How do you approach partnering with a property management team to do deals together? I'd like to give them a lot of the equity so that they're incentivized to keep the property up in exchange for financial help with the downpayment and for a lower management fee. At first, it would be for smaller commercial properties, but if the relationship grows well and we make a good team, I'd love to scale up with them.
Ideally it's a win-win for all:
For the PM:
- They get a large chunk of equity
- They get more business.
- They get access to my investors' capital for potentially future deals
- In a way, they eat what they kill
- I look favorable to the lender with an experienced PM team as a partner
- I'll get a deal under my belt
- I'll be able to get help with the downpayment, reducing the burden on my investors and myself
For my investors
- Sure, they lose out on some equity, but they'll get a (slightly) higher return due to the lower monthly management fee
- They'll sleep easy knowing that the PM has skin in the game and is experienced
To be clear, I'm playing the long game, so I'm more than willing to do say, a 55/30/15 split with the PM/Investors/Myself and with a 3-5% monthly management fee. I don't need to hit a home run.
I've heard that @JoeFairless talks about partnering with a PM company in his new book, but I haven't had the chance to read it yet. Thoughts? What am I overlooking? How does one approach a PM with this strategy? Thanks in advance!
I just can't think of a good reason to do this. A property management company is a vendor and I wouldn't give equity in exchange for vendor services. I can see a situation where you and a person very experienced in property management team up and form a company to acquire assets and each of you get some sort of split of the revenue (and expenses) of that company. Those types of partnerships happen all the time. Just choose your partners well and don't move too quickly until you are certain you have a perfect match.
And I could see where a long-time management company relationship could one day grow to where the management company is making a financial investment in your acquisitions (alongside your other investors).
But to propose to a management company, who you don't know and they don't know you, that they make a financial investment in your first deal and get an equity stake just seem beneficial to either side. But there are some people out there doing it...
I'll play devil's advocate on your win-win points.
For the PM:
- "They get a large chunk of equity." Yes, a win for them if the deal goes well, a loss for them if the deal crashes and burns even if no fault of their own. So, a big risk and one that a lot of "fee-for-service" business owners are trying to avoid. They know that if gold mining is risky, selling shovels is safe.
- "They get more business." True.
- "They get access to my investor's capital." Let's hope not. That would be destructive for you (what would they need you for then?).
- "They eat what they kill." True. But if you sit down at a restaurant the food you are served could be poisoned by a careless chef. The chef in this kitchen is the economy and real estate markets. Such was the case in 2008 when the financial world around us collapsed. If that happens, they get killed. For many property managers, this is why they are in the business they are in--the management company is low risk and will make it's fees no matter what. They aren't taking the risk of loss the way owners are, and may not want to. Sure, there are some that might, but if they have the money and the knowledge, they don't need a "partner" doing his first deal--they will just do it themselves (and many do).
- "I'll look favorable to the lender." Yes, but same is true if you have a management company under a management agreement. They don't have to be a partner nor have equity for a lender to sign-off on management.
- "I'll get a deal under my belt." True.
- "I'll be able to get help with the down payment, reducing the burden on my investors and myself." If you have investors, they are helping you with the down payment so you don't need the management company's help. If you don't have enough investors, either get more investors or look for properties in a lower price range. Shop within your credit limit, so to speak.
For your investors:
- "They'll get a higher return due to the lower management fee." No way. Equity is far more value than fees and management fees are a de minimis cost of doing business.
- "They'll sleep easy knowing that the PM has skin in the game and is experienced." Or, they will be awake at night knowing that if the management company screws up they can't be fired because they are an equity owner, and if they are fired they'll have to pay the replacement manager higher fees while still giving up the equity to the first management company.
I think the biggest downside for you is that you don't know if the management company is any good. Yes, you can screen them, get referrals, etc, but until you actually work with them and see them in action it is a big risk. So my $0.02 is hire your management company, have an ironclad contract with a 30-day termination provision, and get your partners and investors elsewhere.
I personally like idea - The biggest challenge with MF prop management is aligning the interest with investors. Most PM's are incentivized for turnover by move in fee's and by spending more money on your property to charge service fees.
I'm a big believer in having property management in house & our team manages all of our own assets - this gives us the ability to control expenses, negotiate all contracts that come through the door, keep a solid pulse on your investments, and more. If you have the time I would consider hiring a company the first year or two, learning their systems then start managing on your own.
The question is how do you structure this in a way that is a true win-win. I agree with Brian's points. The ideal way to do this is to have them invest with you and receive LP share's and maybe a small GP bonus. On your first deal this will be difficult - in order to achieve this you may consider partnering with an experienced sponsor who is on board with this idea or has their own property management company. Or just bite the bullet on the first deal or two and build the relationship until you win the PM's confidence to invest alongside you.
@Dylan Marma do you find that managing in house limits you to one market? If you're buying in multiple locations how would you build your PM company?
@Brian Burke in your experience have you ever seen an investing company acquire a PM company, and do you think this would be more viable than giving them a slice of the equity?
@John Stoeber , Yes, I've seen operators acquire management companies and I've seen them start their own management companies (as did we).
Starting your own management company when you invest locally is hard enough, creating one on a national scale is a whole different animal. We did that, but I brought in a 40-year experienced veteran with over 40,000 units of experience and who has started national multifamily management platforms six times in his career. It's not a do-it-yourself project, that's for sure.
@John Stoeber Good question - I'd say that you want to hone in on each market you enter until you reach a certain economies of scale in each target market. I believe this is sound advice whether you own in house PM company or not. Even with a 3rd party manager it is still your job to manage the manager and you should expect to be out on the properties at least once a quarter