Reducing Apartment Property Management Expense

If an owner reduces the cost of apartment property management by doing the job herself, does this add value to the property? If I had to choose either a yes or no answer, I would have to say no.

To be clear, when I refer to the value of an investment property in this instance, I am referring to the value placed upon it by the marketplace. Commercial real estate that generates income is typically valued based on its net income. Therefore, by reducing the apartment complex management expense to nothing (by managing your own building) you should increase the net income of the property, and hence the market value. However, even though you will not show an expense for management on your property income statement, if you were to try and sell your property, a savvy apartment building buyer will plug in the going rate for apartment property management and readjust the net income accordingly.

Typically, a property management fee is calculated as a percentage of the gross income of the building. (Remember, we are talking about the property manager here, not the on-site person or "caretaker".) Therefore, when calculating the value of an apartment complex, most investors and commercial realtors will insert an expense for property management somewhere in the 4% to 5% range.

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So although you will benefit from the savings in terms of cash flow, you will likely not benefit from any increase in value of your investment real estate in terms of how the market perceives it.

Keep in mind that the above argument excludes things like the value of your time and the quality of job you would do managing your own building compared to a professional apartment management company.



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