Top 6 Reasons Why Small Property Management Companies Fail

Recently I attended the annual BBQ for the Ottawa Real Estate Investors Organization (OREIO).

While I was there, I saw one of my past students (I’ll call him Joe) who owns some investment properties, and also runs a property management company which manages approximately 30 units for other investors.

Joe was telling me that he recently had the opportunity to bid on a job for managing a large portfolio of properties.

Success and Failure In fact, this job would add over 100 units to his property management company. I believe somehow he knew the person in charge of awarding the contract, and he was competing against some big name property management companies in Ottawa.

However, Joe was a bit concerned that he and his partner wouldn’t be able to handle the workload.  He was asking me for advice and wanted to know what he should do.

 

Normally I am not someone to hold people back from reaching for big goals.  But after asking a few questions, I quickly determined that his small property management company would likely fail under the new workload.

I didn’t tell him exactly what to do (that was his decision), but I told him to be careful about expanding too quickly.  Twice I have seen small property management companies blow up and go out of business (for many reasons but mainly because they grew too fast).

 

After that conversation, I realized that many investors may not know what to look for (or what to avoid) when choosing a property management company, so I’ve put together a list of the top 6 reasons why management companies fail.

And if you are an investor who also does property management on the side for other investors (or you’re thinking about doing it), pay very close attention to these reasons.  The future of your business is at stake!

 

1) Not charging enough money

canadian-moneyAs an investor, your goal is to get your income as high as possible, while simultaneously keeping your expenses as low as possible. When it comes to property management, naturally investors are looking for the best deal, which means the lowest possible management fees.

But there’s a problem with low management fees. It’s a hidden problem that may not show itself until months or years later.

Here is what happens when fees are too low…

  • Low management fees = Low profit for the property management company
  • Low profit = Not enough money to hire staff
  • Not enough money/staff = Few staff managing too many properties

 

Let’s say a property manager has 20 units under management, at an average of $1000 per month in rent per unit.

20 units x $1000/mo = $20,000/mo rent collected

Most property management companies charge a percentage of rents collected, which ranges anywhere from 4% to 10% or more. If this property manager charges 6%, that equals…

$20,000/mo x 6% = $1,200/mo management fees

And that assumes they collect 100% of the rent for each month.

While 6% may seem like a lot for some investors, with only 20 units it is not enough to run a profitable property management business with staff.  The only way it can work is if all work is done by the owner or their family members, and they are simply supplementing their own property investment income.

 

Every business (property managers included) has overhead — the expenses required just to be in business.  With $1,200/mo income, there is no way a property management company could hire full time staff.

Even if the number of units doubled to 40 units, which doubles the potential management fee income to $2,400, it’s still not enough to hire even a single full time person after paying overhead.

If a property management company is trying to earn your business with the lowest rates and they manage only a handful of units, be very careful and consider finding another company that charges more.  I know it seems counter intuitive to investors, but you will have better service and chances are the business will be around longer.

 

2) Not enough staff

Imagine this… a small property management company (a husband and wife team) has worked hard for many years building their portfolio to 50 units.  They keep costs low, provide personalized service to both landlords and tenants, and provide good financial reporting.

Word of their good service begins to spread among investors. One day they receive a phone call from an investor with a large portfolio — over 50 units.

By adding one new customer, this small property management company can double the number of units managed!  The owners are happy and jump at the opportunity to bring in new business.

It would appear that this property manager doubled their revenue with one client.  And at first, that’s exactly what happens.

But after a short time, it becomes apparent that their workload has also doubled.  In fact, it has more than doubled because it takes more work to initially bring on a new client with new properties and tenants.

As a result, management quality is worse for all the other units. Tenants requests aren’t dealt with in a timely manner, landlords aren’t called back right away, etc.  Complaints begin to increase, which increases the stress level on the owners of this company.

 

Every experienced property manager knows it takes a certain number of people to effectively manage a certain number of properties.  If there are not enough people, then the quality of management suffers.

So with this example, let’s say they collect an average of $1000/mo rents for 100 units, and they are charging an 8% management fee.

$1000/mo x 100 units = $100,000/mo rents collected x 8% = $8000/mo mgmt fee

That’s enough to hire one full time person and still provide some income to the owners.  Great!  Problem solved… sort of.  Although a new staff member has been hired, it may still not be enough to handle the workload.

Remember… the workload at least doubled, but the staff increased by only 50%.  That means the owners still have a bigger workload than they did before, which may cause management quality to suffer.

 

3) Too many distributed units

ApartmentBuildingIf you were managing properties, which would you rather have?

  • 100 single family homes, or
  • One multi-unit building with 100 units

For most investors, the answer is simple — whichever produces the most profit and meets their investing goals.

However, for a property manager, the workload for managing 100 single family homes FAR exceeds that of managing a single 100 unit building.

Why is that?  Imagine driving to 100 homes, located in various locations across a city for things such as:

  • rent collection
  • tenant disputes
  • regular maintenance
  • inspections (e.g. fire detectors)
  • emergency repairs (e.g. water leaks)
  • and more

Now contrast that with driving to a single multi-unit building, and simply taking the stairs or the elevator to do all of the same tasks.

It’s easy to see that if a small property management company is focusing on single homes or smaller multi-unit properties, their workload is much higher. As a result, they won’t be able to provide the same quality of service as someone who can simply go to a single large multi-unit building to handle everything.

 

4) No repeatable systems in place 

When someone starts a new property management company, most of the time they are starting from scratch. That means that although they may have some experience managing properties in their own portfolio, they may have little to no experience running a property management business.

What’s the difference?  All businesses need to deal with multiple areas of expertise to succeed, and property management companies are no different.  They need to have processes in place for…

  • Marketing – advertising apartments for rent, advertising for new investor clients
  • Sales – showing and leasing apartments to new tenant, meeting with investor clients and signing them up for service
  • Operations – dealing with tenant requests, evictions, maintenance and repairs
  • Accounting – accounts receivable (money owed from tenants and investor clients), accounts payable (money owed to run the company)
  • Information Systems – all the technology required to run the business, including phones, voicemail, cell service, website, etc.
  • and more

All of this takes time to learn and build for any company just starting out. However, where many property management companies fail is when it comes to making these systems repeatable.

 

For example, let’s say the owner hires a staff member to help out with managing properties.  This new staff members stays with them for many years and learns everything there is to know about property management.  They know how to advertise apartments, deal with tenants, hire contractors for repairs, and more.

Files on bookshelvesThen one day that staff member gets another job offer and decides to leave.  And they take all their knowledge with them, without leaving anything behind that is documented and repeatable.

All of a sudden, the owner is left scrambling to do everything that staff member used to do. But the problem is they don’t know how to login to a website to place an ad, they don’t know which are the best contractors to hire, and so on.

Their business is in chaos, all because nobody in the company documented any of the repeatable processes within their business.

 

5) No dedicated leasing agent 

Leasing (the process of placing a new tenant in a unit) is actually a very good profit centre for property managers. They often charge a $300-$500 flat fee, 50%-100% of 1st month’s rent, or more.

For example, if the fee is 100% of 1st month’s rent, that equals a fee of 8.3% of all the rent collected for 1 year… and its paid up front.

At first, not having a dedicated leasing agent may not seem like a big problem.  Often times the owner of the property management company does all the leasing themselves.

But the problem is that if they are too busy, too sick, or simply unavailable, there is noone else to show and lease apartments.  This results in lower revenue for the property owner, as well as the property manager.

Sometimes a property manager will grow to the point where they can hire a full time leasing agent. However, the problems still exist to a certain degree.

Remember, most apartment showings and leasing is done during the evenings and on weekends. So the leasing agent must have very flexible hours, and be willing to work when most others are not.

With only one person handling leasing, there is a single point of failure. If they are sick or unavailable, again there is no one to handle the job or the owner is stuck doing it.

The result of all this is either:

  • Lost revenue (due to no one being available for a showing)
  • Over worked staff or owner (which results in mistakes, missed tasks, etc.)

 

6) No dedicated bookkeeper

BookkeepingThis is huge!

So many property managers (and business owners in general) try to do their own bookkeeping.  But the problem is they aren’t trained in accounting.

The end result for investors is…

  • Missing income
  • Inaccurate expenses
  • Incorrect tracking of last month’s rents
  • and much more

For the property manager, if they don’t have accurate financial reports for their business, they cannot manage their own business correctly. Most importantly, they can’t foresee cash flow problems before they occur.

Cash flow problems are the #1 cause of small business failure, so having a dedicated bookkeeper (either on staff or outsourced) is critical to long-term success.

Without one, I can almost guarantee that investors are losing money, and property management companies will eventually go out of business.

Inner Circle Membership

Learn directly from real estate industry experts
such as a mortgage broker, accountant,
property manager, and more.

>> CLICK HERE for more details <<

 

Running a property management company can be complex, just like running any business.  And as you can see, there are a variety of reasons why small property management companies can fail.

If you’re an investor and you’re searching for a property manager to manage your investments, keep these things in mind when selecting a company.  If I had to choose which ones to focus on, I would recommend making sure they charge enough money and aren’t trying to grow too fast. Both of those can kill any company fast.

And if you’re a property manager or an investor looking to start your own company, read and re-read this article many times. Then take a good, hard look at your business to see if you’re at risk in any of these areas.  Chances are, the last thing you want is for your company to fail and cause your clients to lose money. Take a proactive approach and you’ll improve your chances of succeeding long term.

What is your experience with small property management companies?

Follow Me

Paul Blacquiere

Paul is an entrepreneur, investor, speaker, and educator.
He's experienced in multi-family properties, renovation, flips,
joint ventures, and is Canada's top RRSP mortgage expert.
Follow Me

Latest posts by Paul Blacquiere (see all)

16 comments
Marjan

Hi Paul;
I’m very good management person and my question is if I had plan to start a property management , is it necessary for me to take the property management course?? or if i searching on the internet for information that will be enough??

I really appreciate if you answer my question thank you

Reply
    Paul Blacquiere

    Hello Marjan,

    Yes, I recommend getting some training before starting a property management company. Just because you’re good at management, doesn’t mean you know how to manage properties 🙂 Also, in some areas, property managers are licensed so you need to pass a test first.

    Hope this helps

    Paul Blacquiere

    Reply
Daniel Madison

Great article! This is a must read for managers and owners/investors alike.

Reply
    Paul Blacquiere

    Thanks Daniel! Glad you enjoyed it

    Reply
Yahozka

Great Article!

Is there a possibility to provide basic property management? For example, leasing, screening, maintenance, everything except for billing and accounting.

If so, how would you charge for this type of service?

Thank you!

Reply
    Paul Blacquiere

    Hi Yahozka,

    I recommend researching your local marketplace to see what other companies are offering, and price your services accordingly (I recommend higher priced and deliver good value). You can check out their websites for details, and even call them up and ask them their rates.

    Hope this helps
    Paul

    Reply
Helder Amaral

Hi Paul,

I’m on my third course of getting the real estate license here in the Toronto area. I also have three condo units of my own that I manage and would like to take it to the next level and start my own PM company. I have 17 year background in highrise condo construction and residential home experience as well. I’ve made many great contacts if I need repairs or advise for repairs on units or homes.

I believe I can offer a great service to other investors who want someone who enjoys this property management bussiness world to take care of their properties. But one of the concerns I have is what other charges should I charge the owner of the property or properties? Are there other fees or charges that I should be charging aside from the management fee of about 8-10 percent?

Thanks in advance for your help and great article Paul!

Reply
    Paul Blacquiere

    Hi Helder,

    Glad you enjoyed the article 🙂

    I recommend doing the following 2 things:

    1) Read this other article – While the purpose is not to outline the various fees you can charge, it does explain many of the common ones: https://www.spirepoint.ca/4-reasons-you-must-manage-your-property-manager/

    2) Research what companies – Find other companies in your area. Give them a call and ask what fees they charge. You’ll very quickly come up with not only a list of what to charge, but you’ll know what your competition is charging to clients. You can then decide your fee structure and pricing.

    Be careful about trying to undercut other companies — the “race to the bottom” pricing mentality will make it difficult for you to hire staff and offer good service.

    Hope this helps

    Paul Blacquiere

    Reply
Ann

Hi Paul,
I am working for a very small property management company (only myself and my boss) managing about 75 properties. The system that my boss has for the whole renting process is hard to follow and I am new to this business. She said that I can create a new “system”/ instruction manual, for running the whole property management process. Can you give me some ideas of how to create an easy system that could allow for me to effectively manage the properties?

Please help!!

Reply
    Paul Blacquiere

    Hi Ann,

    It sounds like what you’re looking for is a “Property Management Business In A Box”. That’s a fairly tall order because in essence it’s an instruction manual on how to operate a profitable business.

    If you’re starting from scratch, keep in mind there are many aspects to property management, such as Marketing, Sales, Operations, Accounting, Information Systems and more. I recommend creating templates for everything and systemizing as much as possible. Also research your area’s landlord/tenant laws so you know the process to follow. Government websites usually have ready made forms to use for landlords and for tenants that can simplify the paperwork a bit.

    Leasing is one aspect that is very important. It’s a part of marketing and sales that is a revenue generator for the company, and it will allow you to hire out the other aspects of the business (because you have the money to do so). I recommend learning how to lease units effectively, which will require some sales and people skills.

    Unfortunately, I don’t have dedicated courses on leasing or property management at this time. However, I am planning to team up with a top property management expert to create one in the future, and he’s a wizard at leasing.

    Sorry I couldn’t be of more help at this time, but if you’re on my email list, you can be notified if/when I release a property management course in the future.

    Paul

    Reply
      david vilkhovoy

      Hi Paul,

      I’d love to connect with your friend who is the “wiz” in leasing. It’s a major area and I’m currently looking for training/ resources/ etc. for that aspect of property management. Thank you and great article.

      Reply
        Paul Blacquiere

        Hi David,

        I’ve been trying to convince him to create a property management course together, but he’s just too busy. He only manages his own units now and he’s got a lot of buildings.

        I’ll keep trying, but in the mean time, you can always check out the Inner Circle Membership – in month 7, I include an interview I did with him that you’ll really enjoy.

        https://www.spirepoint.ca/products-services/investor-training/inner-circle-membership/

        Paul

        Reply
Vicki Auerbach

Are there industry standards about frequency of drive by inspections necessary for protection of the landscape from tenant damage?

Reply
    Paul Blacquiere

    Hi Vicki,

    In Ontario, there are no licensing requirements for property managers, and I don’t know of any ‘industry standards’ for inspections.

    If your property manager isn’t inspecting your property often enough, have a conversation with them about it. If they don’t change their habits, find another company.

    If you have a tenant who is damaging your property, you can evict them if they don’t repair the damages. I recommend reading the Landlord and Tenant Board website for details:

    http://www.ltb.gov.on.ca/en/Key_Information/STEL02_111483.html

    Here is a general FAQ page:

    http://www.ltb.gov.on.ca/en/Key_Information/STEL02_111483.html

    You can also call them for help and advice on what to do

    Hope this helps

    Paul

    Reply
Paul Blacquiere

Hi Mike,

I’ve learned alot over the years not from running a PM company, but from personal experience dealing with them. I also have a friend who has run a successful company for many years, so I get an inside view into things others don’t see.

As for expected rates, I mentioned in the article that I have seen anywhere from 4% (very low) up to 10% or more. The ones I dealt with on the low end usually suffered in some areas such as bookkeeping or management (due to the low rate charged). I did use a larger, more successful company at 4% that did not have those problems, but they were the exception. (Note: they are no longer managing 3rd party buildings due to the low profit margins and some problems I mentioned above). I have seen other companies charge 10%, which seems high, but it really depends on the service that is delivered, how their other fees are structured, etc.

It’s tough because investors always want to spend the least, but by doing so, they’re putting themselves at risk. To be sure you can afford the higher quality PM companies, make sure you buy at the right price (at a discount, so your mortgage payment is lower and cash flow is higher), and don’t get caught up in emotion.

If you’re trying to determine rates for your own PM company, I recommend starting high, deliver top quality service, and if you have trouble bringing on clients, do one of 2 things:

1) improve your selling skills — better sales people will close more clients
2) lower rates only on an exception basis

As for the number of people in the company, it does not have to be 4 full time people. The owner and property manager can be the same. The bookkeeping/accounting can be outsourced (it may take you awhile to find someone good). The leasing agent should ideally be a 2nd person who can dedicate their time to the job, and not have to drop things because they’re busy doing bookkeeping or PM duties.

Re: ratios of staff-to-#-of-units, I don’t have concrete numbers. I have seen 3 person operations (manager, leasing agent, bookkeeping/admin) manage around 100 units and do an ‘ok’ job for awhile. Then they tried to expand to 200 units and blew apart, declaring bankruptcy. I have also seen a larger operation with many hundreds of units do well with 5-6 people, but they had systems in place and high end accounting done on-site.

I hope this helps

Paul

Reply
Mike Bonito

Hi Paul,

This is great. Your really appear to know your stuff when it comes Property Management companies. I think that it would be really useful for myself and other of your readers if you could come out with some facts about what percentages you think they should expect to be charged for good property management from a reputable property management company in the Ottawa area. What about gatineau? what prices should we expect there?

From what I can see here it appears that investors should not even consider property management company that do not have at least 4 people in there office. (Owner, Leasing agent, book keeper and property manager). You are right that is allot of overhead!!

Finally, how many units should a good property management company have before even they are too big for themselves. Even with 4 people there is still only one property manager. It would seem that it would take lots work for the one property manager to deal with all the units necessary to keep the 4 man team floating and profitable. Do you have any ratios for us to consider? How many properties can one property manager mange before it is too much? 5, 10, 15?

This information would be great to help separate the good companies from the ones that are doomed to fail and cost us investors our shirts.

Thanks Paul.

Reply
Click here to add a comment

Leave a comment: