Why do we need to underwrite a management fee?

We are often asked why lenders require factoring in a management fee into expenses if a buyer intends to manage a property themselves. There are two primary reasons. First and foremost, lenders use market expenses typically in underwriting loan requests. And most multifamily properties are professionally managed by third party management companies. And this fact plays into the second reason: if the lender forecloses, they will not manage the property and will employ 3rd party management. If they did not underwrite that expense, it could in theory leave the property with negative cash flow if the lender needs to take over the property.

Both of those reasons also relate to a third philosophical reason to underwrite a management fee – even if the intent is to self-manage. There is no guarantee that as an owner you will want to continue managing a property years in the future. There could be several causes from health to simply frustration in dealing with tenants directly to time considerations. By underwriting the management fee from the outset – which is also presumed in virtually all pro formas from real estate brokers – you as a buyer leave yourself the option to use professional management or increase cash flow by taking the time and effort to self-manage.

Regardless of the reasons above, the market assumption is for professional management. That fee will vary from company to company and is mostly dependent on the number of units. We discuss that in fuller detail in the article regarding underwriting expenses.

As always, if you have any questions about this subject or any others we post and discuss, please don’t hesitate reaching out to us directly either by email or feel free to give us a call. We are happy to help!