to ensure ... More

accounting first and foremost needs to be taken care of a lot of third party property managers, full service. You know, if you're getting that, they're taking care of distributions, they're collecting rent, they're doing all of your camera concealing. I mean it's some nasty accounting if you don't know what to do and you've got to be able to have somebody that that does that regularly that you don't have to worry about it because we know in commercial real estate, $1 lost is worth about $12 in value give or take based on your cap rates. So if, if you're, if you have crappy accounting, your property is worth less. It's just a fact. Welcome back to another episode of how to invest in commercial real estate. You're buying a property, you're in the middle of due diligence right now you're buying a property. And one of the first things you need to decide is who's going to manage that property. If you've been paying attention, you may have realized criterion doesn't have a management arm, we don't manage our properties, we manage the manager and it's a different approach, Joel at precision equity, they have a big management team, they manage all of their own stuff. So there's both ways to do it.

I think we can touch on on pros and cons of doing, you know, either or, and then I think really what we want to dive in on is what are you looking for in a third party property management company, right? Because a lot of people have them, a lot of people are not full time in real estate. A lot of people are investors, A lot of people have a property or two on the side, still a commercial property. A lot of people are getting in and they don't have the infrastructure and the accounting team and the property managers, they don't have all this stuff. So it's, it's a path of least resistance. It's probably an advisable path if you haven't managed property before go hire a third party property manager and at least just rob a ton of notes and systems off of them because that's what, that's what you should be doing with everyone in your life is. Yeah, for sure. Most people just getting into the real estate game, there's not enough scale to have your own property management team. You'll need a property manager, you need leasing, you need, bookkeeping, accounting, all that stuff. And so $150,200,000 worth of salaries right there, at least maybe more. And so yeah, precision equity, we do have our own in house management team, but that was built over time and we have scale uh, criterion is newer and you don't have all that infrastructure employees.

So it's easy to just say, okay, let's find good third party property managers. So today's episode is, what are some things that you should be looking for when trying to choose a third party manager. And it's number one, it's, it's important, we've closed a bunch of deals lately. So you've been out there looking quite a bit right, So how do you go about it? I have, yeah. So just this year alone, we've closed a deal in Wichita which is three hours away from us. Deal in ST louis, you know, 78 hours away from us. A couple of days in ST louis, you've got a deal in Atlanta, you know, Stone Stone Mountain outside of New Orleans. So yeah, so you know, those are more difficult to manage. So for us here, here's what I do. I'm gonna walk you through the entire process. You ready? Pay attention, Pay attention. This is my favorite thing in the world. My favorite quote, we're gonna put it up above google plus effort equals knowledge. What do I do? I go to my computer and I type in commercial property management companies, Stone mountain Georgia 20 show up immediately and I look through, I look through the websites.

It seems ridiculous scanning through websites. So something to combine with that is do, do the due diligence on google, get your list and then ask for recommendations from people that, you know, our trust in the market. Sure, yeah. And and see if they're on that list that you already looked up, right? You're, you're doing all of these things. So like if there's, we have uh listing brokers, we use these guys with Marcus millichap chris and Alex, we've got several deals with him. The first thing I'm doing is hey, you know, chris you wanted me to buy this property? I love it, I'm buying it, it's in contract, I need somebody to manage it. Do you know who's managing it now? And would they be willing to stay on or if not, do you know somebody who would do a great job of managing this asset? What chris is going to do or or your broker should do is they see you're a buyer, they see you as man, I'm gonna get more business out of this guy. I'm gonna sell more deals. I need to take care of this guy, I need to help him out. So he's not gonna give me a bad recommendation because he wants to sell me another deal and he knows I'm gonna go back to him say, hey chris, your property manager sucked, never recommend it to anybody ever again. It may discourage you from buying more in that market and he doesn't want to do that.

You want to do that for sure. So you go you go google, you go ask for the recommendations and you come up with a short list and what you need to be looking for right off the bat is infrastructure right after that. You can see it from the website, you can see it from who you're talking to, you can you can ask, you know, a few questions like tell me about your accounting department, how many do I have a dedicated accounting controller? How many you know accounting controllers do they have is do you have a C. P. A. How long have you been doing this? Does anybody have a degree in accounting? Accounting first and foremost needs to be taken care of a lot of third party property managers? Full service. You know if you're getting that they're taking care of distributions, they're collecting rent, they're doing all of your camera concealing. I mean it's some nasty accounting if you don't know what to do and you've got to be able to have somebody that that does that regularly. That you don't have to worry about it because we know in commercial real estate, $1 lost Is worth about $12 in value. Give or take based on your cap rate. So if you're if you have crappy accounting, your property is worth less. It's just a fact.

And so the help with the accounting is they need to be really good. At least audits. Because the lease audits will tell the accounting who's paying for what what's the tense responsibility, what's your responsibility And in addition to that, what are the camera conciliation look like? Because we won't get into exactly the nuances of camera conciliation but that's what the tenant's obligations to pay our and if you're not on top of that then you won't charge the tenants. What they need to pay and you'll be out money. So the infrastructure with accounting, lease audits and cam reconciliations is, is a really good step to, to start on. So are their property management companies that are big companies that service the entire country or is that mostly local? Uh, companies? I really don't like saying bad things on our podcast. So there, there is national property management companies. There's a lot of national companies. I personally stay away from them. Okay. So it's not like you recommend or in your history that you could, your experience, you could find one that could service all over the place. I'd get a regional or a local, I mean local, you know, they cover within 30, minutes an hour, you know, relatively close to their office, but they manage a lot of properties in that area.

They know the busy streets, they know the best vendors, they've got relationships with roofing. You know, Hey, I think we've got a roof leak. We need to look, oh yeah, I've got five roofers, you know that are on my short call list. We send them tons of work, they know me, I know them, you know, you're getting the benefit of those relationships. So you need somebody that's in that market. I can't, I can't say it seems like with retail or commercial, it's more localized and I think multi family, there are bigger national management companies that maybe take a several state area or even a national area. So it does vary a little bit between multi family and retail. Yeah, but generally speaking, we've had a lot of success with local or regional small mom and pop shops, you know, they've got a brokerage, they own similar property, which is kind of another plus for me, you know, if this guy owns a retail center that I maybe would have, you know, it's like I could have bought that, That's a good looking deal. It's got a good tenant base. I know that he's probably set up that infrastructure to service his properties, right?

And I want mine taken care of, you know, hopefully they take care of their is good, but I want mine taking care of like an owner would Exactly this is an owner, he knows what to look for, he knows as an owner of a shopping center. If you walk up and there's trash everywhere, it's bad if you walk up and the windows are disgusting, that's bad for leasing. If you walk up and the gutters are hanging down, that's bad for your tenants, you're, you're not gonna get the lease increases. Your, if they're, if they're a good owner operator, they're gonna be maximizing cash flow, maximizing Ny. And so that's one great thing about having an owner that also does third party precision equity. We do that we have, we own our own stuff. And in at least in Tulsa, we third party manage and we manage those just like I I do my own assets. So that's that's great because somebody can go to you and if you're also looking for a third party property manager, if you're not in Tulsa and you need a third party property manager in Tulsa. Check out precision and drive by their properties and that's the biggest testament. It's better than any interview you could ever do is Heyuan properties. I'd love to drive by and see what they look like or if you're able to, if you're in the market like ST louis we're not in ST louis, we're in Tulsa.

So if you can fly up to ST louis find a third party property manager that owns a bunch of properties in ST louis and you go look at them, they suck like they're disgusting. They're covered in trash, dirty landscaping done. You you don't need to hire them immediate. Red flags. This is a problem dude. Your center looks like do do, it's not good, not good. So what all does the property manager have to do? I mean to me it seems like lisa's and take care of you know when there's leaks in the roof or something. But what else are you looking for them to do? Sure. I mean you need somebody with a, with a pleasing personality and great customer service. I can't, I mean that's another really important one. As the tenants have to really like your private manager as the owner. You can be the bad guy because they can go to the tenant and say, hey I couldn't get you that lease rate. The owner wants this. So they're playing a little good cop, bad cop. But you want your property manager to have great relationships with the tenants tend to be honest with them. They'll they'll, you know, they'll understand their business. You want a private manager that's gonna know how the tenants are doing. Are they struggling?

Are they doing great? That information will help me negotiate better leases if I know what condition their businesses in. But you're not going to know that if you don't have a great on site property manager that has a great relationship with them, having conversations walking the units. One of the systems in your management company. I know because I helped set it up was you have to talk to every single tenant every single month and fill out a report and that report is submitted. Imagine how valuable that is. Hey, so and so is going out of business. Hey I've never seen a customer in and that boba tea shop ever in my life may have some red flags there. It looks like this person's bailing in the middle of the night. This person's got all sorts of garbage and riff raff and loitering whatever it is, that's amazing information. It's gonna tell you where to push where to back off when you start soft marketing a space before it's vacant. It's like, hey this is, this is going dark, we need to kick it over to the leasing guy and and start to get some activity on it. A good property manager. They're your eyes and ears and hands on the ground. So that's something you should ask when you're interviewing is.

Okay. What are the protocols you have in place? Are you are you doing 10 interviews once a month? Are you doing property walk throughs once a week or you know, maybe even twice a week to make sure there's no trash, how the landscaping looks, What's the parking lot doing? Uh Those are all really good things to do and and even if they say, hey this is our protocol and we do all these things. Do they have, are they appropriately staffed? Because we've had third party managers in the past where they knew all the things to do. They had all the protocols, But they would assign 10, 15 properties 18 properties to one manager. So that's a good question. You need to ask that question. How many properties per manager or how much square foot per manager are you assigning because if they're overloading their property managers and the party manager won't be there on site. They'll, they'll, oh I know I should go this week, I'll just go next week and we would show up and they would be trash, there would be unhappy tenants. They haven't talked to the management in a while. And so it's not just the protocols, it's okay.

How much, what level of staffing do they have and how many properties are they assigning to each property manager? And that kind of goes back to the accounting as well. Is that if they have dedicated bookkeepers, how many properties are those bookkeepers take uh, taken care of at a time. And by, by this point, if some, if I'm a third party property manager and you voiced all of these concerns and ask all these questions, I think you care a lot. I think you care so much. I think I'm not gonna get anything by this guy. I need to be on it and I'm letting my other people know, you know, because you can, you can get that feeling from somebody. You, you have one or two conversations, you're like, man, that guy cares about his property. Do not mess it up. This other dude, forget about it, he's fine, he's about to die. Nobody's touched that property in 10 years, There's no excess money in the account. You know, they kind of know these things so we go in and we give them, hey, here's who we are as owners. We've got cash to fix things, right? We've got cash to lease space. We've got an amazing leasing broker, We're gonna have you an amazing property management company. And if anything goes wrong at all, I need you to call me so we can fix it.

They're excited to hear that because they want to run a good property, they're putting their sign in the front of this thing as advertising is. Hey, I manage this property, look how good it is and full it is. That's, it's a quid. You know, it's, it's helping everyone helping everyone at this point. Yeah. I wouldn't want to be a property manager with an owner who didn't want to spend any money, right? It sucks, you got your name on it and looks bad, looks bad on you. So it does, another thing you need to be doing is, you need to, you need to walk the property with property management company. I'm a firm believer in this. You're, you're gonna see things, um, you know, that you specifically again, you know, let's use Wichita as an example. It's 3.5 hours away. How often am I driving to Wichita? Not many. I mean a few times a year, you know, so if something's wrong, when I go there, I wanna have my, I wanna have my property manager with me. Hey, I'm coming up to Wichita, I wanted to chat with you, just walk the property and I can say, hey, this pothole, let's get that fixed this roof. I'm not feeling that the windows, you know, they're, they're disgusting. Let's, let's replace this landscaping, whatever it is and you, you walk it with them, you know, before, during, after you're, you're taking notes, you're, you're comparing it.

11 other thing I'd like to add is I am a negotiator and I realize increasing rent is how I increase the value of my property. So I want someone that's both knowledgeable on market rents and aggressive and negotiations on lease renewals. And we have, we have examples where we had property managers suggesting rents to me that were what I felt were too low and they're the expert, not me. And then I would have to tell them, no, don't go at that level, Go up, go up higher, go a dollar higher, go $2 higher. And then they come back to me like, oh yeah, the tenant took it and I'm thinking, yeah, but you should have been the one pushing the rent. I shouldn't have to tell you, uh, to increase the rent. That's your expertise. You should know, okay, market rents moving up, let's see how much we can get for the owner, not what's the easiest to sign this deal up at and that's a red flag for me. If it's, if they just want to be comfortable and not, you know, make all the tents too happy by just keeping them at the same rent or, oh, they ask for a discount. I think we should give it to them. I mean, no, I don't want, that's not going to be my first choice. It's so easy to say that when it's somebody else's money. It's like, hey, this is, it doesn't look good, you know, we should fix it or you know that perfect example, It's, hey, we should give this person a discount.

You know, they're so nice. We should, we should give them a break. Sure they're nice. I'm a nice guy too. Why don't you give me some money? It doesn't work that way. It doesn't work that way. So you need somebody with good customer service. But you also need somebody that's, you're not just gonna roll over on their back and say, okay, yeah, take it, whatever fine. You can have it now. The ones that optimize both the property condition, but also the properties bottom line in Hawaii. So that brings me to a good point that, you know, we could probably end on is we handle our own lease renewals and, and, and I get asked why all the time, mainly from the third party property management company that I'm hiring and they want to do my lease renewals. And, and we've personally not had great experiences with them, not our per our personal property management companies. It's not like I haven't had a bad experience with them renewing our lease is because they don't renew our leases. I'm just saying we've had bad experiences in the past and at the end of the day, you are the fiduciary as the owner, you are responsible for the cash. If the deal goes south and you lose everyone's money, nobody gives to ship to the third party, the management company was.

Nobody cares if you did it yourself, it's worse. But if it's third party, nobody cares. So do your job to to manage them properly, right. Check in the more information you have on your center, the better, like, like the monthly tenant visits. That information is invaluable. It's it's so amazing and it tells you, tells you everything you need to know. So in in the beginning when we hire a third party property management company, we have weekly calls, weekly calls every single week. Hey, what's going on? What happened this week? What happened last week? What's going on tomorrow? You know, because it's, you know, it's different. How does your insurance get set up? What do we do about taxes? How do you like to accrue taxes on the P. And L. Do you like it to prepaid insurance and then have like this monthly, you know, you need to have a lot of in depth conversations. You'll need to talk about what you want the reports to look like. Sure, what reports you want included, Do you want a general ledger? Do you want a copy of the reconcile bank statements? Like, do you want all of these things? Right. One thing I like to see is we establish a budget with with a property management company and then every month when there's a deviation from that from that property budget is they tell me why it happened.

Otherwise, I have to go back and wonder what happened. I have to ask them what happened if they'll just include that in the report. Now, I don't need to call them for an hour. No. Okay, Why were we under budget here? Why are we over budget here? So maybe that's the last point we talked about is just uh, finding a product manager where they'll work with you to to do it your way and to get the reports in the format that you like to see to help you optimize your property and it just, it gets to a point and you build a relationship where it goes on autopilot, not in a bad way where nobody cares, but you're setting the budget at the beginning of the year and you're looking at variance reports, you're talking to them and they know what information you want to know. You have to build a relationship and you have to be able to get in and get your hands dirty at the same time, enable them to do their job. You know, So 3rd Party property managers, you have to have them unless you're managing it yourself. And if you're going out of town, you're gonna have to hire a third party, I, we have our own private management, we still hire a third party when we're out of Tulsa just because it's, it's the only way to keep eyes and ears on that property on a daily weekly basis.

Yeah. And and it's built into the operations of the property. So it's not like you're you have this extra fee, you know, you're paying some homeboy 4% and it's just coming straight in your pocket. Like man, I wish I didn't have this. We would still pay it to yourself. Even if you did it yourself. It's just now a employees to do it. So it's not like you're gonna make a ton of money. It's yeah, it's all built into the model so it's wash. Yeah. Anyway there's third party management companies for every asset class. Obviously today we dove into retail because we're buying so much retail. But if you have any specific questions on third party property management companies, if you want recommendations on third party property management companies were in a lot of States, we have a lot of relationships with those companies and we have some good and some bad that we can tell you. So feel free to comment. Like and subscribe, send us an email and we'll give you that information for free because we're nice guys. Until next time. Until next time I'll have to invest in commercial real estate. We will see you next week

Episode #066 - What to Look For in a PROPERTY MANAGER!
Episode #066 - What to Look For in a PROPERTY MANAGER!
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