Why do bigger multifamily buildings use third party management?

Question

I notice a lot of large apartment buildings in my area (Toronto) are being managed by third party property management companies. Why would a company that owns a building like this decide to outsource management instead of hiring in-house?

Greg Dickerson · Answer

The reason is management of large properties requires serious expertise, talent and it’s a completely separate and different business. Some companies do manage their properties in house especially the larger outfits. Personally I like to outsource the management and focus on managing the managers and letting them do their job so I can focus on finding more deals and scaling the business. Managing property in house can be a distraction and a liability.

Andrew Hogan · Answer

As mentioned, it is extremely difficult to successfully manage AND make a profit.

IF you can do it right, it's worth it.. Before syndicating larger assets, BAM starting out as a management company first.

Today everything is managed in-house which allows for about a 15% margin, immediate cost reduction when acquiring an asset, and the ability to execute the plan with more certainty.

Isaac S. · Answer

The half dozen big time individual  investors that I know in Los Angeles, also, own large management companies that can profit off of excess capacity by managing other owners(especially institutional owners) assets.

I would not be surprised if most management companies also owned or were actively trying to acquire assets, too.

But, if you are an insurance company or pension trust administrator, you would probably not want to be managing the day to day operations of multi-family even if it makes a great addition to the trust portfolio.

It depends of the specific scenario of the owner/s

Kim Meredith Hampton · Answer

@John Liaaz

Several reasons why you need to hire professional property management third party managers for large multi family properties; first reason is that, if you have no or limited experience, you will be in serious trouble on many fronts. Secondly, most banks or lending institutions won’t even let you manage without extensive experience for a large asset. The bank will demand this.

Michael Dang · Answer

If they have Freddie Mac or Fannie Mae agency debt, they are required to have a third party management company.

Brian Briscoe · Answer

It's one less thing....  Management is complicated and there are a lot of local laws, so for investors that have a portfolio that spans multiple cities and states, it's a lot of extra stuff to worry about. Some people, frankly, just don't want to or aren't good at it and choose to focus on their strengths. From a liability stand point, the PMs carry their own insurance, licenses, handle payroll, etc., which takes some risk from the operators plate.  My preference for now is to let a professional manage that aspect and I'll manage the manager.  As we scale, we'll discuss forming our own management company.

Ronan Donnelly · Answer

It’s really a case of specialization of skills and appropriate scale. A company than manages 10 buildings will be more efficient than each of those 10 building owners self-managing.

Why do bigger multifamily buildings use third party management?

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