How Much Can Property Management Add to Investment Returns?

This article quantifies the incremental return that can be generated by improving the management of a recently constructed multi-family property. The statistics quoted are not theoretical; they were used to underwrite a recent transaction in Chicago. The results show that a skilled property management team can increase the growth rate of cash flows and make a surprisingly large contribution to projected returns (as expressed by the Internal Rate of Return, or IRR). Therefore, investors could employ skilled property managers to boost returns if they are concerned about the current combination of low capitalization rates (cap rates) and an extended real estate cycle.

Risk and Return in Real Estate Investing

The trade-off between risk and reward is the age-old problem for investors in any asset class. The chart below shows the relationship between risk and return (Internal Rate of Return, or IRR) for commercial real estate investors. Most large real estate investors, in hopes of diversifying the risk in their portfolios, make each type of investment, and then further diversify by geography, quality, or property type.