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Fruit Salad and Property Management

Posted by joe.watkins on April 22, 2015
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So, you own a home in metro Atlanta and need property management from a great property manager but you are just not sure who to use.  You decide to google “property management in Atlanta”, call the top 5 real estate companies, compare their fees and go with the company with the lowest fee structure.  Great approach, right?  I mean, the property management company with the lowest fees yields you the highest return, right?  It is an apples to apples comparison, right?!  Well, it is a bit more of an apples to oranges comparison than you might think.  (Sorry to introduce oranges but a fruit salad is less interesting without them.)
Comparing fees IS an important part of making an informed decision regarding which property management company to use.  It doesn’t tell the whole story, though.  We want to help you understand how to best compare property management companies so you get the best return on your investment. (This is the part where most property management companies start to get nervous as we pull back the curtain to reveal the truth.  This is called transparency and we like it).

Fees are an important consideration.  However, they are only part of the equation used to calculate your return.  The variables are:

management fee (fmg)- the fee charged to manage the tenant.  Usually expressed as a percentage of collected rent.

rent (r)- the rent charged each month

rent collection rate (rrc)- the percentage of rent collected.  It is figured by dividing the total rent collected by the total possible rent collectible.

maintenance fee (fmt)- the fee charged to manage the home and all of its current and deferred maintenance needs.

maintenance invoices (imt)- the actual amount invoiced for work performed on the home.

occupancy rate (ro)- the percentage of time a home (or aggregate of all homes) is occupied.

tenant placement fee (ftp)- the fee charged for placing a highly qualified tenant in your home.

lease renewal fee (flr)- the fee charged for renewing a tenant’s lease for another year.
The formula looks like this:

Money in your pocket (M(t)) = (ro * rrc)[(12)(r – (fmg)(r))(t)] – (imt + (fmt)(imt))(t) – ftp – flr(t-1) where t is time in years.

Complicated, right?! (Don’t you wish you had’ve paid more attention in Ms. Smith’s Algebra class?) The purpose of this post is to help you understand this formula (it IS how your return is calculated whether you like it or not). Let’s look at the various parts of the formula and what each means for you.

(fmg)(r): the management fee rate times the rent amount. This represents the fee you pay to the management company for management.

(imt + (fmt)(imt)): the actual amount you pay for work performed at your home including the maintenance fee. The maintenance fee rate is important but the total amount you pay is influenced more by how low the repair prices are. So, a company that can negotiate lower repair prices (think Bravo Group) with its vendors translates to you making more money.

[r – ((fmg)(r) + (imt + (fmt)(imt)))]: the amount of money you receive each month from the management company. It is the total rent received minus the management fee minus the amount paid for maintenance performed at your home.

(ro * rrc): the occupancy rate times the rent collection rate. Ah- this is one of the biggies and the one most companies don’t want to discuss with you. It is important because a company that is better at getting their tenants to pay rent returns more of your money to you.

Important note: Although two companies may have identical occupancy rates, one may still be more profitable for you due to the number of placement fees you have to pay.

For example, consider two companies that have the same occupancy rate with each managing one of your homes. Both keep your property occupied for 36 out of 39 months. With company A, your tenant occupied the property for 36 consecutive months. Then, the property was vacant for 3 months before it was again occupied. With company B, your tenant occupied the property for 12 consecutive months. Then, your property was vacant for one month. The next tenant occupied the property for 12 consecutive months and then moved out. Again, after one month company B placed a tenant who occupied your property for another 12 consecutive months. Then, it was vacant for a month. So, company B also kept your property occupied for 36 of 39 months. However, with company A, you paid one tenant placement fee whereas with company B you paid 3 tenant placement fees.

Now, let’s look at a real example.

You have a home that rents for $1000 per month. You are considering two companies for management: Low Fees Low Performance Property Management and Bravo Group Property Management.

Low Fees Low Performance’s fees are:

Tenant Placement fee: One month’s rent

Lease Renewal Fee: $250

Management fee: 7%

Maintenance fee: 10%

Total repair cost for the year is $500 (a toilet repair for $200 and roof leak repair for $300)

They collect 93% of all rents due and have an occupancy rate of 88%.

So, M(t) = (.88*.93)[(12)(1000 – (.07)(1000))(t)] – (500 + (.1)(500))(t) – 1000 – 250(t-1)

At the end of the first year (t=1 year), you will have made:

M(1) = (ro * rrc)[(12)(r – (fmg)(r))(1)] – (imt + (fmt)(imt))(1) – ftp – flr(1-1)

= (.88*.93)[(12)($1000 – (.07)($1000))(1)] – ($500 + $50)(1) – $1000 – $250(1-1)

= (.8184)[(12)($1000 – $70)] – ($550)(1) – $1000 – $250(1-1)

= (.8184)[(12)($930)] – ($550)(1) – $1000 – $250(0)

= (.8184)[$11160] – $550 – $1000 – 0

= $9133 – $550 – $1000

= $7583

Wait! Are we really telling you that you only get to keep $7583 of your $12,000?!! Surely, our math is wrong! Let’s look at it again. You make $12,000 in rent a year. From that, Low Fees takes $70 per month in management fees (7% of $1000). That’s $840 per year. Ok, now you have $11,160. Subtract $1000 for the tenant placement fee and $550 in maintenance invoices and maintenance fees.. . . wait a minute. . . you can’t do that yet because Low Fees only collects 93% of rents. So, 93% of $11,160 is $10,378. Great, so just subtract the $1000 from that. Nope. Low Fees only keeps 88% of their homes rented. That means that yours will only be rented 88% of the time. So, take 88% of $10,378. You are left with $9133. Ok, now subtract $550 in maintenance invoices and fees and the $1000 tenant placement fee. You get to keep $7583. Your money is shrinking.

Now, watch what happens when Low Fees Low Performance’s performance matches Bravo’s (We won’t even lower their maintenance prices to match ours.) In other words, let’s change their collection rate to 98% and occupancy rate to 93% (this varies but these percentages are very realistic).

M(1) = (.93 * .98)[(12)(r – (fmg)(r)) – (imt + (fmt)(imt))](1) – ftp – flr(1-1)

= (.93*.98)[(12)($1000 – (.07)($1000))(1)] – ($500 + $50)(1) – $1000 – $250(1-1)

= (.9114)[(12)($1000 – $70)(1)] – ($550)(1) – $1000 – $250(1-1)

= (.9114)[(12)($930)] – ($550)(1) – $1000 – $250(0)

= (.9114)[$11160] – $550(1) – $1000 – 0

= $10171 – $550 – $1000

= $8621

That is a $1038 Bravo difference!

Now, let’s look at Bravo’s actual fees (management fee varies depending on # of properties):

Tenant Placement fee: One month’s rent

Lease Renewal Fee: $399

Management fee: 9%

Maintenance fee: 15%

Total repair cost for the year is $400 (a toilet repair for $150 (you don’t really think we would have spent $200 for a toilet repair do you?) and roof leak repair for $250)

We will use a collection rate of 98% of all rents due and an occupancy rate of 93% (Believe it or not, we actually have many months that we collect 98% of collectible rents.)

So, Bravo Group’s formula looks like this:

M(1) = (.93 * .98)[(12)(r – (fmg)(r))(1)] – (imt + (fmt)(imt))(1) – ftp – flr(1-1)

= (.93 * .98)[(12)($1000 – (.09)($1000))(1)] – ($400 + (.15)($400))(1) – $1000 – $399(0)

= (.9114)[(12)($1000 – $90)] – ($400 + $60)(1) – $1000 – 0

= (.9114)[(12)($910)] – $460 – $1000

= (.9114)[$10920] – $460 – $1000

= $9952 – $460 – $1000

= $8492

The Bravo difference is $909!

One more example. Let’s see how much Bravo Group makes you in the third year of tenancy compared to Low Fees Low Performance (they have to find you a new tenant every year. . . sorry). For this example, we will demonstrate how powerful our ability to retain tenants is!

Remember, Low Fees returns you $7583 per year when the tenant only stays 1 year. At that rate, you will receive $22,749. Let’s look at what Bravo Group returns you if we retain the tenant for 3 years.

(M(t)) = (ro * rrc)[(12)(r – (fmg)(r))(t)] – (imt + (fmt)(imt))(t) – ftp – flr(t-1)

M(3) = (.93 * .98)[(12)($1000 – (.09)($1000))(3)] – ($400 + (.15)($400))(3) – $1000 – $399(3-1)

M(3) = (.93 * .98)[(12)($1000 – ($90))(3)] – ($400 + $60)(3) – $1000 – $399(2)

M(3) = (.93 * .98)[(12)($910)(3)] – ($460)(3) – $1000 – $798

M(3) = (.93 * .98)[$32,760] – $1380 – $1000 – $798

M(3) = (.9114)[$32,760] – $1380 – $1000 – $798

M(3) = $29857 – $1380 – $1000 – $798

M(3) = $26,679

After 3 years, Bravo Group has made you $3930 more than Low Fees Low Performance. Folks, that’s real money in your pocket.

So, as you can see, fees only tell part of the story. Performance is the best predictor of high portfolio profits!!!!

Now, go enjoy a bowl of fruit salad.

Call Bravo Group today!

678.833.2872

 

 

 

 

 

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