How do property manage companies, manage to scale /profit?

[Richard A.]

I see 7-12% fees for property management around here. $1500 month property. $150 at 10% x 12 = $1800 a year

$1800 x 10 properties = $18,000.  Someone can manage 10 properties alone but still you are only pulling in $18,000 a year

$18 x 100 properties = $180,000. Now you are at 180k but with 100 properties you now have inflated costs. office cost, employees, etc. How many employees would it take for 100 properties? Three full time?

What about 100 properties at $1000. Now you have only have $120,000 gross. With a lower quality renter/ worse property(more work)

Just curious how these companies are profitable?

[Nathan Gesner]

Originally posted by @Richard A.:

I see 7-12% fees for property management around here. $1500 month property. $150 at 10% x 12 = $1800 a year

$1800 x 10 properties = $18,000.  Someone can manage 10 properties alone but still you are only pulling in $18,000 a year

$18 x 100 properties = $180,000. Now you are at 180k but with 100 properties you now have inflated costs. office cost, employees, etc. How many employees would it take for 100 properties? Three full time?

What about 100 properties at $1000. Now you have only have $120,000 gross. With a lower quality renter/ worse property(more work)

Just curious how these companies are profitable?

Richard, these are great questions.

Most people don't realize how little profit is earned in the average property management office. We refer to it as "stacking nickels to make a dollar." If you look at most property management companies, they are a good job but not a good business. What I mean is they make enough to pay the salaries, including their own, but not much above that (if any) and they certainly aren't creating 15% net profit. 

I believe the vast majority of Americans pay less than $1,200 for rent so let's assume an average of $1,000 a month.

100 units = $120,000 in PM fees

300 units = $360,000 in PM fees

The difference here is that one person can manage 100 units in their own from home. They don't have to rent/buy an office, no secretary, they can use their cell phone, one computer and printer, etc. 300 units will require 2-4 more employees, an office space, more desks and computers and phones. Many managers are in this same boat where they think they are making big money when the truth is they haven't increased profitability at all and may even be losing money.

The solution? Unbundle services and find ways to monetize them. Instead of charging 10% and including everything you do in that fee, you have to break out certain services, particularly those that force you to deviate from your standard practices. The most successful companies are doing this and they are churning out net profits of 20% or more.

Let me give you an example of how this works. The standard PM would offer all their services for 10%. Some go much lower and, as you probably already know, they can't possibly churn a real profit.

300 units = $360,000 in PM fees

Another company offers PM for 10% but they offer something unique. Many Landlords don't want animals because the amount of damages they can cause. Charging $25 a month per pet only adds up to an extra $300 a year and still doesn't mitigate the risk. So the PM offers to cover up to $3,000 in pet damages in exchange for keeping the pet rent. Here's how it works:

300 units = $360,000 in PM fees

PM has pets in 50% of the rentals with an average of 1.5 pets per unit (some have 1 and some have 3). PM charges a $100 non-refundable fee up front and then $25 per month per pet.

Pet income = $82,500

That's a 22% increase in income to the PM. The owners love it because allowing pets gets their rentals filled quicker and tenants tend to stay longer. Their risk of loss from pets is dramatically reduced because the PM will cover it. 

PM increases income...but they also guaranteed they would cover damages. So how does this work? Well, most pet owners are good people and take care of their animals. Of those that don't, most of their damages can be covered by the security deposit. Of those that can't, the PM has to cover up to $3,000 but only after applying the deposit first. By properly screening the tenants and animals, and having strong policies and procedures in place to minimize expenses, the profits stay high. In a company like mine, I can make over $100,000 from this one technique while paying out less than $10,000 a year in damages (last year was less than $7,000).

Here's another one: Resident Benefits Package. I charge a $20 monthly fee to the tenant in exchange for some benefits like free online payments (no service fee), 24/7 maintenance hotline, one-time forgiveness of $50 late fee, one-time forgiveness of $50 NSF fee, and I include them in my blanket renter's insurance policy covering them for liability and loss.

300 x $20 a month = $72,000. That's not all profit because I have to pay $30,000 for the insurance policy but everything else is profit. All the other "benefits" I provide are currently provided for free so I'm essentially monetizing something that was previously free.

That's just a couple examples. I hope it makes sense and answers your question.