How To Start A Profitable Property Management Business
Are you a landlord who is interested in starting your own property management company? If so, this article will be of interest to you. We’ll cover the basics of what it takes to start your own property management company and provide guidance on the pros and cons.
Why start a property management company if you are a landlord?
These are the main reasons why it makes sense to start your own property management company.
- You like managing properties and want to start your own company to create extra income.
- You are looking to start a new career path but don’t know what you want to do. Starting your own property management company is an option for an alternative profession and can be lucrative as well.
- Your rental properties may not generate enough income on their own, so starting up this business will allow you more opportunities to make money.
- Your local property management companies are not responsive enough or they don’t take care of the maintenance work on a regular basis.
- You like to keep control over how much rent you charge, when tenants move out, etc.
- You want to keep your privacy, you will deal with the tenants as a property manager and not as the landlord.
- The main benefit is that you can sell the business if you create a profitable property management company.
The cons of starting a property management company?
- The cost of setting up a separate business entity and other start-up expenses.
- Managing rental properties for others is different than managing your own properties. It’s more stressful.
- The liabilities are greater than just managing your own properties.
- If the business doesn’t work out, you could lose money.
Do you need a real estate license to start a property management company?
To start a property management company and manage only your own properties, you don’t need to have a real estate license.
If you create a separate legal entity from the one you are holding your rental properties in, you may need a license. Check with your attorney.
If you are going to be managing properties for other people’s rental units, then you either need a broker’s license or a Qualifying Broker.
These are the only states that do not require a real estate or property management license to manage properties for others: Idaho, Kansas (Residential), Maine, Maryland, Massachusetts, and Vermont.
What is a Qualifying Real Estate Broker?
A Qualifying Broker is someone who has a broker real estate license and can serve as a sponsor (active broker) to any company that will perform property management or any brokerage activity.
This arrangement allows you to start your own property management company without obtaining an independent broker’s license.
The best way to find a qualifying broker is to do a Google search. I have seen prices from $250 per month, although qualifying a property management company may cost more because of the liabilities involved.
Do property management companies make a lot of money?
Property management companies bring steady income but the chance of getting rich is very small unless you franchise or start acquiring other pm companies.
According to a NARPM survey, the profit of the top property management companies is 25% of their revenue. For successful property management companies, a quarter of this revenue comes from fees not related to management fees.
What are the standard property management fees?
There is no such thing as a standard property management fee but on average it is around 10% of the monthly rent.
To find a tenant, property management companies charge a leasing fee, which varies from half to one month’s rent.
In addition, there are admin fees, tenant screening fees, late fees, vendor passthrough charges, and others that add to the bottom line.
Tenant screening is a typical charge, it can start at $35 and go up to as high as $100. The administrative fees range from $100 to $350.
Property management companies make money by collecting rent, holding deposits, and handling lease renewals but also offer a lot of other services like paying for repairs, maintaining landscaping, or working with insurance providers to deal with claims.
Because property managers give business to these vendors, they usually get paid marketing fees or passthrough fees, usually 10% to 15% of the repair cost. This is legal as long as it is disclosed in the property management agreement.
Setting up a property management company
First, start by choosing a name. It is important to start with the right company name since many landlords will be using your services and you want to sound professional.
The next step is registering your business as an LLC or another legal entity in order for it to operate legally within the state where it operates. If you are managing rentals for other people register your company with your State’s Real Estate Commission. You need a broker’s real estate license or a Qualifying Broker to do this.
Check with your state RE Commission if there is a requirement for office. I some states a virtual office is OK and some are more strict.
After you have a legal entity registered, get an EIN number from IRS and get Error and Omission(E&O) Insurance.
Next, get property management software and a website. I recommend Buildium if you are starting out.
You should also decide on the type of property management you want to do: long-term or short-term vacation rentals.
How to get property management clients?
You can start building your client base by posting on Facebook and creating Yelp and Google profiles.
I also recommend networking with other investors and real estate agents to get referrals from them for new clients.
After you start getting a decent amount of properties under management, start advertising! You should build an ad campaign that is specific to the type of rental.
Google Per Per Click with a good initial offer is the best way to get new clients in the beginning.
Starting a property management company isn’t easy, but it’s worth the effort! You need to plan carefully and be realistic.
Start with your own properties, put systems in place for everything, and keep accurate books. Most property management companies fail because they don’t have good accounting and they charge too little.
To attract clients you can give them a discount in the beginning but you must raise your prices as soon as possible so you can continue growing and have a healthy business.
Good luck with starting your property management company!