Not everyone is cut out to run a company. First-class property managers who’ve proven their mettle in overseeing large complex real estate portfolios—especially those managers who have not been responsible for business development or engaged in client relations—may find that running a management company is a whole new ballgame. Still, if lack of experience in running a company stopped anyone from making a go at it, there would never be any startups.
|“I highly recommend that anyone who is even thinking about starting a management business attend IREM’s Leading a Successful Management Company course in the classroom.”|
-Branden Barker, CPM
It didn’t stop Branden Barker, who was IREM’s CPM of the Year REME Award recipient in 2018. The entrepreneurial spirit grabbed hold of Barker, and in mid-2017 he gave in to the urge. With 15 years’ property management experience under his belt, he took the leap and launched Barker Property Management and Commercial Real Estate in his hometown of Baton Rouge, La. Barker describes the experience as “a roller coaster ride,” saying that it was both exciting and terrifying while being quick to add, “I wish I’d done it sooner.”
According to the Bureau of Labor Statistics: About 20 percent of small businesses fail in their first year. Put another way, about 80 percent of small businesses make it through their first year. Barker has made it past the one-year mark, and, as he says, “doubled his staff” when he hired his first employee.
Certainly, starting a management business is probably easier than starting other more capital-intensive businesses. With no expense at the front end for inventory (as is the case for retail businesses) or raw material (as is the case for manufacturing), barriers to entry are relatively low. Launching a property management company can be as simple as working from home, printing professionally-designed business cards and stationery, and having a sturdy laptop and printer. That’s the easy part. More critical is doing lots of homework in advance, understanding what type of business it will be, and having a plan to achieve that goal.
Reach out to those who’ve already done it
Before printing those business cards, a strong recommendation is to pick the brains of those who have done it—both those who have started their businesses and succeeded, and those who have not. What success stories can they share? What pitfalls did they experience? What do they wish they had known that would have made their journeys go more smoothly? At least a year before starting his company, Barker reached out to IREM colleagues throughout the country and acknowledges that he “couldn’t have done it without all of the input I received from my network.” He also credits the time he spent in IREM’s Leading a Successful Management Company course in the summer of 2017 for putting him on the right track and expanding his circle of advisors. Although technically for those who already are running their companies, Barker says, “I highly recommend that anyone who is even thinking about starting a management business attend this course in the classroom.”
With those insights, attention can be turned to the legal requirements of starting a management company. Know what the licensing requirements are and make sure you meet them. Generally, anyone who leases space for others, collects rents for others or manages real estate for others for a fee must have a real estate license. In most states, a management company is required to have a real estate broker’s license in order to do business.
Also needed from a legal perspective is establishment of the company’s ownership structure: sole proprietorship, partnership or corporation. Each form of ownership comes with distinct advantages and disadvantages and different short-term and long-term implications. These have to do with facility of set-up and dissolution, legal and accounting fees, income taxes, insurance, cash on hand and operating loans and, above all, legal liability. The sole proprietorship is a very common form of ownership for real estate management companies because of the ease and cost of set-up; the major downside is the unlimited liability that goes with it. This is addressed with a corporation. However, with the corporation comes higher start-up costs and double-taxation. For those who will be joining with someone else in setting up the company, a partnership is an option. One thing is certain: No matter the form of ownership, it should be decided with the help of an attorney and accountant or financial advisor.
Shaping the new company’s vision
As the vision for the future company takes shape, it’s wise to remember that no company can be all things to all people. Identifying the market the new management company will serve is critical, including its degree of specialization in terms of such factors as property type, client profile and geographic reach, among others.
What type of property will the company manage—commercial or residential—and will the focus be narrowed even more within those broad categories? On the commercial side are shopping centers, office buildings, industrial properties and medical office buildings. On the residential side, there are companies that focus exclusively on managing single-family homes and small rental apartment buildings, and others whose market consists of homeowners associations and condominium properties, not to mention those who serve the affordable housing sector, conventional apartment buildings and everything in between. In smaller market areas, such specialization might not be an option.
Identifying a target market requires an assessment of multiple factors: breadth and depth of prior experience in managing that type of asset, the size of the portfolio within the market area to be served and, not to be ignored, the competitive landscape.
Who are the competitors in the marketplace? What market niches are they serving, and what are their strengths and weaknesses? What services are being offered by others, and which are not? Who are their clients? Are they vulnerable? In short: What can your company do better? And where are the opportunities to fill unmet needs within the marketplace?
Things to Keep in Mind When Starting a Business
- Start with a business plan.
- Be prepared to be on your own.
- Have access to a database of potential clients.
- Be prepared financially for your plan to take longer to work out than expected.
- Understand the commitment required.
- Be realistic in assessing market needs.
- Choose your business associates (partners and employees) carefully.
- Be realistic in assessing your skills and talents (and those of any other principals).
- Start with a realistic budget.
- Be patient—starting a new business often requires a great deal of time and effort, and rewards may be small at first and slow in coming.
From Business Strategies for Real Estate Management Companies, Third Edition, by Alan A. Alexander and Richard F. Muhlebach, CPM, published by IREM
The type of business the company will be could have an impact on the name of the company. Names are important. Names are powerful and carry a message. The name should be distinct but not odd, memorable but not peculiar, descriptive but not long. And most importantly, in an age when digital presence is everything, a prime consideration is search engine optimization (SEO) to help ensure the name gets recognized within the Googles and the Bings. As a native of Baton Rouge with name recognition in the community, Barker says he gave the naming of his company a great deal of thought. Ultimately he decided to reflect his personal branding and leverage his family name for his start-up.
What do the numbers say?
Of course, the business side of the new venture also demands attention. Before starting the company, the prospective entrepreneur should develop a business plan and a feasibility study that leads to a realistic financial pro forma containing an honest assessment of the company’s income stream and its expenses.
For a management company, income means management fees, which represent the continual and predictable income stream necessary for the firm’s survival. And that means determining how to structure the firm’s management fees, identifying the services they will cover and thinking about ancillary fee sources. There are a number of ways to structure management fees—flat fees, fees expressed as a percentage of gross potential income, incentive fees, set-up fees when taking over an account, administrative fees and leasing commissions—as well as various pricing philosophies when it comes to competitive positioning.
“Often people starting companies think they have to compete on price in the early stages, making profitability a challenge and growth and expansion of the business very difficult,” according to Alan Alexander and Richard Muhlebach, CPM, in Business Strategies for Real Estate Companies. “A small one-person shop can generally compete by quoting lower fees than the market in order to generate interest, but as a company gets larger and takes on more employees and expenses, it becomes much more difficult to generate a profit on lower-than-market fees.”
Offsetting the new company’s revenue stream will be the costs associated with running the operation. These include office space, equipment and supplies, insurance, taxes, legal fees, accounting services, administrative and other staff, and other costs that may not be readily apparent at the outset. For example, one expense often overlooked is for travel—the cost of meeting potential clients and visiting properties once management accounts are contracted.
In putting together the pro forma, one question to ask is whether the new owner should assign a value to his or her time and talents, i.e., whether the owner’s salary is incorporated into the business plan. If necessary, this particular expense can be delayed or forgone if the business does not perform as planned or during the start-up period if funds are insufficient for the owner to draw a salary. But over the long term, this cost cannot be left out.
It is a good idea to make projections based on both worst-case and reasonably likely scenarios to better evaluate the probability of surviving if new accounts are not acquired as quickly as hoped.
In getting a management company off the ground, a new owner has to find a balance in allotting resources to managing properties that have been acquired—actually earning income—and prospecting for new business. This makes time management critically important, and new owners may find it advisable to set aside time each day to focus on new-business development as a high-priority activity. Indeed, when asked about the challenges he faced with his new company, Branden Barker puts time management at the top of the list. After being a one-man show throughout his first year, he says, “Time was the one thing I never seemed to have enough of.” ￼