Owning commercial income property is an excellent way to diversify your portfolio and build a steady source of income for your retirement. However, unless you own a net lease property, it is not passive income.
Aside from the research and effort needed to find and close a good deal, income properties need plenty of hands-on attention in order to reach their full potential.
Although your duties as a commercial investment property owner may differ from residential real estate, plenty of time and work will need to be expended.
That’s where a good commercial property management company comes in.
The Role Of A Good Commercial Property Management Company
An experienced commercial property management company does more than just managing your property.
Commercial property management companies make it possible for you to increase your net profit by maximizing the potential rent income of the property and minimizing expenses. A property manager who understands your investment goals will always be on the lookout for ways to increase your investment property’s value.
They will also have an eye for how to enhance the visual aspects of your property and the general property value. They will also be able to improve tenant retention by building good relationships with tenants, even spotting problems before they occur.
If you are relatively new to a commercial property you’ll find that a commercial property management company can be a valuable source of information on how to increase the NOI of your property. As a third party, they will have a comprehensive understanding of the factors that are necessary for your property’s success, such as increasing the cash flow, streamlining management, or upgrading the property in order to attract quality tenants.
And because they are thoroughly acquainted with your investment goals, they can ferret out difficult to get information on potential properties by doing walk-bys.
Services Provided By Commercial Property Management Companies
Commercial property management firms differ in terms of the type and breadth of services offered.
Before you sign a contract, you should make sure to be very specific about what services they will provide. A written agreement which spells out the how, when, and what of the services to be provided will go a long way towards preventing future misunderstandings.
- Below are specific services offered by commercial real estate property management firms.
- Provide comprehensive reports on key data relevant to the property
- Create and maintain your property’s budget. This should be a comprehensive budget which includes everything needed to run your property successfully. There should also be periodic reporting of the budget status, which will allow adjustments when necessary.
- Provide a market rent analysis
- Document all procedures necessary for local, state, county, and federal laws. Also, document any administrative regulations and ordinances, and fire, health, and safety code.
- Handle all tenant leases and renewals; act as a general liaison between tenants. Also, handle rental collections and a daily record of deposits.
Finding A Commercial Property Manager
There are several ways to find a commercial property manager.
The best way is to ask your network of commercial real estate investors for references. Make sure you specify both the type of property as well as the number of units. You can also ask commercial brokers for a referral.
An important thing to keep in mind is to make sure that the property management company you’re considering is actually the one handling the property management. This is important because if they are farming out the management of your property to other companies, the price they charge will be higher than it needs to be, and the level of accountability will be lower.
Once you identify several possible commercial property management companies, your next step is to conduct an interview. Your goal during the interview is to determine whether or not you feel the company will be a good match for you.
It might be hard finding the right property management company. As one commercial income property owner put it:
“You’re going to have to kiss a lot of frogs to find the right one.”
But even when you have a wealth of candidates to choose from, it might be hard to distinguish one from the other. There might be several who are certified, have a ton of experience, and seem to offer a reasonable price.
In that case, your best bet is to choose the company that has the most integrity. Ultimately, that is what will decide how well they will try to work with you to accomplish your investment goals. So if they seem to be not answering your calls, or something else seems off, don’t dismiss your intuition.
Initial Interview Questions:
One of the best ways to screen property management companies is through a carefully chosen set of interview questions. The questions below start out simple and non-threatening, so you can establish a connection with your candidate first, and get a feel for what they’re like, how much they really know, and so on.
- What is the general vacancy rate in your area?
- How many units or square footage do you currently have under management?
- How long have you been in the business? (must be more than 2 years)
- What are your management fees, and what other ways are you compensated? PM’s get money from lease-up fees, commissions and other income, Not to mention re-lease fees on a 6-month to annual basis for nearly every property.
- Do you have your own maintenance staff, or do you contract out (shows how organized they are, and how well they manage things)?
This is important because you every time they decide to fix, upgrade, or replace something on your property, it cuts into your NOI. You want to be able to trust them to make the right decisions based on the goals you’ve set for your property, so you should not give them carte-blanche to spend money. Around $250-$350 is a standard amount.
- How do you market your vacancies or upcoming vacancies?
- Will you help me set up an annual operating budget for the property? This allows you to hold the property management accountable for the property they’re managing.
- What monthly reports do you typically send to the owners of the property? This is the primary way of holding them accountable. You also want to make sure that they are using a quality software program to monitor your property and output reports.
Also, make sure they commit to sending you the reports on the same day each month, and that they also collected some or most of the rents by that day.
- Are you licensed, or do you have any professional accreditations or certifications? (ICPM, ARM are some of the most common ones, but there are more)
- Do you own any of your own investment properties? Do you manage them yourself? Where are they? (if they are in your area, there could be a conflict of interest)
How Commercial Property Management Companies Are Paid
Typically, commercial property management companies receive a portion of the collected rent. The average fee is between 5-10% of the rental income collected. Be specific when writing out the contract as to whether the fee is based on the rental income collected, or the property’s gross collected income.
You’ll also want to stay clear of companies whose fees are unusually low; often they will nickel and dime you for every service they provide – including services that should be part of the fee.
Also, you’ll want to find out if the company guarantees tenant placement.
Some property managers churn tenants, then charge the landlord a second time for placing a new tenant. Other companies will try and keep late fees assessed to the tenant. Either one of these scenarios is problematic since they should not get a reward for negative actions; in other words, getting paid when things go wrong.
Instead, offer bonuses when a vacant space is filled, or when rental fees go up. You can also decide to offer a fee based on the number of occupied units. This gives the property manager an incentive to keep the property at full occupancy.
Keep in mind that since this is commercial property, the fee will be paid by your tenants. However, in the interest of tenant retention, you’ll still want to get the best deal possible. And lastly, you’ll need to check that the firm has sufficient insurance coverage, good loss prevention, and risk management programs, and insurance for depositor’s forgery and alteration.
It’s also worthwhile to ask if the property management company has a plan for handling the loss of money or destruction of property through fraudulent acts by employees.