A Jumbo Problem
Jumbo had parked his wheelchair behind some landscaping in the courtyard to provide cover. The sweltering Phoenix heat was in full force, and beads of sweat rolled down his face as he sat and listened in silent tension. Slowly his hand moved down to the compartment on his wheelchair where he kept his semiautomatic. With practiced precision, he flipped the safety off and waited. The Phoenix police had set up a perimeter around the building.
“Don’t make this any harder on yourself, Jumbo!” the police negotiator called out over the bullhorn, his voice breaking eerily through the silence and echoing off the building walls. “You’re not getting out of this. We’ve got the whole building covered. Just come on out and let us take you in. Nice and easy.”
Silence fell over the courtyard again, pierced only by the occasional buzzing of a fly or the passing of a random car. Jumbo knew he was in serious trouble. Finally, Jumbo spoke.
“Screw—you!” he yelled out.
And with that Jumbo’s hands reached for his wheels, and he raced off through the apartment building and down the courtyard path. It didn’t take long for the police to catch up to him. In one swift move the police had knocked over his wheelchair and had Jumbo in cuffs. Just as quickly as it had begun, the standoff was over. When the police found the semiautomatic and the drugs, it was obvious how much worse the situation could have been.
This story may seem like something out of a crime fiction novel, but stories like this happen every day and are often great dinner conversation for the property management industry. The owner of this property was a personal friend who had turned to my company for help, as he was facing foreclosure.
The building had sub-par residents, many with criminal backgrounds, who were allowed to move in. These residents were basically running the place by selling drugs and running prostitution rings. The property was unsafe, which was driving all the good residents out. And because most of the residents weren’t quality residents, most of the rents weren’t paid on time. In fact, the revenues for the property slipped so low because of vacancy and nonpayment that most of the normal bills, including the mortgage, couldn’t be paid. The owner was in dire straits.
Jumbo was just one of those seedy residents allowed to move into the building. He was a known drug dealer with a criminal background who was wheelchair-bound because of crippling gunshot wounds from a previous drug deal gone bad.
This was just one of many examples and an all-too-real reminder that the lack of good property management can put any investment in jeopardy.
In the end, Jumbo was just the tip of the iceberg when it came to this building. It was full of criminal activity and unruly sorts. In fact, one of the main reasons Jumbo was caught by the police was that there were so many police calls to the property address that the property was a huge liability to the surrounding neighborhood. Therefore, with our cooperation, the local police set up a police substation at the property management office and started a surveillance operation from some of the vacant apartments.
I tell you this story not simply because of its shock value, but to dispel the myth that property management is a dull, no-brainer job. It’s anything but! As you read this book, you will hear many stories that you may not have expected—or, if you have been managing property for a while, they may seem all too familiar. The number one job of a property manager is dealing with residents, and the number one rule of dealing with residents is that there are no rules. Any time you take hundreds of people with diverse backgrounds, personalities, and motivations, you have a recipe for the unexpected. The amazing thing about Jumbo’s story is that it isn’t even shocking to me anymore.
Any way you slice it, property management is a down-and-dirty job. But if it’s done correctly it can add incredible value to your investment. I know this because I’ve been doing it for over 25 years, and have seen firsthand the power of property management done right.
And after over 25 years in the property management business, there is one thing I can assure you:
Rich Dad Tip
Poor Management = Poor Profit
By the way, and this should not be too much of a surprise to you; poor management in almost every business usually equals poor profit, not just in property management. I am sure you can relate.
One of the main reasons businesses fail is due to poor management, period. Have you ever been somewhere and had terrible service? Perhaps a restaurant, a hotel, an automotive shop, or a retail cashier? In most cases, you would never go back to that place of business. Well, don’t think you are unique in that experience. The beauty of all this is that for every failing business there is someone in denial or an ego that is directly responsible. The facts are usually the same: high turnover, poor training, and poor service.
I think of these people and businesses as donors to your financial future, and that’s how I look at poorly managed properties.
Here’s the Story
This book is not just about how to manage property or find a good property manager. Though it covers those things, it’s also about stories. Every property has a story or stories that tell you as much about what management will be like as the financial statement will.
Many people are surprised when I tell them that a financial statement can tell a story, but it’s true. Numbers are the universal language, and once you learn how to read them fluently you will be able to see patterns that will give you a very clear picture of the way a property is being managed. I can look at any financial statement for any building and in a matter of minutes be able to determine what is being done right and what is being done wrong in managing that building. I can tell whether rents should be raised, or even more specifically if the property is suffering from poor customer service. This book will teach you to listen to professionals in the property management business no different than you would any other service, and to learn from the stories others and ultimately your financials will tell you about your investment.
The beauty of managing property is that you don’t have to settle for the story as it is. Rather, you can create the story as you see fit through sound principles. Do you have a property that is filled with problems and riffraff? You can rewrite that story; otherwise it will continue to write itself in the same way. Ultimately, the choices you make in managing your property will determine your profit.
Much as I am writing this book, choosing what direction it will go, what words to use, and what I wish to tell you, you have the power of changing the story of your properties and creating a chariot out of a pumpkin if you listen and learn from other property managers, learn how to read your financials thoroughly, and apply the principles you have learned. So, let me tell you my story.
I’ll just get this out on the table: I wasn’t planning on doing property management for a living. I jumped at the free rent. I thought the job would be easy and something to do while I was studying for my real estate license. In other words, I stumbled into it. A lot of people do.
My first job out of college was managing a sixty-unit building where I both lived and worked. It was my first job out of college. It turned out to be a bigger job than I ever could have imagined. I was the only staff on-site and responsible for the collection of rent, leasing of units, all the maintenance, resident communications, and enforcement of rules and regulations. For this I received a salary of $600 per month and a free one-bedroom apartment. Rents at that time were running around $300 per month for a one-bedroom, so all said and done, I was making less than $1,000 per month.
Coming out of college with a mountain of debt due to college loans and never really making any money, I thought it was a great deal. You may not be coming right out of college, but chances are when it comes to property management, you’re as naive as I was. “How hard can collecting a few rents be?” I thought to myself. My education was just about to begin.
As is the case with most young adults coming out of the American education system, with a degree I could hang on my wall, I had no real practical knowledge and absolutely no financial education. So, while the money I was making wasn’t anything to write home about, the education I received from that sixty-unit building was immeasurable. I like to think of it as a paid internship. It takes the edge off a little bit.
My first task was to fire the existing managers. Here I was, a powder-fresh twenty-two-year-old kid giving the pink slip to someone. The two managers had allowed all their friends to move into the building and host parties involving alcohol and drugs. As a consequence, rents were slipping, and policies were not enforced—always a recipe for disastrously devaluing a property. Beyond that, some of their friends were actually drug dealers and were operating from the building.
I thought firing someone was hard, but it paled in comparison to the work that came afterward. The problem with coming into a building like that is even though you fire the managers, the residents are still there. I quickly found out that to be a property manager was to face resistance in everything you do. People complained, moaning and groaning about everything. In some cases, residents even threatened me with bodily harm. (Thankfully, no one ever acted on those threats.)
As you can probably tell I was not very popular. It was a very uncomfortable position for me to be in because I lived in the building and these were my neighbors. At one point, I came out to find my car tipped over in the street.
All sorts of wild things happened at the Seattle building. For instance, a skinhead stole my wallet. When I confronted him, he denied it. “Go ahead and check,” he said. I found it in a box on his living room floor.
I had a really nice guy from the building knock on my door with his face all bloodied and in hysterics because his lover had beaten him up, and when I went up to confront the resident I was thrust into a three-way lovers’ quarrel.
Believe me, there are many more stories just like these. The point is that lots of crazy stuff happens in property management, stuff you’ll never learn how to deal with in a classroom.
Lucky for me, the company I worked for was a solid management company and provided all the support I needed. Most importantly, they had excellent training, systems, policies and procedures, and a central accounting department that allowed me to do my job efficiently and effectively. I eventually gained more responsibility, obtained my real estate license, and ended up having a portfolio of eight buildings in the Seattle metropolitan area—a 100-mile district. These consisted of a variety of building types from a single-family house to a four-plex, an eight-plex, and a twenty-four-unit building, among others, for a total of fewer than fifty units.
The clients I managed for in this portfolio were probably much like you. They were part-time real estate investors who still had full-time jobs and had chosen to hire a third-party management company to oversee their real estate investments. For this they paid a small percentage of the rent collected. Generally this consisted of around 6 percent to 10 percent, depending upon the size. At this time rents averaged around $400 per month, so on the fifty units we collected about $1,600 per month in property management fees to cover my salary, corporate overhead, and my expenses.
Here’s the rub. This was back in the mid- and late 1980s, and in order to be efficient, I bought a car phone. Aside from impressing the ladies, this phone was essential since I was driving hundreds of miles a week in my Volkswagen Scirocco all over the Seattle area to look after the properties. The problem was that the car phone cost about $500 a month. That coupled with the gasoline I used equaled about $ 1,000. I was working about sixty hours a week collecting rents, coordinating maintenance, overseeing legal actions, and showing units. The management company was losing money because my expenses and their expenses far exceeded the property management fees. It became easy to see that in order for me to continue with the company, I had to increase my portfolio and my client base—and fast. This was one of my very first lessons about business: If I cannot pay for myself, I am expendable.
Beyond that, I still had to deal with the same old crap—literally. One of the biggest challenges in property management is parking (an old adage goes, “Property management is simply people, pets, and parking”). In downtown Seattle, I had an ongoing feud with a resident at one particular building regarding the parking situation. One day I came out to find that the driver’s window to my Scirocco was broken. I did a quick search, but couldn’t find anything stolen. I got in the car and set out to do my rounds. I quickly found out the resident had shoveled dog poop onto my engine—something I discovered about thirty miles down the road after it had burned into my engine block and started coming through my vents. For weeks on end, I had a very real reminder of how disgruntled the resident was about the parking situation, and the fact that I had a car phone didn’t impress the ladies that much anymore.
During my time in Seattle, I was able to expand my client base to a portfolio that equaled 450 units spread out through twenty buildings in the greater Seattle metropolitan area. Eventually, I had the opportunity to move to Las Vegas to start a satellite office for the company. I was twenty-six years old and had four years of property management experience, over 10,000 hours.
In Las Vegas, I initially helped secure a new property management contract for a 900-unit building. This gave the company a very strong business base in the city to grow from, but this was a remote location for the Seattle-based company. I relied heavily on the corporate accounting system, but I was responsible for business growth in Las Vegas, as well as day-to-day operations.
This was the first step in my journey toward starting my own company. When all was said and done, after eight years in the business I had grown the portfolio in Las Vegas to 4,000 units. The properties I secured were larger and larger, and the profits began to grow for the company that employed me, but not for me. I became wiser to the game of business, and I moved to Arizona to form my first company. I was twenty-nine years old.
I started my first company with two partners; one was a friend and business associate whom I had met while working at my previous employer. Together we grew our company’s portfolio to 4,000 units, about $1 million in annual revenues, and life seemed to be really hitting on all cylinders.
But I was naive in business, and hadn’t consulted a team before forming my partnership. Consequently, I made a lot of handshake agreements and trusted a lot of verbal commitments. The company grew rapidly, but my business partners were much more seasoned than I was. I learned some big lessons from my first business venture, and I made the decision to move on. I learned that life’s lessons come at you fast, and what you do with those lessons will determine your financial future.
I now had a taste of owning a business, albeit a failed partnership, but I had no real assets and little savings. I faced the decision of once again working for a large national company with a nice six-figure salary, or making a go of it with my own business.
After a couple months on the beach, I decided that I would give the business world another try, and I started McElroy Management. My lush offices consisted of a computer in my spare bedroom and one management account, which I visited every day, a 100-mile round-trip. It was my real first step in the CASHFLOW Quadrant (see chart) from an E to an S because I no longer had support from a national company, nor could I share the workload with partners because I didn’t have any.
The CASHFLOW Quadrant is a concept that Robert Kiyosaki and the Rich Dad team speak of frequently, and Robert wrote about it in the book Rich Dad’s CASHFLOW Quadrant. It is a key concept in the Rich Dad philosophy. Put simply it states that there are four types of people in the business world: Employees, Self-Employed, Business Owners, and Investors.
Rich Dad Tip
Most people choose security over freedom.
Very seldom is someone able to just move from an employee to a financially free investor. As Robert and the Rich Dad team teach, the process of moving through the CASHFLOW Quadrant is a journey. This was the case for me. My journey took over 15 years.
By starting my own business, I moved from an Employee to a Self-Employed individual. This was the first step toward my financial freedom. Eventually, I developed McElroy Management into a large business, overseeing 6,000 units. This made me a business owner and moved me over to the right side of the CASHFLOW Quadrant—the side where wealth really starts to be generated. If you are an E or an S and stop working, your cash flow will stop (in the form of a paycheck). If, however, you are a B or an I, you will have the freedom to create wealth even when you aren’t working.
As Robert says, “Business and investing are team sports.” I took those words to heart when I met my business partner, Ross McCallister, in 1996, and merged McElroy Management with his company McCallister Management to form MC Companies. This was the final step in my CASHFLOW Quadrant journey, as I began not only to manage other people’s investments, but to invest in much larger properties.
Today, my partner, Ross, and I own more than 8,000 units—over $400 million in property—and manage in excess of 5,000. Under the companies we have eight different corporations that range from ground-up construction to corporate housing. All of these companies work for us to generate wealth, and not the other way around. But the CASHFLOW Quadrant is a journey, not an overnight transformation. You have to take little steps toward your goal of financial freedom. Eventually, they will add up in a big way. In fact, my very first investment property was a two-bedroom, two-bathroom condominium in Scottsdale, Arizona, that I bought after I started McElroy Management.
After my first book, The ABCs of Real Estate Investing, was published, I had the opportunity to speak with a lot of people as I traveled with Robert Kiyosaki and the Rich Dad team around the world. Many had used the principles in that book to secure their first properties, and thus began the road to true financial independence. Most didn’t have a clue, however, as to how to go about managing their investments. I began to see that there was a huge need for a book on property management.
This book is inspired by three questions that I continually receive when I speak around the world at Rich Dad seminars:
• Should I manage my own property or hire someone to do it for me?
• How do I find a good property manager?
• How do I hire a good property manager?
As I mentioned before, this book is not only about the mechanical process involved in the answers to these questions, but also about the stories of those who can give insight into those answers. What I mean is this, it’s not just about the what, but also the why. So sit back and relax, because it’s going to be a wild ride as we review some notes from the property management underground.
