Book Review: “Rich Dad’s Advisers: The ABC’s of Property Management” by Ken McElroy

This book paints a pretty accurate and gloomy picture of what property management is all about. The author does not exhibit much enthusiasm about property management. It’s a necessary evil to real estate wealth but can be outsourced or leveraged to outside service. Managing the property manager is what this book is all about. I tend to agree with the author, after managing my own rental property for over 5 years, that it’s not for the faint of heart and it’s way too time consuming to be worth doing it yourself. In any case, the author does offer some good advices on what to look out for. The explanation of the financial statement is helpful and the impetus to maximize the rent and its translation to the value of the property drive home the points.

Here are the outlines of the book:

5 tasks of dealing with tenants: 1. find them, 2. collect rent/fees, 3. Be a sounding board for them, 4. Address their maintenance issues, 5. Enforce policies and contracts.

On laws: Have a solid lease, document everything, know when to fold ’em (let the residents win the battle), LLC’s. Tip: one of the most empowering things you can say is “read your lease.” Always document everything when it comes to resident communication.

Cash flow management: Income/expense statement is your property’s report card. Income – Expenses – Debt = Cash Flow. Tips: a seasoned property manager will immediately see that rents are increased. Never assume that previous year’s actual numbers will hold true in today’s market. Loss to lease = gross potential income – actual potential rent income.

Revenue: Gross Potential Rent Income – Gain/Loss to Old Lease – Concessions – Other Loss – Vacancy => Effective Rental Income + Other Income = Total Income

Operating Expenses: Professional Management + On-site Management/Payroll + Administrative + Advertising + Tax and Insurance + Utilities + Repairs and Maintenance = Total Operating Expenses.

Tips: pre-negotiated contracts with set pricing for their approved vendors (carpet cleaning, interior painting, electrical repairs, heating and air-conditioning service, plumbing repairs, appliance repairs, landscaping, pool service, pest control). Keep a capital reserve in order to complete large, onetime capital projects. Never forget your property’s value is based on its net operating income. Anybody managing anything will cost either time or money.

Net Operating Income = Revenue – Operating Expenses
Cash flow = Net Operating Income – Capital Expenses – Debt Services

Finding good property manager:
Match the needs of your property in terms of age, structure, equipment, grounds, local laws, amenities, administrative needs, and size to the types of property management companies: commercial, HOA, Mini Storage, shopping center, multifamily, single-family/small property. And Operating capacity: national/international, regional, mom-and-pop, realty company, owner/resident management.

Examine the
Employees training, job satisfaction
Systems: policy and procedures, accounting

Do you search
Level 1: Finding the players
Level 2: Meeting the players: the office visit – check for property condition, club house, staff, collateral/marketing materials, tours/models, and office.
Level 3: picking your player. Management contract: Fee structure, accounting systems, responsibilities, and expiration.

There are lots of sample forms, property management agreement, and etc. in the appendix. Good references.