Key Considerations When Creating Your Own Management Firm

Earlier this month, I was in New York City at the IMN Middle Market Multifamily Conference moderating a panel discussion for property owners who are considering creating their own management firms. As a partner in one of the industry’s larger outsourced accounting firms, I help clients make that decision every day. The discussion included some interesting questions I want to share with you as you make your own considerations on whether to create a management firm.

Q: What are the key issues to consider when creating your own management firm?

A: There are several things to consider, including:

  1. What are your core needs? Creating your own firm will provide more control, access to expertise and information, and financial benefits.
  2. Is it in my best interest? Most of our clients say that creating their own firms allows them to align their interests better, as their previous management firms didn’t always have their best interests in mind.

Q: What is it that a management firm does for their fee?

A: A competent property manager can add significant value to your investment, which is why many experienced real estate investors will tell you that a good management company is worth its weight in gold.  There are four primary things that the management firm does for an owner.

  1. They care for the property and manage the property staff, for which the owner is paying. They make sure the properties are well maintained. They also manage renovations.
  2. They market the property. There is more to this than just advertising. A good management company cost-effectively attracts quality potential tenants through effective screening and keeps electronic databases up to date with rates and property information. Effective marketing shortens vacancy cycles to keep the property leased.
  3. They provide benefits and handle payroll to the property staff.
  4. They process and pay invoices, reconcile bank accounts and do the monthly financial reporting.

This is an ideal scenario.  These results can only be expected if a management company is competent, trustworthy and a good fit for your portfolio.  A poor choice of a management company can produce many headaches of its own, which happens more frequently than one would expect.

If you have a good working relationship with your management company and the property is performing well, it may not be wise to upset the apple cart, so to speak.

Q: What are the costs associated with third-party management vs. creating my own management firm? Is there a financial benefit to having my own firm?

A: That’s one of the most important questions, and one that can be best illustrated in a direct comparison. Below are two case studies of owners, one with eight properties and 2,000 units and another with ten properties and 400 units in a high-rent market like New York.

  • Ten properties, 2,000 units – This Midwest based owner paid a three percent management fee that amounted to $63,000 per month.   She chose to hire a VP of Operations, who with benefits cost $11,800 per month. She outsourced accounting and HR to Ascent and the marketing and advertising to a real estate marketing firm. The total cost of outsourcing was $31,000 per month, creating a savings of about 51 percent (see Table One).
  • High-rent, small properties – This owner with 800 high-rent units (20 properties) spent $61,000 per month in management fees, with the management company taking four percent of total rental income. They were able to hire a VP of Operations at $150,000 per year ($12,500 per month plus benefits), outsource their accounting and marketing for better service to their properties at a total annual savings of $334,000 or 46 percent. (see Table Two).

The one thing I see is that most of our clients don’t change solely for financial reasons. Most make the change because something else wasn’t right. They are frustrated that reports aren’t right or on time or there is some other indication that the interests of the management firm weren’t aligned with the owner’s goals.

Q: What is the most important consideration?

A: According to panelist Steve Firestone, managing partner of Crown Bay commercial real estate, ‘The key is to hire the right person to run the ‘in-house’ management firm.” I couldn’t agree more. In our experience, you MUST hire a regional manager, assuming your properties are located in the same general area. The key is to find the right person and allow them to make it succeed. If you don’t hire a regional manager, you will not be successful managing your own properties.

We had a client with numerous properties and several thousand units in the mid-west that took their management in-house. They chose to assign one of their partners to connect with each property manager. He had an MBA with a real estate focus, but little property management experience. Their properties were spread out in five or six states in all three time zones. They hired an accounting staff of three people. They experienced turnover in the accounting staff, didn’t visit the properties as often as they had planned, etc. The properties didn’t perform nearly as well as with professional management. After 15 months and a lot of pain, they threw in the towel and hired three management firms to take over the management.

Q: What are other issues I should consider before bringing the management in house?

A: One thing to keep in mind is that creating your own management firm may not be right for you. This could include factors like:

  • Location of properties. If all of your properties are in the same metropolitan area, it’s easier and more cost effective to manage your own properties. But if your properties are spread out over multiple states, that requires the additional expense and hassle for both time and travel.
  • Lender approval. Many owners have covenants in their loan agreements in which the lender must approve the management company. We have seen some property owners try to move to their own management platform, but their lenders wouldn’t allow it.
  • Whether it’s RealPage, Yardi, ResMan or another accounting platform—you’ll need to get your own. This is regardless of whether you hire an outsourced accounting firm or manage your accounting in-house.  This often takes six to eight weeks, so don’t delay.
  • Time and distraction. If acquiring properties is your key business strategy, managing your own firm may not make sense because of the time required for it. But if you are a hands-on owner who buys one or two properties per year, it might be a great fit for you.

Q: Is there increased liability?

A: Not really, because you, the owner, were already on the hook. Most management companies require the owner to indemnify them against most issues.

If you have been considering creating your own management firm, give me a call for a free consultation. It’s one of my favorite things to discuss.

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