One of the most critical elements of buy-to-let investing is creating and maintaining effective management control. This effort begins with a management agreement that provides for all of these elements and ensures that the mechanism is in place for proper accountability, effective compensation, and a synergistic relationship between manager and investor.
What elements should be included in the management agreement.
- Like all legal agreements, the parties to the agreement must be legally described.
- Compensation should be provided. Typically, compensation is a percentage of revenue plus other direct costs. The percentage may vary depending on the responsibilities. Also, the percentage tends to have a very large location-specific component. One market will charge a percentage and another market will offer another. The higher the typical labor cost in a market, the higher the percentage. If compensation includes a success component, it should be very clearly defined.
- The management agreement should include responsibilities for record keeping, accounting, profit and loss management, marketing, leasing, pricing, occupancy targets, maintenance, and all other aspects of property management.
- The agreement should include the duration of the agreement, including the initial effective date through the closing date. This may include terms for the extension. In addition, the duration should include conditions for early termination either by the manager or by the owners/investors of the project.
Property management companies are notorious for driving up expenses for owners and investors. Some properties are experiencing spending inflation of 25% or even 100% compared to local averages. The main excuse offered is that the condition of the property had started to deteriorate and overcoming these issues was the key to the increased expense. The main step to avoid these problems is their current performance with other properties. Visit properties, check references, ask to see the income statement of some existing properties, as well as age, renovation date if applicable and a description of the most recent renovation. Also, check out affiliated service providers, find out how many properties the service providers serve. Compare the costs from these sources with market rates for similarly sized portfolios. Once the property manager is in place, do not allow operation without supervision (this should be included in your management contract). Review tax returns, check bills and occasionally visit your property and similar properties. Ensure that levels of care, maintenance and customer service remain high and that results meet your expectations. Third-party management does not relieve you of your responsibilities as a principal’s investor. In fact, attention to critical details must be all the more specific to enable outsourcing.