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What I Learned As A Professional Property Management Company Owner

by Jeff Brown on November 27, 2012 · 14 comments

  
property management lessons

I tell this short story to new clients when they inevitably ask me about property management. I came into the office one day only to find Dad waitin’ for me with a cuppa coffee. Crap on a cracker, this can’t be good. Know how sometimes your lizard brain screams a warning at ya? I heard it, but it was too late. Dad sat me down and informed me that this time next week, the company would have a property management division, and I was gonna be VP in charge. Also, it was to be in addition to, not instead of all my investment property brokerage duties. Awesome, Dad. VP my . . . .

8½ years later, Dad was retired — again — and I moved our clients to management firms I chose and vetted. Everyone was content, especially me. But for those 20, um, 8½ years I lived the OldSchool of hard knocks. Did I have mentors to help? You bet. In fact, back in those days I couldn’t swing a dead cat without hittin’ at least one of ‘em. I hated every minute of it, but learned a ton. Dad’s been gone for almost five years now, and I’ve still not forgiven him. Truth be told, those hellish years have served me well, now that management is such a huge part of what we do. Oops, wrong word. Scratch that — what my team does. Since I closed the doors on the so-called management division that 1988 fall day, I’ve never managed another door. Every time I write or say that an involuntary smile hits my face.

Lessons Learned

Before I say more, let it be known I don’t in any way consider myself a professional manager of residential income property. I did a solid, credible job back then, but it was never my ‘profession’. The lessons, nevertheless, were learned and apply pretty much everywhere I’ve been.

1. Management companies don’t make enough money.

If the typical rental commands $1,200-1,600 monthly, and you charge 10% of collected rents, well, do the math. A firm with 20 homes in the middle of that range makes $2,800 a month. That’s before expenses, and before taxes. If 1-3 of ‘em are for rent at any given time, the labor becomes intensive. Even if everything always goes as agreed, the various vendors must be constantly managed. Then there are the monthly reports. The trouble calls from tenants. The concerned calls from investors unclear about what you may or may not be doing. Blah, blahhdie blah.

2. As mentioned in #1, the labor often gets intensive and becomes a giant time suck.

Using the 80/20 rule, most firms simply don’t last long. (And 80/20, in Dad’s opinion was being kind.) The pattern generally begins with the idea that the monthly fees will slowly but surely multiply through new business. Before long they’ll be able to hire help. They find themselves managing employees. This doesn’t turn out well. Vendors screw up, or don’t do their job. Tenants are late with rent — and the ‘why’ must be found out — and sooner rather than later. Phones must be answered, as voice mail is on the A-List as a cause for losing potential tenants. All the niggling little things that take from 10 minutes to an hour tend to pile up. Before long, they’re thinkin’ mowin’ lawns would be a lot easier.

3. Marketing for new business becomes the straw that breaks the camel’s back.

Again, see #1. More income from new business has a different meaning for most management companies. It’s a lesson they learn during their first successful ‘expansion’. They, and you can definitely include me in this one, almost always believe if only they could significantly increase the number of doors they’re managing, that ultimately they’ll outrun the insatiable TimeSuck Machine. That machine is undefeated, and rarely tied. Successful marketing merely yields more fodder for the machine.

4. The final phase is the false epiphany that either A) Corners must be cut; or B) New services for which they can charge their customers must be added to the menu.

These services often begin as bona fide. In-house handymen. But wait, handymen need parts. We can make a profit on those too. And it begins. There are many reading this who know all to well what I’m talkin’ about here. I’ve seen management firms that became virtual repair/replace services with management on the side. Well, probably not that bad. Pretty close though.

Back to Dad and I and our new ‘Division.’
We had one employee, my stepsister, God bless her. She dealt with the day to day stuff, while I took care of the black widows. Over time we ended up watchin’ over roughly 150 doors. Our fees ranged from 6-10% of collected rents, and averaged a bit under 8% overall. Between basic overhead, my sister’s salary, bookkeeping and monthly reports, our little ‘division’ barely paid for itself. We didn’t undercut the market with our fee schedule. We just did the job we were hired to do — lease and mange residential income property. We only managed property owned by our own investment clients, not the general public.

A job performed well, professionally, and with pride, and it paid operating expenses, and one employee. Me? I got nothin’. But I knew that was the deal goin’ in. It brought in new investment business, and solidified relationships with current clients. Otherwise, and with just one lonesome exception, it was a giant waste of time and effort. Most management firms aren’t created with the strategy of gaining investment clients and/or as a break-even proposition. Worse, they never thought of it as being a loss leader.

The TakeAways for real estate investors.

In every market there are astoundingly good property managers — and they’re good people too. I’d say 10-20% of ‘em merit that rating. But then, that’s pretty much true with most service providers, isn’t it? The problem is finding them. One of the lessons Dad taught me over and over was that we can always find folks who’re excellent at something. We can always find people who’re OldSchool honest. What we can’t find are those who possess both attributes. And there’s the rub. 

Whenever you find a real pro in property management, pay them what they want. They’re a bargain at retail. Stop hagglin’ over pennies ‘n nickels when it’s dollars you’re really after. You hired them cuz you won’t or can’t do it yourself. Those who’re wise enough and skilled sufficiently to profit from managing property — honestly — are worth their weight in gold. Attach almost literal meaning to that sentence.

The following axiom doesn’t generally apply to them, though there have been a few sad exceptions in my experience. Management is a hugely important part of my operation, and I never do it myself, nor do I ever make a buck from it. All encompassing diligence is what’s required of the investor opting to benefit from hiring professional management. In essence, you manage the manger, regardless of how good they are. After all, it’s your invested capital at risk. Anywho, here’s what I’ve told hundreds of investors to learn and never forget.

BawldGuy Axiom: Property management companies are nearly always wonderfully effective  — ‘til they day they’re not

Regardless of how well you vet them, you’ll make a mistake or three. I speak from humbling, first hand experience. In the last five years I’ve fired four management firms in different markets. I vetted them in person. I know what to look for. Heck I was one of ‘em once, even if it was as a virtual hostage.

Management is pivotally important. Don’t hire it and walk away. Nobody cares as much as you do.

Photo: Richard O. Barry

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{ 14 comments… read them below or add one }

Kimberly November 27, 2012 at 10:20 pm

This was great! Informative and entertaining… Thank you!!

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Brandon Turner November 27, 2012 at 11:11 pm

Great story Jeff! Sorry about your wasted time on that adventure! Like you said – you learned a lot and now you know what you don’t wanna do. I’m not a huge fan of managing tenants either, but I enjoy managing my resident managers. It’s not necessarily easier – but takes less time!

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Jeff Brown November 28, 2012 at 9:14 am

Hey Brandon — The only part that was remotely enjoyable was my role as BadCop. After the first year my sister, in her ‘welcome’ talk with new tenants, would tell them about her big brother. “If you ever meet him, things aren’t goin’ well, and they’re about to get worse.” :)

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Josh Stevens November 28, 2012 at 12:06 am

Congrats on 150 articles!

I have done the math every which way and always come to the conclusion you spelled out here, the margins are just too thin to make it work very easily. Most of the successful management companies I know start out managing their own units, then eventually add more clients and staff.

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Jeff Brown November 28, 2012 at 9:18 am

Thanks Josh — I didn’t realize I’d written that many. BiggerPockets has been a second home for me.

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Page November 28, 2012 at 6:23 am

“Most management firms aren’t created with the strategy of gaining investment clients and/or as a break-even proposition”.

You’ve provided some straightforward, honest facts without the usual rant against lousy PM’s. Your comment above is one of the main reasons I’m currently considering jumping into property management as an entry point into the local market, with the intention of gaining access to potential investments–people who are tired of managing rentals and eventually just want to sell as well as absentee owners who think they’ll return to their homes after a job relocation but usually don’t (seems to be a lot of that here).

After reading your post, I may consider restructuring my business plan for the shorter term, with the intention of creating a property management business I can sell down the road, rather than something I would hold onto. You’ve given me something to chew on.

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Jeff Brown November 28, 2012 at 9:32 am

Hey Page — Local brokers/brokerages are a super source of biz for PMs. However, it can be a double-edged sword if the relationship isn’t completely understood by both parties. Here’s what I mean.

There’s another fly in that ointment. So many PMs employ a model calling for the recruitment of their mngt customers as investment clients. So far, so good, if they have the expertise. However, it never ceases to amaze me how shortsighted some of ‘em can be, when they brazenly try to ‘poach’ another broker’s investment client. The last time that happened to me, the client called me. She was not only upset about the ethics of it, she was very much offended. The PM was fully aware that the only reason she came to his company was cuz I sent her there. Unbelievable, right?

That move cost his firm about 4-5 dozen doors over the next few months.

The moral of the story: Brokers can be your best friends. Betray them and before long most of the local brokerage community will shun you.

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Page November 28, 2012 at 9:35 am

Yes, I identified that conflict early on after meeting with a broker to brainstorm about a niche for my PM firm. I wouldn’t want to steal anyone’s clients for sure.

I’ll need to clarify my intentions and plan to be transparent about my goals–thanks for the reminder.

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Jen November 28, 2012 at 11:29 am

Jeff,

I am a newbie to this industry and have started working in Prop Mgmt about 9 months ago. I love real estate and look forward to investing in the future. I cannot say enough that you are totally SPOT-ON with this story!!! Working as a prop mgr is helping me learn much that I want to but I certainly don’t plan on managnig properties for decades to come, I plan to own them. Thanks to my accumulating experience and articles like these, I learn great lessons!! :)

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Tiffany H. December 3, 2012 at 1:49 am

Hi Bawldy,
I can’t say I’m happy to hear that even you have had to go through your share of hiring and firing managers. Do you have any protips that have helped you hone in on the keepers prior to hiring? Ie: questions to ask and the answers you want to hear, talking to resident/owner referrals, asking whether they up charge on repairs/getting receipts for repairs, number of units, whether they own any rentals? What am I forgetting?

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Jeff Brown December 3, 2012 at 9:32 am

Hey Tiffany — I sure wish I knew those questions. What you said is wise. Those are all great questions and things to do. Problem is, I’ve even hired good firms that I fired down the road. Why? Who knows why firms decide they don’t hafta perform consistently? For nearly a decade I was one of ‘em, and our Rule #1 was to lease/manage from our best day to day effort.

It’s also common to get ‘lost’ in a large firm who’s become enamored of their own power and reputation in the local market. But when the smoke clears, I’ll admit that asking myriad questions, talkin’ with endless references, etc., isn’t anywhere close to failsafe.

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MIKE PURCELL December 3, 2012 at 11:14 am

Jeff,

Nice post. I am also using my property management background to help break further into the real estate market. I didn’t realize how unprofitable it might be. What I find when talking to people is that it gives me an alternative service that I can offer that shows that I do care about helping this individual. I am hoping that this will help build strong relationships that I can leverage for further business opportunities down the road.

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Jeff Brown December 3, 2012 at 11:38 am

Hey Mike — As long as you realize goin’ in that your management side will likely pay for itself with little if any profit, it will prove to be a real edge for you in your local market.

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Cheryl December 20, 2012 at 12:38 pm

Loved this post! I invest out-of-state, and I just got my first rental this year (4 family). I inherited 3 tenants, and one is vacant. One unit has the slowest payers. Another one is asking that I make all these renovations to his unit, and has been late. The last one is a landlord’s dream tenant.

My property manager is my new BFF because he deals with all that. They do a lot for so little. I’ve learned in the few months I’ve had this rental that no news from the property manager is good news. :-)

He and his team are getting a huge wine basket to enjoy (or drown their tenant sorrows in) for Christmas. ;-)

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