For today’s episode, we will be discussing Property Management.
We will go over the nuances of third-party versus in-house.
What can we do from a property management perspective to help grow the business and help the tenants?
We will talk about these things…and more in another episode of Multifamily Investing Made Simple in under 10 minutes.
Tweetable Quotes:
“You know, the difference between a million-dollar idea and a million dollars is one million dollars worth of execution.” – Anthony Vicino
“The whole HR component of any business is probably one of the more frustrating things to develop inhouse” – Dan Krueger
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Dan Krueger: [00:00:02] Welcome to Multi-Family Investing Made Simple, the podcast where we take the complexity out of the real estate so you can get started investing today. This is our under 10 Minutes segment. And today we’re going to be discussing the nuances of property management, third party versus in-house. What can you do from a property management perspective to grow the business and help your tenants? We’re going to dive into all these things, Anthony. Property management, where do we start? Biggest ones by third-party versus in-house, right? Yeah, I think we are a thing.
Anthony Vicino: [00:00:33] Exactly. Let’s start at the very top 50000-foot view and bucket this into two categories. When you’re looking at apartment syndication as a passive investor, your operators are going to fall into one of two categories. Either they’re going to outsource the property management to a third-party company or they’re going to have built their own in-house property management team. And when that occurs, we refer to that as being vertically integrated. Now, that’s the path that we chose at Invictus capital. We built out the property management company in-house so that we have leasing agents, we have property managers, maintenance. We take care of all that. Let’s first talk about the more common part, which is outsourcing it to a third party. Why would somebody choose that, Dan? What are the benefits? What are what are the cons?
Dan Krueger: [00:01:19] Well, I mean, the whole H.R. component of any business is probably one of the more frustrating things to develop in-house. Going through hiring people is tough. It’s tough to find talent, especially on the maintenance side of things. I’ll tell you, from personal experience, hiring qualified property managers has been much easier than hiring qualified and good maintenance staff. For whatever reason, that skill set is really tough to get talented people for right now. I think there’s just way more work to be done than there is talent out there. And so it makes it pretty tough. So I think the biggest deterrent is you have to go out and hire people in line with your acquisitions and that could be limiting. It’s not easy to hire people and you’re not able to just throw on, you know, large portfolios willy nilly if you don’t already have that staffing there. So it can put some constraints on you with how quickly you can grow. It gives you this whole H.R. component to your business that a lot of people aren’t really chomping at the bit to have to deal with. And so there’s a lot of things that say, hey, the third party, they’ve already got the H.R. thing component done. They’ve hired the people. All I need to do is pay them and they’ll do it better than me. It seems like that would be much easier.
Anthony Vicino: [00:02:33] Yeah, and it makes sense too because one of the strengths is as an operator, you can scale much faster if you have a property management company that’s all they do. You just hire them out and they execute that for you. So all you need to worry about is going out and acquiring the properties, managing it from a high asset level, and then raising the capital and then enables you to go and invest geographically in very diverse markets. So if I wanted to if I was outsourcing my property management, I could go invest in Atlanta and Austin. But because we’re vertically integrated and we were kind of tied in locally to the markets where we have a physical presence. So that’s right. Now, the Twin Cities, maybe at some point we expand into other markets, but it definitely puts a cap on how quickly you can expand. With that said, what are the negatives? What are the cons associated with outsourcing? And why specifically did we choose to keep it in-house?
Dan Krueger: [00:03:24] Mm. Yeah, we’re control freaks for the most part. So the thought of somebody else being in control of our assets is a very scary proposition. No, but in all seriousness, that is one of the trade-offs, and for certain personality types that could be fine. They don’t mind handing off control. They might even prefer to hand off control of that segments of the business because it’s not there. There’s their strongest skill set. It’s not something they enjoy or are very good at. So there might be some people that enjoy handing the baton to somebody else and letting them run with the property management responsibilities. With Anthony and myself and our personalities, we very much would prefer to keep that responsibility, even though it’s more work because it gives us greater control over how our business plan is executed at the ground level. It’s not like playing telephone where we tell a third party what our business plan is and then they tell the onsite staff. And then by the time the message gets delivered, it’s, you know, you might not be getting exactly what you asked for. And then the big one is the cost. If you’re going to a third-party property management company, you’re paying retail prices for this, for the service. And when you do it in-house effectively and keep a lean operation, you know, keep your headcount appropriate for how many assets you have, you can get wholesale prices. And so instead of paying an effective property management rate on, you know, let’s say you got a 50 unit apartment building you want to use a third party for, they might say they’re going to charge six, five, six, maybe seven percent on the high end. But then when it comes down to it, when you get all the lease-up fees and all the other expenses, your. The effective rate at the end of the year is probably going to be over 10 percent do that in-house. If you do it the right way, you can keep that sub-five percent.
Anthony Vicino: [00:05:10] And that just allows you to be, yeah, that much more competitive on your asking price better returns back to the investors then. And at the end of the day, you guys have heard me say this before. You know, the difference between a million-dollar idea and a million dollars is one million dollars worth of execution. So at the end of the day, the people that are on the ground executing the business plan, are the most important people in the entire equation, because, without them, the plan doesn’t matter. It doesn’t matter what numbers you projected if you can’t actually execute it on the day to day level. And so that’s why property management is so important. And for us, our thesis has always been whoever’s closest to the consumer wins and our consumer is both our investors, but also our residents. And by being closest to them, we can do some really interesting things. Let’s say like in the time of covid, where suddenly there’s a lot of stress in the system, people are out of work, and when you’re out of work, you’re not making money. People don’t make great decisions. They start to get the blinders on and they go into tunnel view or tunnel vision mode.
Anthony Vicino: [00:06:07] And so what we can do is we can because we see that because we’re boots on the ground, we can take a proactive approach to reach out to them, to working with them one on one to say here’s the options of payment plans or here’s different agencies in the community that can help you subsidize your rent. And so we can present those. Whereas if it’s a property management company doing it on our behalf, well, they’re going to be doing that on the behalf of all of their companies as well, all of their customers. And so you might not be getting the best customer service that you would expect if you were doing it yourself. And so there’s this inherent principle, agent problem, which is you’re relying on them to do the work for you, but they’re never going to care as much as you do because it’s your baby, it’s your project. And so we just overcame that by saying, let’s do the hard work of building this company ourselves so that downstream, as things come up, we’re always in a better position to pivot and adapt and overcome.
Dan Krueger: [00:07:01] Mm-hmm. Yeah. And I think that principle agent concept you brought up, there’s a key one. And that’s one thing that really turned me off of third-party initially because I did use third party management for about nine months of my very first property when I found out in real-time that it just wasn’t a fit for my personality. And one of the big pieces of that decision was the fact that at the end of the day, the property management company I was using was fiscally incentivized for me to have a higher turnover. Right. They got a commission every time they leased up a unit. So they weren’t really incentivized to bring in the highest quality people and keep them there for several years. The more units they turned over, the more money they made. And so there was this big kind of misalignment there where they’re getting paid more, even if my property is not being run well. So that’s one thing we wanted to try to get out of the equation. And from, you know, the perspective of our investors, it really helps the story a lot because the guys who are equity owners of the property with you are the ones who are managing the property. And what Anthony just made the point about, they’re no one’s going to care about these assets as much as we are and our investors are. And in this case, we are the property management. So that the property management firm is one hundred percent aligned with all of the other investors in the deal. And you get much less of a conflict of interest type of situation.
Anthony Vicino: [00:08:17] Absolutely. So that is property management in a nutshell, both third party, the pros and cons versus in-house. There is no right or wrong answer. Again, it comes down to the personal, you know, taste, and what your goals are. So as you’re working with operators, if you’re looking to passively invest, this is a really important question to understand how they view property management and get inside information into how their brain works. So hopefully this was helpful to you guys. We’ll catch you next week.
