One of the more pressing questions to ask yourself before diving into the real estate rental market as an investor is this: do you really want to be a part-time property manager?
The answer to this question should be a part of the foundation for your investment strategy; if you’d rather pay 10% of your rental earnings to a management company, it is wise to factor that permanent cost into your ROI and risk calculations. If you’re willing to take on the property management responsibilities yourself, you are essentially paying yourself that 10% for the extra work.
While I currently don’t own any property beyond my home, I think I will eventually make residential real estate a decent portion of my investment portfolio. I definitely have a drive to own real estate – maybe I played monopoly a little too much as a kid? As I am probably still a few years away from making my first property purchase a reality, I haven’t really solidified my strategy.
At this point, I have all kinds of unrefined ideas racing around in my head, and I don’t have a definitive plan. One of the more promising ideas I’ve got stashed away up there is a 3rd option in the property management debate: forming a property management co-op.
By forming or joining a property management co-op, you can focus on your strengths, and partner with other investors who have the opposite and complimentary strengths. By forming a partnership, you aren’t shouldered with the responsibilities that make you squirm or you don’t feel qualified to manage. In it’s most basic form, I imagine a co-op could start with 3 people who own a similar number of properties, and have 3 sets of complimentary skills:
- someone who has a knack for accounting/legal
- someone who loves finding and cultivating good relationships with quality tenants
- someone who is a natural when it comes to physical property maintenance
These 3 trusted partners share the responsibilities of managing their pool of rental properties, each focusing on their strength and not having to worry about their weaknesses. Any direct out-of-pocket costs could be covered directly by the property owner, while the “management” responsibilities would be shared.
While an informal and small agreement might work for a small pool of properties and people who trust one another, I imagine this model would quickly become unbalanced in the real world… things may eventually need to be a bit more formal. By applying the principles of a cooperative, the agreement could easily become more structured:
- All members would gain access to a wider pool of skills, tools, experience, and time by sharing
- Members may be required to pay for “shares” – the amount of shares required to join would be determined by the amount of property they want the co-op to manage (number of units? maybe total square footage?) as well as what responsibilities they want the co-op to handle for them
- Members would have the option to contribute their skills and expertise to the co-op to earn their shares
- Most co-ops would probably have a specific and limited geographic region that they serve
- Any net earnings would be distributed back to the members at the end of a fiscal year
I know of at least one property management co-op already in existence in my city. The idea of connecting with and forming an alliance with like-minded investors is really exciting to me – I know a lot of investors are reluctant about at least some of their property management responsibilities, so why not share them?
The first step seems to be finding or starting a local meetup group, mastermind group, or similar social group for real estate investors to congregate, meet each other, and share knowledge. If you find a few like-minded folks near you, you may be saving money and forming a real estate property management co-op before you know it!
What are your thoughts on the co-op idea? What are some additional rules and regulations that would help a co-op run smoothly? How much money do you imagine this model would save you compared to traditional property management?
[featured image author: PT Money]