Introduction to Residential Property Management (For Buyers & Founders)
This is a high-level overview of the residential property management (PM) industry, written for people interested in buying or building a PM company. This is everything I wish I knew when I started one in 2013. For context, I own and run a PM firm in Columbus, Ohio that manages over 600 units. I also own a handful of rental properties and am a licensed real estate broker.
The subject of this article is “fee” management, also known as 3rd party management. Companies in this model are managing property they do not own, for a fee. Note, these companies may also own and manage their own property. But this post will focus on companies that are primarily engaged in fee management.
Industry Organization
PM is segmented into the two major types of management:
Single-site management, also known as on-site management. Typically 100+ unit buildings. There are one or more full-time employees present at the property, usually working out of a leasing office or similar. In this model, all the major property management expenses such as payroll, software, hardware, marketing, and everything else is billed directly to the property itself. The PM firm will charge a small fee (2 to 4% range) to cover certain other expenses, plus profit.
Scattered-site management (no on-site property manager). The properties are usually under 100 units each, down to single-family rentals, and are managed remotely from a central leasing office (usually in the same city as the property). In this model, all the PM firm’s expenses are paid for out-of-pocket instead of being billed to the properties. For this reason, the PM firm will charge a higher fee in order to cover payroll, software, etc.
This remainder of this post will focus on scattered-site management, unless otherwise indicated.
General Overview of Business Activities
Property management is attractive as a recurring-revenue service business with essentially no accounts receivable (property managers pay themselves directly from collected rent). However, there are many risks as well.
PM companies have two customers: the property owners (usually referred to as clients), and the tenants who live in the properties they manage. Not only that, but in large part the interests of these two customers are opposed. Property owners want maximum rent with minimal expenses, and tenants want to pay minimum rent and expect a high level of service. This duality is a big part of what makes property management a very challenging and operations intensive business.
Property management is a task-based business. It is an inch deep and a mile wide, with very few “projects”. To be a successful property management company means organizing many small tasks and ensuring they are completed correctly and in the right order.
Property management companies are responsible for three major areas:
Rent Collection (making sure rent is paid in full and on time, handling late payments and non-payments, evictions, bounced checks, etc)
Leasing (filling vacant units, tenant screening, signing leases, lease renewals, handling early moveouts, lease violations, etc)
Maintenance (responding to tenant maintenance requests, turning over vacant units to make them ready to rent)
In addition, property managers perform trust accounting for each property they manage. All funds coming in (such as rent payments, security deposits, and owner contributions) and going out (to the owner as disbursements, or to vendors to pay for expenses) must be carefully tracked and reconciled monthly. The property management company’s own money must be maintained separately from owner and tenant funds at all times; co-mingling is not permitted. In essence, each property you manage must be accounted for as its own separate business, and the PM is responsible to for monthly and annual reporting to the property owner. This is a large burden and mistakes here can introduce serious legal liability.
Major Trade Groups
The National Association of Residential Property Managers (NARPM). Mostly focused around the single-family rentals, primarily fee managers. Est. 1988, approx. 6,000 members
The Institute of Real Estate Management (IREM). General property management trade group. They issue the CPM (certified property manager) designation, the best-known industry designation. Est. 1934, approximately 20,000 members
The National Apartment Association (NAA) — made up of owners, operators and managers of mostly 100+ unit apartment buildings. Est. 1939, approximately 82,000 members
Typical Fee Models
Most property management companies make money by charging a monthly fee as a percentage of collected rent (often utilities too). Ten percent of collected gross revenue, for example. The exact amount ranges all over the place from 5% to 15%, depending on location and market position. Unlike the residential brokerage industry (where almost every realtor charges 6% give or take), there is no common standard nationwide and it can be quite competitive in large cities. However, you will often need to call and have a discussion with a salesperson to get pricing information. Many companies don’t publish it.
There is a move in the industry toward “flat-rate” pricing, sometimes including tiered options. For example, you may see a firm advertise “Plans starting at $79/mo” and you will see on their website they offer property management plans at $79, $99, and $129/mo — each with different features or benefits. This is becoming more and more common.
Property owners are generally expected to sign a 1-year contract for services, often called a Property Management Agreement or PMA for short.
Read more of what I think about property management pricing models here.
Typical Other Fees
All fees here are paid by the owner (not the tenant) unless otherwise indicated.
Leasing Fee: A fee for finding a tenant and obtaining a signed lease (ie, filling a vacant unit).
Lease Renewal Fee: A fee for obtaining signed lease renewal from an existing tenant
Setup Fee: An initial fee to start service with the PM firm.
Markup on maintenance: Many PM companies will charge a markup on any maintenance work they oversee or manage. I’ve seen 5 to 20%.
Tenant Fees (such as late fees, etc) are almost always kept by the property manager.
Early Termination Fee: A fee paid if the owner prematurely terminates the contract.
M&A Activity
Recent years have seen an number of high-profile mergers and acquisitions, and there is no sign that this won’t continue. Here are a handful that made headlines:
Mynd merged with RentVest in 2019, and had previously acquired Empire Property Management. They now manage over 9,000 units.
HomeRiver Group acquired Property Frameworks in 2020. They now manage around 25,000 units.
Evernest (prev. GK Houses) has acquired a string of smaller PM firms and now manages around 3,000 units.
Renter’s Warehouse is one of the largest such companies; they manage about 22,000 homes.
See my complete list of VC-backed property management companies here.
Thought Leaders & Podcasts
Jordan Muela — founder of PMProfit Coach (Growth/Profit Consulting), LeadSimple (Sales CRM + Process Automation + Shared Inbox) and RentScale (Sales Consulting). Jordan is a leader and deep thinker. He also helped develop the Property Management Financial Benchmarking Study. He has a few podcasts: The Profitable Property Management Podcast and Tribe Mastermind.
Matthew Whitaker is the founder of Evernest (prev. GK Houses). He is sharing the details of his journey from 300 to 3000 units under management on his podcast “300 to 3000”, along with co-host Spencer Sutton.
Brad Larsen hosts a podcast called “The Property Management Mastermind Show”, which is well worth checking out.
Marc Cunningham has a great Youtube channel where he discusses best practices and systems. His website PMBuild is an amazing resource.
Jason Hull is the founder of DoorGrow (Growth Consulting), and also runs the “#DoorGrowShow” podcast, another good one.
Jeremy Pound co-founded Rentscale with Jordan, and is a dynamic sales leader and thinker. He has an excellent (defunct?) podcast associated with his previous venture, Juicy Results.
Most of these organizations have Facebook groups associated with them, several of which are quite lively. Find a directory of these groups here.
Property Management Software
PM software can be divided into two areas. First and most important is the “core” property management software which handles the major accounting functions (charges and payments) and typically provides the following other features as well:
Tracking leases & lease renewals
Rental listing syndication to major listing websites such as Zillow
Tenant portals, where they can pay rent & submit maintenance requests
Owner portals, where they can view accounting information & statements
Rental applications & tenant screening
Ability to run rent rolls and other important reports
Enter and pay bills
Bank reconciliation
Maintenance requests & work orders
Tenant & owner communication
Buildium (bought by RealPage in 2019), Appfolio (publicly traded), Propertyware (owned by Realpage), and Yardi are the large players in the space of “core” property management software. Note that Propertyware was taken private in 2020. Other core software products & companies include Rent Manager, Rentec Direct, and Entrata.
Core PM software is all “accounting-centric” by design, for historical reasons. Process & workflow considerations are mostly an afterthought. In my opinion, this represents an opportunity for a next-generation core software to emerge with standardized workflows at the core of its offering. I wrote a post about how we use no-code tools such as Process Street and Airtable to automate certain parts of our own property management company while awaiting a better solution. One company working to help property management companies solve this problem deserves special mention: LeadSimple.
The second category of software is a large array of “supporting” or ancillary products that help fill in the gaps where the core PM software is weak or missing functionality. Some of them have integrations with the core software and some do not. The space is too broad to provide an overview here, but most PM companies end up using several of these as a part of their property management processes.
Asset Management vs Property Management (Scope of Services)
In large multifamily (100+ unit properties), there is a clear distinction between the functions of asset management and property management. The asset manager is responsible for setting the overall strategy & goals for the property (market positioning, capex planning, budgeting, setting rent & occupancy targets, branding, financial decisions such as refinance or sale, etc). The property manager or property management team is tasked with executing on the vision provided by the asset manager. It is more of a tactical role, with a focus on leasing, rent collection, and basic maintenance. This division of roles works well and allows a skilled asset management team to oversee many large properties and guide the performance as a whole, while the property managers have a limited scope and can become intimately familiar with their property and how to wring every last drop of performance out of it.
However, in the world of single family (SF) and small multifamily (MF), the roles of the asset manager and property manager are combined. Clients (property owners) expect the property manager to take on all the responsibilities typically handled by an asset manager. Unless this is well-understood and acknowledged by both parties (and clarified both in the contract and during the onboarding process), this can be a source of confusion and frustration due to unmet expectations. Compounding this issue is the fact that most SF and small MF owners are not sophisticated investors, and may not have a full understanding themselves of what reasonable property performance looks like.
Until the industry develops a standardized scope of service, this will remain an area of friction between rental property owners & their managers. Each client will need to be educated on exactly what they can and should expect from their property management company, and what activities and responsibilities remain theirs as the owner. I believe we should look to the insurance industry as an example of how this could be improved — insurance is tightly regulated, and all underwriters use the same standard “forms” that define coverage details. This allows consumers to easily shop between companies and feel confident they are getting a similar level of coverage (of course, some coverage details can still be customized).
Licensing and Regulation
Property management is often regulated at the state level. The purpose of state licensing is to protect the public (not to assist the industry, or protect it from competition). Most but not all states require property managers to have some type of license, usually involving both an education component and a test, which can be revoked for bad behavior or other problems. Many states combine this with real estate salesperson (realtor) licensing.
Before starting or buying a property management company in any given state, you should become very familiar with that specific state’s laws & regulations. Some require active oversight of a real state broker, for example.
Hot Topics (Self-Showing, Assistance Animals & Tenant Screening)
Self-showing: There are several companies that offer the ability for property management companies to offer self-showing and online scheduling for prospective tenants interested in rental listings. They work using electronic lockboxes, where after a pre-screening and identity check, the prospects are given a temporary code that allows them to unlock the lockbox and get into the property to tour it. Three competing vendors offer this: Showmojo, Tenant Turner, and Rently. Some of these have integrations with core PM software.
The proliferation of self-showing accelerated rapidly during the COVID-19 pandemic in 2020. Many prospects, especially urban and younger residents, are coming to expect this functionality. It can be combined with electronic lease signing and other functions to provide a completely touchless leasing experience.
Assistance Animals: Tenants with disabilities may legally keep an assistance animal (such as a dog, cat, or other animal) inside their rental home or apartment. They are not considered pets and the property owner/manager may not charge pet rent, an extra security deposit, or any other fees. The property manager may request documentation from a medical professional demonstrating the animal is required. Naturally some tenants abuse this (websites sell fake forms for a fee), and fraudulent activity is rampant. Reform is needed; in the mean time property managers are subject to quite a bit of liability if this is not handled properly.
Tenant Screening: This area of real estate is rife with liabilities and legislative activity. Denying tenants for criminal history, too many occupants, having a section-8 voucher, or other seemingly benign reasons opens up property management companies to discrimination & fair housing legal action. Disparate impact doctrine means using criminal history inappropriately as a reason for denial is illegal. Source-of-income discrimination protection (found in some states and cities) means all forms of income must be allowed, even if subsidized by the government. And so-called “Renter’s Choice” legislation (already passed in several cities) requires landlords to allow certain security deposit alternatives.
A single wrong decision when screening tenants can result in extended vacancy, or expensive evictions & other costs. Tenant screening itself is stuck in the dark ages, with most approval decisions made using arbitrary industry standards (or worse), instead of statistical, outcome-based methodologies. Tenants are unfairly penalized for prior missteps that may have no bearing on their ability to pay rent and be a good tenant. Others are approved despite problematic histories that are statistically correlated with evictions and unpaid rent, leaving an Outstanding Balance at Moveout (OBAM) due to the property owner. Further, despite differing risk levels between tenants, they all pay the same rent and are almost never held accountable for bad behavior. We look again to the insurance industry with their risk-based pricing as an example here, where risky driving habits and other factors lead to increased premiums. Incentives are aligned, to guide behavior in a way that benefits everyone.
Short, Medium, and Long-Term Rentals
Short-term rentals (STR) such as those listed for rent on Airbnb are not typically managed by traditional property management companies, who focus on normal long-term rentals (LTR). The operations are completely different; STR is extremely management-intensive, with turnovers happening every few days instead of every few years, cleaning, furnishing, etc. There are STR-specific management companies in most cities now, who sprung up to handle the demand induced by Airbnb & Homeaway. Often they handle vacation rentals as well (very similar model). Their fees are much higher — 30 to 50% of gross revenue is not uncommon.
Another area of growth is medium-term rentals (MTR) — these would be properties that cater to stays ranging from several weeks up to a year. The units are furnished similar to an extended-stay hotel and target traveling businesspeople, nurses, etc.
Zillow & Airbnb as Threats
Zillow and Airbnb have both come to dominate the consumer mindshare for long-term and short-term rental listings respectively. I believe they are both well-positioned to insert themselves into the property management space and extract most of the value therein.
In fact, Zillow has already started — they now require property management companies and larger landlords to pay for rental listings. They could easily begin to require a standard rental application, and work their way down the value chain / leasing lifecycle from there. Property owners and management companies who do not like this have little choice — if they remove their listings, they are cutting off the vast majority of traffic from prospective renters. Zillow has the power.
Airbnb could similarly enter the LTR market, and enforce standard lease terms & security deposits in the same way they currently do for STR. Landlords who don’t play ball would be cutting off the best and most well-qualified tenants from applying to their properties.
I don’t expect either company to actually enter the property management space directly or own real property — they will still rely on 3rd party operators to actually handle maintenance, turnover between tenants, etc. But high-value activities such as rent collection, leasing, and tenant screening could all be sucked into their domains, leaving property managers with the lowest-value scraps.
Valuation
Property management companies are typically valued in one of three ways:
Per-unit. The buyer pays the seller a flat rate per unit under management (eg, $1,200 per unit). So a company with 250 units under management might sell for $300,000 in this example.
Multiple of gross revenue. The buyer pays the seller a multiple on gross revenue from management (maintenance, brokerage & other revenue is typically excluded). So if the company generates $600,000 a year from management fees, the buyer may agree to pay 0.8x gross revenue, or $480,000.
A larger company (over 500 units) may be valued using more traditional SMB methods such as a multiple on earnings. This is especially true if the seller is not involved in day-to-day management activity.
Other considerations that often factor into the value include the type of purchase (asset vs entity), non-compete clauses, owner financing, and claw-backs for customers who leave within a certain period of time.
I wrote a full blog post about this topic. You can read it here.
Other Common Income Streams (Maintenance, Tenant Fees, & Brokerage)
Increasingly, property management companies are diversifying their income stream beyond the monthly management fee.
Many property management companies operate an internal maintenance division, whereby they directly employ (W-2) handymen and other trade professionals to service the properties managed by the company, and in turn bill out their time at a profit.
Also common is a variety of tenant fees, which cumulatively can add quite a significant amount to revenue. Some examples include a lease-signing administrative fee, lease renewal fee, late fees, tenant benefit package, pet fees, lease-break fees, and more. These fees may be shared with the property owners, or kept entirely by the PM firm.
And finally, the vast majority of PM companies operate a real estate brokerage. It is a natural fit since state licensing typically overlaps, and clients often need to buy or sell properties. However, it can subsume or subsidize property management profits and resources. Real estate salespeople (realtors) generally don’t make good property managers and vice versa (completely different skills sets).
Franchise Companies
There are five major franchisors in the residential property management space:
Renter’s Warehouse (no longer selling franchises)
I put together a detailed overview of the 4 active franchises - you can read that here.
Twitter Community
There is a small but growing community of property management company owners and operators who talk shop on Twitter. I curated a list of them, which you can find and follow here.
For a list of free property management communities (including a bunch on Facebook), go here.
Twitter list of people who discuss property management topics
Fiduciary, Trust, and The Principal-Agent Problem
Property managers act as a fiduciary for their client, the property owner. A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients’ interest ahead of their own, with a duty to preserve good faith and trust. Some examples of other fiduciary occupations include doctors, lawyers, engineers, accountants, and financial planners. Perhaps uniquely, property management is a recurring revenue, service-based, fiduciary activity.
Property management stands out among this group of professionals as the least-trusted. Among small property owners, PM companies enjoy a reputation equivalent to that of a used car salesperson. Many property owners will tell you how they do not trust property managers. Some have had bad experiences in the past, and all have heard horror stories from their peers.
The problem of one person trusting another to act in their best interest, and how best to set up incentives to encourage this behavior, is well-studied in academia and is known as the principal-agent problem. There are no known good solutions. Other industries have tackled this issue with strict licensing and internal governance, combined with decades of educating the public on the value of their trade designations — even enshrining them into state law. With regard to the professions mentioned earlier, the relevant designations are MD, JD, PE, CPA, and CFP respectively. Property managers will likely need to take a similar approach if there is any hope of improving their reputation among rental property owners.
KPIs
Here are some important Key Performance Indicators of residential property management companies:
Occupancy: What percentage of all units under management are currently occupied?
Economic Occupancy: What percentage of all units under management are occupied and current on rent?
Average Turn Time: How long does it take to turn over (make-ready) a vacant unit on average?
Average Leasing Time (aka days on market or DOM): How long does it take to lease a ready and vacant unit on average?
Client & Unit Churn: What percentage of units and/or clients churn out over the course of the year, on average?
Gross Revenue per Unit
Customer Lifetime Profit
Customer Acquisition Cost (CAC)
DLER (Direct Labor Efficiency Ratio), or Units Managed per Employee
Online reputation/score (Google, Yelp, BBB)
Net Promoter Score (NPS): Separate scores for clients and tenants
About Me & Paid Consulting
I’m the co-founder & CEO of RL Property Management, a residential PM company located in Columbus, Ohio. We manage about 700 units as of 2022. The business is owned by myself and my business partner Adam Rich.
I received my Bachelor’s in electrical engineering from Geneva College, and spent five years in the control system engineering industry before starting RL Property Management in 2013.
If you enjoyed this article and want to learn more, you can connect with me on Twitter, subscribe to my podcast Owner Occupied, or sign up for my mailing list.
If you’re interested in a consultation call to discuss anything mentioned in this post, please get in touch.