Best Real Estate Investing Advice Ever Show Podcast

JF1173: Scaling Property Management To Over $3 Billion In Residential Assets Managed with Kevin Ortner

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If you’re wanting to learn how to scale your business, this episode is for you. We’ll hear a lot about property management, but we’ll also hear key principles and values that have helped Kevin grow Renters Warehouse to what it is today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Kevin Ortner Background:

  • President and CEO of Renters Warehouse, the nation’s largest and fastest-growing residential property management company
  • Author of Rent Estate Revolution
  • Increased the company’s managed assets to more than $3 billion in residential real estate
  • Company services over 13,000+ investors and close to 20,000 properties under management in 42 markets and in 25 states
  • A former corporate pilot flying high as an entrepreneur
  • Based in Minneapolis, Minnesota
  • Say hi to him at http://renterswarehouse.com/
  • Best Ever Book: The Compound Effect

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Kevin Ortner. How are you doing, Kevin?

Kevin Ortner: I’m doing good, Joe. Thanks for having me.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Kevin – he is the president and CEO of Renters Warehouse, and holy cow, his company services over 13,000 investor and close to 20,000 properties under management in 42 markets in 25 states across the U.S. Headquartered in Minneapolis, Minnesota. We’ve gotta dig into this… So Kevin, how about you tell us a little bit more about your background and your current focus?

Kevin Ortner: Certainly. I’ve been investing in real estate since I was a freshman in college. I bought a duplex to live in, and I thought “If I buy a duplex and I rent out one side and live in the other, I can probably live rent-free”, which sounded like a fantastic idea. It turns out I ended up cash-flowing on that property a couple hundred bucks a month, so it was even a better idea, and I got the hook; I’ve been investing in real estate ever since.

Actually, in a previous life, since I graduated out of college, was a corporate pilot and flew corporate jets around, but at the same time I continue to build my real estate portfolio through rentals, and ultimately ended up getting into the property management business with Renters Warehouse, which is what I do full-time here today. I joined the company just after it started, about 10 years ago. We were a local small residential property management company focusing on single-family homes.

Fast-forward ten years, we’re now in, as you mentioned, 42 markets across 20+ states, servicing almost 20,000 single-family homes and small multi-family buildings across the country… So it’s been quite the ride.

Joe Fairless: Just from a structure standpoint for how you manage in 42+ different markets in the U.S., do you all have partnership property management companies locally, where you do some sort of partnership with them, or do you have just district and regional managers that you oversee?

Kevin Ortner: We don’t outsource anything to other companies, so we do it all internally, all ourselves. We’ve built the infrastructure semi-nationally at this point, where we’re managing properties in those markets ourselves.

Some of it is through a franchise network; early on in the business we expanded nationally through a franchise model, a nice way for a couple of [unintelligible [00:03:32].00] to grab some market share and expand through a franchise model. Two years ago we sold the majority stake of our business to a private equity firm out of Minneapolis as well, and we were able to get the growth capital that we needed to turn the business into more of a corporate expansion model and open corporate locations across the country.

With that said, every market we’re in, every office we’re in is Renters Warehouse employees on the ground, doing the property management work, or Renters Warehouse leasing agents or realtors that work exclusively for us in all those markets as well. We control every aspect of it under our name and with our people.

Joe Fairless: I wanna make sure I’m getting this right, because this is an important aspect of your growth – originally it was a franchise model, and then you sold to a private equity firm a couple weeks ago, and then it went to a corporate model?

Kevin Ortner: That’s correct. We have between 2011 and the end of 2015 sold 28 franchises across the country. Beginning in 2016 we started to roll some of those franchises back into our business and also expand corporately, opening corporate locations across the country. So at the beginning of 2016 we had one corporate location here in Minneapolis, Minnesota where I’m from, and that was our only corporate location; everything else was a franchise.

Fast-forward to today, we have 25 corporate locations throughout the country, and 17 franchises left of those 28. So we rolled some into our corporate expansion, and we still have some fantastic franchise partners out there that are doing a great job growing the Renters Warehouse name in their cities, and we continue to open new markets under our corporate umbrella at the same time.

Joe Fairless: And from a business standpoint, you’re the president and CEO, so this is right in your wheelhouse – why start with franchising and then move away from it and have the corporate model?

Kevin Ortner: Franchising early on was a very capital-efficient way to expand the business and grow the business. Myself and the founder of the business were a couple broke entrepreneurs when we started the business, and being able to leverage other great talented people across the country and their capital to expand our brand was a good idea.

I really wanted to move from that franchise model to a corporate model really for a couple of reasons, the first being really being able to control the service quality and consistency of what we were doing across the country, but even more importantly than that was we could really make this business very efficient, and from a business owners’ perspective increase our margins through centralizing a lot of our backend services.

So as we grow across the country into new markets – as I mentioned, we went from one [unintelligible [00:06:15].09] to 25 in just under two years… We’re centralizing a lot of what we’re able to back into two of our hubs, which is Minneapolis and Phoenix. So by that I mean things like all the accounting for all the owners of our properties, rent collection, maintenance coordination… Any of those [unintelligible [00:06:31].29] activities – we will do a lot of that work back here in Minneapolis. It allows us to hire and train very easily, instead of having to find someone new and have a great training program and then send people in different markets for them to figure out how to do this business at a high level. We’re able to put people into a great group of people we have here in Minneapolis, Phoenix and just engulf them in this business so they get up to speed faster.

The service quality and consistency remains very high that way, and we’re also able to manage more properties per individual that way as well. So from a business growth perspective, we wanna be able to centralize that for efficiencies in our business, and it also allows us to do something really unique from a corporate perspective, which is we can service larger investors that have properties in multiple cities in a whole new way.

We have an investor client of ours that owns about 1,700 homes across three different markets – St. Louis, Kansas City and Cincinnati, and prior to Renters Warehouse he had seven different property managers. He had a couple in St. Louis, a couple in Kansas City and a couple in Cincinnati, because they were using some local smaller amount property managers, which did a fine job, but they were smaller themselves, so they couldn’t take on 1,000 doors in the city. They didn’t have the resources of the capital to be able to do that. So he had to split it up, and he spent a lot of time managing his property managers, because the processes were different, the accounting reports were different, the collections procedures were different… All these things were a little different and he spent a lot of time just managing those people, whereas he moved his business over to Renters Warehouse – even though he’s in several different states, he has the same process, the same accounting reports, procedures, institutional level reporting and accounting, and one point of contact. So even though we’re operating in multiple cities, he’s able to call in to one portfolio manager and discuss his entire portfolio, versus just one segment that a property manager had before.

So that was the big strategic reason why we moved to a corporate model – we could really service investors across the country in a very different way than available in the past. And frankly, as of today, we’re one of the only ones that can do that across the country at scale, whether you have properties in Florida, or Seattle, Washington, you’re able to call one property manager and have us manage those for you.

So that’s really what we’re trying to build and that was the big strategy behind the change in the business model.

Joe Fairless: Your ideal client is someone who has a lot of properties in a couple different markets and is looking to consolidate, point people and efficiencies, right?

Kevin Ortner: Yeah, I think that’s one of our ideal clients, but we are still really focused on what we call our retail clients, or someone who’s just getting into real estate investing… And frankly, they own a lot of market share, depending on what number you look at, what units you include… If you’re looking at kind of the one to four-unit buildings, 18,5 million of those units are owned by 18,5 million people. So that person who owns one unit is a bit part of this market segment for us. We wanna focus on them, we wanna be able to have them go from owning one property to two, or from two to three.

I think what’s unique about that is today a lot of people can only buy — not “can only buy”, but often times they do only buy in their backyard, because it’s what they’re familiar with, they live there, they know their realtor contacts there, they have a property manager there, or they do it themselves, and with a national platform like this, we’re really making it possible for people to invest across state lines, or in entirely different parts of the country.

We have a lot of people that come to us out of places like California and New York, where it just doesn’t make sense to necessarily buy a single-family home or a condo to rent. The yields aren’t there, the returns aren’t there… But it makes a ton of sense to go into the [unintelligible [00:10:10].17] places like St. Louis, Kansas City, or down into Texas or Alabama, where you [unintelligible [00:10:15].29] and the rents are great, and you get a high yield and high cash-on-cash returns. But in the past, it’s been like okay, I can find them, and with today’s technology evolving and companies out there like Roofstock you can certainly find the asset, but how do you operate them?
We’re really trying to solve that operations problem where you don’t have to go in and interview a local property manager or fly in to check on your property very often. You can use a well-known national company that’s maybe even in your backyard and go and speak with us there, but allow you to diversify where you can [unintelligible [00:10:48].22]

So not only is it the large investor that owns properties in multiple markets or multiple regions, but I think just the smaller investor who wants to continue to expand his or her portfolio and have the opportunity to buy in maybe a different state or outside just their backyard – we’re providing a whole new solution to them as well.

Joe Fairless: What’s one thing that you all have improved upon? I’m sure it’s all aspects, but just one thing in particular that you all had to improve upon from when you started to today, in terms of management? I’m asking this for the Best Ever listeners who self-manage now and can pick up a tip or two from you, since you’re overseeing a large operation.

Kevin Ortner: I think for us, we always say it comes down to the leasing and the tenants we’re placing in the property. Everything else kind of starts to fall in line with that. So that’s tip number one, and I’ll expand on that, because I have two I’d like to share with the Best Ever listeners.

The first is that it all starts with that tenant. Don’t be in a hurry to place the first person that’s coming in to apply for your property. Be confident that you’re gonna have more leads coming in, and really maintain the standards you wanna have for your particular property in that particular area. Because placing the right tenant makes maintenance fall into line. Generally fewer maintenance requests, obviously rent collection is easier with the right people – that kind of stuff. As we’ve evolved our business, we continue to make sure we do a great job placing tenants, and we do that by really trying not to have to limit the people we’re looking at. So we spend a lot of time and effort on how we market our properties, where we market them… We’ve got proprietary listing syndication tools that allow us to generate tens and tens of thousands of tenant leads a month on our thousand or so listings we have every month across the country.

We’re able to, as we process background checks and applications, we do a very thorough background check, we share that with our property owners and our investors, and they can maybe turn one down that’s borderline for them, knowing that hopefully later this week we’ve gonna have another one pop up. So we’re renting homes in less than two weeks on average across the country, and with that we’re able to (we think) place very high-quality tenants in the homes, and that’s the start of a great property management relationship with the tenant in your home.

So that’s number one – take your time on that; vet the tenants as thoroughly as possible, and don’t settle. Make sure you get what you think is gonna be a great tenant for your home.
Number two is really you’ve gotta treat this like a business. I run into a lot of people who manage homes themselves, and they ask me the same thing – what’s that number one tip that can help me make my property more profitable, or things less stressful for me? And it’s very much “Treat it like a business… Not just a hobby, not just that rental property you have down the street.”

What I mean by that is ensure that you’re consistent with your tenants on how you’re collecting rents or how you’re going after it if they are late. Make sure you are taking care of your preventative maintenance, or taking care of maintenance requests quickly when do come in, to save yourself a bigger expense or legal problems down the road with the leases.

I think the advantage of sometimes outsourcing for people who don’t have the time to dedicate that they really need to do a great job, or to some people who don’t have that right personality to be very consistent or methodical in the rent collection process. And obviously, being this is our business, that’s one of the things I think we do best, is make sure that we’re setting the right expectations with our tenants, that “Here is the contract and here’s how we’re gonna follow the contract and follow up with you on things like rent collection, making sure you’re paying your rent on time”, and things like that.

So put the right tenant in place, that’s the best way to start, and then number two is make sure you treat it like a business and stay consistent with how you’re following up.

Joe Fairless: What would be an aspect that you all typically are head and shoulders better than the mom-and-pop owner in terms of management? So when you take a property over, you know that you’re nine times out of ten gonna do much better in this area.

Kevin Ortner: I think it comes down to 1) leasing – we’re great at leasing; we’ve just talked a little bit about that. But the other one really comes down to expense management, maintenance coordination. Because we are a larger national company, we’ve got a lot of buying power. We’re getting fantastic maintenance rates. We don’t have any of that happening in-house; we outsource all of our maintenance on our homes to third-party vendors. But with that being said, we bring on only license bonded and insured vendors, people with good reputations, and we’re able to approach them essentially as a  buying club and say “If you’re gonna work with us, we need you to extend the discount to our clients”, and leverage our buying power in that way.

So not only are we getting maintenance that’s coming in maybe cheaper than the retail prices or what a smaller business can buy for, but we also have great, highly-trained professionals in our office or in our call centers where maintenance requests are coming in where we’re trying to do call avoidance. We’re talking tenants through how to check and understand if a circuit breaker has been tripped and that’s why their power is not working, versus having to send an electrician out to find that out; we’ll walk them through how to do that.

Maybe the garbage disposal is not working, and we discuss different things you can check there… Or whatever it might be; a lot of different examples. So that call avoidance and really trying to shoulder some of that internally and work with tenants through maintenance requests. But if we do have to send someone, having that buying power and that leverage with our vendors and keeping those costs down is an area where we can really shine.

Joe Fairless: Now let’s pretend that you don’t work at Renters Warehouse anymore… You have created your own property management company, and you have a portfolio of, say, 50 properties that you oversee the management of, and you’re looking to grow, but only in Minneapolis. What would be a talking point to a prospective landlord who’s looking to decide between you and Renters Warehouse, where you in this new company would have a competitive advantage?

Kevin Ortner: Wow, that’s a good question, and not one that’s ever been posed to me before. Wanting to grow only in Minneapolis as a new company, I think the competitive advantage for a small property management company over Renters Warehouse in a local market might come down to — if you’re gonna talk to someone who manages very few properties or a smaller portfolio, you’re gonna be working directly with me as the owner of that new company, and probably have a lot of time with me, a lot of strategy conversations with me, and maybe a little bit more one-on-one.

If you’re working with Renters Warehouse, while you have access to a whole team of professionals that are helping you through the process, you are talking to multiple people often…

Sometimes we hear that from our clients – “Hey, I’m talking to a couple different folks, and I wanna just talk with one.” We don’t manage properties that way, we don’t necessarily have portfolio managers. We have specialists in different departments that really understand how to handle that accounting or that rent collection or the maintenance coordination on your home. And that’s not for everybody – some folks really wanna have a more intimate relationship with that portfolio manager, and I would say that’s probably where our competitors, or me in this scenario, if I’m growing a new business, I’d say that’s how we’re a little different… And maybe, if you’re gonna make me say it, maybe how that could be better for some people.

Joe Fairless: I love looking at both sides of the coin. I’m sure it’s a good exercise for you too, and I do the same thing for my business, just to make sure we have all bases covered.

Okay, so what is your best real estate investing advice ever for landlords?

Kevin Ortner: I think it is looking at the long haul, looking at a long-term perspective. I like to say this is a get rich slow scheme, not a get rich quick one. The business I’m in, with investing in rentals and investing in real estate – it’s not as sexy as some of the rehabbing or with flipping, where people are walking away with huge paychecks in a short amount of time, but I think it can be more stable, it can be less risky, and it can really set people up for retirement security, financial freedom, a secure future for the long haul.

So I encourage people to look at it from a long-term perspective, make sure you’re putting the right mortgages and loans on your property, and understand how some of the small decisions you make today, to maybe buy and hold more property, versus buy and rehab and flip more property can really be a game-changer for you in 10, 15 or 20 years.

That would be my biggest investing advice for the Best Ever listeners – be patient; sometimes the rewards aren’t necessarily immediate, but the long-term, and constantly look at how you’re gonna build your portfolio over the long haul to be a big game-changer for you when you need that financial freedom and security come retirement.

Joe Fairless: What’s your number one focus right now, as the president of the company?

Kevin Ortner: The number one focus for us is actually to address some of what we’ve just talked about, with the competitive advantages of a smaller person than the challenges of growing a big, national business… It’s to continue to increase our level of client services for our clients, to increase how we interact with our clients and also how we can give them frankly the best advice ever, whether they’re managing a portfolio of one or a portfolio of 1,000.

We really wanna take an institutional level approach that we work with with our large investors, and be able to boil that down to someone who owns one home, and look at how that asset is performing for them, instead of just on a monthly cashflow basis or understanding if it’s gonna be there for the long haul with them, but maybe that’s not the perfect home and we could sell that and buy something new.

So we wanna take an institutional level approach, bring it down to the person who owns one home or two homes, and allow them to have a lot more options and a lot more data around their home to make great decisions, and also then how we’re delivering that to them, and continually training and evolving our team to be better and better at delivering this service to our clients.

Joe Fairless: If I have one house and I move it over to you all, what are the fees involved on that management?

Kevin Ortner: We’re a flat fee management company, so we don’t do percentage-based, or anything like that. We have two main fees – the leasing fee, or what we call our tenant placement fee, and that’s equal to one month’s rent, and then during the management program, depending on the market where we are across the country, the fee is either $89/month flat fee, or $99/month flat fee. Those are the two fees you’re gonna see.

What we did when we’ve been building this business and growing is we tried to really flip it on its head and say let’s go away from the percentage-based, or the (shall we call it) nickel and dime approach to fees in this industry, standardize it, make it simple and easy to understand… And those are the two main fees we have across the business.

Joe Fairless: Since it’s a flat fee, the flipside is you’re not incentivized to maximize the rent. What are your thoughts on that?

Kevin Ortner: I think we absolutely are, for a couple of reasons. One, our leasing agents are paid on a rent basis, so they’re gonna try to maximize it when we bring in a new tenant. But two, we’re always very concerned about ensuring that our investors stay with us for the long haul. That monthly management, having a large client base over the long term is important; the only way that’s really gonna happen is if people are getting good returns and are continually having a good investment. So addressing and ensuring people stay with us and have a good experience and are seeing that their assets are performing is important as well.

[unintelligible [00:22:09].16] being directly tied to that rent price for our agents, and also our commissions we’re earning on leasing is big, and when it comes time for renewals and all that kind of stuff, being sure that we’re getting market rents or being able to increase them, because that’s what’s gonna make our clients actually stay around with us.

Joe Fairless: What is the resident renewal fee, if any at all?

Kevin Ortner: For the residents in some markets we charge a $100 fee to residents as we go through the renewal process, and [unintelligible [00:22:38].10] additional background screening and inspections we’re doing on the property at renewal time. And for a property owner there’s a renewal fee. It varies a bit by market depending on where we’re at, but it’s there between $299 and $350 come lease renewal time.

Joe Fairless: Then how are maintenance fees handled?

Kevin Ortner: The answer is a direct pass-through. We don’t actually have a markup on any maintenance, so you’ll see the original invoice that comes through from our maintenance vendors on your property. Again, our goal is to have any maintenance that’s done on your home, for any of our investors, be below retail price if you were just to call up a plumber out of a phonebook. When you use our network, you’re gonna see that that came through as a lower cost to you than you would have gotten on your own.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Kevin Ortner: I’m ready.

Joe Fairless: Alright, well then let’s do it. First, a quick word from our Best Ever partners.

Break: [[00:23:26].24] to [[00:24:30].03]

Joe Fairless: Best ever book you’ve read?

Kevin Ortner: The Compound Effect, by Darren Hardy.

Joe Fairless: Best ever deal you’ve done?

Kevin Ortner: I bought a duplex in Rochester, Minnesota. It was a rehab to rental; I bought the property with a hard money loan from a hard money lender that I work with here in Minneapolis. I rehabbed the property, I was able to increase the value enough where my conventional take-out financing covered 100% of the money I had in the property, so I’m in for essentially $0 out of my pocket, and the property cash-flows $350/month, so just a fantastic deal.

Joe Fairless: What’s a mistake you’ve made on a transaction that you haven’t talked about?

Kevin Ortner: The biggest mistake would be I invested in a rehab or a flip deal I was doing in an unknown area. It was in Minneapolis, but it wasn’t a neighborhood I’d done a lot of research on or have ever invested in before, and I didn’t do enough homework. I didn’t ask the right questions, so I bought the wrong kind of home, did the wrong things to it, and it ended up taking a long time to sell it, and I took a loss on that one.

Joe Fairless: Best ever way you like to give back?

Kevin Ortner: I like to give back locally. It’s important for me that a lot of the organizations or causes I support are local, they’re affecting my community in which I live… So I do that by partnering with local organizations at Renters Warehouse. We’ll do that locally in Minneapolis, but also our offices around the country – our folks in those offices will pick local organizations to partner with. But as far as where I give back, I do a lot of youth mentoring; we give back as a company to veterans organizations or other homeless organizations, and we also volunteer time there, hopefully giving encouragement to people who are down on their luck that we do care and that there’s better days ahead.

Joe Fairless: Best ever way the Best Ever listeners can get in touch with you or learn more about your company?

Kevin Ortner: RentersWarehouse.com is the company website. All the information that the Best Ever listeners need to find out about us is there, and the best way to reach me or learn more about me is LinkedIn – just search Kevin Ortner on LinkedIn and you’re gonna find all the information there.

Joe Fairless: Kevin, thank you for being on the show. I enjoyed our conversation, I enjoyed learning about your company. You’re an overnight success… In 10 years. It’s great to see it, it’s great to hear your progress, and holy cow, what a staple of properties that you all have in your management portfolio… Your approach, and your advice for the landlords, the Best Ever listeners who are landlords and currently managing their own properties – one, don’t be in a hurry, so that you’re confident you’re finding the right resident to put in there, and two, treat it like a business. For example, what you all have a focus on is the maintenance coordination so you can avoid the maintenance call – the plumber, the electrician etc. coming out there to fix things and trying to work with the resident proactively on that, or at least trying to be a stop gap so that you don’t have that maintenance call.

Thanks for being on the show. I really enjoyed learning about the evolution of your company. I hope you have a best ever day, and we’ll talk to you soon.

Kevin Ortner: Thanks for having me, Joe.

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