Start a property management company which guarantees rent?
Member since 2020 · 6 posts · 1 vote
Start a property management company which guarantees rent?
Most Popular Reply
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
6y@Gabriel Harper I think it's a losing proposition unless you charge a significantly higher fee or pay the owner a significantly reduced monthly income.
Just off the top of my head, I suspect you would need around 25% of rent income to make it work. Yes, the Landlord is getting a guaranteed income, but it's also a guaranteed loss of 25% every month!
Let's say the market rent is $1,000 a a month. You pay the owner a guaranteed $800 a month and keep $200.
If the home sits vacant for one month, you've lost five months of income. Get a tenant in and start catching up, and then the refrigerator goes out. That's another $600 or three months of income. Tenant moves out and causes $1,500 in damages but you only had a $1,000 deposit, so that's another $500 in lost income.
You could do better through scale because most units get rented faster than a month, most homes don't need a new fridge, and most renters don't leave owing more than their deposit. The question is, are you able to make the numbers work and still make the guaranteed income high enough to attract investors? And what are you gaining from all this? Do you think it's going to build a business that creates greater success than can already be achieved with a traditional property management company? As a property manager that networks with thousands of others around the country, I don't think it's a viable business model because the cost to build/maintain it outweighs the benefit gained, for you and the Landlord.
By the way, the program @Brian LeBow uses is an insurance program, paid for by the Landlord. It's relatively inexpensive, primarily because the only Landlords that will ever buy it are the ones with higher-end properties that are unlikely to experience evictions, unpaid rent, or trashed homes. It's much different than what you're talking about.
The DIY Landlord Book4.7247 Reviews
29 Replies
- Property Manager · Arcadia, CA · Member since 2015 · 37 posts · 17 votes6y
You’d cover expenses and repairs for the building? It’s great if you can list out every item that would go wrong and the associated cost; what happens when the building needs a complete repipe? Who pays? What’s the advantage for owners to give yiu a master lease? I can gurantee income to owners - and we do currently, here in Los Angeles. https://bellpropertymgmt.com/p... Check it out
- Real Estate Broker · San Pedro, CA · Member since 2016 · 206 posts · 89 votes6y
@Gabriel Harper
I think by having the traditional percentage rental income is having “skin in the game”. A lot can go on with expenses, could be an issue with the owner/landlord on who pays what if a major issue came up.
- Washington State · Member since 2020 · 133 posts · 36 votes6y
Very interesting. I’m intrigued. What percentage of rent would you charge for your PM fees?
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes6y
@Gabriel Harper I think it's a losing proposition unless you charge a significantly higher fee or pay the owner a significantly reduced monthly income.
Just off the top of my head, I suspect you would need around 25% of rent income to make it work. Yes, the Landlord is getting a guaranteed income, but it's also a guaranteed loss of 25% every month!
Let's say the market rent is $1,000 a a month. You pay the owner a guaranteed $800 a month and keep $200.
If the home sits vacant for one month, you've lost five months of income. Get a tenant in and start catching up, and then the refrigerator goes out. That's another $600 or three months of income. Tenant moves out and causes $1,500 in damages but you only had a $1,000 deposit, so that's another $500 in lost income.
You could do better through scale because most units get rented faster than a month, most homes don't need a new fridge, and most renters don't leave owing more than their deposit. The question is, are you able to make the numbers work and still make the guaranteed income high enough to attract investors? And what are you gaining from all this? Do you think it's going to build a business that creates greater success than can already be achieved with a traditional property management company? As a property manager that networks with thousands of others around the country, I don't think it's a viable business model because the cost to build/maintain it outweighs the benefit gained, for you and the Landlord.
By the way, the program @Brian LeBow uses is an insurance program, paid for by the Landlord. It's relatively inexpensive, primarily because the only Landlords that will ever buy it are the ones with higher-end properties that are unlikely to experience evictions, unpaid rent, or trashed homes. It's much different than what you're talking about.
The DIY Landlord Book4.7247 Reviews - Real Estate Agent · Nampa, ID · Member since 2017 · 439 posts · 361 votes6y
This seems like a losing proposition. What type of rentals are you planning to manage? How will you cashflow the guaranteed rent AND the major damages? Is this backed by an extra insurance that you are planning to purchase?
I really dont think its a good idea. You will get a ton of leads from people where it wont make sense in d grade areas. Even if you are in a nice town with buildings relatively new there are too many wildcards. In premium areas I could see it working over 90% of the time but the other nightmare capex issue will wreck a lot of profit.
You do what you can as a pm. When things need to be fixed its on the owner and is a part of owning a place. Im an investor as well and it sucks as an owner when something breaks and you have to fix or replace it but its just part of the game.
the only way would be attaching some sort of insurance that doesnt cost too much.
- Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes6y
I suspect finding a lender to bankroll this business model will not be easy.
- 6yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Nathan Gesner:
@Gabriel Harper I think it's a losing proposition unless you charge a significantly higher fee or pay the owner a significantly reduced monthly income.
Just off the top of my head, I suspect you would need around 25% of rent income to make it work. Yes, the Landlord is getting a guaranteed income, but it's also a guaranteed loss of 25% every month!
Let's say the market rent is $1,000 a a month. You pay the owner a guaranteed $800 a month and keep $200.
If the home sits vacant for one month, you've lost five months of income. Get a tenant in and start catching up, and then the refrigerator goes out. That's another $600 or three months of income. Tenant moves out and causes $1,500 in damages but you only had a $1,000 deposit, so that's another $500 in lost income.
You could do better through scale because most units get rented faster than a month, most homes don't need a new fridge, and most renters don't leave owing more than their deposit. The question is, are you able to make the numbers work and still make the guaranteed income high enough to attract investors? And what are you gaining from all this? Do you think it's going to build a business that creates greater success than can already be achieved with a traditional property management company? As a property manager that networks with thousands of others around the country, I don't think it's a viable business model because the cost to build/maintain it outweighs the benefit gained, for you and the Landlord.
By the way, the program @Brian LeBow uses is an insurance program, paid for by the Landlord. It's relatively inexpensive, primarily because the only Landlords that will ever buy it are the ones with higher-end properties that are unlikely to experience evictions, unpaid rent, or trashed homes. It's much different than what you're talking about.
ONE word: well actually two FINANCIAL SUICIDE in almost all markets.. what you would have to charge to cover your rear end and make a profit would be such that it would be very difficult to talk owners into it..
Just buy out burnt out landlords on contract you get to the same place and dont need a license.
@Gabriel Harper This is an interesting concept and almost exactly how we operate with one exception...we handle coordinating all maintenance/repairs, but the costs are still borne by the owner. (If the AC dies and has to be replaced, no way this model would work if the PM is on the hook for it). We do 3-year leases with a fixed monthly rent and zero vacancy guarantee. We also rent the houses out by the bedroom which allow us to pay market rent but still have margin upside.
- Member since 2020 · 6 posts · 1 vote6y
Thank you for your feedback! You clearly have a ton of experience with property managers’ from around the country, so I’d love to chat more - I’ll drop you a PM.
@Brian LeBow, could you tell me a little bit more about that insurance program? I’ve never quite understood how tenant insurance could work without the insurance company being a big part in the tenant selection process.
When I insure a car, I have to put down the make, model, my age, how much I drive, etc. The insurance company crunches the data and gives me a premium. With a tenant, I don’t know how an insurance company could underwrite that risk without being part of the tenant selection process. Any details you can share on how that insurance product works would be really interesting!
- Rental Property Investor · Member since 2020 · 1k+ posts · 1k+ votes6y
This is an interesting idea. By my understanding you aren't saying you will provide upkeep like replacing the fridge when it breaks, just guaranteeing if the tenant breaks it you would replace and then I'm assuming you will collect from them through their security deposit or other means. I think this could work but as others have said you are going to have to price yourself pretty high upon your competition based on these additional services. There is a local company that charges an extra 20 for guaranteed rent in case tenant does not pay, but this doesn't cover vacancy. They will also charge an additional 20 for eviction protection where they will cover those costs for you and if you bundle both they give you a discount and pay $30. I think this may be more feasible for you but I can only see it working in higher end markets and I'm curious on how that is working for them now with Covid. Most people are paying but there still has got to be more than usual that are not.
- Member since 2019 · 1k+ posts · 1k+ votes6y
So I can use a typical (generally right next door to useless) management co and likely make say... ~80% of what I would if I self managed superbly or use your company and I’ll be GUARANTEED to earn ~80% (maybe less to make your spread?) of what I would if I superbly self managed? Sounds like a bad idea on both ends to me.
- Property Manager · Little Rock, AR · Member since 2019 · 27 posts · 8 votes6y
@Gabriel Harper
I do this. Let’s chat.
- Property Manager · HOUSTON OKC, NYC · Member since 2020 · 8 posts · 0 votes6y
@Sarah Brown luxury rentals is the way to go with this one. It’s not a losing position , if you can keep bodies in the unit.
- Rental Property Investor · Dayton, OH · Member since 2019 · 293 posts · 440 votes6y
@Gabriel Harper this concept is an ice covered mountain that only flows down! So many things could go wrong, but maybe there is a market somewhere for it, I would suspect luxury. I would not balk at the guaranteed rent piece under a master lease as I have done that concept very successfully! However including major repairs I would advise against! Are you going to replace the main drain that collapses for 8-10k? Whatever you do, ensure you have a experienced real estate attorney draw up the contract so there are no mistakes
We’ve actually done the opposite where we cover interior maintenance besides HVAC and the owner covers major. I’ve also let someone rent units I own under the same concept where they take interior repairs on.
One master lease program in the right market, would be to guarantee the rent that the owner expects and then run it as an air BnB. Obviously has to be the right market, but we’ve done this successfully! Always be transparent though with the owner.
Best of luck to you.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes6y
@Gabriel Harper this has not only already been done but it's actually old hat, it's been done and tried again and again and again, every time with same epic failure and bankruptcy as every iteration before it.
I'd say the first time I heard of it being done is somewhere in 70's I believe.
Issue is it is always built upon a certain market cycle and standing, then when market changes it's either under-performing for property owners who leave and use standard PM to make much more, or the moment their is any bumps in the road it sucks the business dry of all capital and it goes belly up like a road scorched turtle in the Nevada desert.
Fact is how can you properly capitalize it against loss's AND keep it profitable for property owner? What your describing is basically how insurance works, it's just insuring rent payment performance, which fyi is a thing that any landlord can get today from an insurance agent. So how can you do that for less than what I can pay my insurance agent and PM to do now, AND make a profit at the same time? The math just dosn't work out.
- Member since 2020 · 6 posts · 1 vote6y
@James Hamling
Thank you for providing that context - can you remember the name of the companies that operated this model? It would be great to research past companies that tried this.
I love the "road scorched turtle in the Nevada desert" analogy.
R.e. Rent performant insurance; could you point me to a particular product? I'd love to read their terms & conditions and find out exactly what they offer. - Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes6y
@Gabriel Harper
Farmers Insurance co., I actually meet and spoke with a branch manager on this just last week. Short version is pay ___ premium and receive insurance coverage on rent performance. The quote I got per property with est rents of $1,200 mnthly was shocking, an absolute no brainer.
I do not recall the exact company names off hand, was irrelevant information to hold onto the name of who failed as I focused on the why and how as Property Management operational models is kind of my "thing".
It's a nice idea what your putting out there but unfortunately the math works out where most times someone is getting shafted, and be it the company or clients net result is the same, company failure.
What would be of true resource is a tenant certification. Some group, membership, thing by which a property owner/pm could know a tenant is automatically free of UD's, has good history, decent credit, good tenant history because they are a listed/registered member in good standing with XYZ. And better yet, when have a unit coming vacant can list to that site.
And go ahead and do the same in reverse to rate landlords/ PM's.
The actual action/operation of PM is a rather regimented accounting system at heart, it's the tenant X-factor that add's complexity and troubles, that's where the solution is best needed. As PM we can not give or get references, so it's half investigative work and half gut/knowledge instinct. With a rating agency, wow that would make life a whole lot easier.
- Member since 2020 · 6 posts · 1 vote6y
@James Hamling
Thank you for replying so quickly! I will follow up & find out more about the existing insurance products.
I like your "tenant certificate" idea. What's wrong with the existing screening services? What information do they not provide?
I will drop you a PM - would be great to chat more.
R.e. Everyone else - I will reply, in due course! This thread blew up pretty quickly. - Washington State · Member since 2020 · 133 posts · 36 votes6y
@Najee Bissoon, wow! I wish you guys were in North Carolina! I’ve had some bad luck with property managers. Just got off the phone this morning trying to figure out who my new PM is after they’ve rotated out numerous times now. So frustrating. I just posted my own horror stories and looking for a new PM!
- Investor · St Petersburg, FL · Member since 2014 · 231 posts · 221 votes6y
My PM's have guarantees in our agreements about discounts or refunds if they can't place a tenant within a certain timeframe, but that's my money I'm getting back. If a PM guaranteed me anything, I'd be very skeptical.
It sounds like you're renting from the owners with a sublease to a residential tenant. You're not managing it for the owner, you're leasing it from the owner to rent it to a tenant.
- Investor · Palmdale · Member since 2016 · 112 posts · 80 votes6y
I think this is a great idea, if you are experienced, have a strong process and can scale. If people will buy turnkey, there is also a market for this. I do not believe in out of state investing, but if I did, this could be a good idea. The biggest fear people have with out of state investing is repair costs and vacancy. Your business would eliminate both fears. This could also be great for new or hands off investors. If you are able to thoroughly screen tenants, routinely inspect the property, you should be fine. I would think this would be heavily dependent on location and possibly rent style. This could work excellent in a corporate rental category where you charge higher rents, so that you can charge a higher fee to the property owner. The more I think about it, air bnb rental arbitrage business model is kinda similar to this.
- Investor · Kansas City, MO · Member since 2019 · 130 posts · 118 votes6y
@Gabriel Harper - Cool idea for sure!
There a few companies that are using this model (https://www.doorstead.com/) are the main example I'm aware of.
Coliving companies do this as well a majority of the time (Bungalow, Hubhaus etc.). Definitely reduces the risk for landlords. We also do this at my company (HomeRoom) - the biggest pushback question we get is, "what happens if you go out of business?" If you can answer that question well it will help you quite a bit if you decide to move forward with this.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes6y
Originally posted by @Gabriel Harper:
@James Hamling
Thank you for replying so quickly! I will follow up & find out more about the existing insurance products.
I like your "tenant certificate" idea. What's wrong with the existing screening services? What information do they not provide?
I will drop you a PM - would be great to chat more.
R.e. Everyone else - I will reply, in due course! This thread blew up pretty quickly.The current tenant screening services are just that, "a" screening service which is just 1 part of the puzzle, there is still much leg work to be done and a bit of guess work on tenant track record. A "certification" body who place certified level, say gold, silver, bronze, based upon a persons complete background (think of how a fico score works for credit rating), that would be all but a 1 stop shop AND give better insight on a tenant because as I said landlord referrals are all but impossible anymore.
Yes, it would have to be a voluntary thing on behalf of a tenant but I see smart landlords engaging in such and offering a "rental rebate" for those who have such, and thus a "standard" begins.
As I said before, a far better use of time/ energy than working on a PM structure that math has doomed to failure from go, especially as it is an existing un-solved problem in the market. Ask anyone with 100+ units experience, vetting tenants is a thorn in the side and the #1 causality for lost revenues.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.