The Property Management Playbook: Opportunity Is Knocking
Welcome to another edition of a Cashflow playbook!
A review of the opportunity
Owning a property management company can be a lucrative and rewarding business opportunity as the demand for rental properties continues to grow. People will always rent properties, and landlords and property owners will always need professional help in managing their properties.
Property management is a scalable business model that can be expanded by managing more properties, hiring additional staff, and investing in technology and automation. This makes it an attractive option for entrepreneurs looking to build a business that can grow over time. There are also wide opportunities to diversify revenue streams and reduce reliance on any one source of income. As long as the company has strong operational processes, a solid reputation, and effective marketing, it can generate good profits.
Overall, owning a property management company can provide a great opportunity for entrepreneurs looking for a scalable, flexible, and potentially profitable business.
Summary
Intro:
One of the things we love about property management is that it weathers most economic storms. After all, people will always need a place to live. So, collecting rent, maintaining properties, and keeping those properties filled happens regardless of what it might look like out there.
The industry is still growing year-over-year even despite the pandemic and economic climate. There is plenty of opportunity out there for the taking:
It also doesn’t take any cash to get started if you want to build from ground zero. Alternatively, you can buy a property management company and scale it. Either way, you’re going to have people with investment properties that need renters and renters that need a place to call home.
Note: You’re going to hear “door” or “per door” tossed around a lot in this playbook. When we say “door” we’re talking about a leased unit. So, an apartment building with 20 apartments means you’re managing 20 doors.
Guest
Enter our guest, Peter Lohmann, the co-founder, and CEO of RL Property Management. Having read Rich Dad, Poor Dad (like I’m sure many of you have), Peter Lohmann and his business partner decided to invest in rental properties once they were out of college. Peter, a systems engineer at the time, wasn’t thrilled with the speed at which they were able to acquire rental properties because of cash restraints. He also noticed a definitive gap in the Columbus market while trying to look for a property management company.
“There weren’t any good property management companies in Columbus that we could turn our properties over to.”
Thus, Peter began his journey to fill his own need and the needs of other rental property owners.
Fast forward 10 years, Peter’s company is now making $2.5m in revenue and he was able to take 5 weeks of vacation without ever looking at his phone.
Early on in his search, Peter identified a huge gap in the property management space.
Not a single property owner liked their property management company. That’s when Peter, using his engineering brain, decided to just create systems and processes for himself. Then, he realized he could sell this service in his local area since there was a clear need. Product market fit, ya’ll.
So, armed with only his laptop and his process-focused mind, Peter left his W-2 position and decided to go full force into property management.
Playbook
Step 1: Understand the structure & main components of a Property Management Company
“Property management is really 3 key areas: collecting rent, leasing properties, and dealing with maintenance. There are both a lot of challenges and a lot of opportunities.”
Taking 3 things and turning them into a $2.5, business? We see you, Peter.
Let’s break down each of the key areas:
Collecting Rent
One of the best things about this business opportunity is that you get paid directly as the rents come in. No accounts receivable. So, rent gets paid to you, and then you pass along the base rent to the client, keeping your fee from the rental check.
You typically want to get clients on a minimum year-long agreement. The length of the lease will usually drive the contract you have with your clients. Since you’re managing the lease and the payment process, you’re also incentivized to get tenants to stay long-term, keeping your agreement with the property owner on a longer term as well.
Important cashflow tip: late fees on rent get paid to you - not the landlord. “Think of it as compensation for chasing down the rent check.”
Your fee structure can go one of two ways: a percentage of rent or a flat fee. We highly recommend going with a flat fee, which provides more predictability in your pipeline in terms of revenue coming in. You also automatically set your client standards a little higher, avoiding the lower-income housing clients who are often more work than they’re worth.
Leasing Properties
As the property manager, you will be in charge of showing potential residents the property and getting them to sign the lease. Eventually, you can hire people to do these showings, but a key piece of managing a property is getting it rented.
In the early stages, Peter found himself having a harder time with the soft skills side of things more than anything. Spinning up an LLC and all of the SOPs was easy (especially thanks to tools like Buildium). But dealing with emotionally invested property owners was a challenge.
“For some people, these properties are their highest value asset, so they’re deeply invested in its well-being.”
That’s when Peter learned an important lesson. One of the keys to keeping your clients feeling secure in working with you is open and frequent lines of communication. Peter found that a lot of property owners simply assumed the worst when they didn’t hear from their property managers.
“If they don’t hear from you, they assume no work is being done.”
Keeping your clients for the long term means nurturing the relationship effectively. This is a service business, after all.
Another key component is knowing your eviction process and laws. We don’t want it to be true, but there will always be times when someone doesn’t pay rent. This is where you, as the property manager, come in to deal with the eviction process.
Again, this is a huge piece of your value proposition to your clients. No one wants to deal with evictions. So, make sure you know the exact legal process and anything that may complicate the process (especially squatters' rights). Every state and county is different, so do your due diligence.
What happens if there’s damage to the property after a tenant moves out? That cost all falls back onto the owner. It’s the property owners' responsibility to repair and maintain their property. You can help facilitate the repairs (like with your maintenance arm) but those fees ultimately get paid by the property owner and not you as the property manager.
Other leasing considerations: Properties in bad condition or owners that are awful to work with usually aren’t worth the headache once you’re up and running. Also, pay attention to the rental location. A good location means it’s easier to get new renters in when you need to.
It’s also important to factor in the type of lease you want to use: long term/traditional or short term. You’ll often see these referred to as LTRs or STRs (long/short term rentals).
Let’s break down these down:
Rental Period
Short-term rentals are typically rented for a few days or weeks, while long-term rentals are rented for several months or longer. This means that short-term rentals require more frequent turnover and cleaning, whereas traditional rentals require less turnover but more ongoing maintenance.
Type of Tenant
Short-term rentals are usually rented by travelers and vacationers, while long-term rentals are typically rented by tenants that want to call the rental home. This means that short-term rentals require more marketing and customer service to attract and retain tenants, whereas long-term rentals require more tenant screening and management to ensure stability and consistency.
Revenue
Short-term rentals can generate more revenue per unit due to higher nightly rates, but there is also more competition and volatility in demand. Long-term rentals generate less revenue per unit but provide a more stable and predictable income stream.
Legal and Regulatory Requirements
Short-term rentals are often subject to more legal and regulatory requirements, such as zoning laws, permitting, and taxes. Long-term rentals also have legal and regulatory requirements, but they are typically more straightforward and less subject to change.
Overall, managing short-term rentals requires a different approach than managing traditional rentals due to the unique demands of the business model. Property management companies that specialize in short-term rentals need to have expertise in marketing, customer service, turnover, and revenue management, while long-term rental management requires more focus on tenant screening, maintenance, and stability.
Knowing the general renting habits of prospective tenants will help you build a strong system for bringing in tenants and getting them to renew. Renewals are an easier method of maintaining consistent revenue.
Maintenance
The biggest factor in adding another revenue stream beyond the base management fees is maintenance. You can add on maintenance fees as both an additional revenue stream and a value add for tenants. Knowing there’s someone to call 24/7 is a huge stress relief for both tenants and owners.
You don’t have to bring on a full-time maintenance employee at first, but having them in-house allows you to monitor the quality of the work and delegate priorities. You can also charge premium rates for their service, paying for the employee and putting extra dollars in your pocket. In-house maintenance fees make up 40% of Peter’s revenue.
Licensing and legal requirements
The requirements for a property manager to hold a broker license vary by state and jurisdiction. In some states, property managers are required to hold a real estate broker's license, while in others, a real estate salesperson license is sufficient.
In general, a real estate broker's license is a higher level of licensing than a real estate salesperson license. It typically requires more education and experience, as well as passing a more comprehensive exam. Some states also require property managers to hold a property management license or certification in addition to their real estate license.
We recommend that you check with the real estate commission in your state or jurisdiction to determine the specific licensing requirements for property managers. Additionally, some states may require property management companies to be licensed, even if the individuals working for the company are not required to hold a broker's license. It's also very important for property management business owners to consult with an attorney to ensure that they are complying with all applicable laws and regulations and taking the necessary steps to minimize legal risks.
Here’s a good overview of what to expect out of your property management company’s general breakdown of focus and time spent:
Step 2: Find a business to buy
Don’t want to build something from scratch? Buy it instead. Here are ways you can hunt down a property management business for sale:
- Online Business Marketplaces: Online marketplaces like BizBuySell, BizQuest, and LoopNet list businesses for sale, including property management companies. These marketplaces allow you to search for businesses by location, industry, and price range.
- Business Brokers: Business brokers specialize in buying and selling businesses, including property management companies. They can help you identify potential acquisition targets and negotiate the purchase price and terms.
- Industry Associations: Industry associations like the National Association of Residential Property Managers (NARPM) and the Institute of Real Estate Management (IREM) can provide you with a list of property management companies for sale.
- Networking: Attend industry conferences and events to meet other property management professionals and network with potential sellers. You can also reach out to local real estate agents and property owners to ask for referrals.
- Direct Outreach: Identify property management companies that you would like to acquire and reach out to them directly to express your interest in buying their business.
With these kinds of deals, you usually pay a fee per door to acquire them and then have the option to not pay if a rental goes vacant in 30-60 days from purchase. Try to push for 60-90 if you can, though.
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