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HIGHLIGHTS FROM THE PODCAST: 0:20 - Introduction 1:15 - Spencer's experience before using a PM 4:40 - Where did it go wrong managing himself? 8:45 - 3 things that investors waste their time doing that PMs should be doing 15:19 - You can focus on what puts money in your pocket with PMs.
FULL TRANSCRIPT OF THE PODCAST AUDIO:
Spencer Sutton: They're living in the house and they're paying rent. And if you have a really good property management company, they're going to keep that resident longer than you are. When they treat the resident like an asset, they're going to keep them longer than you. So how do they do that? Spencer Sutton: All right, everybody. Welcome back to another episode of the Birmingham Real Estate Investor podcast. I am your host, Spencer Sutton, and it's great to be here with you. Spencer Sutton: I don't have Matthew with me today. We don't have a guest because I was talking with an investor actually who lives in Atlanta. And we were just talking about property management. We were talking about investors dealing with property managers, and he brought up some really interesting points and thoughts that as I was considering them and he and I were emailing back and forth, I thought that I would just share some of these with you today because I think they're very relevant to the discussion when we have investors who are considering property management. Spencer Sutton: And I know that the title of this podcast is making a pretty bold claim, but I want to back this up, all right? I want to back up my claim that most definitely, when you hire a great property management company, you can actually put more money in your pocket. Spencer Sutton: And so I'm going to discuss the three ways that this happens. But first I want to tell a story because this is based on my experience. This is also based on the experience of many, many, many other investors, but I'm going to tell you from my personal standpoint. Spencer Sutton: So when I first got into real estate back in 2003, I was a wholesaler. And that was a great, great experience for me. We bought a home investor franchise, me and some buddies. So we had billboards all up over town and we were buying houses like crazy. And we didn't care anything about fixing houses up or anything like that. All we wanted to do was wholesale them out. And we knew that we could buy them at a deep, deep discount. Spencer Sutton: And I had a partner and that's all he did was buy at a discount. He was a great buyer. I think you have to have a certain personality to be a buyer. Not everybody makes a good buyer. I, for one, am not the best. I'm pretty good, but I'm not the best. But what I am is a great seller. So I was in charge of developing investor relationships and presenting our deals to them. Spencer Sutton: Now, we were closing every single property. So we were getting money. We had over a million dollar line of credit at the bank, and so we were just paying cash for all these houses. That was part of the appeal that people wanted to sell us their property, is that I could close within two to three business days. As long as I could get clear of title, it was very, very easy for us to close and get them the cash that they wanted. Spencer Sutton: This was great and we had quite a run. I mean, we were, we were wholesaling a lot of houses. We were probably doing between 30 and 40 deals a year. And we were getting maybe a hundred calls a month and we were making offers on about 20 or 30 of those, and then we would end up buying probably three or four a month. Spencer Sutton: And so that was a really good business, but at some point, I wanted to build a rental portfolio. So I think it was probably back in 2005, 2006-ish, because somebody called us about selling their portfolio. And I was like, "Hey, I might want to buy that portfolio." So I was like, you know what? I'm in the business, I'm wholesaling houses, and I might as well add this. I could buy these properties and then I could absolutely manage them myself and start building my rental portfolio. Spencer Sutton: So it was 10 houses. I paid $100,000 dollars for those 10 houses. And yes, they were in C minus, D areas, and it was a rough go. I had all the leases, but I didn't have like security deposits and all this stuff. It was a rough go at first, but that's okay, we got them at a really deep discount. Spencer Sutton: And so the first thing I started doing was communicating with residents. I started going, I started having to collect rent when they were late. I had to start doing all this stuff. And the more I did it, just the more time it consumed. I mean, you can imagine going from no properties that I was managing to 10 right away. I was like, "Oh my goodness, this is a lot of stuff going on," while at the same time I was still wholesaling houses, right? So I had my business that had been my full-time job and still was my full time job, but then what I did was I added a bunch of rental houses on it. Spencer Sutton: And it was okay, right? So I was having to manage repairs, rehabs, all this stuff, any kind of leasing. All of this stuff was just taking up more and more and more time. Spencer Sutton: So eventually I remember we bought a house. It was actually, this was a different house. So this was probably... We were maybe 20 rental houses at this point. I was still managing all of them. This one was in Clay, an area called Clay-Chalkville. A great area. It was a three bedroom, two bath. And I put marketing out. I showed it to a couple of people and eventually leased it to a lady and her daughter. Spencer Sutton: And so I thought, "Okay, this is great," and that was until they stopped paying me. Then I had to make the trek out there, which was a good 30 minute drive every time I needed to go out there and visit. And then I found out they had dogs in the house when I said no pets, and I had just refinished the hardwood floors. And then I had to file for an eviction. Then I had to go out there when the sheriff set all their stuff out. I had secure the property. I mean, it was a nightmare and it left a really, really bad taste in my mouth. And this was probably 2007, 2008. And I eventually turned that property along with all of the other properties that had rental properties over to Evernest. This podcast is an Evernest podcast. This is who I work with now as the director of marketing. Spencer Sutton: So that story to me is a perfect example of what can happen when an investor who has a thing going... So this is an investor who's wholesaling houses, maybe they're flipping houses and they want to buy and start holding on to rental properties, which is great. I think holding rental properties is awesome. Obviously, this is what we do, is manage those. But what it was doing for me was it was sucking a lot of time out of my wholesaling business and I was taking my eye off the ball there. Spencer Sutton: And my partner, around I want to say 2007, he was in the National Guard, so he got called to active duty in Afghanistan. And we didn't know that was going to happen. So I had all of my rental properties, but now I was buying and selling for a wholesale business. And then on top of that, in 2007, the market started to fall apart. Spencer Sutton: So it was a perfect storm, wasn't good. But the whole point of this podcast is I want to convince you that if you find a great property manager, you can actually make an additional at least $5,000 a month in your business, and that's if you're wholesaling houses or if you're flipping houses. Spencer Sutton: The reason I can say that is there at least three things that I can identify where property managers are going to be way better than you, and this is all they do. And what does that do? Spencer Sutton: So the way I like to see, property management is a tough, tough business. I've done it myself personally and now I do it professionally. And what I can tell you, it can be a very low return business, right? And what I mean by that is just tasks that are just kind of repetitive tasks, processes that have to be done that don't give you a huge return, versus if you spent that time and that energy focusing on your wholesale business, focusing on acquisition, focusing on the activities that actually make you lots of money, make you more of an income. If you focus on those and let a great property management company handle your property, you're going to be way better off. Spencer Sutton: But a lot of investors make the mistake like I did in the early days of wanting to manage everything because, hey, listen, nobody's going to manage my property like me. You know what? I can say $10 an hour on a handyman or whatever the case is. I want to have a say in who goes in to this property, I want to meet the person. There's all kind of things that we as investors want to have control of as opposed to turning it over to somebody who's going to do a better job, and then allowing me to focus on activities that are extremely high return activities. Spencer Sutton: Now, I know we were averaging way more than $5,000 a flip. And I would imagine that if you were doing the activities and you were focused on those types of things as opposed to managing your rental property, you're going to put additional money, more than $5,000 in your pocket every single month. Spencer Sutton: So here are the three things that I see investors waste their time doing that they should allow a property management company to do. Number one is handling leasing. All right, now this is a big time suck, right? So it's a time suck to go out there, to take all of the marketing photos, to get all of that up and going. And then that's not the hard part. The hard part is answering all the phone calls, going to all the showings. I mean, what happens when they stand you up? You've driven all the way out there and you did not even get to meet anybody. Underwriting the application, which you're not an expert at doing, but we are. We've actually done tens of thousands. Spencer Sutton: And listen, this is not an EverNest commercial at all. I'm saying any great property management company, screening the applicants, collecting security deposit, getting leases signed, this is a time-intensive part of the whole process. And what I find is that a lot of investors just don't do a great job of this. Spencer Sutton: And so what happens is investors tend to get a little impatient and get a little frustrated. So what they'll end up doing is maybe they'll skip some of the steps in the application process. Maybe they'll go with their gut feeling. Maybe they want to find out a little bit more personal information about the resident, which is not a good idea before they sign the lease. Spencer Sutton: And I'll just tell you, I've seen that happen so many times. I know in the property that I just discussed, like the house where I had to go through the eviction, this was a major issue. And so I cut a few corners more than likely, and what happened was I had to evict this resident after I would say six months. And it took three months to evict them. And then when I turned that over to EverNest, what they did was they found me a resident that stayed over nine years. All right? Spencer Sutton: So I could have saved a leasing fee by doing it again myself, but the chances that I would have found that resident or a resident that would have stayed nine years are slim to none. Spencer Sutton: And so how expensive is that? And I'm not saying every resident that we place is going to be a long long-term resident like this, but the chances of them finding a great resident are going to be far greater than you. Spencer Sutton: And so, number one, stop focusing on all of that stuff that doesn't put money back into your pocket immediately. You can hire a property management company, a great property management company that can do this for you, and it makes way more sense. So that's number one. Spencer Sutton: Number two is a great property management company sees the resident as an asset and they're going to treat them as an asset. So it's not the property, it's not the house that is the main asset. It is that resident. The resident is the one paying the rent, not the house. They're living in the house and they're paying rent. And if you have a really good property management company, they're going to keep that resident longer than you are. When they treat a resident like an asset, they're going to keep them longer than you. Spencer Sutton: So how do they do that? Well, they pick up the phone, they answer the phone and they communicate with them all the time. I know I was not super good at that. I didn't necessarily want to pick up the phone and every time they called, but great property management companies have people on call 24/7. Spencer Sutton: I'll never forget one of my residents called at 2:00, 3:00 in the morning. My phone was in the bathroom. It kept ringing and ringing and ringing. I just went over and I shut it off at 2:00 or 3:00 in the morning and went back to sleep. But when I woke up, what did you think I had? I had a voicemail, a just profanity laced to voicemail because there had been some type of plumbing issue at the house in the middle of the night and I was not about to do anything about it. Like I didn't know what I could do. So I had to get somebody out there the next day. Spencer Sutton: But what they really wanted is they wanted to be heard. They wanted their frustration to be heard. And had I done that, then I probably could have kept that resident longer. But a great property management company is going to treat the resident like an asset. Spencer Sutton: There's a podcast that I recorded, How to Keep a Resident 20 years, and it was Robert Lock out of Atlanta. And I interviewed Robert and he had had a resident for 20 years. And one of the keys he said was treating them like they're truly valuable, like the asset. And so he tended to keep residents longer. Spencer Sutton: And so how is that putting money in your pocket? Well, just think about the expense. What is a major expense for an investor who owns rental property? Well, it's the turn. It's when a resident moves out. And if you're not taking care of that resident and you have residents that move out every year or once every two years, then that's going to be a problem for you. Spencer Sutton: Our average tenancy is over four years. And if you have somebody moving out year after year, you have vacancy issues. You have repair issues because you're going to have to turn that house. Now, you may not have to do much if they're moving out every year, but you are going to have to spend money. And you've got all the time, the expense of leasing the property, plus all of your time showing the property, handling all that is involved in that. And so that is number two. Spencer Sutton: So number one, handling leasing is taking money out of your pocket. Number two is a great property management company is going to treat the resident like an asset. And then number three, a great property management company is going to do inspections and they're going to take care of issues with that property before they become major issues. They're going to take care of minor problems before they become major issues. Spencer Sutton: And I've got several stories about this, where I was like, "Well, it's not that big of a deal." I wasn't great about doing inspections all of the time, but once I turned it over to EverNest, my property, I got inspections a lot more frequently. They would point out different items. I know that I personally kind of ignored a soffit and facia issue and that ended up costing me thousands of dollars, versus it would have been a easy, like preventative maintenance to clean the gutters, to take care of the gutters, as opposed to just kind of letting it ride and having to deal with replacing facia and soffit, which was a lot of money. Spencer Sutton: So a great property management company is going to save you tons of money by handling these minor issues before they turn into major repairs. And then when the resident moves out, you're not going to have as much to do and you're going to be able to get that property leased quicker. If you have a longer punch list, it's going to take you a lot longer. If you have just a short punch list, obviously that's not going to take as long. Spencer Sutton: So those are three ways that I believe, I mean, it's just very, very obvious that you can focus on doing what you do best to make money, which is wholesaling houses, flipping houses, focusing on acquisition, even if it's acquisition of your rental properties. Those are what I call high return activities. Managing rentals, the leasing aspect, managing repairs, and maintenance, managing the communication, and the relationship with the resident, they are not high return activities. Spencer Sutton: So you can pay a small fee. Yes, the leasing fee for most property management companies is going to be somewhere between 50% of the first month's rent to 100% percent of the first month's rent. It just varies depending on what company you're looking at. So that's going to be your biggest expense. And then usually it's just a monthly fee. Like my headaches and what I was able to focus on dramatically improved when I turned all of my properties over to Evernest, and that is a story that we hear from many, many investors all around the country. We manage over 4,500 properties right now for about 2,500 owners. Spencer Sutton: So anyway, those are the ways that I feel that you would be better served to use property management, no matter where you're buying. If you're buying in Birmingham or Atlanta or somewhere else, I mean, it doesn't matter. Seriously consider hiring the professional that does this every single day, that has systems and processes that you don't need to go and try to recreate. And then you focus on higher return activities such as acquisition and put money in your pocket. Spencer Sutton: So my thought process behind this was when I was talking with this investor out of Atlanta, he was like, "Oh man, if you just did not focus on rentals and all you did was acquisition and doing the daily tasks that you need to do to buy houses, you would at least get one more wholesale deal per month." And a wholesale deal, minimum $5,000, so that's where we came up with the number $5,000. Spencer Sutton: Anyway, that is the episode. If you have enjoyed any of our podcasts, leave us a review please on Apple iTunes. It helps others find us. We would appreciate that greatly and we'll be back next week with another episode of the Birmingham Real Estate Investor podcast. See you then.
