Property Management with Mike O’Neill #670

Bruce Norris is joined this week by Mike O’Neill. He is a friend and a workout partner, and he’s also the owner of O’Neil Property Management in Riverside. Mike is a very successful buy and hold real estate investor. 

Episode Highlights

• How did Bruce and Mike apply what they learned in karate to business?
• How old was he when he became interested in real estate?
• What attracted him to property management?
• Is it helpful for management companies to own their own properties?
• Did property management companies who came to California challenge the rates schedule, and did this affect his business?
• What types of properties are his favorite to work with, and which does he stay away from?
• What is the competition right now for available rentals in Riverside?

Episode Notes

Bruce said sometimes when he talks with people that are property holders, somehow they had an entrepreneurial bent when they were growing up. Bruce asked Mike if he was an entrepreneur in any way when growing up? Mike said he always wanted to be an entrepreneur, even in high school. He was already doing sprinkler systems, paint jobs, any type of work he could do besides the regular jobs that he did where he was working for somebody else. So he liked it from the very beginning.

Bruce next asked what age he started taking karate, to which he said at 15. Bruce wondered how his participation in karate impacted his life, specifically in his confidence. Mike said he learned how to handle failure, success, and to rely on other people. Through this, he formed lifetime friendships. He also learned how to have both your mind and body work together. What’s interesting is Mike took karate early in his life while Bruce took it later. Bruce asked him if owning a business has helped him in martial arts. Mike said it’s actually the opposite and martial arts has helped him more in owning his business. However, in owning your business you learn a lot about people and you learn to deal with adversity. He first started with a lot of those things with karate, and they work hand-in-hand.

Bruce became serious about it in his 50s. He had attempted karate in his early 20s, and he just wasn’t ready for it. There was a missing element of discipline, and understanding it was a process. Somehow, becoming successful in business and knowing that it took a while was like a victory that went to the person that was slow and steady and understood that they were going to gain a little skill at a time before getting better. Bruce learned that in business, and it allowed him to implement that in karate when he took it. Business helped him in karate. Mike said they help each other both ways. He doesn’t think anybody started a business where they haven’t struggled along the way. He picked up a little bit of that with the martial arts and some other areas, but every person who has succeeded in business has had their share of trials to get there.

Bruce next asked how old he was when he became interested in real estate. Mike said he was in high school, around 16 or 17. He was always interested in the business world, and real estate fascinated him and still does to this day.

Bruce next asked him how old he was when he owned his first home and whether it was a residence or rental. The first property he bought was a triplex on Mulberry with his brother Chuck. He was a couple of years older than Mike, and he was a senior in high school. He was not yet 18 when they put it into escrow. The property was not intended to be lived in, but rather it was a rental for several years, around 15-20. That was one of the few properties he ever sold, and he sold it to a gentleman named Mark Levi who was living there. He still owns the property today. Mike held the property for 15-20 years, which was actually a short-term holding despite being several years.

Bruce asked Mike what percentage of properties he still owns that he has owned in the past. He said he has sold three, over his lifetime, and one of them was a house that he lived in for twenty-five years before moving to his current house. He also sold two rentals.

Bruce said what’s fascinating is that he bought into the wrong philosophy. He has had a lot of success, but it’s interesting how the people that have a lot of wealth touched probably one-fifteenth of the houses that he did in his life. Although, in all fairness, his job was to turn property. However, for Bruce, it was an inaccurate mindset. In Moreno Valley during the 90s, there were times to buy fourplexes for $60 grand, which he did. He bought several dozen of them, which translated into $500 grand, but not for him. They turned into $130 grand when he sold them. It was always tempting for him to ask why he would want to hassle with a rental and get $500 a month extra. With that philosophy, it took him a long time and hanging around a guy named Jack Fullerton to finally convince him to keep some of what he owned. It seems you get sold on one or the other. Most of the people that won in the long reign kept a lot of properties and didn’t touch a lot of them compared to flippers. This is a good thing to think about if you’re thinking that you’re going to land on one square or the other. It’s a really good skill to end up having both sides of it.

Miked said to hold on to properties all your life. You only get one shot at being right or wrong about doing that. He completely understands why a lot of people have bought and sold and done this type of thing. It just seems that if he held them long enough, he would eventually pay off the mortgages and have income that would allow him to buy more investments instead of continuing to borrow. It’s a different philosophy.

Bruce asked Mike if he always managed his own property. He said yes. He became a full-time property manager at twenty-three. Before that, he and his brother owned most of the properties together when he first started. They started buying properties together because they could qualify for the loans. It’s always nice to have somebody else there, and they divided up the duties of it. His job was basically doing the dealings with the tenant and the property. He handled the bookkeeping and the money in the beginning. As time went by, he wanted to get more and more aggressive, and he didn’t. Eventually, they went different ways. They split up the properties that they owned. His brother would take one, then he would take one, and he thinks his brother sold some but kept one of the original properties himself.

Bruce next asked what attracted him to property management? As far as the hats you can wear in the real estate world, not a lot of people choose that hat. Bruce asked if it was because he knew he was going to own a fair amount of properties. Mike said this was exactly why. The first property he bought was from Century 21 Riverside Realty from a guy named Dennis Bunch. He had a little property management division, and Mike used to call him all the time to ask questions. As he was getting more and more into it, taking real estate classes, and working his job during the day, Dennis asked Mike if he wanted to be a property manager. He didn’t have that many properties, and he just had a bookkeeper handling it at the time. This was how he fell into the business.

Bruce next asked Mike what he would look for if he selected a property manager from scratch. He said this is what they are doing in Florida. They’re interviewing property managers and. going through the process of finding out if what they are saying is accurate. Mike said he first wants to find out what systems they use to do accounting, whether they are up to date or automated. Everything is online-based, and most tenants are used to doing that as well as most owners. It makes it a lot easier, but what is even more important than that is what their philosophy on properties is. Are they hands-on? Do they go to the property and talk to the tenants? Do you get voicemail when you call their office, or does somebody pick it up? When you’re a property manager, people might be calling with emergencies. It doesn’t seem to be the right place to have to go through three or four prompts to get somebody to talk.

This reminded Bruce of someone they dealt within Florida. This company had all the systems in place. When there was a threat of a hurricane, you got a 30-page memo that said what to do. But, when you called in, it was a voicemail that didn’t come on until the 20th ring. It was an interesting process to understand that a company could come across so well, and yet they decided not to be personally involved. It was systems, and that doesn’t work.

A rule of thumb is in the future, if any of your clients are looking for a property manager, sometimes you’re going to find a voicemail. But even if you do, how quickly do they get back to you? If that happens, are we talking minutes, hours? If it’s not minutes, there’s a real problem. It’s not a businesses where you call today and they will call you back tomorrow. It just doesn’t work. Maybe it is because they are not the largest company in the world, but most people he deals with are very unhappy with you if you’re not dealing with them in the same first half of a day to solve their problems.

Bruce asked if it is really helpful for the management company to own their own properties. Mike said you won’t really understand property management unless you do it.

If you have not been involved, had a plumbing leak in the middle of the night, or had a vacancy that you’ve had trouble renting out, it’s hard for you to completely understand what your clients are going through. He is not sure it is a necessity, but it’s a definite plus so they understand what their clients are doing. Mike would want to know what their philosophy to the tenants are since these are their clients. Tenants are important, and you treat them with respect. You don’t always give them everything they want, but you treat them with respect. If they have a problem, you take care of it quickly. If you make a mistake, you say you’re sorry. A lot of that has to do with wanting to keep the customer happy and knowing that is your customer that you’re keeping happy. If you don’t keep them happy, there are other places for them to go.

Since 2008 when real estate really crashed, there’s been an influx in the next eleven years of very sizable companies that first entered into the trustee sale buying business. They started keeping properties, and then they got into the hard money loan business before going into the property management business. Bruce asked if the property management companies that came to California challenged the rates schedule. He also wondered how this impacted his business. He said it actually did not impact him too much. His rate structure has definitely been squeezed some, but not from these huge companies.

His bigger problem is what he calls the mom and pop property managers, the real estate agents that want to handle ten or twelve at once so they can pay some personal bills. They’ll do it at whatever price they have to in order to get a little extra income. They generally don’t have overhead or employees. Generally, they are fitting it in around their regular job. It’s like moonlighting. They have created a little bit of a problem, especially in the Internet age where they can get out there and advertise things that are well below what the actual cost of doing it is. He doesn’t know if the big companies are really that interested in a guy that manages houses, condos, and small units. They may, in some instances, go into an area and buy a lot of single family residence, but he doesn’t know if they really want to manage one house for one family and have to deal with them on a one-on-one basis. That’s a little bit time consuming for those ones that are trying to get the large efficiencies.

Bruce said when people get their first rental, it’s very common that investors really attempt the management side on their own to save money. Bruce asked Mike what his thoughts are on this. Mike said as crude as it sounds, they always chuckle that they will get them after they screw up. They want to save the money and that management fee, and in a lot of cases that management fee is coming out of their pocket because they don’t necessarily have enough rent to cover all their commitments. When he and Bruce looked at one house, Mike knew the rental market better than Bruce did. He was floored at the price Mike said they would be able to get it. He had no idea it had changed that much, so he would have never even thought of asking the number that they got literally in a day.

Mike said the good news about a property manager that’s doing his job is he’s going to try to get to the highest rate he can. If he is a good property manager, he wants his clients to succeed, and he wants to succeed too. Mike said they set all their fees based on getting paid a percentage of what the owner gets paid. They’re the small team mate, and you’re the large team mate, so they work in unison. They will also discuss with owners raising rents, which a lot of small owners don’t like to do. They’re afraid of tenants moving. However, if you’re aware of the market, you can raise your rents and normally not have a tenant move. If you don’t raise the rents, go four or five years of not raising the rents, what if you have to replace a roof and it costs $5,000. Had they raised the rent incrementally during those five years, they probably would’ve collected that much more or more in rent, and it wouldn’t have been nearly as difficult.

Bruce gave Mike a choice of properties and asked him to tell him which are his favorites and which he would stay away from completely. He first mentioned the condo vs. house, to which he said he prefers the house over the condo. The association dues are one of the main reasons. When it comes to the people that manage in those associations, every customer is a tenant and an owner. There are no defined boundaries and they don’t appreciate as fast.

Bruce next asked Mike if he prefers a two-story or one-story house, to which he said one. However, he does not have a huge preference here since he lives in a two-story. However, he thinks a one-story is probably a little easier to market and could get a tad more in rent.

Bruce next asked him about what size he prefers when it comes to square footage. He said you don’t want too small, and you don’t want too big. He likes somewhere around a minimum of 1200-1300. Once you get over 2200-2400, you’re not getting much efficiency and rental income for the extra square footage. It becomes a diminished return as the house gets larger to the point where there’s a smaller market that wants to rent to it.

Bruce next asked him about yard size, to which he said not too big, not too small. He wants a yard that is easy to maintain, whether you hire a gardener or you have the tenant do it. You don’t want to have it be something that is going to take a long time to maintain on a weekly basis. Give him some grass and some bushes at the edge and maybe a tree or two, and he’s happy.

When it comes to a duplex or fourplex vs. a single-family, he owns both and there are pluses and minuses. A house tends to stay longer and appreciate a little bit faster. You can also get a stronger qualified person there. When it comes to multiple units, the bigger they get, the quicker the income stream to total income stream increases. This means you’ll probably get cash flow to the investor quicker. You’re going to have a little bit more turnover. But, every time you raise the rent on a multiple unit building, you’ve increased the value. This is not necessarily the case with houses. Houses are basically comparatively more driven by what the other house similar to yours is sold for in the area.

Bruce next asked what the competition is right now for available rentals in Riverside. Mike said we are in a tight rental market. We’re in a little bit of a lull this time of the year, but we still only have four or five rentals available right now. These are historically low numbers. Bruce wondered what impact rent control has. Mike said it is moderate, more of a nuisance. He doesn’t like the just cause eviction clauses. They’re going to end up with a lot of things in court. The maximum rent is somewhere between 7.6 and 8.1 depending on what index you do. Most of his clients keep their rent increases at around 3 to 5 percent on most cases.

The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669.  For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.

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