How to Start a Property Management Company
We’ve learned a lot along the way as a fledgling property management business. Here are twelve questions we had to answer pretty quickly when we got started
In April 2012 I started a property management company with two of my best friends. None of us had any actual experience in real estate apart from being interested in getting into it. We got the basic paperwork done to incorporate our business in California, and then the real work began.
Avoid the property management roller coaster by heeding expert advice. (Flickr/Au Kirk)
We’ve learned a lot along the way as a fledgling property management business. Here are the questions we had to answer pretty quickly when we got started:
- What Legal Status Should You Have?
- Does Your Team Have Proper Licensing?
- Will You Become a Member of at Least One Real Estate or Property Management Association?
- What Property Management Fees Should You Charge?
- How Do You Track Income and Expenses?
- How Many Properties Should a Property Manager Manage? How Much Should a Property Manager Get Paid?
- What Will Your Company Culture Look Like?
- How Will You Provide Amazing Customer Service?
- How Will You Market Your Company?
- How Will You Handle Property Inspections?
- What Vendors Will You Need?
- Should You Hire an Accountant and a Lawyer?
What Legal Status Should You Have?
We first realized that there’s a lot of liability with running a business, so we incorporated. There are various ways of creating a company: C-corporations, S-corporations, LLCs, and limited partnerships. By incorporating, we limit our assets to whatever we put into the corporation. As long as a lawyer cannot pierce the corporate veil, then our personal assets are protected.
(Piercing the corporate veil? If a court finds the individuals and parties are executing business as themselves while stating that the actions are the actions of the corporation and not of themselves, then the court can decide that the individuals and the parties are the same as the corporation and that there is no difference. It is at this time when the judge may allow the a lawyer representing an opposing party in court to pierce the corporate veil for the purposes of seizing personal assets of the individuals and parties trying to hide behind the corporation.)
We found out that corporations can reduce our personal and business taxes if done correctly. C-corporations have the chance of having a double taxation problem, but that problem does not need to be your problem if you have a good accountant who knows the laws. S-corporations pass through the taxes to the shareholders, so there is no chance for double taxation. The profits will be taxed as personal income instead of business income.
My advice: If you have a sole proprietorship, a general partnership, or even a limited partnership where the general partner is not a corporation, then I suggest creating a corporation, either an S-corporation or a C-corporation, to limit the risks of running a business to just the business assets and not to your personal assets. We feel that LLCs do not have enough court decisions surrounding them to provide a solid, tried-and-true strategy for using it to protect your assets. Second, I strongly suggest hiring a good accountant.
Does Your Team Have Proper Licensing?
We didn’t know that a property manager needed to be licensed as a real estate agent in California — and we didn’t know that a property management company had to have a real estate broker license. The law in California now requires broker applicants to have the full-time experience under a broker, or to have a major or minor in real estate attached to their bachelor’s degree to satisfy the education/experience requirement.
If anyone wants to create a property management company now, I suggest interning or working for a property management company long enough to get a broker’s license, prior to creating the company. Otherwise, the only other route is to get a bachelor’s degree with the major or minor in real estate.
Will You Become a Member of at Least One Real Estate or Property Management Association?
We wanted to know what kind of contracts we should use. Should we use standardized forms, should we create our own, or should we have a lawyer draw them up? We feel that standardized forms would be the most cost-effective, but which forms should we use? We found out that various Realtor associations have standardized forms, so we chose to become a member of the association, which costs money. Is it worth the money to become a member of various real estate and property management associations? Well, we had to look at the other products and services that they could provide to us.
The California Association of Realtors has software called ZipForms. This software contains all the standard forms that we need in our business. These forms have been tested for legitimacy in the courts. The software checks for up-to-date forms to keep the property manager protected if the time comes that the property manager or property owner must go to court, such as during an eviction. This was the first reason why we decided to become a member of the local, state, and national real estate associations.
The California Association of Realtors also offers property management certification for individuals who take and pass a set of online courses. In fact, we are requiring our property managers to complete CAR’s property management certification. The information in the course is helpful for new property managers with starting and running a new business or for new agents who are just becoming a property manager. The certification is also useful because it shows that the property manager has specialized in the field even more and has taken additional training in this field. I feel that it is important to surround yourself with experts, because they will increase the quality of the workplace and of the company’s service.
We became interested in the National Property Management Association’s certifications and the Institute of Real Estate Management certifications. They both offer training, certifications, and designations that can help property managers and property management companies with hiring and training their property managers. They have educational material, accredited courses, and useful programs. It seems to me that it might be worth it for the property manager or for the property management company to pay for these programs to both continually increase the expertise and the knowledge of the property managers and to show the property owners that they have hired a quality company that is only getting better over time. It seemed to us that these associations and training companies provide great educational benefits.
We are glad that we chose to look deeper in the associations to see what else they provided beyond the standardized contracts. We found out that they provide education, certifications, legal help, and networking opportunities (which we are using extensively).
The contracts provide a great way to mitigate contractual risks and can lower errors and omissions insurance fees. The training modules provide information that property managers can use when creating, updating, or revising their policies and procedures. The certifications provide designations and proof of excellence in the professional education of the property manager. The membership fees pay for lawyers to be available to Realtors who may have some questions that they need answering. The associations provide networking opportunities and can help with new agents looking for internships with property management companies. In the end, we felt it was well worth becoming a member of the associations because they provide a lot of benefits.
Update: For more property management news and group resources, see all the links in How to Find Property Management News You Can Use.
What Property Management Fees Should You Charge?
We wanted to know how much we should charge the property owners. We researched the local area to find out the going rates. It seems that the going rates in our area are from six to ten percent. After crunching the numbers, we feel, as of right now, we can provide quality services at a competitive rate of 8.5% with a cap of $150 per unit. If the property rents out for a high amount, then we feel that we do not need to charge more than $150 to be able to manage the property. We want the property owner to keep the extra money.
We also wanted to know how we could keep our overhead low and still provide quality service. We decided that we will manage as many units as we can before taking on extra hands. How do we keep our expenses low?
We kept our marketing expenses low
We found a great location at a very reasonable price
We negotiated a great deal with the phone company that gave us a very discounted bundle for our phone, fax, Internet, and television lines
We kept our servicing area within a reasonable amount to keep gas costs low
We use Buildium for many of our online services that we require
We meet real estate brokers and salespeople in person
We use banks that provide free accounts to us
How Do You Track Income and Expenses?
We break down the income and expense section within our policies to help give property managers an idea of how we view the two topics in a specific light. We define specific in-house financial words that directly affect profit:
Moneymaker vs. Asset
Anything that pays for itself is a moneymaking asset. A rental property that has enough rental income to pay all of its expenses is considered both a moneymaker and an asset. A company car could be a moneymaker if it offsets enough taxes to pay for itself; it could be an asset if the vehicle saves us more money than other alternatives and if the income from services that we perform that require the use of a vehicle and the savings when compared to all other acceptable alternatives outweigh the costs of the vehicle.
A property that is positioned to be rented by a tenant is our product. A property that is sold for more than what was ever put into it is a product. It is not a product we sell because we manage properties, not sell them.
Money Drain vs. Liability
A property that is not bringing enough income to pay expenses is considered both a money drain and a liability. A roof that needs to be replaced is a liability, because it could cause litigation trouble or loss of rent if it is not replaced; costs surrounding litigation and loss of rent are considered controllable expenses. A company car is a money drain, because it does not bring in income, and it is a liability, because something could happen to it that could cause material and monetary damages to the company.
Cash flow is the way that the money moves. Money flows in, through, and out of every property. When money stops flowing, the cash stops flowing. Ensure that money is flowing correctly, otherwise there could be a lot of legal and financial trouble.
A budget is one that has a set amount of money every month to pay all expenses. A successful working budget is one that is satisfactory to the broker and to the client. A very successful working budget is one that is satisfactory to the broker and to the client and is increasing the profit generated by the unit or property over time. Every property manager must achieve a successful working budget and should achieve a very successful working budget for every unit and property that he or she is managing.
Controllable expenses are those that change every month. The cost of these expenses is based on the variables that the property manager can affect.
Non-controllable expenses do not change every month and cannot be changed due to the nature of the property or due to the contracts signed regarding the property or both.
For more information see, Property Management Accounting: A Survival Guide.
How Many Properties Should a Property Manager Manage? How Much Should a Property Manager Get Paid?
We also need to know how many units a property manager can handle. I have heard that a property manager can handle 30-40 units. I was told that if they manage 30, and if someone asks if we can take on a 30-unit complex, then we can say yes, because we can max the agents to 40, so one agent can solely manage the 30-unit complex. Afterwards, we can hire on someone else to take the extra load off of everyone, so the agents will go back down to managing 30 units.
We need to know how much each property manager will be getting paid before we decide how much we will be charging the property owners. How much should each manager make? Should the best way be to sign them as independent contractors, pay them “X” per unit, provide them the policies and procedures, and supervise their actions? What is “X”? Should it be a dollar amount, a percentage of total gross monthly rent, a percentage of total collected rent each month, or a percentage of the total monthly property management fees paid to the company in regards to the properties that he or she managed or helped manage?
How else do the property managers make money if our company does not help people buy and sell properties? Do we allow real estate agents from other companies work with us as property managers, while they help people sell and buy properties with other companies?
Let us assume that the property manager take brings home 5% of the total collected rent each month, that the average property rents at $1,000 and the take-home pay is $50 a month per rental unit. The property manager or the company may collect more than that, but let us assume the extra goes to business expenses. Thirty units at $50 is only $1,500 a month. This is not enough to provide for a household of even one person. So, how can a property manager make enough money or a property management company pay for a quality property manager whose full-time job is to manage properties for the company?
Can a property manager manage one hundred units? The take-home pay would then be $5,000 a month when using the assumed numbers, which is more reasonable. If the property manager is managing an apartment complex, then the rent could be lowered a bit, and reduce the property manager’s income, as according to the law. Otherwise, the rent could be reduced to help the property manager with cashflow, so he or she makes enough money to alleviate the property manager’s financial concerns, so he or she can manage the properties in the best possible way.
What Will Your Company Culture Look Like?
We wanted to know how we could create a positive, productive spirit and culture among the workplace and integrate it in every aspect of our business. We learned from Stephen Covey’s Seven Habits of Highly Effective People that you must start out with core values, move to your mission statement, create your goals, and then create your prioritized tasks. So we created a business focus, core values, a mission statement, a short mission statement, and a business plan that we change and refine continuously.
We have seven core values: Integrity (which includes being ethical), excellence, charity (impactful and effective), respect, character, teamwork, and education.
We have a mission statement: “We help people become financially independent, financially interdependent, and financially wealthy. We provide amazing customer service to every person so that the experiences they receive are described as high quality and of a high caliber. Ultimately, we want to provide excellent property management services on a planetary level.”
Our short mission statement to sum it all up: “Complete property management services for the savvy owner.” In fact, we put this phrase on our business cards. It’s good marketing.
Establishing a good culture can protect the business from the actions of employees or independent contractors. For example, integrity is a core value. Therefore we have policies and procedures that require employees and independent contractors to have open communication, to be ethical, and to follow the company’s policies and procedures. If an employee or independent contractor chooses to disregard the core value or the policies and procedures or both, then the company has a better chance of protecting its assets from the wrongful actions of the employee or independent contractor. If the company did not have core values and policies and procedures based on those core values, then it would be more difficult for the company’s lawyer to prove that the employee’s or independent contractor’s actions were their own actions and were not supported by the company.
How can you create a positive culture in your property management company? First, the management team must create the culture needed for everyone in the business to succeed. Second, follow the list I created in order: Come up with a business focus, decide on a few core values (I suggest looking at Buildium’s core values), create a mission statement, create a brief mission statement, and create your business plan. Third, live the core values; instill a positive environment that helps everyone succeed. Fourth, focus on the customer experience. I cannot stress enough that you have to provide an amazing customer experience for every client, customer, and vendor, because quality service and word-of-mouth advertisement are the most effective and most important aspects to the growth of any company.
How Will You Provide Amazing Customer Service?
We wanted to build a quality company that offered quality service. If we do not provide the best services, then nothing else matters. Word of mouth will spread and no one would work with us.
In order to do provide great customer service, we first needed to know about the best practices. But what are they? I’ve found that researching was the best and truest way to find it out. As such, I’ve interviewed many brokers and property managers.
Our first best practice is focusing on the customer’s experience. We manage the property owner’s unit or units to maximize profits and to meet his or her goals and needs for each property. We take care of each property and each unit so that we can bring in quality tenants who want to stay and pay rent on time. We want to have great communication with all parties.
Our second best practice is to work with quality people, whether they are property owners, vendors, or property managers. It is important to make sure that no one is working under the table, because if someone is cutting corners anywhere, then that individual is likely cutting corners that will cost you either money, clients, customers, or some other way that will negatively hurt the business.
Our third best practice is to ask the experts about the best practices in their field. For example, we asked a tenant screening company about their best practices. After they told us what they were, we decided that it was actually worth it to have them do the screening portion and give us their results. We would take their advice, which is based on a lot more experience (and the Fair Housing Laws), and we would make the final decision. We did not want to necessarily outsource our job, but we did want to provide the best service to our clients, which is ensure that we maximize each rental property and each unit’s profit. If we feel that the best way to do that is to have an excellent screening company do a part of the screening process, which they will do better than we could do, then we will go ahead with this decision.
Finally, our fourth best practice is to continue to research and find out the best practices out there, so that we can incorporate them into our policies and procedures. For example, this blog has allowed us to open up a bit of what we are doing so that others may learn from it, join the conversation, and hopefully teach us some best practices that we may be missing in our company.
How Will You Market Your Company?
How do we market our company? Word of mouth is always the best way.
How can anyone spread our information if they have no clients? A referral payment program. We are the only property management company that we know about in our area that offers referral fees. After researching, we realized that there are two types of referral options: one-time lump sum payment and residual payments made every month or year as long as the property manager is managing the property. We chose to adopt both options. We pay up to $100 initially per unit and up to $50 annually per unit.
Here are some interesting points that I have learned when we created this program:
People like to see money right away, and people like to see residual payments.
This marketing plan allows us to only pay for advertising when we have received our property management fees. We are not paying for something that has no guarantee.
This marketing plan also increases the word of mouth. Real estate agents and brokers are happy to sign contracts with us, because no one else will pay them for referrals.
We can pay referral fees to unlicensed finders. We don’t help people sell or buy properties. Therefore we are not under RESPA. As long as the unlicensed finder does not engage in licensed activity, then we can pay them the referral fees.
People give a warm introduction for us, the property owners are more receptive to us, and if we sign contracts, then everyone wins.
How Will You Handle Property Inspections?
We do four covenant inspections every year. We do two notice inspections, where we will give a notice of entry to the tenants, bring a general contractor, and do an inspection of the property twice a year. We will check to see if the tenants are doing their part of the rental agreement. The contractor will do a maintenance and habitability walkthrough. They charge us a handy-person rate for this service, since it does not require a general contractor to perform this service. The other two non-notice inspections are halfway between the two notice inspections. We drive by the property and note any information we see from the street or sidewalk and follow up accordingly.
There are other types of inspections that may be required for specific properties. If the property has a fireplace, then does it need a required yearly inspection and cleaning service in the fall? We have read that it is good to do that to prevent fires, carbon monoxide poisoning, and larger maintenance issues that could be thwarted if checked periodically. If the property has a pool, then does it need a monthly chemical inspection? Pools need servicing; otherwise the water may not be swimmable after a few months. Has the roof been checked in the last thirty years? It might be time for an inspection. Some roof types have long lifespans, but there could be trouble with any roof after a major storm.
What Vendors Will You Need?
We wanted to know when we needed to call vendors, when we should hire vendors, and who should pay the vendor fees. We didn’t realize that managing properties entailed as much work as it actually does. We are not experts in everything, much less licensed in every possible job that goes into managing properties. There are so many types of vendors that we needed to have on our vendor list.
We have these vendors on our list: Locksmiths, chimney sweeps, landscapers, general contractors, rent recovery services, tenant screening services, home inspectors, insurance companies (home insurance, renter’s insurance, flood insurance, etc.), land surveyor (to check FEMA flood maps to see if a property that is in a designated flood area does not require flood insurance), roof inspectors, flooring vendors, emergency restoration companies, pest and termite control, lawyers, evictions service companies, legal and typing service companies, mortgage lenders (we pay the PITI on behalf of the property owners), painters, pool servicers, HVAC servicers, electricians, and plumbers.
The local locksmith that we use has the ability to create a master key system, which is very useful for property management companies. There are many different ways to create them, so check out a local, certified locksmith about this topic. The locksmith provides many other services, such as lock-outs, swapping out locks, and installing locks on windows too.
Certified chimney sweeps offer three levels of inspections, all of which include cleaning. The chimney sweep provides a level-one inspection yearly, which is visual inspection and the use of basic tools. If the chimney sweep notes that there may be a problem that requires more sophisticated tools to find the problem, then they move to a level-two inspection. Finally, if they have to tear down, replace, and rebuild parts of the fireplace or house or both, then that would be a level-three inspection.
Landscapers provide services for rental units that the property manager or owner or both has deemed that there is enough rental income to pay for this service. The landscaper will take care of lawn care, weeds, and other specialized services such as bush and tree cutting if requested.
General contractors are licensed individuals who work on major and minor construction projects on the property.
There are many other vendors to check out. When hiring any vendor, make sure you get a copy of their license, insurance certificate, and bond certificate if they have one. Try to become a certificate holder and a named insured on the insurance to protect you or your company if something happens due to his or her work. Also, try to fight for a reduced rate for your property owners. They will appreciate that you worked hard to save them money.
Should You Hire an Accountant and a Lawyer?
I strongly suggest hiring or paying for a good accountant. An accountant that is familiar with real estate, with management companies, and with your business setup (corporation, sole proprietor, etc.) will be able to manage your books correctly, offer wise business advice, and keep you out of trouble with the IRS. For example, one of the reasons that I chose someone to be one of my two business partners is that he is a certified public accountant. As the chief financial officer and the treasurer, he is in the prime position to ensure that the entire business runs smoothly and is financially sound.
Having an accountant will help with liability, because his or her skills will protect your company’s assets. If the IRS performs an audit, then the accountant will be able to show that the books are clean, organized correctly, up-to-date, and meeting the current laws. The laws are continually changing, so the accountant must continually take courses or classes to keep up with the changes in the law. The accountant may suggest changing your type of corporation: It might be better to switch from an S-corporation to a C-corporation or vice versa. If the accountant also manages your personal books, then he or she will be able to have a better picture when making these kinds of suggestions.
I also suggest hiring or paying for a corporate lawyer who is well-versed in real estate. Hiring or paying for a lawyer goes hand-in-hand with asset protection and mitigating liability. A corporate lawyer can provide help with many key issues. The lawyer may charge a lesser rate for performing eviction services for your property owners. A lawyer can look over the paperwork to verify that the company is protected.
He or she may suggest that you change your business from a sole proprietorship to a corporation. The lawyer will be looking for many ways to protect your assets from liability. In my opinion, that is his or her primary purpose. Additionally, if the company is a corporation, and if the company must be represented at court, then, according to our lawyer, the corporation must be represented by a lawyer. Our lawyer stated that this is a requirement, at least in the state of California.
A lawyer may look at some interesting methods of protecting your assets. For example, if you have a property management company that has equipment on hand to rent out to tenants, such as refrigerators, washers, and dryers, then the lawyer may suggest creating a second corporation that owns the physical assets and leases them to the property management company for the purpose to rent them out to tenants or has the tenants directly rent the property from the second company. If someone gets hurt by the appliance, then they will have to go after the second company, likely a corporation, and will have a much more difficult time trying to go after the property management company itself. The same thing could be the case with the building in which the property management company resides. If the property is owned by a second or third company, and it rents it out to the property management company, then if the property management company gets sued, then the property will be protected.
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