How Much Can A Dishonest Rental Property Manager Really Steal From You?

If you own commercial real estate and hire a rental property manager, it is almost a certainty that at some point in time you will lose money to theft by an employee. Employee theft is a huge problem in many businesses, and running an apartment building is no different. In fact it is likely worse.

To my knowledge I have only had one employee who has ever stolen from me. He was a resident manager and he was caught skimming the laundry income to feed what I believe was an alcohol addiction. I had "inherited" this employee when I purchased the apartment building, which in hindsight was a poor decision.

What did it cost me? It's hard to say. I am not sure exactly how much he stole from me. But for argument's sake let's say it was $1,000 over the course of a year.

On the surface that doesn't seem like a lot of money, although regardless of the amount it is a crime and no one likes to be stolen from.

Sidebar: I am not, by the way, trying to suggest that every rental property manager is dishonest. I have hired and worked with some great people over the past 14 years. And many of those people have been instrumental in my success as a commercial real estate investor.

Back to the money...

In terms of cash flow I lost $1,000. But, had I sold the building at any point shortly after the theft took place my actual loss would have been more like $11,000. Why?

Well, when preparing the pro forma income statement for the property the amount that I would have shown for laundry income would have been $1,000 less than what it actually was because of what the rental property manager stole. Hence, the net operating income (NOI) would have been understated by $1,000. If I sold the apartment building at a 9% cap rate, the loss in value would have been $11,111, which is $1,000 "capped" at 9%. (See the my section on apartment building real estate valuation if this does not make sense to you.)

So now a $1,000 loss has multiplied into an $11,000 loss.

If you do choose to hire a rental property manager to run your apartment complex make sure that you have proper checks and balances in place. And keep in mind that, as I have illustrated above, even small losses can multiply quickly and really take a bite out of the bottom line.

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