Self-Management vs 3rd Party Management for Apartment Investing

[Dan Handford]

Multifamily Investing Opinion:

Self-Management vs 3rd Party Management?

Most operators look to do 3rd party property management especially in the beginning stages as they begin to acquire more assets in a given market.

After many discussion with larger operators, including the larger REITs, it seems that their investors prefer the self-management option.

The consensus is that self-management is definitely not done to increase profit but to have better control over their assets.

Which do you prefer and why?

[Brian Burke]

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.