How to Start a Property Management Business

Part 1 - How to start a Property Management business - Background

Property management is exciting because there is always something that needs to be done. Normal maintenance can be scheduled; however, pipes may break in the middle of the night and emergencies can come up frequently. A property owner (landlord) can act as a property manager, or he or she can hire a professional property management company to take on full or partial responsibility for the management of a property or properties. The goal of a property management company is to reduce risks and maximize income for the property owners.

Our guide is in 3 parts:

• Part 1 - How to start a Property Management business - Background
• Part 2 - Our planner tool to see if this idea is the right fit for you
• Part 3 - Action plan to get started

What are the costs involved in opening a property management business?

There is little cost to start this business if the property management company manages a single building or a few units because most of the work is done onsite at the property and expenses for repairs and maintenance can be charged to the property owner. For this type of operation, the only expense is having a mobile phone and the time needed to manage the property.

If you want to expand to managing multiple properties then you will need an office and staff to help handle the workload. Real estate brokers who already have an office and staff can enter this business by simply adding more staff that is tasked to provide property management services for the property owners.

What are the ongoing expenses for a property management business?

If the company manages multiple properties, you will need to pay rent for a small office, pay for utilities, and pay staff to answer the phones and manage the workload. Typical office rent is around $2,000 per month. Utilities are around $200 to $300 per month, which includes electrical, telephones, and an Internet connection.

The amount needed for staff depends on the size of the company. Payscale reports that the typical pay for an administrative worker in this sector is about $30,000 per year. Assistant property managers make about $40,000 per year. Company managers and regional managers in this sector make about $73,000 per year.

Who is the target market?

The clients for this business are real estate investors that own rental properties. The can own a single property or be a large Real Estate Investment Trust (REIT) that owns thousands of properties.

How does a property management business make money?

Some property management companies charge professional fees for managing property owned by a third party, while other property managers acquire the properties they manage and keep all rents derived from their property. There are property management companies that do both. Starting out, it may not be possible to directly acquire rental properties unless partnered with a real estate investor that can provide funds to buy a property.

There are five popular business models in this industry sector, which are:

1. Charging the property owner a percentage of the rental income earned by the properties under management.

2. Fixed fee contracts are also common. Under this scenario, the property owner contracts with a property management company for certain services and pays a fixed fee. The property management company may have full or partial responsibility for the property. This type of contract is used when the properties have no income, such as maintaining properties that are vacant and for sale.

3. Base rent guarantee contracts are another type of agreement that property owners make with property management companies. Under these agreements, the owner accepts a base rent that is guaranteed (usually below market rates) by the property management company and allows the property management company to sublet the property for a higher rent. The difference between the two rents is the income for the property management company.

4. Revenue sharing agreements are used for commercial properties that create income, such as stores or restaurants. The property management company pays the owner a percentage of the revenue generated, instead of paying rent for the property.

5. Hybrid agreements are possible, such as a combination of a fixed base rent and a revenue sharing portion that is paid to the property owner by the property management company.

How much can you charge customers?

Property management companies that provide full-service management, which means the management company has full responsibility for the property, usually earn 10% to 15% of the rental income collected, with the balance paid to the property owners. This is the most common metric used in this business.

For example, a property management company has the contract to manage a multi-tenant complex with 100 units that rent for an average of $500 per month each. If they maintain an annual occupancy rate of 90%, which is really good, the annual earnings for the property management would be calculated as follows:

1. 100 units at 90% occupancy equal 90 units rented on average over one year.

2. The rental income would be 90 units times $500 per month times 12 months. This equals (90 x $500 x 12) $540,000 for a year.

3. The fee earned by the property management company would be either 10% or 15% of this amount, which is $54,000 or $81,000 from this single contract.

How much profit can a property management business make?

A staff of one manager, one assistant manager, and one administrative assistant with a modest office costs about $143,000 per year, employee taxes and benefits would be about 30% of the pay, which is around $34,000 and a small office costs about $27,000 per year. This means expenses for the year would be about $204,000.

To make a profit using our example given above for managing 100 units, the property management company would need to have 400 units under management that are similar to the example given. Gross revenues would be $216,000 to $324,000 per year. Gross profits before taxes would be $12,000 at the lower end of the scale (10% fee) and $120,000 (15%) at the higher end of the scale.

How can you make your business more profitable?

Besides managing the properties, you can provide the repairs and renovation services as a sideline business. Everything that needs to be done for the rental properties is a source of potential extra earnings as long as the price of the services is competitive with the local marketplace and full disclosure of the potential conflict of interest is made to the property owner.

A few examples of the possible sideline support businesses include:

• Plumbing

• Painting

• Construction/Carpentry

• Electrical

• Handyman services

• Landscaping

• Carpet cleaning and installation

• AC or furnace repairs and maintenance

Day-to-Day and Growth

What happens during a typical day at a property management business?

As an owner of a property management company, you will need to be able to manage properties remotely for routine matters and be on-site for matters that require personal attention, such as emergencies and showing vacant apartments or rental spaces if the building is a commercial one.

For example, if your property management company manages a large group of single family homes that are rental units you will be constantly checking on them. You will be working with the vacant ones to get them rented as fast as possible. You will be constantly inspecting properties to make sure everything is OK with them and any work needed is being done properly.

You will have an extensive list of to-do items, which changes every day. There is industry-specific property management software available that helps keep track of everything. You must be able to multi-task and constantly get the most critical things accomplished as fast as possible.

Rental properties need constant maintenance. Any vacant properties need to be cleaned up and repaired quickly to find a new renter. The main responsibilities are to keep everything in good condition, manage the tenant relations, and show the vacant places, which are made attractive to reduce the “down time” when the rental properties are vacant.

What are some skills and experiences that will help you build a successful property management business?

Because it is very difficult to remove a bad tenant, skilled property managers will need to be thorough and meticulous in their professional life. Being organized will not only make the job easier, but it will also help you respond quickly whenever issues do come up, whether it is trouble with a tenant, or with the property itself.

You should also be comfortable dealing with all kinds of people.

Having worked for about three years as a property manager prior to starting your own property management company is a very good idea.

What is the growth potential for a property management business?

A privately-owned REIT called Blackstone in the past years, after the real estate market collapse, bought about 50,000 single-family homes all across the USA, with the intention to convert those properties to rental units. A property management company that lands a contract with Blackstone to manage their rental properties would earn many millions of dollars each year.

How and when to build a team

There needs to be an appropriate level of staff that is capable of managing the workload. Adding new staff when increasing the numbers of properties that the company has under management is fairly straightforward. The workload sets the pace and the income earned sets the price you can pay for the additional staff.

Part 2 - Is a Property Management business the right fit for you?

Part 3 - Action plan to launch your Property Management business in 90 days