This story is featured in this week’s premier edition of Inman’s weekly newsletter, Property Portfolio. Every Tuesday, the newsletter explores the overlapping worlds of real estate professionals and the fast-growing property investment and management sector. Sign up to receive Property Portfolio here.
Property management — for most real estate brokers — seems to be the red-headed step child of services offered to consumers. According to NAR’s 2019 Profile of Real Estate Firms, only 7 percent of real estate brokerages specialize mainly in property management.
Of those who considered residential or commercial sales their main line of business, only 31 percent also offered property management to their clients.
Property management can be labor intensive, a legal minefield and seem like more trouble than it is worth. But with proper staffing and systems in place, property management can add another stream of income to your business — and set you apart from your competitors.
Benefits of adding a property management line
The homeownership rate in the United States is roughly 65 percent. Approximately 35 percent of our population does not occupy homes that they own. That’s a huge pool of potential clients not being served. Granted, some might be living at home or with others, but those who are renting — or need a rental — are a historically underserved market.
Extra income
Not all offices or agents will return a phone call from a consumer who “just” wants a rental. But rental placements can be relatively quick money for an agent willing to work with them.
They normally have a fast need for a rental property, and this won’t be a six- or 12-month time frame from first contact to closing. New agents might especially find rentals lead to faster money, and they might help them bide their time before that first closing.
Long-lasting relationships
If your firm helps consumers find rentals, you’ll be working with clients who might form a long-term relationship with your office. Besides the benefit of placing a rental and taking a fee, keeping in touch with these renters means you will be top-of-mind if and when they are ready to buy.
Not all will move to that next step. Some will permanently rent or move on to another location, but a percentage will eventually decide to buy, and if you maintain that relationship, you’ll be their trusted real estate adviser — and buyer’s agent.
Investor clients
Adding property management to your brokerage offerings might attract new investor clients to your office. Some investors want help not just finding and closing new properties, but they want long-term help with collecting rents and managing the units.
If you do not offer this end-to-end service, you might lose out on clients who find help elsewhere. Eventually many investors sell. Some find the business is harder than they thought and need to liquidate. If you are the one who sold them the buildings, and you are the one who is managing them as well, you’re most likely to be selling them when this need occurs.
Security
I opened my office in 2007 at the peak of the market run and added a property management line in 2009. That stream of income helped us make it through the last real estate downturn. The income brought in through property management covered our rent and a little more.
As we became busier and the property management became overwhelming (honestly, too successful), we cut back and stopped adding new clients. Now as 2019 shows signs of future weakening and rumbles on the horizon of the market shifting, we are ramping up the division again.
If we hit a rough spot in 2020 or 2021, property management once again will cover the main bills.
The risk
Property management is hard. It can be frustrating, and it will increase your liability. Property management is one of the main factors in determining your errors and omissions insurance risk levels and will likely increase your E&O rates.
State reporting requirements can be strict, and you might have to have separate brokerage and property management accounts — both operating and expenses and escrow if you are handling security deposits. But as with all lines of business, diversification helps us survive.
Things to consider when adding property management
As with all aspects of your business, you’ll need systems in place to handle this new line of business. Technology helps, but you also need boots on the ground — administrative help, agents to show rentals and handle leases and a reliable group of vendors to fix problems.
Start slowly with trusted clients
Ramp up slowly. Test the systems with a few trusted clients, such as past investors with your company. Contact your investors who have bought properties through your firm in the past, and ask if they need help.
These people already know you and hopefully like and trust you. Offering them your new services is a natural fit. Use them as your beta test as you build out your systems. Tell them to be honest with you and give feedback. You need to be sure all systems work smoothly before rolling out to clients with dozens of units and people who do not know you.
Know the rules
Pay attention to licensing laws in your state, so you know what you can and cannot do as a property manager.
In Pennsylvania, for example, only the broker can manage properties. An agent can assist, but the property manager is the broker in charge. You might need a separate account for property management income and expenses and an account for security deposits.
Keeping this straight is essential to understanding how the property management division works and if it is profitable as well as ensuring tenant money is safe and untouched. Check out the National Association of Residential Property Managers for education, networking and resources.
Use the right tools
There are dozens of property management software options out there, if you choose to automate this process. You might choose to use a simple Excel spreadsheet or Google sheet per property. The more units you manage, the harder spreadsheets will be to maintain.
For transparency, I prefer a property management-specific online platform that allows tenants to pay online, and where landlords can log in and view their account status. These software solutions can be expensive, but I’ve found cheap or freemium versions don’t provide the perks I need.
To be state-compliant in record keeping, transparent to the landlords and avoid accounting headaches, use a software vendor. Check out Buildium, PropertyWare, AppFolio, Rently, Yardi Breeze or RentManager.
Work with good people
Reliable maintenance contractors are a must if you are going to do this properly. Tenants will call at 8 p.m. on Sunday to say that the toilet overflowed or that the upstairs neighbor is fighting with his wife. You need a plan for these calls.
All calls that are tenant-related need to be handled in an appropriate manner. Emergency calls should be handled quickly (the water pipe broke), and others should be routed to a service vendor as soon as practical. If you — the broker — are out of town, who will decide what is handled tonight and what is handled in the morning?
Vendors need to be licensed and insured, not just to be sure they do a good job but also to protect your brokerage. Uncle Mike might be able to handle handyman jobs around your personal rentals, but assigning workmen to your clients’ rentals requires a higher level of professionalism.
There are so many intricacies to be worked out in handling complaints that it can seem overwhelming. The more units you handle, the harder it gets to keep track. If you have property management software and a good number of units, you’ll want the tenants to not only be able to pay online, but also to put in maintenance requests online.
The more you streamline, the easier it will be to keep track of the landlords and tenant issues.
Property management isn’t for everyone. Collecting rents, tracking down late payers and handling problems can be time consuming. You might need to add staff (both administrative to handle the paperwork and agents to work with the tenants and landlords). Don’t do this half-heartedly.
You need to go all-in or not at all, in my experience. Done properly — with solid systems, vendors and technology — property management can be a steady stream of income and fresh clients. If the market hits a downturn in the near future, this could be a way to smooth out the bumps.
Erica Ramus, MRE, is the broker/owner of RAMUS Real Estate. You can follow her on Twitter or LinkedIn.
