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BRIAN ESTES — Why property management should matter to high net-worth individuals

BRIAN ESTES

I have written several real estate articles on high net-worth individuals (HNWIs); however, I believe the subject of property management may be the most important topic I have discussed in regards to HNWIs or even high income individuals.  Generally speaking, high net-worth individuals struggle with making the decision to outsource property management to a third-party management company or to just manage the property themselves.  Many HNWIs already have an ongoing business and believe they can handle the day to days needs of the property and tenants utilizing the staff they already employ.  In addition, most high net-worth individuals became wealthy by creating and/or running their own business and the thought of turning over operations to someone else may seem self-defeating.  However, I believe that there are three primary reasons HNWIs should consider prior to making the decision to manage the property themselves and I have summarized each below.

First is Stick To The Core Business.  Property Management is a challenging business and the property owner is basically handling problems most of the time.  Problems can consist of physical issues with the property, tenant complaints and non-payment of rent.  Again, most HNWIs are wealthy by focusing on their core business and trying to manage their own investment property will most definitely distract them from what they do well.  A great third-party management company will have the skills and resources necessary to handle the everyday issues and problems with most real estate projects.  In addition, the property manager is able to act in an independent manner in negotiating with tenants and vendors.

Second is Risk Mitigation.  There is no doubt property ownership and management has more than its fair share of risk. Certain property types have more than others, such as multifamily properties and larger shopping centers, where there are more occupants and guests coming onto the property.  There are many risks associated with property ownership; however, none more important than “premises liability”.  This type of risk would include “liability” for a tenant or guest getting hurt on the property due to property related issues such as “trip & fall” or security concerns with potential crime.  A Great property management company will routinely inspect and monitor potential issues for the property and are more likely to be objective when it comes to handling life & safety problems.    

Third is Value Creation.  Most Great property management companies are very experienced in “adding value” by both reducing expenses and increasing income with a leasing & management plan.  In most instances, investors who manage their own properties are less likely to create or increase the value of their property because they don’t spend the necessary time and resources to reduce income and/or think about how each lease/tenant adds value.  Most property owners are not as objective as they need to be and some unfortunately create rocky relationships with their tenants.  In general, it is much easier for an independent management company to work with current & prospective tenants to try and build-in rental increases over the term of the lease to cover increases in property expenses.  In addition, experienced property management companies will have a much better understanding of how and what expenses should be reduced.  Additionally, great management companies will have a better understanding of what capital improvements are needed to “add value” by keeping up with market trends which results in higher income.  One final note, properties with great management in-place tend to sell at a higher price and sell faster as most investors want to purchase a property and have consistency in operations.   

Overall, good property management is about taking care of the everyday problems that exist with property ownership.  This can include a myriad of things and several we have already discussed.  Great property management companies have systems in-place to handle these issues including asset management, accounting, maintenance and leasing.  How well these “systems” operate have a direct impact on tenant retention and “value creation”. High net-worth individuals should consider property management & the fees associated with management as an “investment” into their asset.  Most experienced real estate investors will agree that great property managers will pay for themselves.

» Brian E. Estes is president and investment advisor with the Estes Group and can be reached at brian@estesgroup.net.

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