Two different managers on one 9 over 2, deliberately

I wanted income and no second job. What I bought is nine apartments over two ground floor bays, 3,100 sf total commercial, one bay a physical therapy practice and one a small bakery. $1.41M, 25% down, five year fixed with a 25 year amortization.

The thing I did that I'd keep: I hired two management companies instead of one. Residential went to a firm that does small apartment buildings at 7% of collected rent plus half a month for turns. Commercial went to a brokerage's management side at 4% of collected rent with a leasing commission structure, 6% of the first five years of a new lease and 3% on renewals.

Everyone told me this was a mistake and that one manager is simpler. One manager was going to charge me 8% across the board and had, when I asked directly, never done a commercial reconciliation and did not know what an estoppel was. The residential firm was excellent at residential and honest that commercial was outside what they do.

Cost of the split: about $8,900 a year in fees versus roughly $7,600 under the single 8% quote, so I pay about $1,300 more. I also have two portals, two sets of statements, and I do the consolidation myself in a spreadsheet on the second Saturday of the month. That takes me two hours.

Numbers as of last month. Gross scheduled $172,000. Residential $126,000 across nine units, commercial $46,000. Actual collections last twelve months $164,800. Operating expenses including both management contracts $71,400. NOI about $93,400. Debt service $78,900. So roughly $14,500 of cash flow and a 1.18 coverage, which is thinner than I planned.

What nearly broke it. The bakery bay was vacant when I bought and I underwrote 8 months to lease. The commercial manager found a tenant in month 5, which felt great, and then the tenant's build-out ran from month 5 to month 14 because the hood and the grease interceptor turned into a permit fight with the city. Free rent was negotiated to run through construction, so I got zero from that bay for 14 months instead of 8. That's about $19,000 I didn't plan for and it came out of my reserve, which is why I have $6k left in it instead of $25k.

What I'd keep: the split management, and the reserve, which I should have sized to 12 months of the vacant bay instead of 8. What I'd change: I'd have written the free rent to end at a fixed date rather than at certificate of occupancy.

5 replies

-1karen_whitfieldPG4APRO7

The free rent tied to certificate of occupancy is the whole lesson and you already named it. The tenant had no reason to push the city and every reason not to. A fixed outside date puts the permit risk on the party who actually controls the contractor. Did the lease have any construction milestone at all, or was it purely CO?

4marcus_hale41CG4A

1.18 coverage with $6k of reserve on a building with two commercial tenants makes me nervous on your behalf. Move one variable: the physical therapy practice doesn't renew. What's that bay worth annually and what does your coverage look like in the six months it's dark? Because from the outside it looks like you'd be at or under 1.0 and rebuilding a reserve at the same time.

I'd also want to know what the loan documents say about a coverage covenant. Five year fixed on a $1.06M balance, plenty of those have a tested DSCR and a cure period, and $14,500 of annual cash flow is not much of a buffer if a test date lands during a vacancy.

1tashaford30PB2APRO7

I've been reading this thread mainly for the two-manager idea and I think it's the most useful thing here. The question I'd ask any single manager pitching 8% across the board is exactly what you asked, whether they've done a reconciliation. Cheap question.

1brandonlee36Passive

The 6% of the first five years leasing commission on the bakery deal, did that get paid at lease signing or at rent commencement? Because if you paid a commission in month 5 on a lease that didn't produce a dollar until month 14, that's another few thousand of the hole you're describing and it's worth naming for people copying this. Commissions payable at signing are standard and negotiable.

3megan_doyle15 Get yours

I don't understand half of this yet but the part about hiring the manager who admitted commercial was outside what they do stuck with me. Good sign about a person.

Two different managers on one 9 over 2, deliberately

5 replies