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The Pros and Cons of Starting a Property Management Company

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Before we get started, it needs to be said: why would you want to start a property management company? You may just see initial dollar signs, but it’s by far the hardest part of real estate investing and an incredibly thankless job.

If you want to start a property management company, then you need to know that, first off, you’re going to be spending a lot of time managing properties, dealing with tenants, and talking to property owners. What you’re not going to be doing is building your own rental property portfolio because you won’t have the time because starting a company is more than a full time job.

Property Management Companies are a Headache

The landlords aren’t happy with you because the repair costs are too costly. Tenant disputes arise because repairs can’t happen as fast as they think they should, and your maintenance workers and contractors aren’t happy because they thought they’d delivered good work, even though they didn’t. Lastly, keeping property managers motivated is hard because they are constantly dealing with unhappy clients and customers. It’s a thankless job that quickly burns out some employees.

Here’s why you DON’T want to be a property manager.

If you know Oz Realty, you know we are a property management company servicing Toledo for years. So we know all of the ins and outs of rental properties. And, of course, we’ve handled our fair share of tenant disputes.

Tenants from hell.

You’re not always going to currently screen tenants and keep unsuitable tenants out of the properties you manage. Tenant related issues will always occur.

One time, a tenant from hell resulted in us having to go to court. The tenant claimed that they were suffering from carbon monoxide poisoning due to an exterior light exploding. We aren’t science experts, but the facts just didn’t add up. We settled the legal dispute in an effort to save money on expensive real estate attorney costs. But then, it only got worse because we were investigated by the Ohio Division of Real Estate for “managing in an unlicensed manner.”

After two and a half years of disputes and ridiculous legal fees, the case was dropped because it was completely groundless.

A sharp learning curve for property managers.

Managing residential property requires understanding accounting requirements, local laws, and fair housing laws. If you don’t know what you’re doing, then you can end up walking into some hefty fines or even jail time if you compromise your trust account.

Employee problems.

Unfortunately, not all employees are trustworthy. We’ve had employees commit theft and negligence. If you want to start a property management company, you need to be prepared to find the right staff who work with you to support your real estate investor clients. Secondly, property manager turnover is high because property management is a thankless business. Employees get burnt out by the relentless maintenance requests, accounting for collecting rent, and tenant needs.

What does a good property manager offer?

A good property management company knows how to navigate a massive array of personality types and provide asset management services that support real estate investors’ long-term goals. W have a network of multiple vendors that help complete repair and maintenance work in a timely manner and at a moment’s notice. A good property management team will take on all the property responsibilities and let investors avoid the day-to-day tasks required in residential real estate investing so they can simply enjoy passive income.

Tips for starting a property management company.

If you’re hell-bent on starting a property management company, that’s great. Just remember, it won’t be easy. Here are some key tips for getting your property management company started on the right foot.

Get a real estate attorney in your state.

A real estate lawyer will know all the laws and regulations that satisfy your state’s division of real estate. For example, in Ohio, you cannot own a property management company unless you have a license to broker as the officer of that business. But every state is different. They will help you set up the business appropriately.

Leverage professional property management software.

Welcome to the 21st century, where services are supported by technology, including property management companies. Excellent property management software includes AppFolioYardi Breeze, and Buildium. These softwares help communicate transparently with both property owners and tenants. For example, tenants can easily pay their rent online, and landlords can log in to check on the status of their property. These systems will also tie into bookkeeping and accounting, saving your staff time.

Furthermore, software systems help you create a defined process for when a tenant vacates, a new management client is onboarded, late payments and fees, handling maintenance issues, and more.

Get an accountant with experience in real estate.

An accountant or bookkeeper with experience in real estate will know exactly how to record income and expenses and reconcile accounts. Most property management companies require at least one full-time bookkeeper to manage the company’s books and the accounting for clients. In addition, every rental property needs to have rental income and expenses appropriately recorded and tracked for tax purposes.

Make sure that you are FULLY insured.

A property management firm is at risk of lawsuit, it’s just a part of the business. Most lawsuits in real estate happen with property management companies. You absolutely MUST protect yourself, your property managers, and your property management business with the right insurance.

Make sure you’re covered by Errors and Omission, General Liabilities, Cyber Security, Busines Personal Property, Personal Liability, and Worker Compensation Insurance. Then, check with your insurance broker to ensure there aren’t any other insurances you should be purchasing. It’s better to have more coverage than you need, not less.

What are the pros of owning a property management business?

Owning a property management company isn’t all bad – like any business, owning a property management company has its benefits. Otherwise, no one would ever own property management companies!

Economies of scale make it easier.

If your management portfolio is small, you won’t be making much money. However, at least in Ohio, once you get to about 250 properties in your rental property portfolio, the businesses really begins to take off. Leasing fees, tenant placement, and renewal fees start to add up. At this point, a property management company begins to pay off.

Recession-proof businesses.

How many businesses can claim to be recession-proof? The reality of rental property is that it will always be needed, no matter the economic climate. The two most important needs are food and shelter, so people will always need someplace to live. And more often than not, a property owner will not decide to self-manage just because the economy has dropped.

Remember, start slow and start small. It might take time, but if you run your business from the perspective of doing what’s best for your landlord and tenants, you will begin to build a reputable reputation. Don’t nickel and dime your clients. Yes, this means that you likely won’t make a lot of money for the first 2-3 years, but once the word spreads about the great service you offer and ideally high tenant retention rates, you’re going to attract more and more property owners.

If you’re considering starting a property management company, we’d love to hear from you. Have we turned you off or convinced you to walk down this hard but potentially rewarding road? Do you agree?

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About the author

Picture of Kelsey Heath
Kelsey Heath is a real estate content specialist with an extensive background in residential, industrial, and commercial property. She has been involved in the industry for a decade as a professional and personal investor, gaining a deep understanding of the market and trends. With a passion for written communication, Kelsey loves helping people understand the sometimes-complicated concepts behind real estate and is now a sought-out guest and ghostwriter.