Classic JV Deal – Investor #1 is Paid 10% Management Cost

[Nir]

Hi All,

From REIN discussions on the topic, my understanding is that in the case of a classic JV deal, management costs are paid to investor #1.
Assuming there is an active investor #1 and a passive investor #2, say #2 doesn`t even live in Canada so can not manage any aspect of
the deal and/or property.

I understand 10% is a common management cost. I believe Thomas, too, mentioned around 10% of monthly rent as being reasonable.
(another good rule is annual payment of 1% of asset value). Let`s assume 10% of rent and that it is an 8-plex for example.

My question is should this arrangement still allow investor #1, who is being paid 10%, to hire a property management company in the future??
If/when he does that, what is most common/fair – that he still gets 10% but now will have to pay the property management company FROM
THE 10% HE GETS, AND KEEP THE REST TO HIMSELF, if there is anything left!? Well, he will still have to manage the
property manager, bookkeeping, etc. Remember investor #2 does not even live in Canada.

I am assuming the 10% mentioned in REIN discussions is NOT in addition to any property management fees but should include everything from
investor #2`s point of view. Therefore, suggested the above.. not sure(?) my question is not regarding the number - should it be 8% or 10%.
My question is what should the management cost, paid to investor #1 out of cash flow, include? and what are his options in the future?
Of course everything is negotiable, just wanted other investors` opinions as to what is fair and realistic.

THANKS,
Neil

 

[GaryMcGowan]

Every JV deal is different and everyone here will give you a slightly different answer.

Our Classic JV partnership is 50/50 ownership. We provide all that is required to purchase and operate the property. We look for cash partners.

Accounting, advertising, heat, hydro, water/sewer, taxes, insurance, lawn maintenance, snow removal, garbage removal, maintenance budget, misc. vacancy allowance, debt service, reserve fund, and property management is all paid first. Then we share the cash flow 50/50.

10% is what one can assume to pay for pm and is generally the fair market rate for a 8-plex.

If I where your investor I would negotiate that when pm company is hired they provide same level of service that you where providing as pm. If they are not then I don`t want to hire them.

 

[Nir]

Thank You Gary!

So in your case do you hire a property management company or are you the property manager?

You comment is good and should be included in the agreement: "when pm company is hired they provide same level of service that you where providing as pm".

Also, I thought there should be a distinction between paying investor #1 (the partner) 10% and paying a PM: the investor will hire a PM (or do their job) AND manage the property manager! the PM will only manage the property. see the difference? am I missing something?

I thought property managers charge closer to 8% on average and the difference (compared to 10% investor is paid) is due to that additional responsibility allowing investor #2 to live in Switzerland/literally do nothing. I know 2% is really not much relative to the business, just wanted to confirm I understand this correctly(?)

Regards,
Neil

 

[ChrisDavies]

I`ve seen JVs where the PM fees are one thing, and there`s a 2% admin fee or a bookkeeping expense for when you`re using a PM company.

 

[Thomas Beyer]

whatever is negotiated and agreed to !

Usually one separates asset management from property management.

Asset management would include: arrange the mortgage, find the PM, supervise the PM, guide the PM, fire the PM if necessary, do annual accounting and investor reports, decide on capital upgrades, decide on aggressive rental increases with higher vacancies and poorer cash-flow but higher equity value vs. less aggressive rental increases, more cash-flow but lower asset value, timing of sale or re-fi .. etc. ..

For that we charge 0.5% of asset value annually. Probably you should charge more (say 1 or even 2% on smaller assets under $1M)

But again, whatever you and your JV partner thinks is reasonable and agree on !!

PM fees run from 3.5% to 12% depending on asset size and location .. usually around 5% for 40+ suites, 6% for 15-40 suites, 8% or so for less than 15 suites to 10% (or even 12%) for singles or duplexes + a re-lease fee even ..

 

[Nir]

QUOTE (ChrisDavies @ Jul 10 2009, 11:25 PM) I`ve seen JVs where the PM fees are one thing, and there`s a 2% admin fee or a bookkeeping expense for when you`re using a PM company.

Thanks Chris.

For the same reason when there is no PM (in case investor is doing everything), it is reasonable to see a fee 2% higher (like 10% instead of 8%, or 8% instead of 6%). same thing

Regards,
Neil

 

[ChrisDavies]

QUOTE (investmart @ Jul 11 2009, 08:55 AM) Thanks Chris.

For the same reason when there is no PM (in case investor is doing everything), it is reasonable to see a fee 2% higher (like 10% instead of 8%, or 8% instead of 6%). same thing

Regards,
Neil

In the case where the real estate expert is managing, then I`d probably take the 2% asset management and do 8% for PM. That keeps the numbers round, and I think a private investor should charge less than a professional manager.

 

[Nir]

QUOTE (thomasbeyer2000 @ Jul 11 2009, 08:04 AM) whatever is negotiated and agreed to !

Usually one separates asset management from property management.

Asset management would include: arrange the mortgage, find the PM, supervise the PM, guide the PM, fire the PM if necessary, do annual accounting and investor reports, decide on capital upgrades, decide on aggressive rental increases with higher vacancies and poorer cash-flow but higher equity value vs. less aggressive rental increases, more cash-flow but lower asset value, timing of sale or re-fi .. etc. ..

For that we charge 0.5% of asset value annually. Probably you should charge more (say 1 or even 2% on smaller assets under $1M)

But again, whatever you and your JV partner thinks is reasonable and agree on !!

PM fees run from 3.5% to 12% depending on asset size and location .. usually around 5% for 40+ suites, 6% for 15-40 suites, 8% or so for less than 15 suites to 10% (or even 12%) for singles or duplexes + a re-lease fee even ..

Thanks Thomas for some Great input.

However, I can not believe 2% or even 1% is realistic in the case of smaller properties.
Example: $300K 4-plex. rent $3,000.
Based on your numbers; 8% property mgmt company PLUS 2% of asset value = $6,000 = $500/mo = 16.6% of rent!
In other words, what you are saying is that Investor #2 should accept a monthly expense of 24.6% of rent for asset and property management.

I do not think this is a good way to get your foot in the door as a rookie investor. Yes, smaller properties are less efficient but let`s not forget who is buying them... well, smaller investors.

Cheers.

 

[Thomas Beyer]

QUOTE (investmart @ Jul 11 2009, 10:52 AM) Thanks Thomas for some Great input.

However, I can not believe 2% or even 1% is realistic in the case of smaller properties.
Example: $300K 4-plex. rent $3,000.
Based on your numbers; 8% property mgmt company PLUS 2% of asset value = $6,000 = $500/mo = 16.6% of rent!
In other words, what you are saying is that Investor #2 should accept a monthly expense of 24.6% of rent for asset and property management.

I do not think this is a good way to get your foot in the door as a rookie investor. Yes, smaller properties are less efficient but let`s not forget who is buying them... well, smaller investors.

Cheers.
property management is 8% or so .. or 10% for a single .. someone has to do the work .. a 3rd party or you ..

yes .. 2% maybe too high for AM ..

you could also agree to do 60/40 or 33.33/66.67% .. or a hurdle rate for investors of 6% .. then 50/50 ..

50/50 for single family houses does not work well as most of the money is rear-end loaded .. i.e. 5 years from now with almost nothing for 5 years .. so building in a reasonable fee for you to eat and survive 5 years is in order !

More here on what the RE expert does, and a discussion on " 50/50 – is this fair ?"
http://myreinspace.com/public_forums/Real_Estate_Discussion/62-2015-5050__is_this_fair_.html

 

[Nir]

Gary and Chris,

Correct me if I`m wrong but sounds like you, too, use/assume around 10% of rent for EVERYTHING (whether it`s PM + your work or just your work if you are the PM).

I`m asking as, interestingly, Thomas has mentioned a different number, closer to 15%.

Thanks,
Neil

 

[GaryMcGowan]

We pay anywhere from 3% and up for pm. You also get what you pay for...
We also hold rent to owns in our portfolio which require next zero property management.
There is a fine line of paying to much fees to yourself and decreasing the ROI for the investor. Thomas has a post of 50/50 is this fair? ask yourself the same question for property management fees. Is 10% fair? What are you offering for 10%? Most pm companies will charge a finders fee for placing tenets, will you? I assume you have a few properties now, are doing your own property management? Or will this be a new trade you will have to learn?

To answer your question; yes 10% seems to be in line. You will have to balance your expenses and income very carefully as they factor into the ROI the most for your investor. Cash Flow is the king here. Control those and you keep everyone happy.

Chris has a great background of property management and will be able to add some value to your questions.

 

[Nir]

QUOTE (GaryMcGowan @ Jul 11 2009, 04:15 PM) We pay anywhere from 3% and up for pm. You also get what you pay for...
We also hold rent to owns in our portfolio which require next zero property management.
There is a fine line of paying to much fees to yourself and decreasing the ROI for the investor. Thomas has a post of 50/50 is this fair? ask yourself the same question for property management fees. Is 10% fair? What are you offering for 10%? Most pm companies will charge a finders fee for placing tenets, will you? I assume you have a few properties now, are doing your own property management? Or will this be a new trade you will have to learn?

To answer your question; yes 10% seems to be in line. You will have to balance your expenses and income very carefully as they factor into the ROI the most for your investor. Cash Flow is the king here. Control those and you keep everyone happy.

Chris has a great background of property management and will be able to add some value to your questions.

so correct me if I`m wrong if you hire a PM company you do not pay any fee to yourself? what about the asset management fee Thomas mentioned?

I`m absolutely not saying you are wrong. Chris mentioned he saw cases where only 2% is charged. It is interesting to see how different investors approach this.

 

[ChrisDavies]

As an example, I`m looking at a new deal. Single family home, new JV partner. House is $165k, investment is 15% down plus ~5k for fees and reserve fund. I`m going to charge 2% of rent collected for admin, plus PM. If I manage myself, I`ll charge 8%. If I outsource bookeeping, and can expense it by property or JV partner, I probably will and reduce the 2%.

 

[GaryMcGowan]

There is no wrong answer here.
You will also see the Finder partner not take any cash flow but take an finders fee up front anywhere from 5-10k. They usually will charge 2% or more admin fee as Chris mentions.
Do whatever you feel is the best business practice for yourself. All approaches has pros and cons.
We feel in our business at the moment - not to charge a finders fee, maybe down the road we will.
If you are happy and your JV Partner is happy then you have the JV agreement in place.

I`m sure as we add properties to our portfolio we will definitely add a asset management fee. Our portfolio is small potatoes compared to some. We will be holding 10+ by the end of the year.

 

[Nir]

Good tips and an interesting discussion. Thanks everyone.