Real Estate Investing Basics

The Pros and Cons of Starting a Property Management Company

Expertise: Real Estate Investing Basics, Personal Development, Landlording & Rental Properties, Real Estate News & Commentary, Business Management, Flipping Houses, Real Estate Deal Analysis & Advice, Personal Finance, Real Estate Marketing
247 Articles Written

Let’s talk about how to start a property management company.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

First of all, I don’t know why you would want to. Property management is by far the crappiest part of real estate.

It’s a very thankless job. You’re constantly dealing with tenants and toilets. You can pretty much never win.

The landlords aren’t happy with you because the repairs are too high and they don’t want to do them. The tenants aren’t happy with you because the repairs aren’t done quick enough. The maintenance guys and contractors, they’re also not happy, because they thought they did the job well when they actually didn’t.

It just ends up being pandemonium. It’s also hard to keep the employees motivated because they’re constantly dealing with problems, tenant complaints, and emails from landlords expressing their dissatisfaction.

Tales of a Former Property Management Company Owner

Let me just touch on a few of the horror stories that I have had owning a property management company.

I once had a tenant from hell who went to court and complained about carbon monoxide poisoning after an exterior light exploded. Explain that one to me?! Anyway, we had to settle that one.

We were also investigated by the Ohio Division of Real Estate for managing in an unlicensed manner. After more than two years of mumbo jumbo paperwork, they dropped the case because it was pointless. I guess they didn’t have enough work to do, so they started an investigation for no reason.

We’ve also compromised the bank accounts—as in the rent account and the operating account. We really didn’t know what we were doing at the time. Thank goodness we didn’t compromise the trust account, because that would’ve meant jail time.

Moreover, I’ve had employees steal money out of the operating account. We’ve had a lot of turnover with employees.

So I hope I’ve painted a picture for you as to why you should not start a property management company. Well, not really. I just want to tell you guys that I don’t think it is going to be that easy based on my experience.

Related: How to Be A Prepared Property Manager in 6 P’s

Tips for Future Property Management Company Owners

For anyone still interested in the gig, here are a few tips for you.

If you’re looking to start a property management company, first, I think it’s very important that you get a real estate attorney in that specific state. Why? Because they will know all of the laws and regulations that will satisfy the Division of Real Estate.

In Ohio, you cannot own a property management company unless you have a licensed broker as the officer of that business. So you don’t have to be a licensed individual, you can own the company, but the officer of that company has to be a licensed broker.

Keep in mind that every state is different and that is just in Ohio. If you have to be licensed in your state, figure out how you can do that or hire a broker to be part of your company.

Another thing that is very important (and somewhere we went wrong) is to make sure to get an accountant or a bookkeeper—preferably one that has experience in real estate. I say this because you will want them overlooking everything and making sure that they’re reconciling the accounts every single month. Don’t ask me how to do it because I’ve got no freaking clue. But I sound really cool when I say,”Reconciling the accounts every single month.”

Before you get a bookkeeper or accountant on board, I think it’s very important that you put the software you intend to use in place. AppFolio, Yardie, and Buildium are some of the different softwares that are available. Property management companies can benefit from the transparency they provide for tenants and landlords.

The tenants can log in and pay their rent online, which is important. You want the majority of your tenants—over 90 percent—paying the rent online. It just minimizes paperwork, administrative costs, and time.

It’s also great for landlords because they can log online to see what’s going on at any given moment. That is when you also tie in the accounting and bookkeeping. They can overlook everything and make sure that it’s getting reconciled and that nothing is out of whack.

Related: 5 Ways to Stand Above the Competition as a Property Manager

real estate investment, rental, housing

The Upside of Property Management

Now let me talk about some of the pros of owning a property management company. Personally, I think that once you get to around 250 properties under property management it really starts to snowball. The 10 percent from the rent collected monthly really starts to add up.

The leasing renewal fees start to add up, and the tenant placement fees start to add up. You can introduce in-house maintenance and charge a bit of a margin on any bit of work that is done. So it really starts to be a predictable business, where it generates income every single month.

It's recession-proof, as well, in my opinion, because the two most important things to humanity are food and shelter. So as long as people need a roof over their head, they're going to need somewhere to live, somewhere to rent. That's where you come into play.

Look, it takes a long time to get there. You’re probably going to be eating crap for two or three years. You’re going to be managing yourself and doing all the work yourself. You’re not going to like it. But once you hit the economies of scale standpoint, you’re really going to see it come to fruition.

Something I almost forgot to mention is insurance. Make sure you are ultra insured. I mean, have every insurance known to man, because property management is the most lawsuit-friendly industry when it comes to real estate. Make sure you have E and O, general liability, and cybersecurity. You want to pile it up.

Another thing is to start off slow and start off small. It took me over a year to sell my first property when I started my turnkey company. All good things take time, and nothing is going to happen overnight. Be a true brand ambassador, and do it proudly.

Listen, one thing will lead to another. So it may take you some time to get your first landlord, but do the right thing by them. Don't nickel and dime like a lot of the other property managers.

Again, you’re probably not going to make money for two to three years, but if word spreads that you are doing a good job and you’re prompt at communicating, you’ll do fine.

Communication in property management is very important. You’re going to make mistakes, but if you explain what’s going on to landlords and tenants, they’re going to love you for it and forgive you for it. It’s how I found out that a lot of people are forgiving.

Why are you considering getting in to property management? Do any of the points I raised come as a surprise to you? Any other questions about the business? 

Let’s chat in the comment section. 

 

Engelo Rumora, a.k.a."the Real Estate Dingo," quit school at the age of 14 and played professional soccer at the age of 18. From there, he began to invest in real estate. He now owns real estate al...
Read more
    Rodney Harris Rental Property Investor from Kansas City, KS
    Replied over 1 year ago
    Excellent article! Property management is the toughest job with the least pay. What is your thought on potentially buying a PM company? I was thinking of doing that in the future?
    Engelo Rumora Specialist from Toledo, OH
    Replied over 1 year ago
    Thanks Rodney, I don’t think you should buy a property management company unless you have years of experience in owning, running and growing one. Then the quickest way to grow would be to acquire another company in your market. Much success
    Julie Marquez Investor from Seattle, WA
    Replied over 1 year ago
    Since I manage my own rentals, I thought about expanding and managing others. I’d definitely need a great handyman and contractors if I do that.
    Engelo Rumora Specialist from Toledo, OH
    Replied over 1 year ago
    It’s a tough gig Julie and takes years to master the craft. Have patience and thick skin. You will need both. Much success
    Engelo Rumora Specialist from Toledo, OH
    Replied over 1 year ago
    Thanks for your comment George. Keep the dream alive mate and I wish you much success.
    Trina Shelton Real Estate Agent from Enterprise
    Replied over 1 year ago
    Great Article. I have several years experience as a bookkeeper for a property management/real estate company. It is a very thankless job but rewarding when you can keep your clients happy. Hopefully in the near future, I will become a partner in a startup property management company. While I am scared, my partner and I know what it takes to be successful in the property management.
    Engelo Rumora Specialist from Toledo, OH
    Replied over 1 year ago
    Thanks for your comment Trina, I wish you much success 🙂
    Daniel Alhadeff Professional from Seattle, Washington
    Replied over 1 year ago
    Trina, don’t be scared. The regret of not following your dream will be greater than your fear of starting it. Do it.
    Joel Good Property Manager from Charleston, SC
    Replied over 1 year ago
    I’m in the process of starting a PM company right now, so this is a timely article for me personally – thanks to the author! You’ve accurately covered many of the negative aspects of running a PM company. I’ll highlight a few positives: – Startup costs are not significant – I anticipate spending less than $5k to get up and running, mainly for legal and equipment/computer. Ongoing costs are not that much either – insurance and monthly fee for software such as AppFolio or Buildium. – Since the job has such a poor reputation, the competition is not stiff. If you are organized and a good communicator, it is easy to really stand out from the crowd. – Assuming a 10% management fee, every ten houses under management is the equivalent of owning a rental property with no mortgage. If you stack enough of those, you can make some good money! – Having a vacancy represents lost income, but it is not magnified with a mortgage payment that is also due. – It’s a great entry way into the industry. As I build my PM business, I will also be enhancing my network in the industry, which I plan to use in order to grow my personal investment portfolio. As is the case with any RE venture, you have to work hard to be successful. I plan to do so, and can’t wait to get things up and running. I’m on target to go live in July!!
    Daniel Alhadeff Professional from Seattle, Washington
    Replied over 1 year ago
    Hey Joel, what city are you starting your company in?
    Joel Good Property Manager from Charleston, SC
    Replied over 1 year ago
    Hi Daniel…thanks for asking. My PM company will be operating in the greater Charleston, SC area.
    Engelo Rumora Specialist from Toledo, OH
    Replied over 1 year ago
    Thanks Joel, Awesome stuff mate. Keep the dream alive
    Harry Looknanan Jr. Rental Property Investor from San Antonio TX
    Replied over 1 year ago
    Hi Joel. I like your observation about the positive of PM. Particularly, earning the equivalent of owning rental houses without the mortgage. However, this is assuming the rent being charged is at market or better, and that 10 houses will generate the income. I did find your start up cost a bit low. Are you operating from your Home?
    Joel Good Property Manager from Charleston, SC
    Replied over 1 year ago
    Hi Harry…yes, I plan to operate the PM business out of my house. Have access to some shared office space for times when I need a conference room. But largely operating from home office.
    Jeff Rutherford
    Replied over 1 year ago
    I was considering opening a Property Management company after having a bad experience with the company managing my lone rental. Now I’m second guessing myself as the thought of dealing with multiple landlords like myself 🙂
    Engelo Rumora Specialist from Toledo, OH
    Replied over 1 year ago
    Haha How about hundreds of them… Not easy work mate but it pays the bills regularly. It’s a predictable business. Much success
    Michael Tempel Property Manager from Minneapolis, MN
    Replied over 1 year ago
    Agree is a a difficult thankless career at times, when you grow the income does snowball, but you will equally have new business expenses, employees and a larger target on your head since you have something worth going after. After managing for years and having over 1000 units under management I am leaning more and more towards syndicating as GP and ensuring I have control over the business. Fee management is difficult since you are dealing with many ownership groups, owners and management expectations. Can feel like you own 10 different businesses.
    Jeff J. from Santa Fe, New Mexico
    Replied over 1 year ago
    My wife and I have accumulated about 125 rentals. Since I still work, as we grew the business we had a specific goal of developing a robust property management entity. We have a property manager, who is an experienced professional property manager – both commercial and residential – as well as a robust maintenance team, which is really too large for the size of our portfolio. We have recently branched into residential property management, since the infrastructure is in place and we will explore commercial property management as opportunities arise. This allows us to play to our strength with limited risk and start to spread our payroll to other projects. Depending on your business model, PM can be a natural fit.
    Matthew Whitaker from Birmingham, Alabama
    Replied over 1 year ago
    The first couple of minutes of this is BP gold. Thanks Engelo for sharing the truth!
    Engelo Rumora Specialist from Toledo, OH
    Replied over 1 year ago
    haha I do my best to keep it real. Glad you liked it mate 🙂
    Katie Rogers from Santa Barbara, California
    Replied over 1 year ago
    “Moreover, I’ve had employees steal money out of the operating account. We’ve had a lot of turnover with employees.” And that is a very good reason why prospective tenants should never write their Social Security number, driver’s license number or bank account numbers on any rental applications.
    Engelo Rumora Specialist from Toledo, OH
    Replied over 1 year ago
    And then they will never be able to be approved for a rental. Our misfortune didn’t affect any tenants. Plus, we have all necessary insurances in place to cover such mishaps if they ever do happen again. Thanks
    Katie Rogers from Santa Barbara, California
    Replied over 1 year ago
    Your insurance won’t help the tenant who gets their identity stolen, or a fraudulent tax return filed using their personal info because of the great distress and turmoil associated with trying to fix the problem. Most of the time, the tenant would not be able to identify who stole the information, so it is possible you would never know if your tenant’s info was stolen. Most likely it would be stolen by an employee who no longer works for you, and if the employee is smart they would wait until the tenant is no longer your tenant. I have worked on some of these cases. Perhaps it is my personal demeanor and gravitas, but when I was a tenant, I never provided any personal financial information that was usable for theft, and I managed to rent units. I used my passport for ID, NOT my social security card or driver’s license. I provided the name of ONE bank that held an account. The landlord could always call the bank and verify that I had an account, but nothing more. One application I refused to fill out asked not only for the account number, but also my mother’s maiden name. Why do you think a landlord would want to know mother’s maiden name, hmm? Perhaps, you are NOW protected, but probably not your tenants, and probably not most landlords and tenants out there. Also landlords do not usually like to be asked questions about their procedures and systems. One way for a prospective tenant to easily get on a landlord’s bad side is to openly vet the landlord with screening questions of their own. I vetted them anyway. One thing I used to do is go to the recorder’s office and find out if they owned other properties. Then I would drive by to take a look at the condition of the property. I would also take a look at the landlord’s car. I also usually avoid property managers and work only with landlords who self-manage their units. One thing I learned reviewing property manager’s contracts is that while a property manager likes to blame the owner for an odious policy, according to the contract the PM has with the owner, the PM gets to set policy. On numerous posts, Joshua or Brandon have mentioned the bad rap landlords have. There is a reason landlords have acquired a bad reputation. So tenants should not divulge personal information, and they should endeavor to vet the prospective landlord. There are ways to screen tenants without collecting personal financial information. In fact, until relatively recently, and pre-credit reports, landlords utilized these other ways, apparently just as successfully, given the many reports of bad tenants who evidently passed modern screening.
    Donte Jones from Atlanta , Georgia
    Replied over 1 year ago
    Great read!!!
    Ryan Carlen
    Replied 9 months ago
    Engelo, I'm from the Toledo Ohio area and I'm interested in real estate investing as well as property management. I'm currently working in the construction industry, and I do maintenance for a group of investors in Toledo. I would like to see if you could give me some information that would help me in this venture. I'm interested in doing this full time and leaving my current career. I'm always looking for experts in this field for good advice and leadership. Thank you in advance for any information you can provide.