Vertical Integration - Savior to Multifamily (MF) Investing?

[Ashley Wilson]

Vertical Integration - Savior to Multifamily (MF) Investing?

You have to be living under a rock (if you are a MF investor) to not know the challenges MF is facing right now. Interest rates, insurance hikes, rise in real estate taxes, eviction delays, rising expenses and delinquency are just a few problems investors are encountering. Owners/Operators have to identify new and innovative ways to offset these expenses just to survive.

One of the most common solutions I keep hearing is bringing property management in-house (aka vertical integration). On paper this may look like an obvious solution, however, in practice it can cause more challenges (cost) than it saves for most situations. Before jumping to the challenges, let's talk about some of the positives.

The most obvious positive is the PM fee. The industry average is 3% for large properties, not including add-on fees. Through vertical integration a company can have one in-house PM manage multiple properties, when maybe only 1-2 properties need to off-set that expense.

Another benefit is the higher visibility in the day-to-day operational spend. Most 3rd party PM companies have a spend limit that they are allowed to spend without ownership's approval to avoid delays in operations. Bringing the management in-house would allow real time decision making on the validity of the spend.

While there are other benefits, for brevity this post is just going to focus on the expense.

Looking at the opposite side, there are quite a few challenges to starting a new business, which in essence is what is being done here. For those of you who think it is the same, I would argue that they are similar but not the same. One of the most important roles your PM company provides is knowledge on the legal side of leasing at a national, state and local level. I can guarantee that most owner/operators are not aware of these details.

Clearly there are companies who are thriving with in-house management. I would suspect that these companies did not decide to go vertical when they were cash-strapped, but in a position of financial security to take on this new risk.

PM teams should be adding incredible value to your overall business plan. If they are not, then it might be time to switch companies, or even, dare I say, self-reflect as your team might actually be to blame. If it is the latter, then no new PM company, nor vertical integration will solve your challenges.

Ultimately there are some investment companies that vertical integration is going to be a key part of their success, while others vary from no impact to being the downfall. Regardless of what you decide, I do not believe it is the only action someone will need to take to "survive to '25". Operations is a game of keeping a lot of balls in the air. If you relied on the wind to keep a few of those balls in the air these past years, it then becomes very difficult to figure out how to juggle even if you add an extra set of hands.