Turnkey Property Management Question

[David Katz]

Aside from Memphis Invest (now REI Nation), what other turnkey companies have an in-house property management team? A friend of mine was considering turnkey, and I advised him to look for turnkey providers that actually manage the properties they sell (as opposed to passing investors along to a separate, third-party PM). I know Memphis Invest has their own in-house PM wing, but I don't actually know which other turnkey companies are also structured like this.

[Jeff Schechter]

This is a post I've been meaning to write for a long time.  I'm the co-founder of a successful TK operation in Indianapolis.  We've been at it almost 4 years, and have TRIED IT ALL in regards to PM.  What I'm about to tell you may seem counter-intuitive, but after being on this side of the equation, there are other considerations for you to look at.

We started by partnering with another turkey provider.  You may have heard of them...Oceanpointe Properties. Initially, we were a sales and marketing company...just selling their stuff.  As you can imagine, it was a disaster...even back then... long before the scandal.  We ran away from them as fast as we could.  Thankfully, we saw the writing on the wall early.  (I could write books on how much we've helped those initial investors overcome those issues, but it is not contextual to this conversation.  We were interviewed on @James Wise documentary if you want to learn more about that).

We then started getting very good at our own acquisitions and rehabs, and partnered with a local mom and pop PM.  And while they were responsive, our investors were getting creamed on pricing for tenant turns.  We just couldn't live with that.

So we drank the above mentioned kool-aid...namely, that a real TK company needs to have their own in-house PM solution.  We partnered with one of our acquisition partners who had a sizable portfolio that they were already managing, and provided a one-stop-shop for our investors.  And while that was great, the PM business is extremely difficult...across ALL property classes.  We found that unless you are managing at least 2,000-3,000 doors, there are not enough economies of scale in place to do things really well.  There was SO MUCH that we wanted to do in terms of technology, collections, screening, showings, automations, etc, but we just weren't generating enough revenue to afford it. 

We kept the markup VERY LOW on repairs and tenant turns, to help the investors cash flow.  Eventually, that division brought down the profitability of the entire company.  So, we contemplated charging more for our properties.  But, that would also not serve the investor.  Truly a catch 22.  Everyone understands simple economics...profits have to come from somewhere, otherwise you don't survive.

We also found that we were having to be all things to all investors. The attention, resources, and customer service bandwidth required to run our own PM made us LESS effective at the things we do really well...namely acquisitions and rehabs.

As we all have learned from the Oceanpointe/Morris Invest debacle, it's also VERY easy for a "full" TK company to hide issues that they don't want their investors to see.  So, while it may APPEAR that the TK has the best interests of the investor at heart, it doesn't always play out that way.  When separate entities are not accountable to their respective responsibilities, it can provide a "false truth" for the turnkey investor. 

Eventually, we decided to go back to the drawing board, and ask the most important question...Notwithstanding the mantra that a "real Turnkey company" HAS TO have their own in-house PM...What is the absolute BEST scenario, that will provide our investors with the highest chance for success?

We began a search... nationwide.  We wanted a "strategic relationship" partner.  It's a common arrangement in our high-tech world, which allows for specialization....allowing each party do what they do best, in support of each other, and for the common good of serving customers.

As an example... Roche Laboratories (here in Indy) is known the world over as a TESTING company for new drugs and health-related technologies.  But, they also DON'T do 99% of their own testing.  That effort is outsourced to their strategic partners that are strictly in the testing business.

We had a pretty big laundry list... We wanted a high-tech AND high-touch partner, that could do all of the things we previously WISHED we could have done for our investor.  Software, robust investor portals, customer service agents, field crews, the whole 9.  We wanted INTEGRATION with what we're doing on the acquisition/rehab side.  We wanted SYSTEMS and complete accountability to managing properties across all the multiple markets that our investors are in, and the markets we are growing into.  We also wanted FIXED PRICING on repairs/maintenance.  Ideally, we wanted to find a company large enough that they could make it on management fees ALONE, and weren't relying on repair/maintenance markups for profitability.  

Our laundry list was so big, that we thought we'd never find anyone...

But we did.

And now, after just a few months, our company has completely turned around. Our investors are very happy. They are getting treated very professionally... full service, total accountability, etc. To be truthful, our investors are now BETTER served. As an example, our PM partners are catching things that 3rd Party Inspectors don't catch....they want those properties to be in the best possible shape for tenants, to achieve the highest probability of securing the best tenants. So, we've had to up our game in terms of finish-out. Because we're now focused on our core strengths, we have also been able to keep our pricing down...in many cases we can do a BETTER job for the SAME PRICE than the OOS investor who is hell-bent on doing their own BRRRR. This is the kind of stuff that happens when you allow specialized teams to do what they do best.

@David Katz, who makes some excellent points, stated: "for a turnkey operation that has property management in-house, they aren't in the business of property management"  True indeed, David.  

In summary, having in-house PM does make sense for some TK operators.  But it certainly did not for us, or our investors.  Moreover, it is important for ALL OF US as investors and entrepreneurs to question the status quo...lets not make assumptions on things just because they are continually repeated in forums like this.  While many people posting in these forums have good intentions, they often don't have the larger perspective or experience to provide deeper insights into issues like these.

I hope that what I've shared helps you to gain a new perspective on this issue...which is widely discussed here on BP.  Whatever you do, keep an open mind, and do your due diligence!