Why property management is not very competitive in Columbus?

Question

I've recently closed and rehabed a property in Columbus (and actively looking to get more, so if you have any leads, pls PM me ;) - but my question is about property management in the metro. There seems to be a number of solid PM companies around, RL, Panzera, etc. but most if not all have a rather high fee structure when compared to what I'm used to in CA.

As a comparison, my PMs in Sac charge me 50% of 1st mo for placement (up to max 500), then 75/mo for management and 75 for lease reviewals. My PMs in Fresno charge me flat 8% of leased gross - no placement, no renewal, no vacancy charge (comes to ~80/mo average for PM).

In Columbus, almost everyone wants to charge some startup fee, a full month for placement, a lease renewal fee and 8% to 10% of monthly fee. The end result is that monthly rents in Columbus average much less than in CA, yet absolute dollar amount for PMs is significantly higher.

Example (all units in similar B type areas):

Sac (1st year with placement) - rent 2,100/mo, PM (with placement fee amortized) - $110/mo (or 5.2%)

Fresno (1st year with placement) - rent 1,200/mo, PM - $96/mo (or 8%)

Columbus (first year with placement) - rent 1,200/mo, PM (with placement fee and startup fee amortized) - $171/mo (or 14.2%)

Thoughts?

Peter Lohmann · Answer

It's funny to see the perspective from the other side. From where I sit, we're barely charging enough to make it worth all the trouble and headaches (small margins), and it feels like every other company is making way more than us (mostly through leasing fees). We're philosophically opposed to leasing (placement) fees. The good news is that management fees are going up, not down, in Columbus. We track the pricing for all our major competitors and fees are up in the last few years. I think that's overall healthy for the marketplace because it will allow all the PM companies to deliver better quality service to their clients and tenants, keep better care of the properties, etc - which improves the bottom line of the property owner. When everyone is super-competitive and margins are razor-thin, service suffers big time. Doing PM correctly requires significant effort, technology, and really awesome team members (who command decent wages). A PM company can swing the value of your asset + or - several percentage points over 3-5 years of management, which is interesting since that's typically far greater than their cost in terms of absolute dollars. If I was hiring a PM company I'd completely ignore fees and just look at quality of service, systems, etc. It's way more important in the long run for the reason described above. Competition keeps fees generally in line.

Brandon Sturgill · Answer

@Avtandil G. PM for us small guys is a tough go...if you own less than 30-units (example), you won't receive the attention of the larger or institutional investors...Columbus was just named top real estate market in the country...things are jumping here...most PM's won't even enter zip codes they perceive as risky or not worth their time because they don't have to...they can set their own fees now, but it's breeding competition...as the market peaks here and out-of-state dollars continue to roll in, you'll see a few companies emerge with more competitive rates...the alternative is to leverage technology and self-manage...

Aside from that, it's just a matter of vetting the 200 PM companies in town until you find the right one. We keep an active database of PM companies and ask them all 20-questions about pertinent details, including fees and services provided. It takes a lot of work...

Best of luck as you scale up in Columbus.

Benjamin Piecenski · Answer

There definitely is some competition in the area with property managers, but there is not quite the amount of larger property management firms that drive lower costs through competition in Columbus as there is in other similar sized markets.  I do think with how much real estate investors (especially from out of state) have been entering the market, we will see property management average fees get lower as they stay competitive to capture all the new demand.

Peter Lohmann · Answer

I think the answer is a mixture of a few things. First, you're getting a sweetheart deal in those other 2 cities. Those numbers look very very low to me relative to average PM fees nationwide. Are you sure you're including ALL fees - annual fees, leasing fees, setup fees, renewal fees, marketing fees, etc? How long have these businesses been operating and what kind of service are they providing? It could be that some things aren't included in their "base" pricing which are included in the companies you are comparing against.

I also think you might be cherry-picking Columbus - I don't know of any PM in Columbus who charges both a placement fee and a startup fee.

As a point of reference, RL's amortized monthly charge for the first year on a $1,200/mo rental (Silver plan) per your example is $134, or about 11%. That's in line with the average PM cost (if you include all fees) across the country. And if you bring us an occupied unit, that drops to $109/mo, or 9%. All our prices are right on our website btw.

Avtandil G. · Answer

@Peter Lohmann - i think we all agree that PM is a hard business to be in and your points about a good PM increasing the value of the property long-term are absolutely on point. However, I'd encourage you to take perspective of the investors as well - it's hard to rationalize that PM fees should add up to 15% while investors' return is only 6% - particularly since there are examples where we have more competitive structure in more expensive market like CA. I'm not sure how they achieve it, but it seems to be working for them long term

Avtandil G. · Answer

@Kenny Dahill - thanks for chiming in. I'm not sure I agree with you analysis though - I think both absolute  as well as relative amounts matter in this business. absolute amount caps the expense and makes sense for more expensive rental markets, while percentage of gross makes sense in cheaper markets. I do agree that all management fees should be included, which is what I've been mentioning earlier as well. However, even with fees included (and I keep repeating that there are more fees I'm seeing in Mid-West than in CA), we still should never be anywhere close to 18% of gross.

Think of it this way - 10% of $3,000, an average rent in San Jose, is $300. And 100% uncapped placement fee, means $3,000. Nobody in CA would agree to pay 17.5% of gross under those terms  ($6,300 / year). I know that since I have rentals in these markets and all my property managers cap their fees. For expensive markets like Bay Area, my relative PM costs are in 5%-7% range, in cheaper markets like Fresno / Bakersfield, they are in 8%-10% range. Total.

In that sense, @Peter Lohmann structure is much more aligned with investors' interests in a sense that he has flat monthly (and predictable) fee. Yes, RL is one of the more cost efficient ones in Columbus, but still 'expensive' by CA standards.

Brandon Garabedian · Answer

I'd imagine the lack of overall volume of units available in Columbus vs any suberb of California is a huge factor in the varying percentages between two locations and why even at a higher percent in Ohio, managers feel as if margins are low. I live in Los Angeles, so I can definitely see why <8% is plausible and profitable with volume and available resources. Vacancy too perhaps...

Kenny Dahill · Answer

@Avtandil G.,

California is an outlier in real estate investing.  I'm sure we can both agree with that.  Similar to CA, other Class A properties that have high rents as well then you can expect the percentage of AGI to be lower.  The reason being: flat rates makes more sense.

However, 16-18% is the norm.  More markets are like Columbus than California.  You may not like or believe it, but it is what it is.  I've got the unique pleasure of seeing a lot of management fee structures for properties across many regions too.  You're more than welcomed to not like it though.

You can't cross compare the percentage of AGI because of what I stated in my previous post: different markets, different economics.

I'll counter your San Jose argument by giving you a more realistic example that far more majority of the national scene relates to.  A SFR/unit that rents for $750.  At 10% and full month leasing that equals $1,650 in fees.  $9,000 NOI.  18.33% of your AGI.  What if we used your Sacramento PM at $110/month.  That's $1,320 per year.  Okay, cheaper.  It's still 14.6% AGI!  For the exact same flat rate!

Yet it's relatively the same amount of labor to manage as the San Jose property.  Which at $125/mo (example) is $1,500 annual fees.  That's 4% of your $36k NOI.  Why would I want to pay 18% AGI when I can pay 4%?  Everybody would take 4% all day.  You're still paying the same amount for the same labor, except the NOI is significantly different due to their market rents.

Personally I think flat rates should always be used.  Obviously the PM's can set their own rates and adjust per property.  In my opinion, the labor is what it is labor.  Labor isn't conductive based on the rent amount.  The counter argument is lower rent properties are typically Class C/D and do require more labor for maintenance and tenant control.  If I were a PM operator, I would have different tiers or could always decide not to manage those C/D properties.

I wouldn't focus on the percentage of gross.  That's a result mostly focused on the rent amount than it is PM fees.  The higher rent, the lower AGI percentage.  You can disagree with the belief all you want but it's a mathematical fact.  The better argument is why does Columbus cost $2k to manage while California cost $1,100.  After all, similar labor and efforts.

Avtandil G. · Answer

@Peter Lohmann- the companies I'm using in both have been in business for 30+ years and have each ~1,000-2,000 units under management each. I don't think that's an issue. As I said, there are no other fees...

Brandon Schlichter · Answer

From my perspective, there's way more money in simple sales than anything else. Property management has a much higher involvement then simple sales, lower overall returns among several other things. Not that it can't be profitable for someone doing it, but if you can make 2x or 3x the amount of money for the same time input, you can't blame brokers/agents for going to the segment that's more profitable.That isn't to say there aren't good managers in Columbus, for better or worse i've only heard one maybe two that were worth anything.

Why property management is not very competitive in Columbus?

Most Popular Reply