- How Do Property Management Companies Make Money
- Is Property Management Profitable?
- How To Start A Property Management Company
- H2: How Much Does It Cost To Start A Property Management Business? (Secondary Keyword)
- Property Management Business Models (Secondary Keyword)
- Property Management Startup Checklist
‘Property Management’ is one of those concepts that seem pretty self-explanatory and obvious right? - it’s the management of properties. Easy enough right? Wrong.
To the outside world, Property Management can be belittled to a couple of sentences like - "it’s the operation, control, maintenance, and oversight of real estate and physical property” or “it’s the daily oversight of residential, commercial, or industrial real estate”. I’m sure you’ve seen those definitions before or similar rephrase.
However, if you have any intentions of starting a property management company or knowing more about this industry - then you’re going to need way more than these bland definitions.
This article encompasses all there is to know about property management and the step-by-step procedures you’d need to follow to start a company of your own. Let’s dive in.
How Do Property Management Companies Make Money
There are dozens of reasons why you might want to start a property management company of your own.
Whatever the reason may be, one common factor is important to virtually everyone which is whether going into this business will be profitable or not.
Which begs the question - How exactly do Property Management Companies make money?
The simple answer is that they make money by charging multiple (legitimate) fees from their clients. Some of these could include
Initial Setup Fee
This is the fee a property management company will charge to set up a property owner’s initial account with their company.
This fee could also include costs to inspect the condition of the property, as well as costs to notify tenants that your company will be managing the property.
This is a standard fee to charge and it’s usually done on a monthly basis. Typically, management fees are taken as a percentage of the total units under management.
However, some companies will charge a flat fee which is usually calculated based on the size of the property. It’s a fixed amount that must be paid every month irrespective of whether rent is paid or not.
Going by the percentage model, you could either choose to collect the monthly management for only all the properties once rent is due regardless of if the property is tenant occupied or not. Or you could charge when the rent has been collected by your client.
The traditional percentage is usually between 8% to 12% but, could go as low as 5% for properties with a lot of units (because the rent will be higher so you’d still make revenue and your client gets to pay less. It’s a win-win).
Maintenance fees can be categorized into simple daily tasks (such as keeping common areas clean, taking out garbage and snow, and leaf removal) or maintenance in terms of repair.
The maintenance fee in terms of simple daily tasks is usually hidden in the management fee. When it comes to repairs, there are several ways to go about it.
The most profitable way is to create a Reserve Repair Fund. This is a separate account that the property owner puts money in for necessary repairs at the property.
They can choose to authorize every repair deduction from the account or can let your company use the account at their discretion. A minimum amount must be kept in this account, which would be agreed upon in the contract.
For more out-of-the-box ideas on how you can build higher rental profits through maintenance, check out our article on property maintenance essential for higher rental profits .
Alternatively, you can give your client the option of using their own handymen/contractors for repairs. This method might not make you more money but, it sure earns you more trust.
Tenant Placement Fees
Some management companies charge a separate fee for placing a tenant in the client’s property.
This fee can be collected as a sign-up fee or a lease fee. Sign-up fee means you charge upfront and then after your client’s payment, you find them a tenant before the contract expires. The lease fee is collected after a tenant has moved in.
In both cases, the fee is meant to cover the costs associated with the marketing, showing, and screening of prospective tenants, drafting the lease and completing the move-in inspection. The only difference is when the client makes the payment.
Of course, collecting Tenant Placement fees in the form of a Lease fee is most attractive to most clients because then they only have to pay you money when they make money in terms of rent from a new tenant. Tenant Placement fees typically range from $199 to 50% of the first month’s rent.
Charging this fee could make your property management company a lot of money but, it comes with a con or two.
How an application fee works is that you charge potential tenants a fixed price of maybe $20, $40 or $50 to view the property.
So if a management company charges a $50 application fee and a property attracted 5 potential tenants in a day who are interested in viewing, that would be $250 made in a day.
Over a long period of time, property management companies could be making monthly revenue from this that is equivalent to or more than even the management fees.
The con is that adding a fee to view a property or to simply complete an application could be an unnecessary barrier that may slow the rental process. I mean, would you pay $50 just to view a property? Probably not.
However, many people will pay a fee to officially apply after viewing. If you’re not confident about charging for viewings, then try charging potential tenants who have viewed for free and are interested in taking the next step to apply.
This is a pretty ridiculous one but, technically it’s still a way property management companies make money. You could charge an extra late fee for tenants who do not pay their rent when due. The late fees aren’t collected from the tenant but, from your client.
Some property management companies are able to pull this off - good for them but, it’s advisable not to.
Profiting off late rent payments at the expense of your client is shady. Especially if your company was the one that placed the Tenant.
So while it’s good to know that this is a thing you can do to make more money, know that it comes with the risk of losing the client’s trust in you
Here are some other fees you can charge in addition to your management fees:
- Move-in and Move out Inspections
- Photography and Video to be used for promotion
- Internet Marketing fee
- Eviction fees
- Outside of Normal Duties fee
- Insurance Claim fee
Early Termination Fee
Finally, the early termination fee. You have to protect yourself. If your client breaks their contract early, they should have to pay an early termination fee or you could take them to court for breach of contract.
Is Property Management Profitable?
With the endless list of fees that could be generated from property management, one might start to look at it as a get-rich-quick scheme. But is it really a profitable business?
To make a reasonable amount of revenue for your salary and your workers, you will need to have at least 60 to 75 units under management.
Property management can be a very lucrative business if the right work ethic and a solid system are in play. There are many areas to generate multiple profit pools from and the only way to do it correctly is slowly.
How To Start A Property Management Company
If you’re impressed with what property management entails and how you can make money off it, you might be thinking about starting your own company. Starting a company, especially one this delicate, can seem scary or intimidating.
Here is a step-by-step guide on how to begin your journey in this niche.
Step 1: Setting Up Your Property Management Company
Property Management Business Plans
A business plan is an overview of your property management business and lays out your company’s core values, strategies, and growth plan for the next future. It explains your business goals and your strategy for reaching them. It also includes market research to support your plans.
Some of the content that should be included in your business plan are:
- Executive summary
- Company description
- Products and services
- Marketing plan
- Operational plan
- Financial plan/projections
You can use our Free Project management business template to create yours.
Property Management Certification
In most states, property managers are required to hold a real estate broker's license or to be a licensed realtors employed by a broker.
There are no formal property management certification requirements; however, a variety of organizations offer membership certifications.
If you’re interested in getting certified, here is a list of certifications to consider:
- Building Owners and Managers Association International(BOMA)
- Institute of Real Estate Management (IREM)
- National Apartment Association (NAA)
- National Association of Residential Property Managers (NARPM)
- National Property Management Association (NPMA)
- National Apartment Leasing Professional (NALP)
- Certified Apartment Manager (CAM)
- Certified Property Manager (CPM)
- Master Property Manager (MPM)
To understand the property management requirements based on your location, check out the property management laws for each state .
Property Manager License
As mentioned earlier, to set up your project management company, you are required to hold a real estate broker’s license or realtor’s license.
Alternatively, you can just hire a skilled and licensed property manager. Not all states require a license for property managers.
However, before you set up your property management company, make sure to check if your state requires a property manager license . If they do, ensure you have the license to practice in your state.
Determine the Legal Entity of Your Business
The next thing is to establish a legal entity for your business. This means that you have to determine what type of legal entity you want to do business as. This will determine the taxes you’ll have to pay, investment properties, and paperwork to file.
There are four types of legal structures for a business
- Sole Proprietorship: This means that you are responsible for your business profits and debts. It is the most basic business structure.
- Corporation: Corporations can own properties and are held accountable to pay taxes.
- Partnership: A partnership is a shared responsibility between two or more people who are liable for a business
- Limited Liability Company (LLC): This legal structure allows owners to limit personal liability. However, they still get to pay taxes.
Typically, most property management companies operate as a Limited Liability Corporation (LLC). It is advisable to work with your legal counsel to get the best idea of which structure to follow.
Step 2: Organizing Your Finances
The next major part of starting a property management business is your finances. You need to consider your revenue and expenses.
Now, to properly do that, you need to set up your property accounting.
Set Up Property Accounting
For a brand new business and less scalable businesses, Excel or another spreadsheet is totally up to the job but, for property management? No way.
You need a method that can enable you to follow every transaction and easily record payments from residents and association homeowners.
The most effective way to handle your finances is by getting property management accounting software .
To get the best out of your accounting software and be certain it’s capable of doing what you need, it’s best to sign up for a free trial if one is available.
Understand Expenses Involve
This means you should understand the different expenses involved in starting a property management company.
These expenses include:
- Business license
- Buying initial equipment
- Property Management and Accounting Software Fees
- Bookkeeping Assistance Program
- Website, Email, and Learning Center
- Salary and Wage Expenses
The expenses could vary based on your peculiar requirements. Understanding the expenses that would be involved will play a vital role in your revenue forecast.
Your revenue forecast is an essential part of business planning. You need to know approximately how much you can make throughout the year, your expected cash flow and how much growth your company could undergo in the nearest years.
To develop your revenue forecast, you need to do some thorough research. Obtain data from competitors in similar growth stages as your business predicted seasonal trends and other increased revenue periods.
You can also utilize industry case studies, reports, and other data sources for a compilation. Look beyond your regular costs and estimate the number of occasional expense costs.
Make estimates for irregular costs and miscellaneous costs as well. Planning for higher costs and unexpected expenses by having a budget surplus makes you prepared for the worst.
Step 3: Getting Your Business Off the Ground
Once your business plan and finances have been sorted out, it’s time to move on to get your business off the ground and set it in motion.
And the first step in doing that is building the right team.
Property Management Team
You can’t hire just anybody to manage properties and that’s why successful companies hire well. The first question is what roles are you looking to fill?
Here are some of the typical tasks that will come up and need a staff to regulate:
- Performing rent collection
- Adjusting lease terms as necessary
- Finding and vetting new tenants
- Drawing up legally compliant leases
- Evicting tenants if it becomes necessary
- Performing onsite repairs
- Maintaining the property and green spaces
- Performing bookkeeping and staying organized
Now remember, for a start-up, you certainly do not need to hire one person for each task. Starting with a small team is always more profitable so the key is to find highly efficient people.
The next question is what kind of person can you work with character-wise? Don’t get me wrong, high qualification is great but, do you know what’s even better? Personality. It’s advisable to not over-focus on technical skills.
Like the saying goes “Hire for personality, train for skill.”
Here are some tips to help you with building your complete team:
- Have a great contractor on standby
- Implement an organization system
- Choose an easy to navigate property management software
- Build a team that has a customer service mindset
Property Management Software You’ll Need
Technology helps property managers manage their properties profitably. That’s why it’s one of the tools needed to build a property management company you’re confident of.
You can automate most of the processes that come with managing properties. An added advantage is that using the right software could help you cut down on the number of staff you need to hire thereby saving you money and time.
There are various software and apps you can install on your employees’ computers that could handle isolated tasks such as collaboration, accounting tasks, etc but, the best method is to get an all-in-one property management software that handles ALL automatable tasks from one platform.
Step 4: Marketing Your Property Management Company
The best and most feature-packed property management company could go ignored if it’s not marketed properly.
Below are guaranteed marketing strategies to put your company at the forefront of the market:
- Proper branding and development of your website
- Utilizing Search engine optimization (SEO)
- Content marketing
- Investing in pay per click advertising (PPC)
- Email marketing (and remarketing)
- Video marketing
- Social media marketing
Step 5: Get Your First Property
Property Management Pricing Structure
In the ' How do Property Management Companies Make Money ' section of this article, we were able to delve into the common fees and services that they can offer to increase revenue. Before you get your first property, you need to develop a pricing structure.
Heard of the Three-Tier Pricing Strategy ? It’s simply the act of giving your clients three pricing options in the form of packages.
Now with the common services and fees mentioned earlier in this article and also the add-on services, you can develop your pricing packages for your clients based on those.
An example of a property management company that has done this perfectly is Real PM gold. You can take a look at their pricing structure for inspiration but, make sure to develop one yourself and put your market into consideration when doing so.
Property Management Contracts
The term contract signifies so much commitment. It’s the make-it or break-it moment. The final clause.
People in the property management space usually refer to the contracts as ‘property management agreements’ or ‘management agency agreements’ and they all mean the same thing.
What happens when your contracts are filled with loopholes that affect you or a detrimental to your client in some way?
You don’t want to find out the hard way. Never be careless with creating your agreement documents. Even though we never read the term and conditions when installing an application, best believe that your client will read your agreement contracts over and over again.
And here are some of the things they’d be looking out for that you should make sure to cover properly:
- Services and Fees
- Contract Duration
- Termination Clause
- The services you’d be rendering aka your responsibilities
Step 6: Craft Your Resident Experience
Resident experience refers to a resident’s living experience in a building. Savvy property managers know that their responsibility includes creating an intentional resident experience.
Some of the benefits of crafting a positive resident experience include:
- Increased lease renewal rates
- Higher referral rates → higher occupancy rates
- Maximized net operating income (NOI)
- Loyal residents, tight-knit communities, and better reviews
Here are 3 ways to create a positive resident experience:
Experience & Amenities
When deciding on which amenities to include in a property, you should consider the behaviors, preferences, and demographics of the customers in your target market.
Residents crave amenities that ensure their safety, help add day-to-day comfort and simplify their work-life balance. Some top amenities residents want in 2021 include Coworking spaces, Visitor management systems, and Outdoor space.
Handle Complaints, Requests & Disputes
Taking care of problems quickly goes a long way in solidifying relationships with your clients and their tenants.
Hiring professional landscapers and cleaners and an easy way for the tenants to communicate their requests and disputes shows that you care about their wellbeing.
When taking action in regards to repair, make sure to let them know about it far ahead of time. Send out details regarding the scope and timeline of repairs or upcoming projects to limit surprise disruptions and resident frustration.
You can best prepare residents by providing them with a detailed emergency response plan.
If you’re in an area with insecurity, you might want to make plans of how to handle neighborhood violence or robberies. Or in an area where natural disasters like hurricanes or earthquakes happen frequently, you might want to practice drills.
H2: How Much Does It Cost To Start A Property Management Business? (Secondary Keyword)
The low starting cost in property management makes it appealing as a new business idea. No academic qualifications are necessary. According to AppFolio , startup fees range from $2,000 to $10,000, and you may start the business with very little to no experience. Real estate experience is advantageous but not necessary.
These figures above are very much relative, and starting a self storage business may cost way more than that, especially when it’s on a larger scale.
There’s also a case of starting our property management company from the scratch and owning a franchise.
For instance, investment costs for a property management franchises company known as All County® Property Management range from $72,450 to $104,400, making them comparatively affordable but not as low as the figures in the first paragraph.
This is based on the $45,000 initial franchise fee plus an anticipated range of $27,450 to $59,400 for start-up costs and ongoing operational costs. Also, the initial costs may be significantly lower if you already have an office.
Estimated Cost Breakdown:
Renting an office space is undoubtedly the most important aspect affecting a property management company's start-up costs. The following estimation by “ Profitable Ventures ” should serve as a reference for beginning a small to medium-sized property management business:
- The entire incorporation cost for the business was $750.
- Liability insurance, licenses, and permits will cost $2,500.
- The sum of $40,000 is required to purchase a suitable office space with appropriate room for six months (new construction of the facility included).
- The price to outfit the office (including furniture, phones, filing cabinets, pcs, photocopiers, fax machines, and other devices) is $5,000.
- Launching your official website will cost you $600.
- Budget for paying power bills and at least two staff for three months: $10,000
- Business cards, signage, advertisements, promotions, and other additional costs total $2,500.
- Extra cost: $1000
Financing Your Property Management Business
If you decide to establish your property management company on a decent size, you may not require a lot of cash, but if you want to launch it on a big scale, you will undoubtedly need to obtain the necessary start-up capital.
If you plan to launch your property management business on a significant scale, you will require a suitable office space, office supplies, and money set aside for paying staff and utility bills for at three months at least. You are essentially expected to raise your own startup funding.
Writing a strong business plan is one of the first, if not the most important, considerations you should make when seeking finance for your enterprise.
You might not need to do put too much effort into persuading your friends, investors, and aquintances to invest in your company if you already have a solid and practical business strategy/plan in place.
Here are some of the possibilities you might investigate while looking for startup money for your property management company:
- Acquiring funds from one's own savings and via the sale of one's own assets and properties.
- Obtaining funding from partners and investors.
- Making a Loan Request to Your Bank or Banks.
- Presenting your business plan and requesting business grants, startup money, and seed funding from donor groups.
- Ask your friends and relatives for soft loans as a source.
Property Management Business Models (Secondary Keyword)
You may ask how the property management business generates revenue if this seems like something that could interest you. There are four common business models that a property management firm may choose to use.
Depending on the particular circumstance, a mixture of these configurations may potentially be adopted. Below are some of the business models property managers may utilize:
Rent as a percentage:
This is the most typical kind of agreement. To give the management permission to rent out the apartments, the landlord enters into an agreement with it. Typically, the business keeps about 5% and 20% of each month's rent and provides the remainder to the landlord.
It is common in this sort of setup for the homeowner to not even be aware of who the tenants are. This concept is particularly helpful because you don't have to pay if there isn't a renter.
As the term suggests, this is a set sum that is paid to the business each month in exchange for its services. When the building or land is empty, this kind of business strategy is employed.
The property manager will keep an eye on the property to prevent potential vandals, thieves, or squatters. A flat charge is paid since there is no rent to deduct a percentage from.
Another option is the "Guaranteed rent" agreement, which is less popular than a rent percentage or a set rate. In this kind of arrangement, the corporation sublets the property to a third party for a greater cost while still paying the landlord a set monthly price. The amount of revenue the property management makes distinguishes the two.
A commercial setting is where this kind of agreement is most frequently employed. A percentage of the income generated by the use of the landlord's premises by the property management business, such as a retail outlet, is split with the landlord.
Bonus: Managing Your Properties
Leads Pipeline (process to get high-quality residents)
Here are 5 ways to keep your tenant pipeline flowing:
- Automate as Much as Possible
- Invest in Content and Photos
- Build Your Email List and Automate Your Newsletter
- Get Your Properties on the Map
- Improve your Online Reputation
Use Property Management Software for a better bottom line.
It automates the leads generation process and takes most of the workload off your hands.
Property Management Compliance
Compliance usually falls under one of three categories:
- Financials Compliance
- Physical Property Standards and Maintenance
- Tenant Relations
Property Management Startup Checklist
You might understand the theory of starting your property management company but, it’s easy to miss some things when the process is in motion.
To ensure you cover all that needs to be covered, utilize a checklist.
This Property Management Startup Checklist is a summary of the steps involved in building a property management company the right way.