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The Management Problem

managementminiProfessional property management sometimes isn't very professional. This is most true at the small property level where multiple locations and distance between sites increase management cost considerably. Nearly all real estate investments require management. Who shall do this management is a major question any real estate investor faces.

Deciding whether to self-manage or retain others, the owner must consider perverse incentives. Manager compensation based on collected rent is independent of expenses. The fact that the owner's interest is to maximize net income makes his success dependent on controlling expenses. This sets up a conflict of incentives that is not easily resolved.

The graph shows that although collected rent, the manager's net profit and the owner's net operating income are all optimized at the same (approximately $400) scheduled rent the manager's net profit is only positive across a very narrow rent range. Little imagination is requried to reveal the opportunities for mischief here. In the end, especially at the small property level, this suggests an Impossibility Theorem describing the owner's dilemma when choosing a management plan.