Invested in Real Estate and the Management Company Swallowed Your Profits? There’s a Solution

I fly quite a lot, and over time I’ve learned that I hear the best stories, and sometimes the most surreal ones, on flights. The person sitting next to you, or someone who recognizes your face from social media, will tell you their problems, and when they find out (if they didn’t already know) that you work in real estate in the country you’re flying to, they’ll ask for advice or legal help.

I met Amit on a flight to Bucharest. He was sitting next to me, and toward the end of the flight, which I spent working on a legal document on my laptop, he turned to me and asked to share his troubles. Amit had saved for several years and, after consulting various financial advisers, decided to invest in buying an apartment to start generating passive income for himself (that’s what everyone who advised him claimed). Since the capital he had built up wasn’t large, and after checks from which he learned that the ongoing return would be higher abroad, and that his own capital was enough to buy an apartment without a mortgage, he decided to buy an apartment in Romania.

The agent who found him the apartment did an excellent job, he said, and helped him with the purchase procedures. Amit felt confident about the purchase and trusted the agent when he recommended a management company to run the apartment for him. Before the apartment was offered for rent, a cosmetic renovation was done, he said.

“The moment I signed up with the management company, the problems started,” he said. “The first tenant was a good tenant. He paid on time, and after a year he asked to leave. The company recommended repainting the apartment. I agreed. The second tenant they brought in didn’t keep up with the monthly payments. There were constant delays, until at some point they decided, with my consent, to get him out of the apartment. It turned out he left unpaid electricity and water bills, which I had to pay,” he went on. “And then, after 6 months, they brought in a third tenant and wanted to charge again for a legal agreement and again a fee for finding the tenant.”

It turned out the third, fourth and fifth tenants didn’t last long in the apartment either (whether because they were evicted after falling behind on payments or because they suddenly left of their own accord), and every time a tenant was replaced they wanted to charge Amit for the legal agreement and for finding the tenant. In between, they charged Amit for cleaning the apartment between tenants. The quarterly reports promised to Amit at the start also stopped arriving, and the income kept falling from quarter to quarter. A month before the flight Amit fired the management company, and now, he said, he was on his way to Bucharest to find a new one.

“Do you maybe have a management company you could recommend?” he asked.

“I don’t really like to make recommendations, but I’d be glad to understand what criteria you’re looking for in a management company before I decide whether to recommend one,” I replied.

“I don’t have any criteria. I want someone reliable,” he replied.

“Besides reliability, what do you want the company to do? How do you want it to work?” I pressed.

Amit had no clear picture of his criteria or requirements for the management company, and that’s not surprising, since many of the investors I’ve met over the years didn’t know how to check, what a management company is supposed to do (other than find a tenant, collect the rent and pass it on to the owner), what its capabilities are, and so on. It’s no accident you hear stories of properties standing empty for months, tenants struggling to pay, unplanned maintenance costs and more. Contrary to popular belief, buying the property is not the critical stage of a successful investment (although it is important and critical in its own right). The success of the investment depends on managing the property properly, in a way that ensures a stable return and prevents the property from losing value. For that, the management company you hire needs to know how to screen tenants and choose reliable ones for you, check their financial background and rental history (yes, ask to speak to previous landlords) and interview them. In addition, the management company needs to carry out preventive and ongoing maintenance to preserve the property’s value and save costs in the long run, do periodic inspections and fix faults early. And you, as the owner, also need to pay attention and keep track of income and expenses on an ongoing basis (and if you can hire a management company that uses an advanced computerized management system, that will only help you stay in control). You also need to watch for regulatory changes such as tax updates or new rental requirements.

Managing your property is a strategic tool that can turn the investment into a success and increase your return.