Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
6y
I preferred third-party management because the property management business is monumentally difficult. In my mind there are few businesses that are more challenging than property management.
But as your business grows eventually you have to grow up from being a real estate wheeler-dealer into a full-blown operator. This means taking property management in-house. By that I don't mean a sole-operator syndicator sits in the office and tours prospects, signs leases, and knocks on doors collecting rent. Instead, vertical integration means forming a management company and bringing in the right systems, technology, and teams to run it. Think of it as third-party management but you own the company. It's a professionally-run subsidiary, not an ad-hoc afterthought.
But up to a point vertical integration doesn't make sense because the management fee from just a few properties doesn't pay for the talent needed to oversee it. For this reason, most people start out with third-party management--that's how I started too. After I had 1,500 units and began seeking institutional investors, I knew it was time to make the move.
Institutional investors prefer groups that are vertically integrated because they realize that the operator has more control over the process, more integration, and a deeper commitment to being in the business for the long-haul.
So you're right, Dan. It really isn't about profits, but control. Having said that, control can lead to profits. But this comes at a cost--it is a complex additional layer to execute so it's important to recruit excellent talent instead of trying to figure it out on your own.
Property Manager · Indianapolis, IN · Member since 2018 · 136 posts · 71 votes
6y
@Dan Handford I can see pros/cons either way. I would say however that a good 3rd party manager should have the type of operations, transparency and communication with the client to where they never feel out of control and/or out of the loop. If one of my clients every felt that way than I failed in the early stages when expectations were being established.
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
6y
I preferred third-party management because the property management business is monumentally difficult. In my mind there are few businesses that are more challenging than property management.
But as your business grows eventually you have to grow up from being a real estate wheeler-dealer into a full-blown operator. This means taking property management in-house. By that I don't mean a sole-operator syndicator sits in the office and tours prospects, signs leases, and knocks on doors collecting rent. Instead, vertical integration means forming a management company and bringing in the right systems, technology, and teams to run it. Think of it as third-party management but you own the company. It's a professionally-run subsidiary, not an ad-hoc afterthought.
But up to a point vertical integration doesn't make sense because the management fee from just a few properties doesn't pay for the talent needed to oversee it. For this reason, most people start out with third-party management--that's how I started too. After I had 1,500 units and began seeking institutional investors, I knew it was time to make the move.
Institutional investors prefer groups that are vertically integrated because they realize that the operator has more control over the process, more integration, and a deeper commitment to being in the business for the long-haul.
So you're right, Dan. It really isn't about profits, but control. Having said that, control can lead to profits. But this comes at a cost--it is a complex additional layer to execute so it's important to recruit excellent talent instead of trying to figure it out on your own.
Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
6y
I have always used third party managers. You can definitely scale faster and do much larger deals that way. I much prefer focusing on the big picture and helping my third party managers/partners build their business vs trying to bring it in house. I use this strategy across the board from the vertical through to the management.
Investor · Charlotte, NC · Member since 2017 · 791 posts · 479 votes
6y
@Dan Handford yes many larger groups with scale choose to bring PM in house. It's definitely not an income generator thought process but rather a control initiative.
Property Manager · Indianapolis, IN · Member since 2018 · 136 posts · 71 votes
6y
@Brian Burke hope you and your business are doing ok after the fires. I was just in Santa Rosa, and have close friends who live there. Next time I am there, maybe I can take you out for lunch or coffee. With that being said, your feedback was on point. In the Indianapolis market, I have noticed a trend of companies using 3rd party management to expedite their growth and then bringing it in-house once they reach a certain size. Sometimes, even bringing an executive from the PM company over to run their in-house team.
I definitely think that the importance of a great PM gets lost on some investors who are in growth mode. The relationship between the client and property manager is vital to an owner meeting their investment goals.
As you mentioned in the beginning the syndicator needs to be focused more on acquisitions, so yes outsourcing management to a 3rd party is probably the smartest thing to do. But as one grows and starts to scale - it may then at that time make more sense to bring management in house. This is where the true power of economies of scale come in. Bringing management in house will certainly add more to your bottom line NOI.
Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
6y
Great Topic.
For BAM, an in-house vertical integration strategy is mission critical. Does it make profit? No. Instead of focusing on a small margin of profit we instead focus on attracting great people, paying them well and giving them the tools to succeed in an environment of growth opportunities.
Further, we no longer have to acquire, refi, or sell to make payroll. Management fees cover the overhead. This allows us to stay disciplined on the acquisition criteria.