Is a commercial property management company necessary to scale?

Question

I am relatively new to commercial real estate with 4 buildings under my belt in 3 years. So I am learning as I go and would love you to critique what I am about to say.

In my 8 years of residential single family rentals I had 3 different property managers early on and non of them did a good job, at all. At some point around 2018, my involvement in my real estate business went from part time to nearly full time. I do not have a day job, just another business I own and I split my time up rough 80/20 (real estate/other).

This is when I decided to ditch my PM and self manage (with my wifes help). Since then, I am getting much higher rents, filling units quicker, and tenants are getting work orders resolved faster and for less. Not to mention saving 30-40k a year in fees. My goal is not to self manage much longer since I am approaching 65 doors. I want to bring on a part time employee to work in house as the PM in addition to other tasks. Not only to save money, but to have better control over things unlike when I hired out property management companies and I was just a drop in the bucket.

So far, I have taken this same approach to commercial real estate. I see SO many vacant units in and around my buildings that stay vacant, but we are able to fill our spaces up much quicker. The only thing I can think of is that I work much harder at finding tenants then a PM with dozens and dozens of properties. Know one is going to care about my properties/tenants the same way I do and I understand that. And for me to pay them a hefty fee to do a lesser job does not sit well with me. I feel I can train a part time employee who can nearly work from home to do a better job for less in the near future.

Thoughts on this?

George Azita · Answer

65 unit ain't nothing to self-manage and if you hire an in-house employee then you have to manage and pay the employee more than you paid a PM. So, what is the difference?

We own many times more than 65 units. They are is several different states and we self-manage every unit. We went many years without a PM and did very well. A few years ago, we hire a PM for our rentals in Las Vegas and we lost a lot of money and the strange thing is we spent more time and had more aggravation dealing with the problems with the PM. It was easier and more-profitable to do our own management.

I find that the problem most self-managers have is they do not have good systems in place, no good set of policies and guidelines to adhere to and no good philosophies. While I find that most landlords hate being landlords and they hate dealing with their tenants with a passion, we actually enjoy dealing with out tenant's complaints and issues because we have policies and guidelines that we follow and we understand that dealing with tenants is exactly the same as every other business has to deal with their client's and customer's complaints and issues like the airlines and restaurants have to deal with the surge in anger and physical abuse, or like employers have to deal with employee issues and lawsuits.

There is nothing better than being 100% hands-on and have 100% control of every penny spent.

George Azita · Answer

One last thought! I've went to Columbus Ohio two times in the past year to look at both single-family homes and multi-units.  Members have been claiming that Columbus is a hot market for more than a year and I never saw one property with good numbers. If anyone has a property that is hot I would like to see those numbers and how you came up with them.

Thank you!

George Azita · Answer

I think everyone has dreams of sitting on a beach drinking Mia Tais or living in a white house with a picket fence without a care in the world. The strange thing is; most of the rich people I've ever met who have far more than enough money to fulfill those dreams never do because there is this strange phenomena where most of the people who become rich do so because they are hard-working people and the second phenomena is that the people who work harder and who earn high incomes constantly have more business tasks on their plate. While it may sound like hard-working people and high-income earners live a stressful life, those things are offset by gratification for their achievements and money is secondary to them.

The above paragraph is to point out that it appears that you want to own real estate only for the money and it appears that you already have a mindset that you don't want to manage your properties and you don't enjoy all facets of the business and you think you can buy properties and have an expectation that you can eventually turn your business over to some strangers who have their own personal agendas and then you will allow those strangers to make decisions you should be on top of and allow them to manage your properties and have ultimate control of your fate.

As for your saying that you can train and hire someone for less than the cost of a PM, I don't believe you can. If you hire even one decent person in today's world you will need to pay that person no less than $40 per hour and at $1600 per week that is still a very low wage and barely enough for a person to rent or buy a decent place to live. Then, you will have to match payroll taxes and pay for worker's comp insurance. You will need to provide someone with a work vehicle, pay for the insurance, gas and maintenance and then you will need to constantly worry about being sued for overtime pay, sexual harassment, retaliation, age or race discrimination and a thousand other possible issues that could result in a civil lawsuit against you, personally. So, since there is 4-1/2 weeks to a month, you will be paying $7,200 per month for wages plus all the above mentioned costs and one employee will cost more than $10,000 per month and that is more than the 6% a PM charges. And... I never paid a PM one month of rent to rent an apartment. I think my PM charged something like $300 for signing the lease plus advertising costs and my advertising cost to rent an apartment on zillow.com is usually $10 to $30 to run an ad for 1 to 3 weeks.

Everyone has different philosophies! Some people invest in real estate for the money and some invest because they enjoy being an entrepreneur and actually enjoy the highs and lows that come with running a business. Everyone has their own personal mindset! I am 72-years old, get up every morning at 5 am to deal with my 20+ employees. My wife and I get 2 to 3 text messages or telephone calls from tenants every day. We've had more than enough money to retire 30 years ago, can never spend all the money we have and we give away more money every year than most people earn. We are entrepreneurs and we don't work to earn money. We work because we enjoy doing working. enjoy dealing with tenants, enjoy employing people and we actually enjoy dealing with complaints and even enjoy handling lawsuits when we get sued because there is a sense of self-satisfaction or self-gratification to know that we will get sued, occasionally. We are well-prepared and never ever let a business problem make us get emotional. I've had 21 lawsuits filed against my company since 2015, sleep very well when being sued and I won every lawsuit because my businesses are super organized and I am always prepared in advance with good documentation to beat lawsuits. I actually enjoy putting documents together and sending the documents to attorneys.

Adam Craig · Answer

Good to know someone who has scaled and has properties all over the country is self managing :)

I do not feel the in house employee would cost anywhere near as much as a PM company since I can set the salary and not fork over an entire months rent for new leases plus 6-10% of the rent. I can train someone to do things how I want and have much better control. I also plan to outsource more day to day tasks to this employee as he/she learns.

My wife handles the leasing stuff and I handle the turnover/work order items. My long term vision in real estate is not me answering tenant phone calls and emails about repairs and headaches. I have been doing it for 5+ years and I do enjoy getting to know some tenants. But I would much prefer dealing with high level items as I scale.

So is my vision of "getting out of the weeds" unrealistic?

Jason Bott · Answer

@Adam Craig All of my clients who run 500-1,000 units self manage.  No one will hustle for your properties like you will.

On the flip side, I have a lot of OOS investors who have a demanding job or primary business and the only way they can get into the REI game is to partner with a PM.   I do not intimately know all of the #'s, but they keep scaling up as well, just not as fast.

With your model and @George Azita you are building a business.  I feel the others main goal is to create a passive income stream, even if it means the margins are less.

John McKee · Answer

It sounds like you answered your own question.   If you truly want to scale BIG and act like a CEO instead of COO then you will need to hire someone.  It just depends on how you value your time and how big you want to get.  If your stuck in the hamster wheel you at least need to try something different to achieve your goal.

George Azita · Answer

"Never count someone else's money"

Your peers who have properties managers, acquisition managers, etc. are under a serious amount of much more stress than you can imagine because when you have that many people and different departments in your organization in your company you also have much more stress, more expenses, less efficiencies and your profit margins are also lower. I don't envy any business owner who raves about how much business he does, raves about his gross sales and raves about the number or people he employs because the larger your company is the more vicious your circle of problems widens.

Adam Craig · Answer

My dream is never to be sitting on the beach, retirement is not a goal of mine I would be too bored I work all the time and enjoy it. But I do have a dream of dealing with parts of my business that will help it grow - new deals, networking, website/social media growth, branding, systems. All those things do not get enough of my attention because I am dealing with day to day tenant related issues - leases, repairs, turnovers ect...

Also, I am wondering if you being in LA makes "acceptable pay" different. I have a whole slew of contractors that work for me between 20-30 an hour. I know that amount goes know where in LA but in the Midwest it can get you by. The PM I would hire would be part time and remote since i only have 60 doors. I assume 20 hours a week or less and then mileage credits - I would not be hiring an employee in the same capacity you explained.

I hope you are wrong because when I look at some of my peers or guys who are larger then I, I see on their websites they have acquisitions manager, property manager, fund raising outreach ect...  This is where I want to be someday, overseeing a team of people instead of tenants.

Is a commercial property management company necessary to scale?

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