Tips on Selecting a Property Manager
An Interview with Steve Bergess – This is Episode 43 on the Invest Florida Show
You can listen to all Podcast Interviews at: InvestFloridaShow.com
A direct link to Episode 43 is: Hiring a Property Manager
Eric Odum: And today we have with us Steve Berges. Steve transacted over hundred million dollars personally and assisted over 150 million dollars in client transactions in multi-family arena. The more importantly is how we actually came to find Steve, he was the author of the Complete Guide to Buying and Selling Apartment Buildings. Steve, thank you so much for taking your time to talk with us today.
Steve Berges: My pleasure, glad to be here.
Steven Silverman: How did you get started in multi-family investing?
Steve Berges: Well probably, the same way a lot of investors started in many years ago in a single family business. As a matter of fact, I was serving in the air force many years ago and I came across a book called ‘How to Wake Up the Financial Genius Inside You’ by Mark O. Haroldsen. And for those of your listeners who have been around for a while, they have heard of this book. It has a picture of a young man sitting on the hood of a Mercedes Benz. He talks in the book a lot about the fundamentals of Real Estate which at the time all brand new to me. He talks about things like the margin of compound interest, leverage, using other people’s money against the basic and fundamental principles of real estate. But they are all brand new to me at the time that I was inspired by his writings. The book of Mark O. Haroldsen, ‘How to Wake Up the Financial Genius Inside You’ I don’t know if that book is still available. When I bought it, it was in late 70s or so. Anyways, if you’re going to ask me if it’s a good read, it is a good read. And I still have a copy of it on my shelf today. So yeah, it was the book that inspired me to start out single-family, buying and selling like many of your audience starting out small and eventually growing into multi-family properties.
Steven Silverman: So Steve why did you choose multi-family properties over other asset classes?
Eric Odum: Obviously, you started in single-family but it was natural progression but, obviously, you make a conscious decision to stick with the residential side and just move in to multi-family. So tell us more about that.
Steve Berges: Well, the things I like about multi-family are several things actually. But with the multi-family property, one of things that I learned long ago and I like specifically about this strategy in my book is what I refer to as the Value-Play strategy. It is simply that value-add but when you compare a value-add strategy with multi-family to a single-family, if you’re going in to do the standard fix and flip on single-family, normally on a single-family house, the house is vacant, that means your occupancy is 0%. Which means you are not cash-flowing it all. With multi-family, you can do the same thing but a larger and more efficient scale and generally, you will have at least 70-90% occupancy depending on the market and the quality of the asset is higher . So your property is at least cash-flowing, it’s generating some cash. Your cash may still be in negative but hopefully if you do your homework you are at least able to identify property that is at the minimum break even. So to me multi-family compared to single-family is much more efficient process, like for example, I can purchase a one hundred unit apartment building and I’ll only do 1 deal a year or 1 deal over couple of years using a value-add/value-play strategy and you’re trying to achieve the same financial status using single-family. Think about how many single-family houses that you have to go out and find how transaction oriented that process, you have to constantly identify new opportunities and you have to have team in place to help you do that and if you’re buying a hundred houses in a year, that’s a lot of process, a lot of transactions, that’s is two in a week on average. And on the buy side, when you turn in selling those houses there’s two more to sell so doing four transactions a week. Compared to multi-family, it might 1 transaction a year or two transactions a year. And really, that’s sufficient for me. I can make money out of one deal to be able to live very comfortably and taking care the needs of my family without having to try going crazy by finding multiple transactions. One of the other things with multi-family is that there’s certainly a competitive market environment at least in the current economy it is. Single-family, chance will be a lot of competition. There’s a lot more fish in the sea. You are going after those single-family deals and they are really can be hard to identify the margins often times. You might end up scheming fifteen or twenty thousand single-family house on a larger transaction, more luxury home you might earn fifty to seventy five or hundred thousand dollars. But often times a bread and butter houses are fifteen to twenty thousand dollars and for me, personally, that’s a lot of work for 15-20 grand that I have to go out and identify those and have a full blown team in place. So the multi-family again is much more efficient process and one which I enjoy immensely. Now, one of the challenges in multi-family, it is just understanding the dynamics of the value of the assets and what drives the value and that all gets into understanding that operating income and certainly, multi-family properties are valued much differently than single-family properties. So you have to really understand that and have a good handle on it to know what you’re dealing with or otherwise you’ll be paying too much for a property.
Steven Silverman: So Steve, you had mentioned a value-add, what is that mean?
Steve Berges: Well, just like the single-family, a property can be undervalued for any number of reasons. Single-family with the average home and neighborhood worth $150,000 and you happened to identify one that is being offered for $100,000, there’s a reason for that and you know you deferred maintenance, one of the houses in poor conditions so if you’re going to do the fix and flip, you’re going to go on with all the repairs to bring up the standards of the surrounding neighborhood and hope to be able to exit after you put 20 or 30 thousand dollars into it at the market value around $130,000 to $150,000 that I talked about a minute ago. So multi-family is the same principle when you’re looking for property that is undervalued for any number of reasons and often times one of those reasons is function of the management. Poor management, owner is burnt out, does not really know what to do, so the property isn’t cash-flowing as well as it should be. Of course, that creates problems downstream and that if the property is not throwing out cash then you don’t have money to cover the needed repairs and that will end up repair and maintenance and equipment begins to fail and it will just create snowball effect. So you really have to stay on top of the game and understand all the pieces to make sure that the asset performs as it should. You know that’s a process required few things involved on that but not all was able to do that just like the single-family has fix and flip with the same concept. You go in making improvements to the property, capital improvements; you can do things, any number of things. Things as simple as paintings and landscaping, roofing, the interiors of the unit are important and recognizing what the current market is for the competing properties, what are rents, what kind of rents are being collected in your competitor’s properties and understanding if you are relative to that. For example, if your competitors, if the market says you should be getting 90 cents of foot but you’re only getting 65 cents of foot, what huge opportunity like that. Find out the reason why the property is only getting 65 65 cents per foot . Perhaps the owner’s is unsophisticated and doesn’t realize that her property should be performing better and secondly, your management team, is not on top of their game and not driving the value of the property the way it should be. So again, it’s understanding that process and recognizing that there’s additional value to be captured in the process.
Eric Odum: Now Steve, you’re based in Houston, right?
Steve Berges: Correct. Houston, Texas
Eric Odum: And are you pretty much looking for opportunities in that market or you’re looking all over the country?
Steve Berges: Generally, I stay focus in Houston area. I do have clients contact me from time to time. I work with them individually and sometimes they have a particular interest in a specific market area over Houston area but if they don’t, I encourage them to work with me in a Houston market because, you know, I’m located right here, am able to go and drive to properties and even they are out of State, I work with out of State owners and buyers in number of occasions. And it isn’t really a big deal as long as you have a team in place in a local level who can make sure that the property is operating the way it should be, it’s really no problem with buyers or investors to run properties out of State. But for me, personally, I like to focus on Houston market because that’s the market that I know and understand the best.
Steven Silverman: So Steve, why do you think coming out look for multi-families properties. Prices have risen so much recently?
Steve Berges: I think it’s a certainly a good indicator if you are a seller in this market. If you are a buyer, it can make things a bit more challenging as far as whether not things are beginning to get tough heavy. It merely depends on the overall economy and that’s not so much from a local stand point but more of the macro perspective, a global perspective. And for example, there are issues in Greece some of the listeners might have heard about that may impact the euro and that affect the value of the property and the economy in Chinese has beginning to see a bottom term. So all of those factors have global implications and if you have something like that affects the economy from a macros standpoint then I will be very concern. But like you I don’t have a crystal ball and I can’t foresee those things. I can be aware of indicators on the horizon and keep an eye on them. But certainly it’s very difficult to call those down turns on the economy. So, I would say, to be very cautious. That’s one of the reasons that I like the value-play strategy is because if I can purchase an asset that is undervalue relative to the current market then I wouldn’t be so concern getting caught upside down in a market environment that becomes tough heavy and another advantage of value-play strategy is much like creating stocks, you’re in out your trader versus somebody who’s investing for the long term unlike the buy and sale, buy and sale, buy and sale. My personality is not suited to someone who holds for the long term and that for me, it helps some of that short term risks.
Eric Odum: You talked about more investors, including you, started in single-family market. What would you tell to the newbie multi-family investor who maybe came from single-family environment, what you would tell him, just couple of points in getting started, what would you say are the most important things?
Steve Berges: Well I have new investors, new clients, who will contact me all the time and probably the biggest couple of things are: 1. Be patient. Because it’s very easy to identify an opportunity and get excited about it and you go and walk the property and tour and the selling broker talks it up, what a great deal it is and you better hurry or it’s not going to last long. You really need to be very careful and in my opinion if it’s your first time, it is helpful to work with someone like myself who can lane you in and caution you to proceed carefully. Part of that also is working with a lead investor, somebody who has the experience who can guide a newer individual and help them to be careful, help them make the right decisions. There are a lot of pieces, so for example, new investors who might already be in single-family housing who already know where to go to get financing for single-family deals but they don’t know necessarily where to go for financing for multiple-family properties. And it’s not always the same people and that often times different. So again, working with an individual who is experienced can guide them to each step of the process. I think it’s very important so that coupled with just exercising caution and care and patience on the first deal, these are the things that they should be aware of.
Eric Odum: You mentioned the debt is something that is different. In fact, in many cases you really can’t even get the most advantageous debt which is the agency debt. You don’t have experience which as a key principle on other multi-family deal. So this goes back in line about what you are talking about that maybe the first deal that you do, or first couple of deals that you find someone you can partner with to get your experience that you can put in your resume so you can get access to the best debts. Is it a fair assessment Steve?
Steve Berges: Well it is. However, I personally don’t use the long term agency debt as you referred to like Tanya and Freddie. Primarily because my deals are short term in nature and that type of debt is generally for a long term structures so it’s probably 10-15 years and there are kinds of pre-payment penalties associated with those types of loans, they have reserved requirements. A lot of things they have to be aware of. So for me personally, I usually work more with local lender, and local relationships that I can go in and sit down at the President’s office and talk about a deal and they know multi-family and that what binds us and I like to be able to sit across as a guest and look the in the eye and talk about the opportunity, that works well for me.
Eric Odum: That’s a really good point, you know. Debt is the key because you’re so limited in the single-family side and I think depending on how deals are structure in a multi-family you have a much broader appetite on the debt for the multi-family. But it’s different, you know, it’s one of the things that completely different from the single-family side. I want to talk to you a little bit about managers managing because that one of the things we knew that you have a lot of experience in terms of managing deals and helping your clients or what not. Are you guys currently using third-party managers on your properties?
Steve Berges: Yes, absolutely. I use a third-party management team. And that certainly a key element of purchasing a multi-family property. If you’re just buying a fourplex or something like that, you probably won’t need a third-party manager but if you’re dealing with 50-100 units I would recommend it. And one of the reasons why I said that is because it’s kinda like if I will hire people to manage, think about the money that you can save. Well it’s not what I’m trying to do, it’s not my background, not my expertise is, and it’s not what my time is best. Just like I wouldn’t go and try to paint the interiors of my units. I wouldn’t go and try to put a new roof on just to save money because it’s not what I do. I can hire somebody who can do that cheaper that what I can do it for. And in fact, they can do a better job provided that I oversee and provide the guidance and directions. So just for example, one of the deals/ properties that I recently purchase is a smaller about 28 units. But it has been owner operated through individual selling. That was his first property to purchase and he was self-managing and he is completely unaware of what the sub-market, his competitor has been doing in the sub-market. And there are reports, so for example here in Houston I use what’s call the ADS (Apartment Desk Services) report. I can pull up 15-25 closest competitors to my property and I can see breakdown of what each and every one of them is charging per square feet basis. Usually when I look at a deal including this 28-unit deal, I was able to see that the property is being way underrated relative to the market. So the seller who’s a full time engineer and a part time manager on weekends is trying to win that and doing his best he can. So in my opinion, being extremely short sided, he had no business managing that property in a professional management team for a much better job than he was doing. But again there lies the opportunity that I like to look for is something small like that has been operated. I know that Boston in that, they don’t know what they are doing; they don’t know and understand the dynamics of the market what’s going on around them. So I was able to purchase that property. And again right now, I’m in the process of diving value by increasing significantly. So just for example, some of the units he have been rented for $520-$540 one bedroom unit was leased for $675, so that’s a significant difference of $125 per unit per month times 28 units if you do the math, I think that around $400,000 value that was created.
Eric Odum: There’s the example of a value-add right there.
Steve Berges: Let me pull out a calculator real quick, so that’s $125 times 12, times 28, that’s $494,000 in value that was created. And certainly, I have to spend a little bit of money to do that; the property itself is in overall in good condition but I have money budgeted for the interior of the units to upgrade or doing the process of upgrading the property profile. So if you understand what’s going on the in the immediate sub-market, these are the plans of opportunities that you can take advantage of, buying individual who is attempting to self-manage. Often or not, they do it for a job so once again they realize the opportunity.
Steven Silverman: So Steve, you experienced very well the advantages of using a third-party property manager. There are some things to be aware of when you also like to be a third-party property manager and some put falls. Can you elaborate on that a little?
Steve Berges: Yes I can. I interviewed and work with several property management firms over the years. And I gone back to one that I’ve used in the 90s that did an excellent job for me. And I know them personally, they manage a little over 5000 units, most of them are in Houston area. And they’re just doing outstanding job but there’s another group, a couple of other groups. One in particular, one I interviewed on the surface, they seem very professional. They’re good; they know what they’re doing. But through other sources, I was able to learn that they’re really unresponsive to one of their clients. So for example, if you ask for current financial reports or any other important things about the property and you don’t hear back from them for several days, or week or two, you begin to question that. So when you’re talking about managing a two/three/four/five million dollar asset, you want somebody who’s going to be responsive and more than just on a surface which turns to be more superficial in nature. So it’s helpful to talk to other property owners to get feedbacks from them on a particular management company you can ask for references but of course imagine a company who’s going to give you their best customers and the ones that they know happy with their services. So it can eat a little more time to identify who’s going to do a good job for you. And for me, I view my relationship with them as I am the strategic manager. I’m going to provide the overall guidance and directions for the management team. And then I’m going to hold on a caliber; so this is what I’m looking for, this is what I expect, here are my goals, my objectives, my properties that I want to achieve 3rd quarter 2015, 4th quarter 2015, here’s what I expect by Q1 2016. And when things happening quite according to your timetable or no caliber issues, so they approach you directly like this is what we’ve talked about, this is what was expected. So they were able to pick up the phase. But part of the management team also, obviously, is the onsite property manager, every individual is key. Again I mentioned that you are managing a two-three-four-five million dollar asset, you need somebody that has experience not just somebody who’s young, you know, somebody who just graduated from school, doesn’t have any experience, and doesn’t really know what they’re doing. You need a premium performer, in my opinion, premium individual to be a property manager you pay even $10,000 or more but they can push you up from 93%-97%, you think about the return in investment compared to the extra $10,000 to the manager, so really it’s just a huge swing.
Eric Odum: So Steve, you like to see the experience not just from the company level but you also want that on site manager to have that equivalent level of experience. Is that a fair assessment?
Steve Berges: Absolutely. Absolutely, correct!
Eric Odum: And I know you’ve been in the business for a while so you must have a horror story, something that happened to you, say man up in terms of the property managers, they say wow, I learned from that, I’ll never let that happen to me again.
Steve Berges: Well, from the management team in general, I have services that I have been dissatisfied with. And I just took few short lapses to be able recognize that, it’s just a challenge, as simple as that. Again when these individuals are unresponsive, they don’t take your calls, you know, like me pretty much everybody else, sometimes when you call me, it’s going to be a voice mail because I’m on the other line busy with a client. There are times when they reach a voicemail, I’m not going to hear from them in a day or two. And that takes two weeks for them to meet with me. And after 2-3 months of that, I might make a change with it. So as far as horror stories go, that’s really the extent of it.
Eric Odum: Do you select managers that only do multi-family or does it matter to you if they do general assets too?
Steve Berges: Generally, with the management team that I work with, they specializes in multi-family. Some of the larger companies participate in retail space, office or warehouse space. And some of those larger companies may have those divisions; multi-family division, office division and an industrial division so I’m not saying that you need to stay away from that but my preference is you know, remember about the lender that I mentioned earlier, I worked with local lender who really knows the Houston market. I can go in and I can talk with them on the phone or I can stop by at their office. I have to do the same thing with management team and their headquarter is here in Houston. If in need to schedule a meeting with them, they’re very accommodating. I can go there and sit down, talk to them and look them in the eye and we can work those issues together, so much the same process.
Eric Odum: And how about online services or what not, is there things that you like to see for the management team to make sure that they’re up to date, maybe expedites the way payments are made, that sort of thing? Software or online services for your tenants, anything along those lines?
Steve Berges: Not necessarily so much for the tenants because the properties that I typically trading in or in the same space surpass the assets with multi-families that may not be internet savvy. There’s isn’t really a need for that as far as the tenant’s skill.
Eric Odum: It’s the old school write a check and making sure it get send in.
Steve Berges: Check or money order, bring that in and the onsite manager records that and sends report to the corporate office as needed and deposits locally. So pretty much it works. I personally review the financial statements because I want to see where the data has been sent. I want to make sure that my properties are being managed the way I want my own company to be managed and to make sure that we’re not over spending or in control of our expenses.
Steven Silverman: So Steve, how can people find your book and how can our listeners get in touch with you if they want to know more?
Steve Berges: I recommend that they go to my website which is steveberges.com. And generally, it’s best if they will just email me, shoot me an email, there’s a contact page on the website. Tell me what they interest are. And I’m really pretty good about responding depending on my schedule. And I do typically work with handful of clients. I value my personal time and my time with my family so I’m not one to work with and take any client just because they show up and say, ‘hey can you work with me?’ I do limit that. Not to discourage your listeners, certainly if you’re interested, feel free to contact me and I just have to look at my schedule.
Eric Odum: And I got one more question before we wrap up for today Steve. You know, in terms of managing the managers which is what you do and what you’re recommending certainly in managing your assets that investors do, there’s this fine line of the right amount of touches you make with that manager because some asset manager, and that’s what you are, believe that if they are not checking on that manager everyday then they are not doing their job. But the reality situation of the property management side is that’s a really high touch, high maintenance type of client for them, they can’t handle a lot if they have happened to handle a lot of inbound calls. So how do you find that balance, maybe it sounds like you pretty much laid out ahead of time and adjust expectations so people know what their selves get into. But over-managing property managers, one of the mistakes we see investors make most of the time, maybe you have some ideas about how to tell investors how to manage that process?
Steve Berges: Well the good thing about my onsite manager is that she knows better than I do; the needs of the property, the needs of the tenants because she’s in touch with them, she see them multiple times a day. I more concern about the big picture; how’s our occupancy look, how can our unit turns. I typically visit the property once or twice a week but I don’t like to overstay. I don’t like to overstay my welcome because I know they’re busy with other things and I want to give them that freedom to focus on what they are being paid for. I view the relationship also like for those of your listeners who have children, it can be 11, at the same time they can be friends with my kids. Employees and happy managers are much the same. I was just there couple of weeks ago and I gave my onsite manager $50 and told to by herself a lunch along with her assistant. She literally has almost tears in her eyes when I did that. Well to me it’s no big deal, but to her it looked like a great deal and showed that I care about. Just little things like that; it’s all part of human relation.
Eric Odum: And you talked about, if you’re over-managing them, they will become quickly kinda productive. But if you don’t pay attention to them, pretend that you don’t care, and you quickly watch you profits to be ready to way.
Steve Berges: That’s right. I do want to schedule formal meeting with them and that’s the time that I sit down with them, minimum once a month. We sit down, we review the financial together, and we talk about the revenues and the expenses and where the property is at and where it should be. And provide guidance and directions at that time that we have that formal meeting. We’re reviewing the previous month. And what the expectations are for the property and for the manager.
Eric Odum: Awesome. Steven, anything else you want to ask before we wrap for today?
Steven Silverman: I don’t mean a lot Steve. Because you know, especially the things you want to look for in a property manager just doesn’t run and buy and sign. You’ve got to gently keep your foot on the pedal.
Steve Berges: That’s right.
Eric Odum: Well Steve, we definitely appreciate the time you spent with us today. And anything else you want to cover with our listeners before we sign off here?
Steve Berges: No. Thank you very much for having me. And again I will encourage you that if this is your first time to dip in your toe to multi-family water to, again exercise patience, prudence and feel free reach to individuals such as myself, leading investor, who can help navigate the territory and I will be happy to do that. So again thank you very much for having me.
Steven Silverman: Steve thanks very much. And we’ll talk to you soon.