The Pros and Cons of Starting a Property Management Company
Let’s talk about how to start a property management company.
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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.
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.
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.