You Don’t Have to Do Everything Yourself: Building Your Real Estate Team
How to assemble the right specialists so you can focus on what matters
In my previous post 5 Ways to Invest in Real Estate (From $60 to All-In), I discuss the passive and active ways to invest in real estate. A quick overview:
Passive: buying REIT shares or investing as a limited partner (LP) with someone that puts together and manages the investment - the general partner (GP).
Active: buying a property on your own, with a partner, or by raising money from multiple LPs.
Both are good ways to invest and, as with almost everything in life, they each have their trade offs.
Passive Investing
Passive investing requires minimal effort. Someone else does the work. Once you make the investment, you don’t have to do much. Read the quarterly reports. File your tax return. In exchange, you have little control and pay the REIT or GP to run the investment (we will get into the details of fees and promotes another week).
Active Investing
Active investing gives you more control and allows you to collect fees and promote. In exchange, you have to do all the work.
Unless you are part of a company that acts as the GP, this can be an overwhelming amount of work. Just like a business owner, you have to wear many hats and deal with a vast variety of issues.
The Many Demands of Owning a Real Estate Investment
Regardless of the type of investment property you buy, you will be faced with many, many issues as a real estate owner. Calls from tenants with plumbing leaks, tenants not paying rent, insurance policies, loan expirations, vendors and contractors, tax returns…the list is seemingly endless.
This can be daunting as you think of making this your side-hustle.
Don’t worry.
There are ways for you to handle this and keep your sanity.
The key is to assemble the right team.
And for those who want to go all-in and create a company, this will be an essential guide of who you need as your employees and advisors.
Let’s dig in.
An Industry of Specialists
The real estate industry is full of people that specialize in various niches within the industry. I break down the industry in my discussion on CRE 101.
The groups in green have a financial interest in a property. Said another way, they write a check to invest.
The groups in blue provide services to the groups in green for a fee. Sometimes the fee is one time. Sometimes it is on a monthly basis. Sometimes the owner creates a company and hires people in the blue group to be their employees. Example: property management and accounting.
Each group is made up of people that have chosen to specialize in their given niche based on their skills and interests.
Be the Leader. Don’t Do Everything Yourself.
As the owner of a property, it is up to you to decide what you want to do yourself and what you want to pay a specialist to do. Do you want to:
Get calls from tenants or pay a property manager to handle this?
Do the accounting/bookkeeping or hire an accountant?
Lease the vacant space or hire a broker?
Fix the leaky faucet or hire a handyman?
Oversee the construction or hire a general contractor?
Everyone is different. You need to decide what works for you.
For the property I own with a partner, I pay a property manager to interface with the tenants, manage the vendors, and do the property accounting.
But when it came to replacing the roof a few years ago, I decided to work directly with the roof company as it would only be done every 10 years and it is so critical to the performance of the building.
So who does what and how do they get paid?
Let’s break it down.
Here are the key roles you need to understand, roughly in the order you'll need them:
Mentor
Role: A mentor is someone who (a) has already achieved what you want to achieve and (b) is interested in helping you. They are your vision of yourself in 5-10 years. Your mentor was helped by others in their journey. They want to pay it forward. They will be your guide, especially in challenging situations.
Compensation: None. You shouldn’t need to pay a mentor. This will only work if you demonstrate you are someone worth the mentor spending time on.
How to Find One: Ask around. Contact someone on LinkedIn. Meet someone at an industry event. Be specific about what you want to learn and respect their time. Come prepared with questions and updates on your progress.
Business Partner
Role: They are your investing partner. You do the deal together. You keep each other accountable and share the ups and downs.
Compensation: None. You each invest in the property as partners.
How to Find One: Only do a deal with someone you know and trust. It is like a marriage. See Option 4 in 5 Ways to Invest in Real Estate (From $60 to All-In).
Acquisition Broker / Realtor / Real Estate Agent
Role: They find the property for you. The good ones help you navigate the acquisition process, from the purchase contract to due diligence to escrow and title to the loan and to closing. They have been there, done that. They are licensed by the state they reside in. Note that most of the time they are selling the property on behalf of the owner. Make sure you ask who they are representing. They will either be representing the seller or both of you. Either is fine. Just know that if they are only representing the seller, they may be giving you an (overly) optimistic vision of the market conditions. Make sure you ask the opinion of other brokers not part of this transaction.
Compensation: Commission. They earn 1-6% of the purchase price, depending on the size of the deal and asset class. Example: $3M x 6% = $180,000. The commission is paid at closing and typically paid by the seller. You pay nothing as the buyer unless this is pre-agreed upon by you and the broker.
How to Find One: Check loopnet.com and other websites to see properties for sale. They will list the broker. Contact the broker and tell them what you are looking for. There are national brokerage companies that specialize in industrial, retail, office, and larger apartment buildings (CBRE, JLL, Newmark, Marcus & Millichap, Cushman & Wakefield, Voit, and Lee & Associates). Brokers that specialize in 1-4 unit residential tend to be more locally focused. If the latter, you want to find one that specializes in investment properties, not traditional home sales.
Leasing Broker
Role: Same as an acquisition broker, except they specialize in leasing. This is typically only applicable to industrial, retail, and office. Property management companies tend to do the leasing for apartments and 1-4 unit residential.
Compensation: Commission.
How to Find One: Through the acquisition broker.
Property Manager and Property Accountant
Role: Manages the day-to-day of a property, from interfacing with tenants to managing vendors and maintenance needs to overseeing smaller construction jobs. This role is critical to running a property as well as being the most time consuming on an ongoing basis. They also provide accounting to track the monthly financial performance of a property.
Compensation: A percentage of monthly revenue with a minimum or it could be a flat fee. Example 3-5% of monthly revenue with a $1,000 per month minimum. There could also be additional charges for overseeing construction and renewing tenants.
How to Find One: Through the acquisition broker.
Lender / Loan Broker
Role: The lender provides the debt to help you buy the property. A loan broker helps you find the right lender for you by marketing the property to many different lenders.
Compensation: The lender may charge you not only a fee for the loan at closing (example 1% of the loan amount), but will also pass through the amounts they pay to their attorneys and due diligence consultants. The loan broker is paid just like an acquisition broker (example 1% of the loan amount).
How to Find One: Through the acquisition broker.
Insurance Broker / Agent
Role: Connects you with the right insurance carrier for you to get insurance to protect you against costs related to property damage (property insurance) and being sued (liability insurance).
Compensation: Commission that is imbedded into the cost you pay the insurance carrier.
How to Find One: Through the acquisition broker.
Handyman or Contractor
Role: Handles repairs and construction, ranging from fixing a leaking faucet to painting a vacant unit to replacing a roof.
Compensation: Fixed or percentage fee.
How to Find One: Through the property manager.
Escrow & Title
Role: An escrow agent is the “referee” between the buyer and the seller. They make sure each party follows what is required under the purchase and sale agreement as well as manage the exchange of money. Title makes sure that what everyone thinks is being bought and sold is actually being bought and sold. They also provide title insurance to protect against future issues.
Compensation: One time fees.
How to Find One: Through the acquisition broker.
Attorney
Role: Advises you on legal issues. On larger deals (ex. $5M+), attorneys are used to negotiate purchase and sale agreements, loan agreements, and partnerships agreements involving GPs and LPs. They are also used on larger leases. Some owners won’t do a deal without advice from an attorney. Others rely on standard form documents without using an attorney (Example: AIA Contracts).
Compensation: Paid based on an hourly rate.
How to Find One: Through the acquisition broker or property manager.
Tax Accountant
Role: Prepares your tax return and advises on tax strategy. Remember, the property manager only does monthly property accounting that tells you about the monthly performance of your property (income statement, balance sheet, and cash flow). This is different from a tax return you file with the IRS.
Compensation: Paid based on an hourly rate.
How to Find One: Through the acquisition broker or property manager.
Summary
That was a lot to cover. Let’s try to make it more digestible by providing two examples of how you could approach this.
Option 1: Keep it Simple - Outsource Everything
Find a broker that works for a company that also does property management, accounting, and construction management. Even brokers that work for companies without these services know of other companies that can provide them.
A good broker will help you find a property to invest in and bring together the team to both help you buy it and run it once you own the property.
Once you own it, be clear on what you want to approve and what you are delegating to the property management team. Example: the property manager has discretion to proceed with all maintenance issues < $250 without owner’s approval. Increase or decrease your delegation threshold over time. Dive into specific issues if needed. And be willing to change teams if the existing property manager is not working for you.
Option 2: Active Control
Do any or all of the above functions yourself. You will still likely want to use a broker, but everything else you can do yourself.
You will save money but you will pay for it with your time and energy. You will experience first hand what it is like to get an emergency call from a tenant in the middle of the night or while you are on vacation.
It is not for everyone, but it does have the advantage of teaching you what it is like to really run a property.
You Can Change Your Approach Over Time
Remember that none of this needs to be permanent. You could start with the active approach and then switch to the outsource approach.
This is what I did with my industrial property.
Active: I did the property management and accounting myself for a year and then decided this was not for me.
Hybrid: I then hired a group to do the property management only while I continued with the property accounting.
Outsource: Finally, I decided they did not manage the property in the way I wanted it managed, so I hired a new property manager and increased the scope so that they did the property accounting as well. They have been excellent. I happily pay them their monthly fee.
There is no universal right answer.
Be a student of yourself and observe what works for you.
Professor Bateman