How to Start a Property Management Company
Owning your own home has become increasingly expensive and unattainable for many families in the US. As a result, over 50% of major US cities now have more renters than homeowners. That’s a steep incline compared to 2006, where renters only outnumbered owners in one in five major cities.
The flow-on effect has been a steady increase in property management companies that primarily manage real estate on behalf of absentee landlords. But of course, residential renting is just one market segment of this industry. Property managers are also in demand for industrial and commercial real estate.
If you have a keen interest in real estate, have an eye for detail, and enjoy a busy, customer-facing work environment, starting your own property management company offers many benefits and opportunities.
Real estate investors and property owners typically hire the services of a property management company to take on the day-to-day operations of residential, industrial, or commercial real estate.
Property management tasks may include:
- advertising rentals and screening applicants;
- arranging the viewing of properties and regular inspections of tenanted units;
- organizing and coordinating scheduled maintenance as well as repairs and professional cleaning services;
- managing issues with tenants and implementing eviction processes if needed;
- Staffing and management of additional services such as concierge duties, for example
- basic accounting and handling payments for insurance, maintenance bills, and utilities, as well as overseeing rental income
- Regular reporting to owners
The industry is highly fragmented. Fifty of the largest companies make up 32% of the annual revenue; most businesses are small, employing 3-4 staff.
According to Zippia, this is a female-dominated industry, and it’s interesting to note that the average age of a property manager is 47.6 years.
The US Bureau of Labor Statistics states that employment demand will be driven by the uptake in rental properties such as condos, apartment buildings, senior housing, and planned communities, as these types of accommodation are typically serviced by property management companies. Overall, growth is expected to be around 3% up to 2030 in the US.
It is expected that institutional owners such as pension funds and commercial owners will continue to outsource their property management and consolidate their service provider relationships in the coming year to provide more streamlined operations. This will likely give larger property management companies an advantage.
Your target market will be commercial, industrial, or residential real estate owners wishing to outsource their properties’ management.
That may include property developers, government departments, rental property groups and investors, owners of large apartment buildings or holiday house owners, community housing projects, pension funds, or insurance funds owning property.
A thorough analysis of the property market in your area will help you determine what segment you want to target, where the gap in services is and where demand will most likely increase in the next few years.
Checklist for Starting a Property Management Business
Starting a property management business can be an incredibly rewarding experience, but it’s important to make sure you’re prepared for the challenges ahead. Use this checklist to help get your business off on the right foot.
Step 1: Write a Business Plan
If you’re thinking about starting a property management company, the first step is to write a business plan. This will help you map out your business goals and objectives, as well as set up your financial projections. Once you’ve got a solid business plan in place, you can start working on setting up your company.
Related: How to write a business plan
Step 2: Name the Business
You’ll need to choose a name for your property management company. This is something you should put some thought into, as it will be the name that customers and clients will associate with your business. Once you’ve chosen a name, you can register it with the state and get started on setting up your company.
Step 3: Form a Business Entity
A business entity (also referred to as a legal entity) refers to how a business is legally organized to operate. There are four primary business structures to choose from, which include the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.
When deciding on which business entity is best for a property management business, it normally comes down to the sole proprietorship and Limited Liability Company.
A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay.
The corporation can be a good choice to minimize liability risk because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.
That leaves the sole proprietorship and LLC.
The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is that the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.
Related: Guide to forming your LLC
Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.
Some popular LLC formation services include:
IncFile - $0 plus state fees & free registered agent for 1 year!
IncAuthority - $0 plus state fees & free registered agent the first year!
ZenBusiness - $49 plus state fees & free registered agent for 1 year!
Step 4: Select Your Location
While property management companies can operate from home, having a physical location will lend to a more professional appearance and place to meet with clients.
If meeting with clients isn’t a necessity, operating from home is a great, low-cost option. Be sure to check zoning and covenants in case you have a neighbor that doesn’t approve of your venture.
If operating from a storefront, be on the lookout for a location that is convenient for your customers and clients. You’ll want to choose a location that is easily accessible and has good visibility.
Step 5: Apply for Business Licenses and Permits
Before you can start operating your property management company, you’ll need to obtain the necessary licenses and permits.
The licenses you need will vary depending on the state you’re operating in, but you’ll typically need to get a business license and a real estate broker’s license.
Step 6: Find Financing
Starting a property management company can be expensive, so you’ll need to find financing to cover your startup costs. There are a few different ways you can finance your business, such as taking out a loan or investing your own money. Once you’ve secured the necessary financing, you can start working on setting up your business.
Banks are typically going to want the borrower to have good credit and be able to invest 15-25% of their money towards the total start-up costs.
Step 7: Open a Business Bank Account
Keeping your small business and personal finances in separate bank accounts is important to track the income and expenses of your business and identify trends.
Many banks offer free business checking accounts, so be sure to find a cost-effective option for your business.
Step 8: Get your Marketing Plan in Place
A well-executed marketing plan is essential for any business, and a property management company is no exception. There are a number of factors to consider when creating a marketing plan for a property management company, including the type of properties the company manages, its target market, and its budget. A few tips to consider when working on your marketing plan include:
First, consider your target audience. Who are you trying to reach with your marketing efforts? Once you know who your ideal tenant or buyer is, you can tailor your marketing message to appeal to them.
Next, think about the various channels through which you can reach your target market. Traditional advertising methods like print ads and radio commercials can be effective, but don’t forget about online marketing strategies like SEO and social media platforms. By using a mix of both offline and online marketing tactics, you’ll have the best chance of reaching your target market.
Finally, make sure you have a system in place to track your marketing efforts. This will help you see what’s working and what isn’t so you can adjust your plan accordingly. By following these tips, you’ll be well on your way to creating a successful marketing plan for your property management company.
Step 9: Get Business Insurance
You’ll need to get insurance for your property management company. This will help protect you from liability if something goes wrong with a property you’re managing.
A few of these include:
– General liability insurance covers expenses if a client is ever injured or if an employee damages a client’s property.
– Worker’s compensation insurance is required if a business hires employees. It helps cover expenses like lost wages or medical bills if an employee is injured while working.
– Automobile insurance is needed to cover any vehicles and drivers. If you plan to use a personal vehicle, be sure to review your current policy to ensure it allows for commercial activity.
The cost to insure a property management business will differ according to factors like a business’ location, the value of the equipment to be insured, and the number of employees on staff. To get a more accurate idea of potential insurance costs, request quotes from multiple insurance companies. Compare the policies and consider factors like deductibles and coverage limits to find the policy that’s best for a business.
Related: Types of insurance your business may need
Step 10: Hire Employees
As your property management company grows, you’ll need to hire employees to help you with the day-to-day tasks associated with running a business. You’ll want to carefully screen and train your employees to make sure they’re capable of providing quality service. Once you’ve hired employees, you can start working on managing your properties.
There are a number of steps that are required before hiring an employee.
Related: Hiring your first employee
Step 11: Obtain Property Management Software
Setting up an accounting system for your property management business is critical to your business’s long-term success by accurately keeping up with security deposits, income from rent, and fees, along with any business expenses.
Staying on top of taxes not only keeps the business out of trouble with the government, but the numbers can be used to track and monitor trends and cash flow in the business and maximize profits.
The thought of accounting can be intimidating for a lot of new entrepreneurs. There are a number of ways of handling bookkeeping, from DIY to hiring a bookkeeper. These include:
- Pen and paper - Low expense, but difficult to track.
- Spreadsheet - Low expense, but easy to make errors.
- Accounting software - Medium expense, but owner typically inputs expenses. Some great accounting software programs include Freshbooks or Wave Accounting.
- Hire a bookkeeper - Higher expense, though very affordable at $100-$200 per month in most cases. A dedicated bookkeeper will probably save money because, in addition to handling all of the bookkeeping (so you can focus on the business), they also provide personalized tax advice and ensure the business is in compliance.
Find bookkeepers in your local area or use a service like 800Accountant.
How much does it cost to start a property management business?
Start-up costs for a property management company are typically around $30,000.
That said, costs will vary depending on the properties you will be managing, their size and location, their specific requirements, and whether you will start with a brick-and-mortar office.
But let’s assume you are looking to set up an office where you can meet with potential clients, and you are looking to attract contracts for larger properties. You might need:
– Real Estate Licence, initial exams, and ongoing licensing: up to $3,000 in year one.
– Office: rental/lease: $500 – $1,500 monthly depending on location and square footage
– Furnishings and technology: $3,000 – $5,000 setup costs
– Insurances: $ 2,500 monthly
– Accounting, property management, HR software: $300 monthly
– Marketing and communications: $3,000 to start up, plus monthly licensing fees.
Add to that potential supplies, stock, utilities, staffing, and transportation costs.
How much can a property management business owner make?
A property management company provides a valuable service to landlords by taking on the day-to-day tasks of running a rental property. In return for their services, the property management company charges a management fee, which is typically a percentage of the monthly rent. In addition to their regular fee, property management companies may also charge for one-time services, such as finding a new tenant, evictions, or conducting repairs. As a result, property management companies are able to generate a steady stream of income, which allows them to provide an important service to landlords and tenants alike.
The amount of money that can be made by owning a property management company will vary based on factors such as location, number of properties, etc. To get an estimate based on a newer company, we looked at statistics from IPropertyManagement who compiled a detailed overview of income of property managers.
Metropolitan areas such as Washington DC, New York, and New Jersey or Virginia have the highest incomes for property managers at over $90,000. This income reflects above-average living costs and a thriving, high-end rental market. For example, in Washington, DC, there is one property manager for every 301 working residents. However, in States such as Idaho, Montana, or New Mexico, the annual income of a Property Manager is closer to $50,000.
Are there grants to start a property management business?
It’s extremely rare to find a grant to start a property management business. If you search for business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.
Legitimate federal grants can be found at Grants.gov, and you can check on your state’s economic development office to see if they have any grants available.
What skills are needed to run a property management business?
Outstanding interpersonal and customer services skills
These are essential skills you need to enjoy! Your role will likely include showing real estate to prospective renters, screening applicants, inspecting rented units, and maintaining everything well. You may also have to evict renters. Therefore, outstanding customer service, excellent people skills, clear and professional communications, and interactions will be crucial.
Excellent organizational skills
A positive can-do attitude, attention to detail, and exceptional organizational skills are vital in this business. In addition, you must organize your time well to ensure you meet your obligations managing a property while keeping both tenants and owners informed and ensuring good record keeping of all transactions.
Good time management also means you assign time to look after your own business administration, meet with potential clients, develop your marketing and keep on top of quotes and invoicing.
Stay up to date with legislation and licensing
To run your own property management business, you will need a Real Estate Broker Licence in most US states. And that often means gaining up to three years of experience as a Real Estate Agent and passing a licensing exam. Some States accept a Property Management Licence.
Or you might decide to start as a Certified Apartment Manager or a Vacation Rental Manager, which requires a far simpler certification. In any case, obtaining a relevant professional certification will undoubtedly assist in attracting new and potential clients and support your on-the-job decision-making. In addition, it will give you a good grounding in business management and organization, guest and owner relations, marketing, and promotion.
You will also need to stay updated with current legislation relating to rental properties, your responsibilities towards tenants and owners, the code of compliance of buildings, and any work done.
What is the NAICS code for a property management business?
The NAICS code for a property management business is either 531311, which is classified under Residential Property Managers, or 531312 Nonresidential Property Managers.
The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.
Related: What is a NAICS code?
Starting your property management business may just tick all the boxes if you enjoy dealing with people from all walks of life, whether they are holidaymakers in a vacation home or are leasing a large commercial property. And having an eye for detail, a practical, can-do attitude, and knowing a thing or two about real estate will also help make this a successful venture.