The property management company that manages your apartment investments is one of your most important team members. Because they are responsible for overseeing the day-to-day operations of your apartment investments and implementing your business plan, they can make or break your business.
Many apartment investors start off by hiring a 3rd party property management company. However, the other option is to bring property management in-house.
Why Bring Property Management In-House
The primary reason to bring property management in-house is to improve the performance of your apartment portfolio. You do not bring property management in-house to make money. In fact, it is possible that your in-house property management company operates at a loss. The purpose of bringing property management in-house is to improve the overall performance of the individual apartment asset and your portfolio as a while. In-house management can result in higher quality customer service for residents, better marketing, faster unit turnover, more training opportunity for staff, top talent, etc. The important word here is “can.” Therefore, If you don’t think you can do it better, don’t do it at all.
Secondly, there are greater alignment of interests with in-house property management. 3rd-party property managers typically make money from a percentage of the collected revenue (referred to as fee-based management). The major issue with fee-based management is that the 3rd-party property management company isn’t incentivized to maximize revenue. Let’s say a 3rd-party property management company charges a 3% management fee. If the property generated $100,000 per month in revenue, they make $3,000 per month. If revenue increased by 25% to $125,000, they make $3,750, or only $750 more per month. An increase in revenue of 25% is huge for you and your investors, but not so much for a 3rd party property management company. However, when property management is in-house, maximizing revenue (or whatever else you decide) will be a top priority.
Lastly, bringing property management in-house improves communication. Since it is your property management company, you decide how often they send you the property’s KPIs. If you want a daily report, no problem. Whereas with 3rd-party property management, they may only agree to send weekly or monthly performance reports. Similarly, since it is your property management company, you can be as involved in the actual operations of the property as you want. In turn, you will have more up-to-date, detailed information to share with investors about the status of your business plan, as well as make faster adjustments if challenges arise.
When to Bring Property Management In-House
There are only two times when apartment investors bring property management in-house: day 1 or when they have achieved scale (i.e., thousands of apartment units). Neither option is objectively better than the other but there are potential pros and cons.
Pros of Bringing Property Management In-House Day 1
Bringing property management in-house day 1 results in zero disruptions. There are a lot of moving parts when transitioning from 3rd party to in-house management. You need to provide notice to the current company, terminate contracts, create the new company, and then move the all the operations over to your company. This may involve all new staff as well. All of this is a major disruption for residents and potentially operations.
Bringing property management in-house day 1 results in smaller overhead.
You will not need to build out an entire operation with Executive, Directors, etc., which is expensive and time consuming, especially since the team and infrastructure need to be created before taking over management and generating revenue. Instead, it is likely that it is just you and your site staff. Over time, as needed, you can bring on additional team members and naturally grow to a full-sized business.
Pros of Bringing Property Management In-House When You Have Achieved Scale
Bringing property management in-house when you have achieved scale allows you to attract top talent. Property management and business professionals are eager to bring their expertise to a brand-new company that will manage thousands of units. They cannot wait to be actively involved in implementing a business plan they had a hand in creating. You will have a difficult time attracting the best-of-the-best to your property management company when it only manages one building.
Bringing property management in-house when you have achieved scale can generate a profit. As I mentioned earlier, the purpose of creating a property management company is not to make money. However, waiting to bring management in-house when you have thousands of units may allow you to generate a small profit, or at least breakeven. Having one apartment will not cover the costs of an in-house property management company and you will operate at a loss.
Bringing property management in-house when you have achieved scale allows you to implement best practices. The top talent you attract will also come with the best property management practices. They have years of experience working for the best property management institutions. They will have intimate knowledge of the market. As a result, they will bring their expertise to your portfolio, allowing in your ability to implement the best practices to improve operations. When you do not have a track record and large portfolio of properties, you won’t attract the top talent, meaning you likely won’t be implementing the best practices.
Why and When to Bring Property Management In-House
The main reason why you bring property management in-house is to improve the operations of your apartment portfolio. It will also increase alignment of interests and improve communication.
You can either bring property management in-house day 1 or when you have achieved scale. The benefits of bringing property management in-house day 1 are no disruptions and smaller overhead. The benefits of bringing property management in-house when you have achieved scale is your ability to attract top talent, start with a profit margin, and implement best practices.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.