Funding for Start Up - Can you include Payroll

13 Replies

When starting up a new company and seeking funding, are you able to or is it taboo rather, to ask for payroll and/or operating fees during that start up?

My scenario would be a start up property management company that would be looking for funding of a multi-family unit. One problem I am running into is I cannot quit my job for very long before needing to begin making money, so is it possible to get an investment that included my management company start up funds which included payroll? Would it be separate investments if so, 1 for my company and 1 for the deal?

People can and do start companies, raise money, and then use some of that money on salaries.  Quite common for high tech startups where the major expense is often payroll.

But I don't think you really mean you want to start a property management company.  You mean you want to create a syndication to acquire an apartment building.   One thing to realize is that the people who put money into such a deal are the owners.  If you're not putting money in, you're going to get, at best, a tiny sliver of the equity.  If investors put in 100% of the cash they are going to expect to get very close to 100% of the ownership.  Usually the promoters of such syndicates invest some of their own cash into the deal so they get a slice of the equity.  Its a way for the promoter to do a bigger deal than they could do on their own.

Now, if your role is to act as the manager of the business you could collect a management fee.  If you're also doing the actual property management you could also collect the property manager's fees.  The amount of those fees depends on the size of the business.  I just looked at the latest report from a deal I'm in.  The management fees are about 5% of gross revenues and the wages and taxes for our full time, on-site manager run about 14% of gross revenues.

@Jon Holdman  thank you for the reply, and I would be doing the 2nd option of business manager and actual property manager. In this case, the pay I would prepare for would be the management fee (which will not be all profit) and property manager salary?

I do see what your saying for the syndication to acquire an apartment building but am not familiar with that at all.

Is this for 1 multi-family property?

If so, unless it's huge, make sure you have realistic expectations.  Around here, most management fees are 8% and that includes all salaries.  Unless it was a huge property and you could demonstrate value, I'd never pay a fee PLUS a salary.

Retiring into property management sounds cool (conceptually), but make sure your expectations are reasonable.  Realize the value that you're providing and what a reasonable rate is for that value.

Property management seems to be very much about scale.  Since there are large fixed costs (salary) it'd be hard to do it for just a few properties.  But, if you get many properties it becomes much more feasible.

The one owner I know of a LARGE complex just has 2 property managers.  They're both part time employees of his probably making $12-$15 an hour.  They handle administrative duties and showings and make sure repairs are called in to the right people (owner pays for repairs). 

I'd imagine most large complexes utilize the employee property managers and smaller places will pay the fee (8%), but I struggle to think of scenarios where a fee and a salary make sense.

@Rusty Knowles   in your first post you wrote:

My scenario would be a start up property management company that would be looking for funding of a multi-family unit.

A property management company doesn't own properties.  It manages them for their owners.

If you're looking to create a company, get investors and then acquire and run an apartment building then you're talking about creating a syndicate.  Keep in mind there are a LOT of legal issues with doing that and you will incur some non-trivial legal fees to set that up.  I've heard number from about $10,000 to $25,000.  And you can only raise money from people you already know and have a relationship with.  There is a way to advertise, but they you're limited to only accredited investors.

Neither the management fees nor the property management fees are profit.  They're expenses paid by the company to you.  Profit comes after deducting all expenses.

You might be able to start collecting the property management fees pretty quickly, assuming the place you buy already has tenants.  PM fees are usually based on collected rents.  The management fees may need to be waived at first.  For the deal I mentioned (its a mini-storage) the managers waived these fees for several years because of low returns on the deal.  IMHO they should still be waiving them since I've note seen any returns on the deal for years.

If you're looking for a job being a PM why bother acquiring a building?  Form a company and start soliciting owners to manage their properties.  That's a business you could build in your spare time and then only go full time when it gets big enough.

@J V.  this is for 1 property and ideally it would be a fairly large property. Somewhere in the 300,000 GPR per month range. Again, I envision it as me acting as the actual on-site manager as well as the Property Management Company owner. Typically, the PM fees are around 4-8% but on-site manager salary would come out of the property payroll, not so much the investment or payroll for the PM company. The benefit I would see to this for the investor is my actions on site directly reflect my revenue thus more at stake than just hiring a person to run it for us.

That being said, @Jon Holdman  , you make a good point and actually I think my communication or explanation of what I want has been off because the way you explained it is what I was really looking for. I want to the be PM for the property and I would think it would be easier to make the leap finding an someone looking to purchase a property to team up with out of the gate rather than hitting up current owners. However, I do like that idea as well.

Thank you both for all the advice and tips and please let me know if you have more. This has been extremely valuable!

I honestly think you're just looking for a job.  Why not just try applying at large complexes in your area?  That's going to be a lot easier than putting together a HUGH syndication like this unless you have a LOT of experience and no small amount of your own cash.  $300K in gross rents per month (I think that's what you mean) probably translates into a $30 million (+/-) deal.  That's 10 times bigger than the mini-storage I mentioned and that promoter had done over a dozen similar deals before.

Originally posted by @Rusty Knowles:

@J V. this is for 1 property and ideally it would be a fairly large property. Somewhere in the 300,000 GPR per month range. Again, I envision it as me acting as the actual on-site manager as well as the Property Management Company owner. Typically, the PM fees are around 4-8% but on-site manager salary would come out of the property payroll, not so much the investment or payroll for the PM company. The benefit I would see to this for the investor is my actions on site directly reflect my revenue thus more at stake than just hiring a person to run it for us.

That being said, @Jon Holdman  , you make a good point and actually I think my communication or explanation of what I want has been off because the way you explained it is what I was really looking for. I want to the be PM for the property and I would think it would be easier to make the leap finding an someone looking to purchase a property to team up with out of the gate rather than hitting up current owners. However, I do like that idea as well.

Thank you both for all the advice and tips and please let me know if you have more. This has been extremely valuable!

IF you can find this arrangement (and that's a big if), why would they pay you 8% AND a salary?  They can hire a property manager for a salary OR 8%.

When they pay the 8% property management fee to an outside property manager that includes the salary of the property management employees.  If they hire someone to manage their properties they pay a salary, but not an additional fee (your fee is your salary).

Not trying to be a jerk, but from how I'm understanding your explanation I'm not sure you're going down a viable path here.

@Jon Holdman  @J V.  thanks for the comments 

I am currently looking to work for myself and am not looking for a Job for starters. The company I work for now, as a manager, pays me well which is my concern in starting a company on my own without any payroll. The current structure on the property that is a $32 million asset is management fees to the management company @ 5% paid out of Operating from the Property, and then that property, owned by the Syndicate or Owner, is budgeted Payroll to pay the property manager (me) @ X salary. My point was could the Owner or Syndicate not hire my property management company to manage their property for X% and then I could also run that property as property manager to be paid the Property Salary budgeted payroll for X Salary?

If you are not familiar with this type of structure I understand, just curious if my initial question was even possible.

@Rusty Knowles   there are really two distinct and unrelated parts to what you're trying to do:

1) Put together a syndicate to acquire this $32 million property, and

2) For a management company to manage this property for the syndicate.

Make no mistake, #2 absolute is a JOB.  You're not working for your self.  You're working for the syndicate.  Many small businesses (which your PM company would be) are started by people who know how to do the actual task the business is doing.  They are effectively "buying a job".  And doing the actual work (PM, in this case) is only a piece of what it takes to create a successful business.  Arguably, it is the least important piece.  I highly recommend "The E-Myth Revisited" which discusses the other, and more important, roles that you, as the business owner, really have to deal with.

So, could you form a PM company, get hired by the owners of this building and pay yourself a salary.  Sure.  I think you will be very hard pressed to get investors to fund such a business.  Honestly, there just isn't very much value in such a business.  It produces income solely as a result of the efforts of you and your employees.  That's different than a high-tech startup that has some great product or key patents.  Those products or patents provide value.  Or a business that has some barrier to entry for others.  A PM company can be started by anyone (with a RE license, and perhaps a broker to work under.)  There is no barrier to entry.  There is no unique value that you bring vs. someone else.  If you want to start that business you are probably going to have to look for more traditional funding.  The most common funding route is your own savings. Then, look to a small business loan, vendor financing, or other routes.  Sorry, but I think its unrealistic to think you can start a business with little of your own cash and have the business very quickly start paying you a significant salary.  You need to be prepared to live off your savings for some time while you're getting the business up and running.

As far as putting together this syndicate to acquire this building, that looks like an enormous project to me.  You will need to raise something like $10 million from investors.  Do you personally know people right now who have assets totaling something like $100 million?  If so, those would be your pool of potential investors.  SEC regulations limit you to either people you know (no advertising) or accredited investors.  I've watched people try to raise much smaller mounts (1-2 million) and it is a very difficult task.

Have you ever done such a project?  A track record is pretty important to putting these deals together.  This is a very, very large deal and having experience in all the ins and outs of creating this syndicate, getting loans (you prepared to sign your name on a $20 million loan, because you will have to), doing due diligence on the property and then buying it and getting it running.  A bunch of that work is going to have to be done before you can even think about collecting a salary.  And a bunch of money is going to have to be spent on the up front costs.

If you do get that put together, you then have the challenge of convincing the syndicate to hire your PM company.  That would be easier if you had a significant equity stake in the company.  For instance, putting $1 million of your cash into this deal.

@Jon Holdman  that makes a lot of sense and thanks for breaking it all down for me.

Making payroll is the most important task for any growing staffing agency. You can retain high quality talent only if you offer good salaries and pay on time. A better alternative is to build a money, while using external financing to help pay for operating costs. Although there are a number of resource that can be used for payroll financing, the best one is payroll outsourcing.

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