So, You Want to Start a Property Management Company?

They say that ignorance is bliss. So, if you are thinking about starting your own property management company then either hit the “Back” button on your computer now, or read on knowing that you were forewarned about the journey you are about to embark on.

Why I Started My Own 

When my partner and I started to buy and hold properties, we needed a property management company that could handle the various needs of our portfolio. Not only did we want a good property manager, but we also had a handful of vacation rentals that demanded daily attention and at the time there were not many vacation rental managers, much less a company that did both conventional management and vacation rental management.

After interviewing the top property management companies in my area, I concluded two things: 1. I didn’t like the pricing structure of property management companies, and 2. How hard could it be?

This naiveté came from the fact that I had quite a bit property management experience in the past. This was for large, 200+ unit apartment complexes with built-in maintenance crews, account managers, leasing staff, and staged units. Our portfolio on the other hand consisted of much smaller multifamily properties.

Initially it wasn’t difficult to manage our own properties and I was the property manager. However, things changed when other investors started seeking us out specifically for property management and brokerage services.

The entrepreneur in me was intrigued by the idea of scaling a property management company. Anything with reoccurring monthly revenues rather than one-off sales is an attractive model in my mind. I also theorized that fee property management would be a great acquisition strategy when Owner clients are ready to sell.

Then I thought that with enough properties I could hire someone full time to manage the company’s portfolio and I could even stop paying management fees on our own properties.

Everything sounds easier in theory and I thought about throwing in the towel several times over the years. At the end of the day I’m glad we didn’t do that, but here are a few things that I wish I would have known at the beginning that hopefully will help you.

Lessons Learned

• Scaling is paramount – With everything we had going on it became evident early on that we needed more help around 30 units. First it was an assistant that helped with leasing, and then it became a full-fledged property manager. Salaries are expensive and the property management business model is low margins with a small portfolio.

When getting into it I was told that 50 units were what you needed in order to get over a big hurdle and make it worth it. Others told me it was 100, or 150, or 300. I don’t think there is a magic number because no matter what you have to scale no matter what level you are at.

At 50 units I could hire a full-time property manager, but we needed a leasing agent and I still needed to be in charge of business development. That meant more revenue. At 150 units you will soon need to start thinking about another property manager, but you also need a more full-time handyman, a full-ish time leasing agent, dialed in systems, and oh yeah, company sponsored health care. That requires more units and more revenue.

And so it goes.

• High Opportunity Costs - Fee property management is a time intensive business. Clients don’t come to you with fully stabilized amazing properties that are easy to manage. No, they come to you with problems, or vacant units, or both.

Turning rental units requires time and energy. This is the major difference from a portfolio of similar size that is strictly owner managed. It’s rare to be able to coast like you can with your own portfolio when you are doing fee property management.

When you are starting out, and even for a long time thereafter, the amount of time you have to personally invest simply is not worth it. In hindsight I could have scaled my investment portfolio much more quickly if I would have focused on strictly investing and not management.

Your time represents the ultimate opportunity costs. Use it wisely.

• Owners can be worse than tenants

Not all property owners that hire property managers are knowledgeable or savvy investors. Many are quite green and they require significant amount of coaching and education. These are both accidental landlords that have moved out of their primary residence as well as new investors.

These are not easy clients to work with because owning a home is a completely different mindset than investing. For us to run a well-oiled machine, our clients have to be on-board with our programming and our philosophy. Spending time educating and working with clients that are easy to get along with is fine, but when you’re dealing with Owners that are stressed out emotionally and financially, then watch out. That’s when things get fun…

There’s also a saying that is popular in the investing community, which is that you have to “manage the manager.” This is just my personal rant, but that does not mean you have a license to be a jerk and belittle your property manager.

A property manager that you have to “manage” only promulgates a property manager who will maintain the status quo. You and your manager should be on same team. That’s the difference between a good manager and a great manager. The latter will actually increase the value of your property. Sure, there will be situations that arise, but that’s what you get when you are dealing with the intersection of people, money, and real property.

I don’t require our Clients to be locked into a contract for a certain amount of time because I don’t want anyone to be in a relationship that they do not want to be a part of. If you want to run a successful management company, then do not be afraid to let problem clients and properties go. Life is too short, and the time you sink into those people will absolutely derail your productivity. With the dead weight shed, you will be able to get back to work.

Check out Part 2 of this article where I continue with more lessons learned that I wish someone would have told me when starting my property management company.