In April 2012, I started a property management company with two of my best friends. None of us had any qualifications in real estate apart from being interested in getting into it, and nobody had ever advised us on how to start a property management company. We got the basic paperwork done to incorporate our business in California, and then the real work began.
We’ve learned a lot along the way as a fledgling property management business, so we thought we’d share our biggest learning experiences with you. Here are 12 key questions to ask yourself when you’re first starting out.
How to Start a Property Management Company: 12 Frequently Asked Questions
#1: What Legal Status Should a Property Management Company Have?
We first realized that there’s a lot of liability involved in running a property management company, so we incorporated. There are various ways of creating a company: C-corporations, S-corporations, LLCs, and limited partnerships. By incorporating our property management company, 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 that the individuals and parties are executing business as themselves, while stating that their 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. The judge may allow the 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 risk having a double taxation problem, but you shouldn’t have to worry about that 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.
How to Incorporate Your Property Management Company: 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. It should be 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. I feel that LLCs do not have enough court decisions surrounding them to provide a solid, tried-and-true strategy for protecting your assets. Second, I strongly suggest hiring a good accountant.
#2: Does Your Property Management Team Have Proper Licensing?
We didn’t know that a property manager needed to be licensed as a real estate agent in California, or that a property management company had to have a real estate broker license. California law now requires broker applicants to have 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. Prior to creating your company, I highly suggest interning or working for a property management company for long enough to get a broker’s license. Otherwise, the only other route is to get a bachelor’s degree with a real estate concentration.
#3: Should You Join a Real Estate or Property Management Association?
We wanted to know which kind of contracts we should use. Should we use more cost-effective standardized forms, should we create our own, or should we have a lawyer draw them up? We found out that various realtor associations have standardized forms, so we chose to become members of the association. Is joining real estate and property management associations worth the cost? To figure this out, 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 of the standard forms that we would need for our business, all of which 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 owner must go to court, such as during an eviction. This was the first reason why we decided to become a member of 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 now require our property managers to complete CAR’s property management certification. The information in the course is helpful for new property managers starting or running a 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 taken additional training in this field.
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 to hire and train their property managers. They have educational materials, accredited courses, and useful programs. It seems to me that it might be worth it for the property manager or their company to pay for these programs, both to continually increase their expertise and the knowledge, and to show property owners that they have hired a quality company that is only getting better over time.
Why It’s Worth it to Join Industry Associations
We are glad that we chose to look deeper in these associations to see what else they provided beyond the standardized contracts. We found out that they provide education, certifications, legal help, and networking opportunities, all of which we are using extensively.
The contracts they provide can mitigate contractual risks and lower errors and omissions insurance fees. The training modules can be used by property managers in 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 who are available to answer realtors’ questions. The associations provide networking opportunities and can help new agents to find property management internships. In the end, we felt it was well worth becoming a member of the associations because of all of the benefits that they provide.
#4: How Much Do Property Managers Charge Property Owners?
We wanted to know how much we should charge our property owners. We researched the local area to find out the going rates. It seems that the average property management fees in our area are between six and ten percent. After crunching the numbers, as of right now, we feel that 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.
You also need to know how much each property manager will be getting paid before we decide how much you’ll charge the property owners. How much should each manager make? Is it the best way to sign them as independent contractors, pay them “X” per unit, provide them with the policies and procedures, and supervise their actions? What is “X”? Should it be a dollar amount, a percentage of the total gross monthly rent, a percentage of total rent collected 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?
How We Kept Our 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 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 property management software for many of our online services.
We meet real estate brokers and salespeople in person.
We use banks that provide free accounts to us.
#5: How Do You Track Property Management Income and Expenses?
For many new managers, property management accounting is one of the most difficult aspects of running a business.
Here are some basic terms and concepts to become familiar with.
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 acceptable alternatives, or if the income from services that we perform that require the use of a vehicle 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 in enough income to pay for its 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. Ensure that money is flowing correctly; otherwise, there could be a lot of legal and financial trouble.
A budget has a set amount of money every month to pay for all expenses. A successful working budget is one that is satisfactory to both the broker and the client. A very successful working budget is one that is satisfactory to both the broker and the client, and is also increasing the profit generated by the unit or property over time. Every property manager must achieve a successful working budget for every unit or property that he or she is managing.
Controllable expenses are those that change every month. The cost of these expenses is based on variables that the property manager can affect.
Non-controllable expenses do not change every month and cannot be changed, either due to the nature of the property, or the contracts signed regarding the property.
For more information, see Property Management Accounting: A Survival Guide.
#6: How Many Properties Should I Manage?
To answer this question, you need to know how many units a property manager can handle. I have heard that a typical property manager can handle 30-40 individual units. I was told that if they currently manage 30 and someone asks if we can take on a 30-unit complex, then we can say yes, because one agent can solely manage the 30-unit complex. Afterwards, we can hire someone else to take the extra load off, so the agents will go back to just managing 30 units.
How else do the property managers make money if our company does not help people to buy and sell properties? Do we allow real estate agents from other companies to work with us as property managers, while they help people to sell and buy properties with other companies?
Let us assume that the property manager gets 5% of the total rent that’s collected each month, and the average property rents at $1000 per month, making the take-home pay $50 a month per unit. The property manager or the company may collect more than that, but let us assume that the extra goes to business expenses. Thirty units at $50 is only $1500 a month. This is not enough to provide for a household of even one person. So how can a property manager make a living?
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Can a property manager manage one hundred units? Based on the same rate, the take-home pay would then be $5000 a month. If the property manager is managing an apartment complex, then the rent could be lowered a bit, reducing the property manager’s income. Otherwise, the rent could be raised to help the property manager with cashflow, to alleviate his or her financial concerns, and to ensure that he or she can manage the property in the best possible way.
#7: What Will Your Company Culture Look Like?
We wanted to know how we could create a productive, positive company culture throughout the workplace, integrating this into every aspect of our business. We learned from Stephen Covey’s Seven Habits of Highly Effective People that you must start out with your core values, then establish your mission statement, create your goals, and prioritize tasks. So we devised a focus for our business, as well as a strategic plan that we change and refine continuously.
We have seven core values: Integrity, excellence, charity, respect, character, teamwork, and education.
We have a mission statement: “We help people to 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 sums it all up in a concise way: “Complete property management services for the savvy owner.” In fact, we print this phrase on our business cards.
Legally, establishing core values can protect your 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 values, 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 that the business and its employees need in order to succeed. Second, follow the list that I created in order: Come up with a business focus, a few core values (I suggest looking at Buildium’s core values), a mission statement, and a business plan. Third, live the core values; instill a positive environment that helps everyone to 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 components of the growth of any company.
#8: How Will You Provide Amazing Customer Service?
We wanted to build a quality company that provided excellent service. If we do not provide the best services, then nothing else matters.
In order to provide great customer service, we determined some best practices by interviewing many brokers and property managers. From these conversations, we learned the following:
Our first best practice is focusing on customer experience. We manage the property owner’s units to maximize profits and meet his or her goals and needs for each property. We take care of each property and 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 involved 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, it could cost you money, clients, or customers, or otherwise hurt the business.
Our third best practice is to ask the experts about best practices in their field. For example, after we asked a tenant screening company about their best practices, we decided that it would be worth it to have them take care of the screening portion and give us their results. We make a habit of taking others’ advice, which is based on a lot more experience (as well as Fair Housing Laws). We did not necessarily want to outsource our job, but we did want to provide the best service to our clients. If we feel that the best way to do that is to have an excellent screening company conduct a portion of the tenant verification process, which they will do better than we could, then we will go ahead with this decision.
Finally, our fourth best practice is to continue to research best practices and 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.
#9: How Should You Market Your Property Management Company?
How do we market our company? Word-of-mouth is always the best way.
How can you spread your information if you have no clients? A referral payment program. We are the only property management company in our area that offers referral fees. After researching, we realized that there are two types of referral options: one-time lump sum payments, and residual payments made every month or year for 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.
Advice for Running a Referral 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 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 to 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.
As a result of this strategy, people give us a warm introduction; property owners are more receptive to us; and if we sign contracts, then everyone wins.
#10: How Will You Handle Property Inspections?
We do four covenant property inspections every year. We do two notice inspections each year, where we will give a notice of entry to the tenants, bring a general contractor, and do an inspection of the property. The contractor does a maintenance and habitability walk-through to determine whether the tenants are holding up their end of the rental agreement. They charge us a handy-person rate for this service, since it does not require a general contractor. The other two non-notice inspections are halfway between the two notice inspections. We drive by the property and note any information that we can see from the street or sidewalk, then follow up accordingly.
There are other types of inspections that may be required for specific properties. If the property has a fireplace, then it may require a yearly inspection and cleaning service in the fall to prevent fires, carbon monoxide poisoning, and larger maintenance issues. If the property has a pool, then it may need a monthly chemical inspection; pools need servicing, otherwise the water may not be swimmable after a few months. Has the roof been checked lately? 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.
#11: Which Vendors Will You Need?
We wanted to know when we needed to call vendors, when to hire them, and who should pay their fees. Truthfully, we didn’t realize that managing properties entailed so much work. We are not experts in everything, much less licensed in every skill that goes into managing properties.
There are so many types of vendors that we needed to have on our vendor list. Here are some of them, from A to Z: Chimney sweeps, electricians, emergency restoration companies, eviction services companies, flooring vendors, general contractors, home inspectors, HVAC services, insurance companies (flood insurance, home insurance, renters insurance, etc.), landscapers, land surveyors (for instance, to check FEMA flood maps to see if a property in a designated flood zone requires flood insurance), lawyers & legal services companies, locksmiths, mortgage lenders (we pay the PITI on behalf of the property owners), painters, pest & termite control, plumbers, pool services, rent recovery services, roof inspectors, and tenant screening services.
Two notes on the in-depth services that two vendors provide:
- Our local locksmith 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 ask a certified locksmith about this topic. In addition, the locksmith provides many other services, such as handling lock-outs, swapping out locks, and installing locks on windows.
- 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, then they move to a level-two inspection. Finally, if they have to tear down, replace, or rebuild parts of the fireplace, that would be a level-three inspection.
From property maintenance services to inspections, there are many other vendors to check out. When hiring any vendor, make sure to get a copy of their license, insurance certificate, and bond certificate (if they have one) to protect your company if something goes wrong. Also, try to fight for a reduced rate for your property owners; they will appreciate that you worked hard to save them money.
#12: Does Your Property Management Business Need an Accountant and a Lawyer?
I strongly suggest working with a good accountant. An accountant familiar with real estate, management companies, and your business set-up (corporation, sole proprietor, etc.) will be able to manage your books correctly, offer business advice, and keep you out of trouble with the IRS. Personally, I chose a certified public accountant to be one of my two business partners. As the Chief Financial Officer and treasurer, he is in a 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. This goes hand-in-hand with protecting your assets and mitigating liability. A corporate lawyer can provide help on many key issues; for example, they may charge a lower rate for performing eviction services for your property owners. A lawyer can also look over paperwork to verify that the company is protected from various risks. In addition, in many states, if your company is a corporation, they must be represented by a lawyer in court.
As a lawyer’s primary purpose is to protect your assets from liability, he or she may suggest that you change your business from a sole proprietorship to a corporation. If you rent out appliances 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, who then rents them out to tenants. If someone gets hurt by the appliance, they’ll have to go after the second company–which is likely a corporation–and will have a much more difficult time trying to go after the property management company itself. This could also be the case with the building in which the property management company resides. If the property is owned by a second or third company, which it rents it out to the property management company, the property will be protected if the management company is the subject of a lawsuit.
What’s your best advice to someone who’s considering starting a property management company? Let us know in the comments!Read more on Scaling