Today’s episode is another in property management education. It’s crucial that you identify the weak link in all your investments, as well as figuring out a safeguard against them. When it comes to your real estate investing, it’s quite possible that your weak link is your property manager.
After his intro, Jason Hartman has part 1 of a client case study with Muthiah, where the two discuss an incident Muthiah recently had with a vendor, recognizing bad real estate ethics, and what actions you can take when you’re being wronged.
Cutting Out the Middleman
Jason Hartman announces that Episode 1000 is just around the corner, and to offer a clue about what will be featured in it, he plays a clip of the song “Bubbly” by Colbie Caillat. He explains that she is going to be interviewed during the 1000th episode, and because it’s a 10th episode, she is going to talk about her music career and how she got started online, as well as her songwriting methods. Hartman adds that there are too few singer/songwriters in the music industry today.
He states that there is a lot going on in the world today with one of the most important being the self-management revolution. Getting the middleman out and disintermediating gives power to the investor. He notes that being an empowered investor means better returns, more money, and an easier life. His aim is to teach people self-management as his research has shown. Hartman adds that he has been in the investment business for fourteen years, and before that he was in traditional real estate. He went from being a low information person to one of high information.
The Right Way to Invest With Real Estate Ethics
Real estate investment with self-management is the right way to invest, he says. What his research has discovered is that a lot of property managers suck and lack basic real estate ethics. Some are crooks, and that is not a desirable outcome for Hartman’s listeners. He asks, compared to what, though? Compared to Wall Street, property managers suck less, though they still are the Achilles heel of the business. Some managers are great, but most are mediocre and lousy. It’s a great idea to get the middleman out of the game. When people invest for the long-term with buy and hold properties, there is only one intermediary: the property manager. Hartman states that his company is finding ways to disintermediate as much as possible.
He clarifies that if you have a good property manager, keep them, but fire the lousy ones as soon as you can.
Hartman states that people believe that the next unemployment report will be interesting, and he adds that he realizes that the official numbers are not exactly accurate. It’s getting closer now and comparing apples to apples. Hartman relates these numbers to the scale he has at home that claims to read body fat composition, hydration, weight, and bone mass. He realizes that it isn’t accurate, but it gives a good ballpark estimate. The scale tells him, “compared to what” and compares the measurement with the highly accurate measurement involving water tank submersion. The scale gives him an idea of where he’s at and allows him to establish a pattern.
He explains that with investment properties, there are ways to establish a pattern as well. One of the best decisions he’s made was on consistent benchmarks. The property tracker software on his website is used as a benchmark. On the page at www.jasonhartman.com/properties, the pro formas on the properties are static, but with a subscription, you can use the property tracker software to examine ad change numbers.
He adds that some people are promoting their properties with no benchmark, and sometimes it’s hard to present with fluctuating benchmarks as well. He explains that when listeners join him in Philadelphia for the May 19th Creating Wealth seminar, they will learn how to benchmark better. Also featured will be the portfolio-building game, played for the first time at a Creating Wealth Event. It’s the only one happening this year, so get your tickets as soon as you can at www.jasonhartman.com/events.
The following weekend is the Venture Alliance trip in New York City.
Look for the Weakest Link in Your Investment
Hartman states that he is going to do some complaining today and reminds listeners to ask themselves, “compared to what” throughout the episode. The other options available are either investing in cryptocurrencies or precious metals, which provide no backup, as they are speculation. These investments do not create income, and a lot of people have lost money this way. There is no recovery method for these kinds of investments.
He notes that he spoke with a software company today in a two-hour conference call. He reminds listeners that if they have a service or skill to offer, they can mention it at www.jasonhartman.com/ask. One thing that you always want to accomplish in business and life is to have the fewest points of failure possible, he says. A chain is only as strong as its weakest link.
A weak link for an investment is for that investment to be one-dimensional, which includes non-dividend stocks and precious metals. Two-dimensional investments include dividend stocks or something with a return. In most of these investments there are intermediary party risks. When you disintermediate, you have better control.
Maintain Control of Your Real Estate Ethics
Hartman reminds listeners of Commandment 3: “Thou shalt maintain control.” If you let go of your control, you might be investing with a crook. There are of course legal crooks that are taking your money, and property managers fit into this category at times. He states that he is still in litigation with what is now Quincy Property Management and in all of the years of litigation, they still cannot produce any documents to excuse them.
He mentions watching Better Call Saul, a show about a semi-sleazy attorney that is not actually a bad or sleazy guy. His character sticks up for the little guy, reminding Hartman a bit of himself.
He states that property managers are the only people with their hands in the cookie jar with this type of investment. If you can self-manage your properties, you can take some of this away. Self-management with the use of ala carte services for managers to handle tenant turns and lease-ups is the best method of self-management, what Hartman refers to as the hybrid method.
Being a Complainer is not Always a Bad Thing
Before opening the interview with Muthiah, Hartman explains that he has been called a complainer before. While he understands that he shouldn’t be negative, he also admits that he complains sometimes. He then adds that complainers are the people who change the world. Is it fair to say that Martin Luther King was a complainer? Were those involved in the Boston Tea Party complainers? The founding documents of the United States came from that complaint.
He states that he’s lucky to have citizenship in the US and admits that there are a lot of great countries out there, but he’s here, and this is a good place. Our founding documents give us rights over the government, and the Magna Carta was a similar setup, with rights being issued to the people rather than governing bodies. At one point, the US was the only country to have the word “happiness” in its official chartering documents.
Muthiah’s Experience, Creating Tension with Seller
Hartman welcomes Muthiah to the episode, a client and returning speaker on the show. Recently, Muthiah was having some issues with a property of his, and Hartman explains that he recommended that Muthiah file a complaint against the seller and property manager involved with the specific property. Muthiah did so, and he got some justice for the problems he was facing, as well as getting some of his money back.
He recommends to everyone listening to be the empowered investor, the empowered consumer. Don’t be a victim. There are ways you can hold people accountable for their actions without needing a court or lawyer. That method can be a mess, and sometimes it doesn’t work.
He adds that an ounce of prevention is worth a pound of cure, or according to Hartman’s Aunt Bernice, “A stitch in time saves nine.”
Muthiah explains that he bought a couple of properties in Alabama, and one of them had a pool. It brought about some problems, as he did not have a lot of experience regarding properties with pools. He reminds listeners that it’s important to have a home inspection performed on the entire property. He did not have the pool inspected, and there were some issues with it. He advises listeners to learn from his mistake, have inspections done, and when the issues have been fixed, have a second inspection done to ensure that everything has been corrected.
Hartman adds that sometimes it’s best to avoid properties with pools. They can be nice, but they can also add problems. Sometimes they’re worth it, but most properties are not going to have pools. He explains that he doesn’t mean to say no to properties with pools every time, but if you’re going to buy a property with a pool, have a pool inspection performed.
If Repairs are Not Completed
This is usually done by a completely different inspector than the one who conducts the home inspection, he says. When you have a home inspection, there will almost always be punch-list items to consider. It’s up to you to decide, if they’re minor items, you can choose to trust that the seller will take care of them. You must have a re-inspection done to make sure the repairs are finished before you close on the property.
Hartman advises against taking a promissory note from the seller. Accept money held in the escrow account if for some reason the seller can’t get the repairs done before closing. Some of the seller’s proceeds can be withheld to make sure the repairs are adequate. For example, if the property needs a new water heater and it costs $700, you can withhold at least that amount, maybe a bit more. If $1,000 is withheld and you control it until the issues are fixed, it’s insurance.
Muthiah states that ever since he bought properties, he has had to deal with property managers and their companies. He advises listeners to read all of the standard contracts properly and have a good relationship with the company. Sometimes it’s a good idea to go with the company the seller recommends, but shop around first to get your best option. You need to work with someone that you’re comfortable with because a lot can go wrong.
He mentions that in his opinion, within the last two years, the bigger the company is that he’s working with, the more layers it has and the harder it is to deal with them.
Two Ends of the Spectrum
Hartman explains that there’s a trade off for it, and he isn’t sure which sort of company is best. There are two sorts. The big company that supposedly has great systems and has invested in technology and protocols will have a lot more bureaucracy. On the other side, the small company might be winging it in some ways. They’re hungry for clients and want to give great service to get bigger. They’re two ends of the spectrum, with the small company not being as efficient in some ways. It all depends, he says.
Muthiah states that it’s important to make your expectations very clear so they know that you are not willing to accept whatever they want. Look at your statements and question things. Ask why certain things are supposedly your responsibility and not that of the tenant.
Negotiate Your Contracts
Hartman advises listeners not to be an easy pushover customer. Don’t be too hard to deal with, either. Neither of these people get far in life as nobody wants to work with the difficult person and the pushover is taken advantage of. The answer lies somewhere in the middle. If there’s a continuum between these two people, be 60-65% of the difficult person. You can have high expectations without being a jerk.
Regarding contracts, Hartman states that not only should you read and understand the contract, you should negotiate it as well. Negotiate on the latitude the property manager has to charge you for things. There will be standard clauses, but inquire as to how much they are needed. A clause might say that in case of an emergency, the property manager will address it and then charge you for it. That’s understandable, but there are also optional repairs. If the tenant calls because a lightbulb burned out, the property manager doesn’t need to fix that.
Hartman explains that when his mother self-manages her properties, she hardly has to spend money on them because she does not have a property manager. Some property managers are giving your money away. It’s a good idea to assert that the deduction od incident money should be limited per month rather than per incident. When money can be deducted per incident, it’s possible that the tenant calls two times in one month, one for a broken garbage disposal and one for a second issue that comes up. If your property manager is deducting $200 per incident, you could lose $400 in one month.
The duty is on the investor to be available and responsive, he says. If the tenant calls about something and needs to have something fixed, it’s important to know what you’re obligated to do as the investor. Communicate in a timely manner and approve or deny requests quickly. Have incident deductions set at no more than $200 per month.
Muthiah states that he will play the Devil’s advocate in this scenario and explains that sometimes there are companies that manage a lot of accounts and keep standard contracts. A lot of them state that they will not change their contract for one customer as they do not have the resources to handle that change.
The Conflict of Interest with Property Managers
Hartman advises listeners to take their business elsewhere if the property management company reacts that way. There is often a conflict of interest with property managers, Hartman says. They are often trying to serve two masters. Their obligation is to the investor, but they will also try to serve the tenant. They want to make the tenant happy so that they don’t write bad reviews about the company on Yelp.
He explains that we all know a lot of reviews are falsified, whether positively or negatively. Competitors will write fake bad reviews about a rival company, and employees will write fake good reviews about their own place of employment. It’s important to read through the reviews and judge for ourselves. We have brains that work that way. If a property manager has a lot of bad reviews from tenants, that’s not necessarily bad. If the investors hate the property management company, there’s something to consider.
He reminds listeners again to consider the “compared to what” question. Compared to Wall Street or some fund investment, you know what’s going on. When you’re a direct investor, you’ll feel the bumps in the road. If you’re letting someone else feel the bumps in the road for you, they’re still around, but someone else is taking your money so that you don’t experience the bumps. Be direct and get higher yields because you’re maintaining control.