Property Management: The Daily Grind That Makes a Difference

Ed Aloe (00:02): 

Welcome to the Real Estate Wealth Podcast, the show about how you can build wealth by investing in real estate. I'm your host, Ed Aloe, founder and CEO of CALCAP Advisors. I'll dive deep into multifamily investing in today's current market. I'll also help you acquire the knowledge and tools necessary to generate passive income for life through discussions with friends and experts in the industry. 

(00:34): 

Today, I would like to welcome Lani Porter to the show. Lani is an EVP and managing director of our property management company, CALCAP Properties. Lani has been with us for over five years now. We hired her with the intention of growing out a fee property management business. Up until that time, CALCAP really we only managed properties that we owned, but we felt there was an opportunity to expand upon what we had learned from renovating and managing our own properties over the years to begin to offer those services to other clients and other owners. Today with Lani's oversight, we own and operate over 5,000 units in nine different states, and we are quickly expanding from here. So Lani, welcome to the Real Estate Wealth Podcast. 

Lani Porter (01:20): 

Well, thank you for having me, Ed. 

Ed Aloe (01:22): 

Today we can talk about all things' property management, and I know you and I speak all the time, and I always tell you it's the blocking and tackling, the super important part, the less glamorous, less sexy part of real estate investing and owning, but super critical. So we can get into that, but before, why don't you tell our listeners a little bit about yourself and how you got into this business. 

Lani Porter (01:44): 

Sure, be happy to. I will say I've probably been involved in most every aspect of the food chain that is involved from lending on multifamily assets and single family homes all the way through to formulating REIT. The very first REIT to go public in the space with American residential properties, and then rolling through to the pure multifamily management side of things ultimately, which is where I am today and have been for over five years now. 

Ed Aloe (02:24): 

Okay, great. Why don't you give us a little overview. When you think about property management, I think there's a lot of owners, especially owners that think they could do it themselves. You hear the old adage of what is it, tenants, toilets, and trash I think of the three Ts of property management, which is true. 

Lani Porter (02:41): 

Yes. 

Ed Aloe (02:42): 

But there is also a heck of a lot more than that when you really look at professional property management services and everything we can do or management can do and offer. So would you mind sharing with our listeners some of just the overall capabilities, what CALCAP Management can do? 

Lani Porter (03:00): 

Absolutely. So, you touched on something there in terms of the mom and pop side of things, it's difficult when you are self-managing because you don't have that other perspective that separates you from the basics of what your expectations for the property were and what it takes to actually execute that plan. The point of a professional property management company is really to have a partner in helping you to execute your strategy. And as a partner, we like to bring all kinds of perspective to look at the opportunity from every possibility. And what I mean by that is even at the beginning during the acquisition process, when someone is looking to acquire an asset in a given market, it may be new to them, they may not be familiar with some of the challenges that may come just geographically. 

(04:03): 

But in addition to that, as you develop your plans for acquiring an asset, you really need to be able to have a company that is able to come in and provide what is a proforma look at how that asset could potentially perform not just in the short term, but in execution over a long term hold. So what needs to be done initially at a property ultimately is to be able to stabilize it, to be able to shore up the weaknesses in the asset that are maybe apparent going in, whether that's because the property has been neglected from just a pure physical condition, or whether the property has a performance challenge in terms of the rental base that you would be inheriting. So developing a proforma that says, this is where we need to focus first to get the property stabilized and then here is our forward looking outlook on the ways that we can enhance performance once it's stabilized. 

Ed Aloe (05:20): 

Right, so it really starts with building out, initially building out a budget for the client and really an overview assessment of, okay, what do we have here? Because every property is different. You have stabilized properties, you have unstabilized properties, have properties suffering from poor previous management, I mean going through COVID. Let's talk a little bit about the due diligence process you go through. So say an owner hires us, they're going through an acquisition, they now hire CALCAP to help them upfront with due diligence. Why don't you walk our listeners through that checklist and all the things that we look at and go through when helping someone evaluate whether to acquire a property or not? 

Lani Porter (06:07): 

Sure. So at the due diligence period there are really two different areas with which we need to go deep. One of course is the physical aspect of the property and for that we walk every single unit, inspect every aspect of the interiors and make note of that, which is also something that is monetized so that as we identify where flooring needs to be replaced, where drywall needs to be repaired, any aspects of the physical unit, we actually have that tied to those rankings of those repair replace aspects tied to a monetize back in. 

Ed Aloe (07:03): 

Would you take a step back there, mind explaining when you say monetize, like exactly what you mean and how that works? 

Lani Porter (07:10): 

Sure. So if we have to replace a dishwasher, if we have indicated replace, we will have a value attached to that dishwasher. The same is true with a faucet or down to a smoke detector. Every item within the unit that gets evaluated also has an estimated cost associated with it in the program that we use, which helps to then show you not only what needs to be repaired and replaced, but it provides an estimate of what the cumulative amount of those repairs or replacement items would cost you. And so the due diligence reporting that we produce is very fulsome in that you can go in once you've acquired the property and know which units are going to require what repairs, and in developing the funds that will be needed for the asset once you've acquired it. 

(08:24): 

You can already have a reserve amount that is related specifically to those findings on the one hand, or it may actually be a point of negotiation that you're able to utilize coming out of due diligence when negotiating final price before your money goes non-refundable. In addition to the physical aspects of that inspection on the interior units themselves, there's also a large need to look at the big ticket items such as the roofs and the HVAC systems, whether there be boilers or chillers, any other major aspects of the envelope of the property. We bring professional third party vendors in to make those evaluations and to also develop and present an estimate of what repairs would be required. 

(09:25): 

It also helps to provide an estimate of the remaining useful life of those major systems so that as we develop a budget and we're looking at that proforma forecast, we can also account for perhaps we have a useful life of another three years on the roofs, even though the roof is fine today, we need to be able to plan for in a five year, seven year hold, we need to be able to plan for that ultimate replacement or major repairs that may be required given the age of that particular aspect of the property. And then, you have your big ticket amenity items such as the pools, looking to see the condition of those pool decks, the systems' filtration, as far as the exercise rooms, if there's a gym, what kind of condition is that equipment in? 

Ed Aloe (10:28): 

We also look at maybe doing some conservation green initiatives that come along with it, which can also help you get slightly better financing, especially from the agencies. So can you talk a little bit, when we look at some of these items, how we might apply looking at it through a green aspect lens and how we can maybe conserve water, for example, we look hard at that or electricity savings. 

Lani Porter (10:53): 

Yes, so it can come in a variety of forms in terms of the requirements for a green loan. And one of the most common aspects is a level of conservation adjustment to the property, which would include things like low flow toilets, aerators that would also conserve on water flow. And in terms of the new LED lighting that is available in many different forms, you can replace wall packs and property lighting throughout the common areas, et cetera. So there are a number of ways now that we are able to institute and execute against requirements for a green loan. So it is in the long run, probably the direction that we'll be moving more and more often with properties, but in terms of the savings that it can bring an owner, it's just a prudent thing to do. 

Ed Aloe (12:06): 

Yeah, absolutely. And some of those savings you can recoup pretty quickly within a year, within a couple years sometimes. 

Lani Porter (12:13): 

Yes. 

Ed Aloe (12:13): 

I think some people think on a larger property we found is you really need to walk every single unit and occasionally it'll get them where, oh, we don't have keys for this one, and sometimes they might want to try to keep you out of a unit, which we've seen before, and then we finally get in and there's a gaping hole in the ceiling and it's flooded. But I think it's super important to walk every unit. And really in the old days we would have a clipboard and write down a physical checklist of, okay, the stove is not working in this one, the tenant said the air conditioner's not working, whatever it was. But now through technology, it's pretty cool because you guys use the technology where literally you walk around with a phone or an iPad, right? 

Lani Porter (12:58): 

That's right. 

Ed Aloe (12:58): 

You can get all of the information and then at the end of the physical inspection basically upload that into a consolidated report. So can you talk about that a little bit? 

Lani Porter (13:10): 

Sure. So we utilize a technology called HappyCo, which you're able to use your smartphone as a maintenance tech that is walking the units to do record the physical inspection. And what this does is allow us to not only make a quick assessment to record it on the phone, but we're able to take a picture of that particular line item and it's automatically attached to that rating, the picture evidence of what is being recorded. So not only do we produce a very comprehensive due diligence report output at the end of walking all of these units, but it also provides that very valuable physical or photographic evidence of the deferred maintenance estimates that we're providing that allows the prospective buyer to utilize in that negotiation that we talked about. 

(14:25): 

So once the property is acquired, all of that that was captured during the due diligence, we're able to leverage that as the property manager to be able to prioritize those units where we found the extensive damage that even if someone is occupying that unit, we're able to go in, make those repairs and prevent something from becoming a bigger problem. So very helpful to us in formulating that early strategy upon takeover. In addition to being able to record every line item with photographic evidence of the ranking that we've assigned to it, it also provides the visibility during the due diligence where I can be here in our headquarters in Arizona, our team can be out there walking a property in the middle of Texas, and I can log on and physically see the results as they're being recorded. 

Ed Aloe (15:42): 

Right. Because there's really two components, the physical which you just went through, which is obviously very important, but then equally if not more important is the financial due diligence. 

Lani Porter (15:52): 

Yes. 

Ed Aloe (15:53): 

So do you want to walk through some of the financial due diligence piece? 

Lani Porter (15:56): 

Absolutely. So from the obvious review of leases, we're able to derive a lot of either validation of the numbers that were provided or present a very good list of questions to current ownership for clarification. And sometimes what we find is even though you may have the occupancy, the residents in on the rent roll in those units, it may turn out that there are several that are rolling as month to month, even though they're indicated as still on a lease term that is longer or vice versa. So we're able to determine how many folks are actually physically in place, for one. For two, that the terms of their lease match up with what the rent roll had indicated. And then conversely, we're also able to tell what kind of delinquency is actually the situation. So things can change very quickly with regard to the contractual side of the business, which is the lease terms. 

(17:23): 

But aside from that, we also want to look at all of the service contracts that are in place. We want to understand what the element of termination for those agreements are because in some cases you may have say a 10 year cable agreement, but the caveat is at ownership, change of ownership, you may be able to terminate that contract. And if you miss that window, you may not be able to terminate it once the acquisition has culminated. So the service contracts, it's the leases, it is doing a physical inventory of what is actually going to stay with the property at acquisition. So we may find that an inventory is lacking many items that we find intrinsic to needing to stay with the property, and therefore that will also be included at the conclusion of due diligence period. So some of that inventory can include some pretty big ticket items, whether it be tools or furnishings or computer equipment, it all adds up. So we look to identify all of those aspects as well. 

Ed Aloe (18:50): 

And I think in looking at the financials, like when you mentioned rent roll in terms of horror stories in the business, I remember a few times where it's important like we mentioned, to walk and validate what the rent roll says because we've had properties before with, let's just say less than scrupulous property managers where they report a unit as vacant and then when you physically walk next thing there's a family living there that's been paying them in cash to your community manager. So there's various ways to game the system that we're always looking out for because we've seen them. But yeah, I'm always amazed with some of the things we discover on those walks. 

Lani Porter (19:35): 

Yeah, I mean it's really the inverse because sometimes when you're looking at the rent roll and you're just, you're like validating occupancy and vacancy or matching up, but the truth of the matter is that you can end up with people in a unit that are indicated to be a vacant unit, just like you said. And once you've acquired the property, it becomes even more difficult to get past the, oh no, this was a special arrangement, I've always been allowed to do this, et cetera. So really important to get those things nailed down before the keys are actually handed over. 

Ed Aloe (20:16): 

Let's talk a little bit about some of the value add strategies. CALCAP as a buyer, we are typically a value add buyer of properties so we look for properties that are either mismanaged from a financial standpoint or a physical standpoint where we can now invest money into those projects to increase the rental income. We have a lot of our fee customers that also are value add buyers, and I think that's a result of our company knowing that business. And so would you mind getting into what you look at, now that we've gone through the physical and the financial due diligence of a deal. If an owner says, "Okay, how can I maximize my rents here or minimize my expenses?" What are some value add strategies that you would recommend they employ? 

Lani Porter (21:10): 

So there's a market potential rent for every floor plan and that market potential to a achieve that rent is derived from the competition in the area and what they're able to get for those similar floor plans. And so there is a market achievable rent that is sometimes untapped and not fully realized by an existing property ownership. And some of that can stem from the fact that let's say the property has been self-managed by the same owner for let's say 10 years, maybe even longer, and they've been reluctant to raise rents and keep them up with market because maybe their reluctance is that they don't want to spend money on turns. And so they've lost out on the opportunity to cashflow those units consistent what the market is getting so coming in and saying, look, this is what we need to do to provide a facelift to the common areas and possibly to all of the buildings, whether it be a repaint, but certainly looking at the fascia, whether any wood needs to be replaced, things of that nature to make the properties presentation live up to the competition within that footprint. 

(23:00): 

And then what kind of lift can we get out of doing upgrades to the interiors of those units themselves. So really our teams look at that as two different opportunities and then a compounded opportunity when the strategy is to do both. So certainly we have certain restrictions in terms of how much upside there can be to upgrading units, and we want to also be mindful of that because the average household income for the area will always inform you as to how high the rents can reasonably go, for one. And for two, that investment that you are going to make or propose for an upgrade package has got to be thought out in terms of what is the achievable ROI, return on investment that you are looking to get. 

Ed Aloe (24:10): 

Can you give some examples, Lani, as a real life sort of value add? When I think of it, certainly exterior stuff we do signage, paint, newer driveways always looks good, but on the interior there's usually a big focus on the kitchen area and bathrooms and flooring, right? Can you touch a little bit upon what we do there? 

Lani Porter (24:30): 

Sure. So it is always low hanging fruit to replace the flooring and to do a nice two-tone paint, that's a nice refresh for a good pop. But really when you look at modernizing, for instance, the appliance package, whether you're going stainless or black, that can also have a nice pop. And then in terms of countertops, fixtures, faucets, we generally will look at how much of a real sustainable investment for those kinds of things that will last for a very long time once they've been upgraded. That is really important because if you're going to replace the flooring, if you're going to do a full paint and you are going to leave what is old dingy looking cabinetry, it's really doesn't make any sense to put in the full appliance package. 

(25:43): 

It really is one of those things where if you're going to do three or four of the major things, what other enhancements based on the condition and the age of the property are going to have the most long lasting benefit of return? So if you've got cabinetry that is outdated, I think that is imperative to do on those upgrades. And I don't mean to replace the boxes, it could just be the faces. So you can really get a nice new look from just doing a refacing. And then on top of that, of course the countertops, whether it's granite or laminate, always a big hit with people that are looking for a unit that's attractive to move into. So countertops, cabinets, flooring, and paint, they are the key areas. 

Ed Aloe (26:44): 

And then just kind of modernizing, I guess I would say amenities as lifestyles and people have changed over the years. We often find, especially in the southwest, a lot of 1980s projects were built with tennis courts in, you'll walk the tennis court and there's weeds going through it and cracks in it and no one's used it except kids running around it for the last 25 years. So we would use that as an opportunity for maybe a big open space dog park, or perhaps now maybe half of it becomes a pickleball court. I think it's important to look at what people really want today when they tour, and what amenities are appealing in the current marketplace. 

Lani Porter (27:24): 

Yeah, I think having a dog park super important. It's just a feature, an amenity that most people expect these days. In addition, it's kind of nice when you have the space for let's say a dog wash area, that's always a nice amenity as well, but really just making the best use of what is available, whether it be simply adding a couple of extra barbecue social pit areas on the property if that's all that space allows, just any kind of additional way of being able to provide a nice communal open space for people to use to make the property feel like a community as opposed to an apartment building. 

Ed Aloe (28:21): 

Yeah, I think that's exactly right. Let's shift gears for a minute here and talk a little bit about once you've taken over property, you're now managing it. What are some of the property metrics that you would look at with the owner or some of the KPIs, the key performance indicators? But I think a lot of owners, depending on what they look at, can be sometimes lulled or confused where maybe the property seems like it's performing well because say it's a hundred percent occupied, but there's a lot more to it. And of course occupied, what do I always say to you? 

Lani Porter (28:55): 

We're not charging enough rent. 

Ed Aloe (28:57): 

Yeah. Well, congratulations. The rents are too low in that building. So why don't you talk a little bit about some of the metrics we look at when we evaluate how a property is actually performing. 

Lani Porter (29:07): 

Sure. Well you know those basics, occupancy, you touched on it, that seems to be what everybody is really interested in every week when our regionals connect with their ownership, where's our occupancy? But the reality is is that there are many other indicators that are important to demonstrating progress of the property and clearly where your lease up rate is is sometimes as important or more important than what today's occupancy is, because that lease up number is going to take into account all of those units that are in a notice to vacate status. That is they've given notice that they're going to move out, and therefore it is essentially telling you in the future where you are trending to in terms of your leased up. And then also all of those leases that you have assigned where the prospect has not moved in and become a resident yet is also incorporated into that lease up number. 

(30:25): 

So the lease up side of it is going to tell you more of your future outs and your future ins and where you're trending to for that future. So regardless of where occupancy is today, you could be a hundred percent occupied, but the reality is is that you're 87% on the lease trend. So I'm going to be more concerned about that 87% and less thrilled about the 100% that is only for the moment. So from just the last couple of years, the emphasis on delinquency has become extreme to the point where I think better reporting has been developed to be able to look at the trend of progress. Certainly when we look at delinquency, we're looking at how much of that is a hangover from COVID related assistance that has yet to come through. How much of that is related to residents who may have been on assistance but have exhausted their full compliment of allowable assistance and therefore are back to being self-reliant in covering their rent. 

(31:41): 

So delinquency isn't just a straight up number anymore. There are many layers to which we look at that make up that delinquency trend that are even more important than years past where we may have only been looking at, here's your percentage of delinquency. And then as we get into what are tougher times, retention has always been important, but retention is taking on further importance these days. Really just in general, when you look at retention, it could be a good thing and it can be a bad thing. So retention is sometimes to Ed's point if you're a hundred percent occupied, maybe you're not pushing rents enough, maybe you are not taking opportunities at renewal to close some of that loss to lease gap. So retention is really important to have a strategy around. 

Ed Aloe (32:43): 

So it's important to point out in a market where we are executing a strategy, maybe there's a big loss to lease, like we talked about, the owner's now going to come in, spend a bunch of money to renovate and get that higher rent, or in a marketplace where maybe rents are just escalating like they have been the last five years. But to your point, yes, and especially in this marketplace where now there's a lot of economic uncertainties, retention is probably going to be more and more of a focal point. Like you and I talked about, especially on properties that are more stabilized cash flowing, because you have to remember, turnover is an expense. Not only does the unit now lose income because it's vacant, then you're also going to now put money into that unit. So your repairs and maintenance costs go up as your turnover goes up. So nowadays, we're going to focus on really trying to maintain and retain versus maximizing rents because we're not in that market. 

Lani Porter (33:46): 

Right and that's why I say, you really need to have a good understanding of your ownership's goals for the property and in understanding what that strategy is, you can develop a plan so that everyone is in agreement with what we're going to do. 

Ed Aloe (34:08): 

I think it's important to note that most residents today, just like anything in our lives, you start your search for an apartment online, unlike the old days where people were driving up and down neighborhoods where they thought they wanted to live. Now you're starting online and the first thing you're going to look at is what are people saying about the product I'm buying? And in this case, the product is an apartment building, so what are people living there saying about it? Super important. 

Lani Porter (34:33): 

That's right. Yeah. It doesn't matter how much you spend on marketing. You could spend a gazillion dollars a month attracting leads, but if you don't pay attention to those things, you will never have conversion at the level that justifies that spend. So to that end, the other most important KPIs that we look at are related to our marketing efficiency because everything starts there in terms of affecting our occupancy and being able to garner that reputational rating. So when we look at market efficiency, we're looking at our spend, our marketing spend, and we follow the history of every lead from the day that we receive it until, well until forever. 

(35:28): 

Because we have found that leads can have legs nine and 12 months later, because even though you came and passed on the opportunity nine, 12 months ago, it may have been that you were in that renewal period with your own apartment that you were already in and decided to renew, but during that period, you checked us out and then we find that you're coming back 9, 10, 11, 12 months later even. And so we're able to tie that lead back to when they first took an action to look at our offering, and then that ties into what our cost per application ultimately is. Because once someone finally applies for an apartment, we're able to see what their duration of time from when they first contacted us to when they actually move into the unit is. And so it helps us to turn up and down our marketing dials to get more efficiency out of what we're spending and when we're spending it. 

Ed Aloe (36:40): 

Before we wrap up here, any more technology that we used today that is critical, would you say for your business that didn't exist maybe even five years ago? 

Lani Porter (36:52): 

Well, just we talked about the due diligence aspect of our maintenance technology, but that carries through to every day, day-to-day operations. Just being able to utilize that same system for move-ins and move outs helps to keep things organized, and also providing photographic evidence for damages on move out, which really helps to dispel some of the angst that comes at the end of the day when you have someone moving out and you're telling them that they're only getting half of their deposit back. Just being able to quantify that through the technology capture that we utilize for those inspection points, super important, helps us a great deal in that regard. And then just the many ways of outreach that we have available these days, very valuable. 

(37:52): 

The fact that we're able to utilize chat to answer people's questions 24/7 through the AI capabilities of that chat that's evolved, the ability for our prospects to self-schedule their tours, or the ability for them to do a virtual tour and skip the need to have that physical tour before committing to the property. The fact that they can produce a full lease without leaving their living room or their work desk, that they can do an online application and complete an online lease. So all of these things have just helped to create efficiencies and levels of service available to the public that we have only in the last couple of years been able to really fully enjoy the benefits of. So lots of different areas that we can be more efficient, but also more effective from just a customer service standpoint. 

Ed Aloe (39:07): 

Yep and it's efficient and cost effective as well, so absolutely right. Well, thank you, Lani, for joining me today. I hope our listeners got a better understanding of the property management side of the business and how absolutely critical professional property management is for any real estate investor looking to grow their wealth. It really is the daily grind that makes the difference. So thanks again. 

Lani Porter (39:32): 

Thank you, Ed. 

Ed Aloe (39:45): 

I hope today's show inspired you just a little bit and would like to thank my guest again. I'm excited to bring you more episodes with interesting and informative experts to help you navigate your way to wealth in real estate investing. 

Credits (40:04): 

Thanks for listening to the Real Estate Wealth Podcast. The Real Estate Wealth Podcast is produced by Gusto, a Matter Company. Our producer and audio engineer is Jeanette Harris-Courts, with support from Gabe Gerzon and Susan Rangel. Maia Laperle is our writer. For show notes and more information about this podcast, visit edaloe.com, and for more information about CALCAP Advisors, visit us at www.calcap.com or follow us on Twitter, @CALCAPAdvisors. 

Ed Aloe (40:41): 

I'm your host Ed Aloe, and thank you for listening.