JF2388: Why and When to bring apartment property management in-house | Syndication School With Theo Hicks
In today’s Syndication School episode, Theo Hicks talks about why and when to bring apartment property management in-house. He will be basing this episode on the presentation given by the founder of Ashcroft capital Frank Roessler at the Best Ever Conference 2021.
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Theo Hicks: Hello Best Ever listeners and welcome to The Best Real Estate Investing Advice Ever Show. I’m Theo Hicks, and today is Syndication School, where we focus on the how-to’s of apartment syndication. This episode will be focusing on in-house property management; more specifically, as the title implies, why and when to bring apartment property management in-house. This episode we based on the presentation given by the founder of Ashcroft Capital, Frank Roessler, at the Best Ever conference 2021. I really liked his presentation and the information he provided, and I thought it’d be very relevant to our listeners. We will be going over his points today. Of course, I will be adding my thoughts to those as well.
We’ve done a lot of episodes in the past on property management – how to find them, how to qualify them, when to fire them, how to manage them, and that is usually focusing on third-party property management. A company that is completely separate from your apartments syndication business. Maybe it’s just a couple of people, or maybe it’s a national organization with tens of thousands of employees. But either way, the distinguishing factor of third-party management is that it’s third-party. It’s not you, it’s not anyone that is in your actual company, or it’s not your company that you own; it is completely separate and run by someone else.
Whereas the other option would be in-house property management, which as the name implies, is a property management company that you own, that you are in charge of, that works for your apartment syndication company. Today we’re going to talk about, as I mentioned, why would you want to transition from third-party management to in-house property management, or why would you want to use in-house property management over third-party property management from the get-go? So that will be the why. And then the when would be, well, two different times – right away, or once you achieve scale. We’ll talk about the pros and cons of the timing of bringing property management in-house.
One thing that Frank said that I really liked – he said, “I can say this and then I can probably end my presentation here. The only reason why you’re going to bring property management in-house is to improve the performance of your apartment portfolio.” You’re not bringing property management in-house in order to make money, to generate a profit, to save money on a property management fee. That’s not the main reason why you do it. It is also possible that bringing property management in-house will result in a loss. The property management company itself operating at a loss.
So again, the purpose of bringing property management in-house is to improve the overall performance of the apartments that you own. The reason why is because by using an in-house property management company as opposed to a third-party can result in higher quality service to both you, your residents, marketing; they will do faster unit turnovers, more training opportunities for your staff, you can attract top talent… There are all these potential benefits that can come from it being your company. But the keyword here is that these are potential benefits, so you have to make sure that by bringing property management in-house, you can do all these things better than a third-party. If you can’t, then there’s no reason to use in-house property management, because in that sense, you’re going to get a worse service, which is not going to allow you to maximize profits.
One distinction before we move on to the next point is that the property management company itself might potentially operate at a loss; it’s not always going to operate a loss. It might not be a massive loss, and it might break even. However, other aspects of the performance of the apartments are going to improve. So overall you’re going to make more money, it’s just that the property management company itself is not going to be a cash cow for you. The money is going to come from the improvements in the operations of the asset. That’s something important to keep in mind.
So of course, you’re going to be making more money by bringing management in-house, but the actual company itself is not going to be making money. So again, that’s the main reason or probably the only reason why you bring management in-house, it works better.
Now, one of the main reasons why it works better is because there’s a greater alignment of interests between you and the in-house property management. Just think about how a traditional third-party property manager makes money. It’s either $1 per unit per year, which is not really standard; what’s more standard would be the percentage of the collected revenue, also known as fee-based management. There’s a better alignment of interests with fee-based management compared to a per unit per year management, because at least with fee-based management if the revenue goes to zero, then they make no money at all. However, there is still a lacking in alignment of interests, and a third-party property management company is not really incentivized to maximize revenue.
Here’s a perfect example to illustrate that. Let’s say you’ve got a property management company that charges the 3% property management fee, and you have a property that generates $100,000 per month in total revenue. 30% of that goes to the management company, so the management company will make $3,000 per month. Now, let’s say that you asked the product management company to increase the revenue by 25%. So they work really hard over the next year to increase revenue by 25%. The revenue increases to $125,000 per month, which is a massive increase in the value of the property, and a massive increase in the returns to you and your investors. However, there’s not really a massive increase to the property management company, because they only make another $750 per month. So again, that increase of 25% is a lot more impactful to your company than it is to the property management company. So if it is your company that is the property management company, they’re way more incentivized to actually increase the revenue by, say, 25% in this example, because you are their top priority. Whereas for property management companies that are third-party, the way that it works is they just want to manage a bunch of properties. They don’t usescale to make money. So if they lose you, if you ask them, “Hey, can you increase my revenue at 25%?” Like, “No, I don’t think so. We’ll drop you.” Well, they lose three grand a month; they probably work with 100 other operators. Whereas if it’s your in-house brand management company, you better believe that they’re going to focus on doing what you ask them to do, because you own them, you’re in charge of them. So that’s one of the reasons why it could result in improvement in the performance of the property.
The third reason why you’d bring property management in-house is because it improves communication. So what this means is that traditionally, when you’re working with a third-party property management company, or really any property management company, you want to be tracking the important metrics or the KPIs, key performance indicators, of the property. We’ve done an episode in the past on those KPIs, and we talked about how to be the Best Ever asset manager. Now, this is going to be just one example, but let’s say you want to receive KPIs every single day from your product management company. Well, if it’s a third-party management company, they might have their standard SOP for how they deal with KPIs; maybe they only send them once a week, or maybe they only send them every two weeks or every month. Whereas if you have your in-house property management company, from the get-go you say “Hey, we want daily reports at the end of the day.” “No problem.” Whereas again, the third-party management company might not be able to do that.
Something else that’s also going to be good here is that you’ll get more up-to-date, more speedily communications from your property management company. Because again, they are yours; you are their sole priority, as opposed to the third-party property management company which is working with a lot of different operators.
Let’s say you’re working on your emails to your investors, rather than the property management company maybe sending you a snapshot of the data you need once a month, that is out of date by a couple of weeks by the time they send you emails, you can work with your management company to get the information for occupancy collections that exact day.
Also, the improvement in communications allows you to check the status of your business plan a lot faster, which means you are able to catch any problems or any variances a lot faster, as well as make adjustments to the business plan when those challenges actually arise. So those are the three reasons why you bring property management in-house.
Now, when do you do this? As I mentioned at the beginning of this episode, the two times that you can bring property management in house is day one. The second you close on that apartment community, the property management company that takes over is an in-house management company. Or you can wait until you achieve scale and have thousands of units. There are pros and cons to each of these.
Let’s start with the pros of bringing property management in-house on day one. The biggest benefit is that there are no disruptions. So transitioning from a third-party property management to in-house property management is a pretty big process. I mean, transitioning from one third-party property management company to another is a big deal on the property itself. Transitioning over all the new people, terminating contracts, having them take over, any sort of relationship tensions between the new and the old management company… There are lots of problems just taking over the property in general, when it’s already up and running. It’s kind of similar to transitioning from the old property management company from the old owner to the new owner… But there’s also big disruption with you and your business, because you have to create the company before you actually have a deal.
So in this case, when you don’t have a property yet, you can create your property management company and then transition over to this new property… Whereas when you have a scale already, you’ve got this massive portfolio you’re working on. At the same time, you’re working on creating a brand new business at the exact same time, so that might impact the way that you are able to focus on your current portfolio. Of course, there’s a major disruption to the residence as well, maybe operations within the new management company taking over a large portfolio, whereas again, no property exists yet, and so there’s no operation or residence to really disrupt.
The other pro or other benefit would be a smaller overhead. When you don’t have a property yet, the team you’re creating is not very big; it might just be you and a site manager, and then that’s it, and then leasing staff, which is not going to be that expensive. Whereas when you’re building out an entire property management company that needs to be able to manage thousands of units, you’re gonna need actual executives, directors, presidents, and managers that are going to probably be making low six figures. And you need to create all this infrastructure before the property management company is even making any money, before it actually takes over the portfolio. Whereas again, from day one it’s just you and maybe a couple of other people, really small overhead, not that expensive and not that time-consuming.
Going back to the disruption, by creating a full-fledged property management company that’s going to be able to manage thousands of units – it is going to take some time, as well as money. So those are really the two benefits of bringing property management in-house on day one – zero disruptions and smaller overhead.
Now, however, I think (whatever I’m going to say next) that the benefits of bringing in property management in-house when you have to scale far outweighs the potential drawbacks of the disruption. Because again, the disruption kind of happens anyway when you buy a property, and your new property management company takes over, which is usually why operations are known to not perform as well in the first few months after operations because of the new management. And of course, the smaller overhead is a money issue. But again, you’re not doing this for money, you’re doing this for an increase in performance.
This brings us to the first major pro of bringing property management in-house when you achieve scale, and that is the ability to attract top talent. If you don’t have a property, then that one site manager and a couple of leasing staff people that you’re going to attract, to use in-house management day one – they’re not going to be the best of the best. Whereas if you have a portfolio that’s a billion dollars or a hundred million dollars, the top management professionals and even business professionals are going to be proactively reaching out to you to work with your company to create a brand new company that will manage thousands of units. They can’t wait to be involved in creating a business plan and then implementing that business plan when they’ve worked for a massive corporation and just kind of had to follow the SOP of that company for the longest time.
So you’re going to have a lot more difficulty attracting the best of the best when you only have one property for your management company to manage. And then with attracting top talent will come the ability for you to implement the best practices starting from day one after you’ve achieved scale and brought management in-house. Because you have that top talent who has years of experience managing apartments for the best property management institutions in the country, they’ll have a lot of knowledge on the market, hopefully… And because of all of this, they’re going to bring their expertise to your portfolio, which will allow you to implement the best practices immediately in order to improve operations… As opposed to bringing them in-house on day one, not really having the best talent, and having to train them yourself or having them learn on your dime. So you really need that track record and have that large portfolio of properties in order to attract that top talent; and once you attract that top talent, then you will, by default, have the best property management practices implemented at your property.
Now the other benefit, as I kind of mentioned earlier, of bringing it in-house, after your achieve scale, is that there is a possibility that you generate a profit, or at least you break even. Whereas if you only have one apartment, there’s zero chance you’re going to be able to cover the costs of a full-time site manager, a full-time property manager, or regional manager, a full-time team member with one apartment. You’re going to operate at a loss for a while until you achieve scale. So again, why not just wait until you scale in order to bring management in-house. This is something I’m kind of biased towards in-house, but I wanted to present to you the different benefits of each, bringing it in immediately or bring it in once you’ve achieved scale.
So overall, the main reason why you bring property management in-house is to improve the operations of your apartment portfolio. The other benefit is that it will increase the alignment of interests, because you’re the top priority, and it will improve the communications between you and your management company.
The two options of when to bring management house would be day one, or once you have achieved scale. We mentioned that the benefits of bringing them in on day one would be no disruptions and smaller overhead… Whereas the benefits of bringing them in once you’ve achieved scale is your ability to attract that top talent, which in turn allows you to implement the best practices, which in turn may allow you to start with a profit margin.
But either way, the main thing you should be thinking about is “Should I bring property management in-house? When I should I bring property management in-house? Will this allow me to improve operations at my property? Can I do property management better than a third-party manager at this particular time?” If the answer is no, then don’t bring it in-house. If the answer is yes, then bring it in-house, whether it’s immediately, or when you’ve achieved scale.
That will conclude this episode of the why and when to bring apartment property management in-house. Make sure you check out our other Syndication School episodes. We also provide a lot of free documents with Syndication School, those are at syndicationschool.com. Thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.
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