Starting a Property management company?

Question

I can't seem to find a decent property management, but I know I could build a great team for it. Thoughts and concerns about starting my own property management ?

Brad Larsen · Answer

I would not say "a lot" of people are moving to Self Managing their own investment properties.  It would appear just the opposite.  With more regulation coming on all the time (rent control) - dealing with Fair Housing laws, service animals, insurance, and regulatory agencies - finding a quality Property Management company is worth the effort.

Starting your own PM company to service your own rental homes is why a lot of PM company owners get into it.  The extremely basic numbers put at you from above are guesses from the outside.  Property Management is the only true business in the business of real estate.  Everything else is commission based from development to sales to lending.  They are all chasing the next deal.

Your profitability will not happen until near 80 units with an average monthly income of $100 / unit.  (I did my whole MBA final study on the PM Company model).   Plus, I am a Property Management company owner.  In the beginning, there is a lot of start up costs.  There are side costs you can't even predict.... from the cost of software, to labor, to insurance, to phones, to websites, to signs, to office space.....you name it.

If you can build a great service, the clients will follow and after time....you can build up a good business.  I say if you have the mindset to 100% fully commit to starting a Property Management company - do whatever it takes to delight your clients with great service.  (It is a challenge!)  The rest will follow from there.

Peter Tverdov · Answer

I started a property management company three years ago as a side hustle because I wanted to eventually hire a PM for my properties but I wanted them to do it my way. I grew it slowly on purpose and only now have I started to hire staff to help me and have started to branch out to other neighborhoods or towns in New Jersey. I have a very good and organized system. For 3 years I literally only focused on student housing in one town by word of mouth, didn't even advertise.

You will likely need a real estate license. You will need someone with a license to Lease the property. There are costs for advertising, for signs. For office space. Costs for software if you use it. Business Insurance, Liability Insurance. You better have a list of several vendors for every trade. Make sure they're licensed/insured. Basically right now 35% of my revenue at a minimum goes towards costs and the rest is profit. I keep re-investing to grow it. Currently at 21 properties under management - 33 doors. Still a side hustle, I have a regular W2 48 hour a week job.

Happy to answer any questions you have.

John Mocker · Answer

Clark, From an insurance standpoint, you will probably need:

1. Professional Liability (aka Errors & Ommissions or E&O)

2. General Liability

3. Workers Compensation

4. Bonding (dishonesty bond)

5. Business Auto coverage

I would also strongly recommend getting a Attorney who is experienced in the area of Real Estate contracts.  So much of the Liability you could have is the result of the contracts you have with the property owners and also with your subcontractors.  Having someone to draft effective contracts for you may prevent your being dragged into claims.

Brad Larsen · Answer

@Clark Michael  If you are serious about starting your own fee based 3rd party property management system you will need to find a good mentor and do whatever you can to get them to open up to you.  Maybe you simply join NARPM and start hanging around their meet ups or conferences....asking a lot of questions.  People there are very helpful and don't be afraid to tell them you are new.  Go with these first 2 things and they will tell you all of the context specific things that YOU should do to be successful in this venture.

Taylor Roeling · Answer

@Clark Michael People often run into this problem with property management companies. There are pros and cons to both. A lot of people are moving toward managing their own properties and using online software and apps to help their process! Usually they are free too. This way you are streamlining the applicants who are applying to live at your property, screening them properly, and you can manage them as well. DIYing the process to save funds and using online tools to save money seems like the best direction for a lot of people.

Clark Michael · Answer

@Brad Larsen What advice would you give to a new and upcoming PM company? I have my own investments, and work for a real estate company so I am hoping to start this and have synergy with all three.

Mike Roy · Answer

@Clark Michael - I see.  There is definitely a learning curve to that business side, which is why some states require a license to manage property.  I've thought about that and would seek out education before jumping in.  I'd also make sure I'm covered by all relevant insurance.

As far as risk and time, I tend to think that the reward is only worth it if you are able to scale fairly large.  I look at it like this: Let's say the average rent on your managed properties is $900 and you charge 8% - $72.  Big assumption here, but let's also assume in your secondary market that a property manager will mostly be handling smaller buildings averaging 10 units each and can manage up to 10 of these effectively at a salary of $40,000.  In this scenario, your annual revenue is $86,400 and your costs are a $40,000 salary plus insurance, maybe some advertising, and any rent loss you experience.  Maybe you net $40k.

$40k isn't bad, but you might need 1,000 units to net $400k.  But that would require landing 100 10-unit properties in a small market where a lot of owners are likely local and self-manage.  It also requires managing 10 property managers, or hiring someone to do it, which would reduce your net income.  Maybe you try to get away with having one manager handle 20 properties, but I think it would be hard to deliver a quality service at that point.

I think large scale is possible in a small market, but is the work it takes to get there worth the effort you'd be diverting from investing or brokering real estate?  I would anticipate a lot of turnover as well, which means someone (probably you) would always be working to sign up new clients.  That is, of course, unless you hire sales people, further reducing your net income again.

Your numbers in your market might be different, but this is how I look at the model for the small market where I invest.  Things change dramatically if you're managing 100+-unit buildings, but I'm guessing there would be a couple of competent property managers in your market already if it this type of asset was common.

So yes, I think its a viable path to build a decent sized passive property management company in a small market that nets multiple six-figures - BUT -  is the time and effort worth the opportunity cost of other pursuits?  If it's just another piece that actually enhances those other activities, then maybe.

Clark Michael · Answer

@Mike Roy Yes, that is pretty much the story I am in right now.

There is many upsides to starting my own property management company. The synergy for deal flow, and also I am an active real estate broker could flow well. I have a team I could build to get it started and then let it work and not have to put much time in it.

My major concerns are the rules and regulations for the trust account, and other basic management rules.

I am not sure if the risk and timeis worth the reward.

Mike Roy · Answer

@Clark Michael - I've thought about this as well.  Let me guess: you invest in a secondary market and have build a little scale?  That's my story anyway.

The obvious upside is that building a property management company can potentially enhance your deal flow and over time reduce your own management costs of your personal portfolio.

My biggest concern is that I did not start investing to go into property management, so if I did start something, I'd want to do it in a way that creates synergy and enables me to maintain focus on why I'm in real estate in the first place.

To me, that means not only finding good team members, but also creating systems and operating procedures that enable me to free up time for my highest dollar/hour pursuits.

Starting a Property management company?

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