Money Monk asks:

“A question about your commercial property: How do you collect rent? Do you use paypal or another source? Do you have a Post Office Box that they send checks to or do you have a property management team do it for you? I only plan to have one properly so a mgmt team may not be necessary.”

I currently have a smaller portfolio of investment property than previously [AJC: unfortunately, I also have a larger portfolio of for-my-own-use residential property than planned or ideal], having sold the ‘jewel in my investing crown’ due to market conditions (then, favorable) upon careful deliberation and finally deciding NOT to be my own developer (the existing property was not the ‘highest and best use of the land’ so somebody needed to develop the land) …

… however, I still use a variety of Property Management teams (paid by ~6% commission on rents collected) for all of my remaining properties; they pay directly into my account (monthly) and send me statements electronically (also monthly).

I recommend that you use property managers once your portfolio gets to a certain size … unfortunately, I have no rules of thumb on this other than that I took this route from the very beginning NEVER managing even my first apartment myself.

However, if – like Money Monk – you only plan to have one or two properties – and, they will be conveniently located (and, you don’t mind calls from the tenant/s) – then managing them yourself can:

(a) save 6% – 10% in Mgt Fees, which may make the difference between a cashflow positive property or one that loses you money, and

(b) provide needed experience to help you oversee the property managers better, if and when your portfolio grows.

Just remember, if you do decide to manage the properties yourself, to STILL build in the property manager’s fee (say 6% to 10%) when doing your acquisition budget, as you are really paying yourself to manage the property.

Also, be aware of burnout … it only takes a few late night phone calls to unclog a blocked toilet before you decide that this “property thing” really isn’t for you, and put your property/s up on the market at a loss  … when what you really mean is that this PROPERTY MANAGEMENT thing isn’t for you, so you should just outsource it …

… lucky you built that extra 6% to 10% into your budget ‘just in case’. huh? 😉

OK, it may be me who may carry the disease … I may be jaundiced by my experiences with partnerships, but frankly I don’t see the need.

Unless your partner brings a unique skill-set that you can’t hire in, contract out, or simply acquire for yourself – or, provides a lot of capital then is willing to sit back and let you work your magic – I think that you would be well-advised to rethink your need for partners.

I was having coffee this morning with my insurance broker / friend who expressed a desire to acquire some residential property.

To digress, I would normally suggest commercial property for its superior income-generation ability (assuming that you buy / manage right … but, that’s another story), but in his case: he has a 50% share of a small broking practice that turns over $2.5 million a year and puts around 30% on the bottom-line.

If you set aside one client that provides about 25% of this revenue, that’s about $300k per year that he can pretty much safely ‘bank on’ as income year-in-year-out … with upside as he grows the practice.

So, income isn’t his ‘problem’ … for him it’s equity and taxes:

1. Equity: broking practices (as do many professional practices of other types and in other markets) tend to sell for a multiple of earnings (i.e. profits) or simply a smaller multiple of revenue; for insurance brokers in his market, right now, it’s bout $2 for every $1 of revenue. Since he has a 50% partner, he’s currently ‘worth’ about $1.8 – $2.5 million (depending upon what happens with that one big client) plus whatever equity he has in his house.

Again, not a lot of risk in that equity figure, and it will grow with the practice, but not a lot … his practice would need to double in size before he’s worth $5 Mill. (and, if that takes 20 years, then he’s really gone nowhere, slowly).

2. Taxes: How does a professional in a professional practice protect against taxes? The answer is that they don’t: these are the soft targets for the tax systems of most countries!

So, if he doesn’t need the income, then it may very well be that residential real-estate provides a suitable solution to his tax/equity ‘problems’ … one that fits into his investment ‘comfort zone’ (assuming that his Number is circa $5 Mill.):

If he buys Tax Cashflow (or better) residential property, he may have enough income/purchasing power to acquire enough property that he can afford to wait 20 years to supplement his ‘retirement’ when he eventually sells his practice.

So, what does this have to do with partnerships?

Not much, other than he asked if I wanted to go 50/50 with him on a small block of apartments … I said ‘no’.

The reason is that our interests may diverge: and if one wants to sell and the other doesn’t, what happens?

And, what’s so special about a block of apartments that we couldn’t each buy one on our own for about half the size/price of one that we could buy together (eg a duplex each instead of a quadraplex).

And, if you’re the type of person who needs a bit of motivation/hand-holding, you can always do what a friend and I did (in fact, this was my first-ever property acquisition):

We researched and found together two apartments in a new construction.

We negotiated a reasonable price from the bank-in-possession (it was a foreclosure) since we were buying two, and a reasonable loan … then we simply executed two sets of loan and purchase documents, one set in each of our names.

Sure enough, he ended up selling way before I did … but, it had absolutely no impact on me 🙂