Legacy Wealth Holdings

When Should You Bring Property Management In House?

If you’re scaling your rental portfolio, when is a good time to switch from using a third-party management company to owning your own?

Great question. 

Looking at large rental operators, I’ve realized that one of the five things that has helped them grow their investment portfolio so large is that they manage their property themselves. But at what point do you do that? It’s a math equation, right? 

Here’s how to calculate that for whatever rental market you’re in.

It’s not necessarily dependent on the number of doors you have. It’s all about how much revenue you are bringing in. 

How much is a property manager going to cost you in your market? Let’s call it $4,000 a month. So $4,000 a month is the amount you’ve got to earn in order for this to make sense. Are you paying more than $4,000 a month in management fees currently? 

Let’s say you have a single-family rental portfolio. Typically, rental management companies are going to charge around a 10% management fee for a single family house.

When you get into multifamily or multiple single family properties, they’ll reduce that fee a little bit and maybe drop it down to, let’s call it an 8% management fee.

What does your rental portfolio need to look like and how much revenue do you need to bring in before that 8% becomes more than $4,000 a month?

So you take that $4,000 and divide by 8%. 

4,000 ÷ .08 = $50,000 a month in rental revenue.

$50,000 a month in rental revenue at 8% means you’re paying the management company $4,000 a month.

That to me is the breakpoint on when I should start bringing management in-house versus what I should start paying it out to a third party.

Now, here’s something to pay attention to. I remember early on when I started growing my business, I was like, I want to vertically integrate everything. I want in-house construction, in-house management, in-house brokerage, in-house investment, in-house investment fund…all this under one roof!

What I didn’t realize is that every single one of those is its own business. You need a CEO to run every single one, and you need all these different processes, procedures, and people in place to build each of those different businesses.

As you’re growing, think about what brings the highest return on your time. Typically that’s going to be on the investment side. So if you can staff out the brokerage, if you can staff out the property management, if you can staff out the construction and project management, I think you should wait until you get to a point where the rental revenue is enough on a monthly basis where it justifies bringing ONE THING  in house. Then you can bring the next thing in house, then the next thing, and so on.

So how many doors is $50,000 a month? Well, it could be 50 doors at $1,000/month or it could be 100 doors at $500/month. $500/month rent is probably very, very difficult to manage because it’s a C-class, maybe even D-class type property on 100 doors. That’s a pain in the ass. I probably wouldn’t even want to bring that in house. But maybe it’s 20 doors at $2,500 per month.Like I said before, it doesn’t necessarily depend on the door count. In my mind, it depends on the revenue. 

You’re actually reducing what your initial cost is on managing fewer doors versus buying a bunch of C and D-class type stuff where only one person can manage these hundred doors. That’s a lot of work and you’d probably need to hire somebody else. But if you can get into higher-valued assets (where there isn’t as much headache) and bring in an in-house property manager, you can scale that pretty substantially. With B or A-Class properties, a manager can handle 100 doors and bring in way more revenue than 100 C-class or D-class doors.

And that’s just residential! If it’s a triple-net lease, if it’s an office building, or if it’s a warehouse or industrial space, chances are that a single manager can manage a lot more than even 100 doors in those kinds of properties.

So it’s just a math equation: 

  • Figure out what a salary is going to cost you in order to hire that property manager in your marketplace.
  • Understand the percentage that the management companies are currently charging.
  • Determine how many doors you need or what rental rates you need to charge to get to that monthly rate.

And realize that 8% we were talking about might actually be costing you more than you think it’s costing you. There could be leasing fees and overhead fees to oversee project management, renovations, and capital improvements to the property. So make sure you look into that.

Keep in mind though: if you hire a property manager, you have to manage the management company.

If you hire a property manager in-house to work for you, you have to manage that person also. We all want a real business, but then I see people saying, “Well, I’m just going to 1099 all my employees.” They try to build a business on a lackluster, half-assed business foundation, and you can’t build a real business that way. 

So make sure that if you say that you want a real business, you’re operating this thing as a real business. Set up payroll. Take care of their health insurance. Maybe there’s a retirement plan or maybe you pay a little bit more to go into a Roth IRA instead of 401k. Do things like that to attract real talent into your business. If you have standard operating procedures, an employee handbook, and you can do a W-2 and all those things, you are building a real business.

If you’re not willing to do that, I would probably ride it out with a third-party management company for a little bit longer until you’ve gotten to a point where you’re comfortable and confident in being able to put the right business foundational elements in place to attract a high caliber talent into your business.

We made a video on this! Watch it on the Legacy Wealth YouTube channel here: https://www.youtube.com/watch?v=TC3dEcjrB4g&t=2s