How Profitable Is Property Management?

General Landlording & Rental Properties
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How Profitable Is Property Management?

Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

I received a question about profitabilty of being a PM. I thought about it. I've had PMs at times 10% of rents. I'm thinking around here average rents are probably $500, that's $50 bucks plus first months rent.

$1100 a year. Seems you'd need 50 units for a living, 55k gross.

Then start looking at expenses,

Fill in the blanks.....

Advertising
Auto Exp
Office Rents
Office Supplies
Office Fixtures/Equip.
Legal Exp
License and Cont. Education
Membership Fees MLS

Assuming you need a license, Realtor fees and education requirements are there.

Where is the break even?

But here is the other aspect, how long does it take to get 50 units under management? Any guess?

You could pick off one complex and get that, but assume all the bigger owners have a staff/employees and you pick up no more than 5 units (sfd) at a time.

Where is you guess in time wise in getting a PM business going?

The PMs I know have been around for decades, 1,000+ units, I watched them grow, but it seems it would have been long and slow going.

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David Beard
Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
13y

This subject always comes up with predictable replies. "Who are these idiots working for practically nothing, incurring all these headaches and slaving round the clock for peanuts. I'd never do it, but glad there are some idiots out there that do."

By contrast, the companies I see that seem to have the best thing going are multi-faceted with multiple profit centers that gel together.

• PM Fees
• Lease Up Fees
• Maintenance crew markup for turns and non-licensed maint work
• Rehabbing newly acquired rental properties for investors
• Sales commissions buying/selling properties for investors
• In great position to find great deals in acquiring their own rentals, essentially managing these at cost
• Using crews and contacts to sell turnkey rentals, and possibly even retail flipping.

These activities all work well together and fully exploit the PM's position in the middle of a web of investors.

Just looking at the PM mgmt fees and leasing fees is way too narrow, as any half way intelligent business person will quickly expand it to something much more substantial. They will also effectively utilize the labor of others and systematize/automate all processes.

It is at least a business that will have rapidly growing demand in the coming years that will be less cyclical than some other aspects of RE that depends on adequate inventory, price cycle, economic cycles, etc. But no doubt the business I described above has quite a few employees and all the associated issues of a sizable operation, versus the near-solo operator making good money in a transaction-based fix-and-flip or commercial brokering business. At the end of the day, you have to enjoy it.

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  • Rich Weese
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    13y

    I agree with Bill. One more thing, having had a couple mgmt companies-growing pains. You'll reach different levels where you have to take a step back on income because you incur higher expenses. Adding another employee, larger office or first office if you work from home, etc. Most PM's have a difficult time being willing to take the step back and their service suffers. If you do a good job, # of units under control will increase. managing your RE is what investors hate. Good luck. Rich

    2Reply
  • Account Closed
    Member since 2012 · 55 posts · 12 votes
    13y

    From my experience, you're correct.

    It requires a significant investment of time and energy. At least, to do it correctly.

    Sure, you'll find a few shops that quickly accumulate and manage a ton of properties. You'll also read about those same properties getting sued, going out of business, having terrible reputation and giving the property management industry a poor rating.

    Just surf these boards.

    Plenty of terrible property managers because they're completely profit driven. To have higher profits you must have fewer employees and more properties. The result is a disaster.

    In my opinion the only way to do it correctly is slowly.

    3Reply
  • Troy Fisher
    Specialist · Kirkland, WA · Member since 2013 · 1k+ posts · 817 votes
    13y

    Ugh. Not profitable enough for me to want to do it myself. At $55/unit (multifamily) chasing rent and finding tenants. I sure am glad that there are people out there that want to do this. Cheers to you!

    0Reply
  • Johann Jells
    Rental Property Investor · Jersey City, NJ · Member since 2011 · 1k+ posts · 876 votes
    13y

    This thread has peaked my interest, my "day job" business is pretty slow these days, and I think I do a pretty good job of managing my properties. What would this plan look like if the units rent for $1000-3000 as they do in my area? Still 10%? What kind of license is required and who issues it? What if I do the "handyman" type no permit required work myself? Is that conflict of interest?

    0Reply
  • Bill Gulley
    OP
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    I wouldn't pay 10% if my rents were 3000 0r even 1500, why? Because the funtions performed are no more than for a 500 rental and, you get off eaiser since I have more affluent renters, anyone making 9,000 a month shouldn't be hard to collect from. Much less headaches with a nice property than a war zone unit, so you may have very little to do.

    You need a RE license to lease for other owners.

    So, let's see a pro foram on this, how does it shake down?

    For those interested in such a business.... :)

    1Reply
  • Account Closed
    Member since 2012 · 55 posts · 12 votes
    13y
    Originally posted by Bill Gulley:
    I wouldn't pay 10% if my rents were 3000 0r even 1500, why? Because the funtions performed are no more than for a 500 rental and, you get off eaiser since I have more affluent renters, anyone making 9,000 a month shouldn't be hard to collect from. Much less headaches with a nice property than a war zone unit, so you may have very little to do.

    Excellent point!

    I suppose the same should apply to real estate agents too.

    Why pay 6% when a flat-fee would do?

    2Reply
  • Rob K.
    Investor · Southeast, MI · Member since 2012 · 2k+ posts · 1k+ votes
    13y

    I manage my own properties and I've often had people ask me if I would be interested in managung theirs. I don't see how it would be worth it. For my own, I'm managing my own investments and will take care of them better than anyone else. To manage other properties for a pittance would just be another headache.

    I'm sure there's money to be made once you have hundreds of units, but there's also a lot of problems. You don't just have tenants to deal with, you have the owners also.

    2Reply
  • Rich Weese
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    13y

    Bill G- One caveat. If you only manage properties for a single entity, no license is needed in most states if not all. I hired a couple to manage my south Texas properties and they are not licensed. I know this would not be the norm, but still a possibility.

    Rob K-Different people look at things with other motives than experienced investors. It might still be a good option for some to try mgmt. Rich

    0Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    13y

    Another profit center is mark up on repairs and materials.

    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    Property management is just not a business or income stream I will ever get excited about. If one person was ever put on this Earth to NOT do property management it is me.

    I am all about transacting deals for clients and my own investments. I equate property management to intensive time needed and low returns. There is a reason many people do not want to do it.

    I know some friends that scaled it and make a decent living at it but my view is that why should I waste time on a small stream when I am closing big chunks of income at a time??

    Property management is one of the most underpaid and undervalued jobs out there. I think there is much better returns in other RE niches unless you really enjoy management then it might be a fit for you.

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    1Reply
  • Aly W.
    Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
    13y

    I manage the 8 rentals that my husband and I own, and for the same reason Rob K does...who will better watch the farm than the owners? Of course with only 8 rentals, it's doable, because I'm self employed anyway and my time is not constrained by a 9 - 5 job.

    We have contractors in both investment states that do the repairs and deal with showing any vacant units, doing walkthroughs with tenants, posting notices as necessary. They charge by the hour.

    I know what's involved and how much time I spend doing everything else, from bookkeeping to advertising to marketing to dealing with vendors, tenant screening, phone calls, etc. I wouldn't do it for anyone else without a very high hourly rate at a minimum number of hours. For 10% of a $1000 rental per month? No way.

    That said, it really just takes 1 bad tenant to create 90% of the work at a given time.

    1Reply
  • Seth WilliamsPro Member
    Specialist · Grand Rapids, MI · Member since 2012 · 582 posts · 353 votes
    13y

    I talked briefly with my property manager about this when I hired him (it was just small talk, in passing). It was pretty interesting.

    His company manages 350 residential properties in my town. The business consists of himself, 1 partner (they are both 50/50 owners of the company), 1 employee, and 8 subcontractors that they hire on an as-needed basis. He also owns 3 rental properties himself.

    He shared with me that last year, both he and his partner took home approximately $60K each (after all expenses, before taxes).

    Their revenue comes largely from the 10% of gross rents that they charge per month, per property, and from the 50% placement fees (they take half of the first month's rent revenue whenever they place a tenant).

    I don't know how difficult it is to manage 350 residential properties (because I would never sign up for the job), but I can't imagine it's easy. Seems like the kind of business that requires a heck of a learning curve upfront, but could be pretty doable once things are well-established.

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    1Reply
  • Karen Rittenhouse
    Flipper/Rehabber · Greensboro, NC · Member since 2010 · 623 posts · 615 votes
    13y
    Originally posted by Rich Weese:
    Bill G- One caveat. If you only manage properties for a single entity, no license is needed in most states if not all. I hired a couple to manage my south Texas properties and they are not licensed. I know this would not be the norm, but still a possibility.

    Rich - actually, what you said to Bill G is not correct. If you manage your own properties, you do not need a license. If you manage a property you do not own, you must be a licensed real estate agent - even if you want to manage a property for a family member. This law is federal. If you have a couple managing for you without a licensed, it is illegal. Of course, this is only a problem if they are caught, but why risk doing something wrong when there are so many capable companies to use. Good luck to you!

    0Reply
  • Karen Rittenhouse
    Flipper/Rehabber · Greensboro, NC · Member since 2010 · 623 posts · 615 votes
    13y

    I started out managing only our own properties. When we had 56 properties, I tried to hire a management company to take them over. I couldn't find one I like so we started our own.

    There is a federal mandate that you must be a licensed real estate agent to manage any properties you do not own (including managing for family members). Because I am not an agent and we had so many people asking us to manage their properties for them, we opened a full service property management company and hired licensed agents to run it.

    We, like the others in our area, charge 10% monthly to manage and 1/2 of the first months rent to market, screen prospects, and put in a tenant. It's only one arm of what we do, but there was a need and it's working very well for us and for our clients.

    2Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    13y

    Karen, can you comment on the profitability level of the PM company?

    0Reply
  • Karen Rittenhouse
    Flipper/Rehabber · Greensboro, NC · Member since 2010 · 623 posts · 615 votes
    13y

    Jon - For us, PM is very profitable. It's an all cash business in that we have no expenses. The expenses belong to the property owner.

    We did already have a business structure in place, however, as we had been active investors for about 7 years before managing for others so we had websites, marketing, copiers, phone system, etc. already functioning. For us, it was a saving grace during the last few years when property values were dropping and buyers couldn't get loans. Tenants were everywhere so vacancies were very low and we had time to get the kinks out during a "slower" market (slower, but we did buy 68 houses last year!).

    Does this help answer your question?

    3Reply
  • Account Closed
    Member since 2012 · 55 posts · 12 votes
    13y
    Originally posted by Karen Rittenhouse:
    however, as we had been active investors for about 7 years before managing for others....
    Tenants were everywhere so vacancies were very low and we had time to get the kinks out during a "slower" market

    This is the right way to do it. There is no such overnight success and certainly no windfall profits.

    The beauty of their operation is that it is tied into their existing business.

    Our attorney is making all the money in our case.

    1Reply
  • Bill Gulley
    OP
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Jon, I was waiting for this other profit center that I intentionally left out. Charging admin fees on top of materials and labor, inspections of work, etc. An open door to unethical practices can easily be opened, as well as acting as another professional, construction mgt, as a CG, an inspector and other areas that may require a license, business license, etc. While common, it can be a touchy area and really investigated before a Realtor goes there, IMO.

    As to a License requirement, Rich is correct, if I own 300 units, I can have a staff of employees, they don't need a RE license, but if one of them holds themself out to the public to manage properties owned by others, you need a license. Any RE management comapny identified under the IRS code, unless totally private for owned properties needs to be owned by (including all principals and major stockholders, a RE brokers license. Realtors come under the Board of Realtor ethics requirements which fall into the national arena for all Realtors.

    Karen, you might be thinking of the Realtor requirements. Not all agents or brokers are Realtors. Unless something new has popped up.

    1Reply
  • Karen Rittenhouse
    Flipper/Rehabber · Greensboro, NC · Member since 2010 · 623 posts · 615 votes
    13y

    Bill: No, not all real estate agents are Realtors (that requires joining the National Association of Realtors). Yes, all Realtors are licensed real estate agents. Only licensed real estate agents (which includes Realtors) may manage properties for others. As I said to Rich, anyone can manage properties they own. The unlicensed couple he has in Texas cannot manage his properties legally. I was able to mange all of our properties without a license, and still can. However, I could not manage properties for anyone else. Because we were willing to manage for others, we had to hire licensed real estate agents to run our property management company.

    1Reply
  • Aly W.
    Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
    13y

    Thanks Karen Rittenhouse, this is all great information! I'm a licensed real estate agent, currently in referral status, but if I decide to start managing for others, would I need to be in full realtor status?

    0Reply
  • Remrie Arrie
    Chagrin Falls, OH · Member since 2012 · 13 posts · 2 votes
    13y

    Hey, everyone. I simply want to say thanks for sharing so much knowledge and insight. This is a very eye opening discussion.

    0Reply
  • Karen Rittenhouse
    Flipper/Rehabber · Greensboro, NC · Member since 2010 · 623 posts · 615 votes
    13y

    Yes, Aly, you'd need a fully active license.

    1Reply
  • Tina Granger
    Professional · Orange, TX · Member since 2013 · 26 posts · 3 votes
    13y

    Bill Gulley you are most correct. From the real estate agent perspective (the use of the registered trademark name Realtor(R) means you simply paid fees to be a member of the National Association of Realtors) you must be licensed to do third party property management. (You/company manages other peoples property.) Rich Weese Licensing is a requirement in Texas! If you work directly for a property owner (as an employee) a license is not required. As Karen said, you can manage your own properties without a RE license.

    0Reply
  • Bill Gulley
    OP
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Amy, to have a company owned by you that manages for the public you need a RE Broker license. If you are an agent under a broker, you can manage for the public, but that is not your company per se, you're acting as an agent under your broker.

    State laws govern and they vary, if you have a business entity that performs those duties/functions that require an individual to hold a license, the owners are normally required to hold a brokers license and the only way a broker can sponsor a company is if all oweners/members in that company are agents, then that broker becomes the managing broker.

    I had an agent approach me as a broker to do this, I declined as the liability for a managing broker is much greater and I'd have compliance issues required, just not close to being worth it to manage someone starting out.

    You can have on site managers living in a development as an employee of the property owners, they won't need a license, unless reqired under state law. This is the general rule. There was one creative type who was saying they were part time employees, fine, but they werealso soliciting other employment contracts for more part time management jobs, naturally, they got nailed. There are other determinations, like the majority of your time and working income, as the IRS might see it, that will put you in the light as an agent for others/public.

    As Karen mentioned, there are alot of managers and even agents that are not in strict compliance, for many reasons, not knowing or simply taking short cuts. All that needs to happen is such a manager takes some tenant to court for a routine eviction and have the judge probe into thier ability to bring the action for everthing to come unglued. Best to have an attorney bless your operations before you consider management as well as your broker.

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y
    Originally posted by Johann Jells:
    This thread has peaked my interest, my "day job" business is pretty slow these days, and I think I do a pretty good job of managing my properties. What would this plan look like if the units rent for $1000-3000 as they do in my area? Still 10%? What kind of license is required and who issues it? What if I do the "handyman" type no permit required work myself? Is that conflict of interest?

    There is a property management company here in my town that gets 10% and everything they manage rents for $1500-$4K. They also have some commercial accounts (strip malls). Everybody knows she charges more than most and she doesn't bargain much. She's very good at what she does. A lot of what they manage is student rentals near the university, where bedrooms are $1K.

    They are one of the few PM companies I've encountered that know what they are doing to make a profit on the management side. Lots of PMs have a lot of other side hustles going on.

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