Property management is a huge but highly fragmented industry. It’s a roughly $58 billion sector in the U.S. alone, and most of the companies operating in the space have only a handful of employees. But while the barriers to entry might be low, finding success in the property management industry can be a challenge. Many property management companies fold after just a few years.
When you dig a little deeper, you start to see a few trends emerge. Property management companies that go under usually have a few characteristics in common. Here are 8 of the most common reasons why property management companies fail—and what you should do to avoid the same fate!
Why Property Management Companies Fail: Reason #1
They Charge Too Little
Property management is a crowded field; so one of the ways that some property management companies try to stand out is by offering below-market-rate management fees. “Whereas our competitors charge 8-12% of gross rents collected, we’ll only charge 4-8%!” they offer.
But this is a fool’s errand. Property management companies rely on their management fees to fund all aspects of their operation. When you offer too significant of a discount, you aren’t able to provide the same high-quality service as your competitors. When you start stretching your budget too thin, it becomes harder to respond to your clients’ needs.
Sure, this tactic might win you new business; but if your rates are too low, you won’t be able to afford hiring the additional staff you need to manage the increased workload. Your management quality will start to decline for new and existing clients alike—which could actually cost you business in the long run.
To avoid this common pitfall, spend some time getting an accurate handle on your operating budget. How much do you need to charge in order to cover your current expenses (and still make a profit)? Then, evaluate your staff capacity. Do you have room to add new units to your portfolio without hiring additional help? If not, analyze:
- How many new units you’d need to add to your portfolio to warrant hiring another property manager under your existing management fee structure.
- How much you need to raise your management fee to add that capacity so you don’t sacrifice service when taking on new clients.
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Why Property Management Companies Fail: Reason #2
They Don’t Know Their Market
Property managers often become too involved in the day-to-day operations of the properties they manage to stay up-to-speed on local market conditions. We see this happen a lot with small mom-and-pop shops and solo property managers. They’re so deep in the weeds of running their business that they fail to track relevant market data that would not only help to grow their business, but benefit the investors they work with as well.
Case in point: We recently spoke with a property manager who was charging roughly 20% below-market rents. He’s been so busy over the past few years that he didn’t even realize his local market had strengthened by that much. Suddenly, it clicked: Now he knew why he was able to rent units so quickly. He was undercharging! In doing so, he was leaving important revenue on the table—for both his investors and his business, since his management fee is based on total rents collected.
We know that property managers are busy, but it’s critically important to keep your finger on the pulse of your local market conditions. At least once a quarter, scope out comps in the areas you serve to ensure that your rents are still competitive. If investors catch wind that you’re undercharging, they might decide to work with another management company.
Why Property Management Companies Fail: Reason #3
They Expand Too Quickly
We’re all for property management companies striving to grow, but they need to do so methodically. One reason why property management companies fail is because they add too many units to their portfolio too quickly. They successfully bid on large management contracts. They acquire other property management companies and assume operations.
But amidst the excitement of growing their company, they fail to plan accordingly. All of a sudden, their portfolio of units under management explodes and they have no way to manage that influx of units successfully. Sadly, these companies are destined to fail.
It doesn’t have to be that way. If you’re considering growing your property management portfolio, take a step back and (again) review your staff’s capacity. Bring on and train new hires as soon as possible. Put systems in place to streamline operations. Start using property management software that can support your company’s growth. Integrate new technology to lift some of the weight off of your property managers’ shoulders.
Why Property Management Companies Fail: Reason #4
They’re Spread Too Thin
There’s a real benefit to managing a large complex, or rental units located in the same general area: It makes your life so much easier. Property managers can be far more efficient when units are in close proximity to one another.
One of the reasons why property management companies fail is because the units they maintain are too disaggregated. 2 units on this side of town, 10 units on the other. Another 12 units in the town next door, and a 20-unit project they just couldn’t turn down… even though it’s over 30 miles away from their home base! This leaves property managers running all over the place. They need to find contractors in all of the different areas. They need to learn the nuances of each individual market. They might even need to adopt different marketing strategies depending on the local demographic.
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In order to be a successful property manager, you need to learn when to say no. If you’re over-eager to add units to your profile, you could end up managing properties that are more of a hassle than they’re worth. After all, which do you think is easier: Managing a 60-unit complex, or 15 different properties with 4 units each? (I don’t think we need to answer that for you!)
Why Property Management Companies Fail: Reason #5
They’re Always Playing Catch-Up
Too many property managers fly by the seats of their pants. They start to renew leases sometime in January… or February. Whoops! A little behind schedule? Maybe we’ll start to renew leases in April. After all, they don’t expire until June 30th!
When property managers don’t have proper systems in place, they often find themselves behind the 8-ball. They’re always playing catch-up.
This doesn’t just pertain to leasing. To be successful, you should have systems in place for collecting rent, responding to service requests, and tracking ongoing repairs and maintenance. Even better: Use property management software to automate these tasks.
Why Property Management Companies Fail: Reason #6
They’re Afraid of Technology
A tenant wants to see a vacant unit on Monday night. You rush over to meet them, only to have them reschedule. Huge waste of time. Then, a resident locks herself out on Saturday night. Here we go again! Another trip out to the property.
There are so many ways that property managers can integrate new technology into their business to save time, money, and (perhaps most importantly) unnecessary headaches. For instance, you might market a vacant unit using 3D video capabilities that allows them to browse the unit as if they were really there. Or, you can use smart lock technology to let them tour the property on their own. Adding smart locks to all of your units will also solve that pesky lock-out problem once and for all!
Why Property Management Companies Fail: Reason #7
They Overpay for Maintenance
Maintenance is one of the biggest costs for property management companies. Some property managers tack on their own fee to any contractor’s estimate for the sake of managing the process. Others carefully vet contractors in advance, then enter into exclusivity agreements with their contractors to secure lower rates. The former strategy can hurt a property manager’s business, whereas the latter may be perceived as a value-add to real estate investors when evaluating potential property managers.
Regardless of the strategy that you adopt, it’s important that you have a solid grasp on the going rates for contractors and various repairs and maintenance costs. For instance, renovating a 900 ft.2 unit for $15,000 might seem like a bargain initially; but what if you knew that other contractors could do the same work, at the same level of quality, for 30% less? If you want to run a successful property management company, now’s the time to stop overpaying your contractors.
Why Property Management Companies Fail: Reason #8
Their Books Are a Mess
If only we had a dollar for every time that this put a property management company out of business! Too often, property managers (and business owners in general) think that they can handle all of their accounting in-house. The problem is that most property managers aren’t trained to be accountants; and as a result, they don’t properly manage their books.
Not only do property managers need to have a strong understanding of their own accounting, but they need to be adept at managing their clients’ books as well. One reason why property management companies fail is because the accounting that they do for their investors is too loose. This results in missing income, inaccurate expenses, overdue payments to third-party vendors, inaccurate rent rolls, and so much more. Instead, do one of two things: Either hire a dedicated bookkeeper in-house, or outsource your bookkeeping to a professional accountant.
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Not every property management company will be successful, but there’s no reason why yours can’t be. If you can successfully manage to avoid these pitfalls, you’ll be headed in the right direction.
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