What is the minimum amount of units (in multi-family apartment) where an onsite property manager is not required?

Question

The question is in regards to balancing property management costs.

I've noted, that generally apartment complexes require a property management company that takes between 5-8% of gross rents, and also hires payroll staff to be on site.

Eg a site manager, and an assistant to a site manager, and a contractor for 50+ units.  In evitably, this results in reduced NOI, which in turn reduces the cap rates and cash on cash returns for investors.

If one is seeking to pick up another apartment, then what is the threshold level for # of units one can own without having to employ an onsite property manager (but still retain a property management company to handle the leasing, maintenance, etc)?

Is this strategy advisable? Why or why not?

Michael Tempel · Answer

The answer is both answers can be correct.  I am the management company and have a partial ownership in our properties so obviously I don't want to push not using a management company :-).

You can always self manage and many owners do.  I have seen this on a small and large portfolio basis.  I think if I can have one manager handle 140 units total (one is going through a full renovation/transformation) - you can see it on our website "The Avenue Apartments" that you probably could have one less manager and reduce payroll.

Always remember that self management and understaffed properties can lose money by not maximizing rent/leases and lack quality customer service.   It is usually due to lack of experience and learning the hard way.  My acquisition targets have always been self-managed portfolios that were poorly managed in one way or another.   We love properties that have rents way below market, vacancies (the more the better), this seems to be the case in many portfolios without professional management.

We buy at a discount and get to work solving problems to reach profitability very quickly, because we have long term experience solving issues newer self-managed owners haven't had.  We also put our team through a ton of training and constantly mentor daily while using systems that took over 15 years to put in place.  The systems and ability to quickly increase a properties value is where a PM company earns its money.

Of course, this isn't true with all self-managed portfolios by any means, there are some fantastic self managed portfolios in our market.    Another flip side is the wrong PM company can run a portfolio to the ground or even worse, hold it hostage during contract (we hear about this all the time).

Final thought, is if you are looking to grow, sometimes it is okay to have a little extra on the payroll if you have a great employee and they can quickly take over a larger acquisition effectively.   The quality of service and ability to take action with the right team members is crucial in our market in Minneapolis for example.

Probably gave a little more than you are asking, hope it was helpful.  Staffing is always one of the largest challenges.  My biggest rule is to always hire the best and don't waste time on poor performance to save a little on payroll if possible.

Jay Hinrichs · Answer

States have specific laws regarding when an onsite manger is required. I know Oregon does.  One client I sold an 80 unit to... has on site management he pays for and his off site PM manages that manager and charges 4%

Gautam Shah · Answer

@Roy N. Roy good points.  In our case, the property management company hired the onsite team too.  A contractor, a site manager, and an assistant to a site manager, managing across an 80 unit and 50 unit.

In the instance, it runs with just the team on the ground.  The property management team is not required, however, they have the ground team on their payroll, and bill it to our apartment.  How to move away from the property management company, but retain the ground team now becomes the new question.

Michael Tempel · Answer

This is a great question and something that makes a large difference in payroll expenses.   I like to have managers take on multiple properties.   For example we have one manager mainly run our 92 unit property, but also take care of a 36 unit property in another close city and another 12 unit property in another area.

Obviously she is a great manager, but this can be done successfully and bring overall cost down, but still pay the manager a higher wage by sharing the cost based on number of units or other formula.    I do this with another manager as well that manages 2 sites about 120 units total.

Personally I love 50 plus unit properties that allows room in the budget for an onsite manager (it is easier that way).

Also, equally as important this same method should be used with maintenance.   All of our techs can rove, but have their main sites and areas they are in charge of.   Has worked very well.   We have 6 communities and three techs for example.

Andrew Fingado · Answer

In California it is 15 by law.  I'm not sure if your area has similar legal requirements, maybe someone else can weigh in.

From a personal level though, as a property manager, I think it would be a good idea to have an on-site manager with a building with 25 units or more.

Gautam Shah · Answer

@Jay Hinrichs

Glad to know this.  How does one find out the state laws for GA, and requirement for on site PM based on unit count?

With respect to the set up you mentioned, is there a contractor full time as well (in addition to the site manager, and offsite PM)?

Thank you

Gautam Shah · Answer

@Andrew Kniffin agreed with your statement of having an onsite manager being beneficial for 80 unit.  But the site manager is hired by a property management company and on their payroll, but billed to our financials.

The 8% offsite PM won't work in an 80 unit, or even 50 unit.  In fact, that is what I'm trying to determine, ie that sweet spot where a property will not require an onsite PM.  How many units would that apartment complex or multi-family have when an onsite PM is not an absolute requirement?

Gautam Shah · Answer

@Michael Tempel

Great response.  Thank you. This is similar the what we currently have set up, where costs for the onsite staff/contractor are reported to the appropriate properties proportionately, eg 80 unit bears 60% of the wages, and 50 unit bears 40% of the labour costs.

However, there is still a property management company charging 5%, and one site manager, one assistant, and one contractor.

Would you still make this leaner?  If yes, then how?   (I read somewhere else by a note from @ChadCarson, that 80 unit should have only one site manager and one contractor.  ie no property management company in the mix.  Wondering if this will work for 80 unit and 50 unit properties nearby to be managed simultaneously).  Thank you in advance for the input.

Andrew Kniffin · Answer

hi Gautam-

You may have it backwards here.  The general rule is that you can have an onsite PM, and this begin to cover costs internally, at 80 units.  This saves on mgmt costs as compared to 8% that offsite PM would charge.

Interested to hear if others think differently...

Roy N. · Answer

@Gautam  Shah

5-8% pm fees seems a little low, we typically see 7-10%, unless you are looking at large properties.

The answer is going to be a bit location dependent and one you can work out yourself.

The first thing to verify is whether the Province requires you to have on-site management for a build with X or more units.  If they do, then you essentially have your answer.

Otherwise, solve for the crossover point:  The point at which the cost of retaining a PM company will exceed the cost of having your own on-site employees.   The salary for an on-site manager will be dependent on the location:  it will be greater in Toronto than here in the Maritimes.

Once you know the loaded cost (salary, plus payroll taxes, insurance, etc) for the employee(s), you can easily find the crossover.

What is the minimum amount of units (in multi-family apartment) where an onsite property manager is not required?

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