Hiring a property manager for your investment property is an exciting step. You’ll now be a true investor: collecting the profits, monitoring the performance of your manager, and focusing on expanding your portfolio. With all of the benefits that come with outsourcing your property management, identifying the right manager is critical.
There are many lists which cover the best questions to ask when interviewing a property manager, and these lists are sufficient to help establish a candidate’s baseline knowledge and experience. But I believe there is one key concept that fosters a successful relationship between property manager and owner, the concept of Alignment of Interests.
When selecting a manager to handle your investment properties, you are trying to solve the problem of Agency Theory; the concern that you and your manager may have different risk tolerances, experiences, and/or quality standards, which may result in your manager taking an action which is not to your satisfaction or in your best interest. Agency Theory is a highly researched subject across the financial sector.
The commonly accepted solution to Agency Theory is a well defined Alignment of Interests between the investor and the manager.
In terms of property management, we are seeking to align the compensation of the manager with maximizing your profit. While determining alignment of interests is not an exact science, it is important that you, as an owner/investor, consider how closely aligned your property manager is with your interests.
Below are a few questions that will help determine alignment of interests:
- Are management fees based on the service provided or a percentage of your property’s rentable value? If percentage based, does your manager provide greater service to units where they are collecting higher fees?
- Are additional fees collected for leasing vacant units? Does this encourage tenant retention or turnover; to your benefit or detriment?
- Are there additional charges for maintenance oversight? Do these charges vary with the cost of repairs? Do they incentive the manager to minimize or maximize repair costs?
- Generally is your manager best served by maximizing your rent collections and minimizing maintenance problems, or does your manager profit from turmoil?
There are no right or wrong answers to these questions, but they help frame the concept of alignment of interests. It’s best to consider them on a scale of 1-10, with 1 being not aligned with your interest and 10 being maximally aligned with your interest.
Many factors influence a successful owner/manager relationship, but generally, the relationship has a higher chance of success, and profit, if an owner feels that, more often than not, the manager’s interests are consistent with his/her own.