Running a Property Management Business: Top 10 Mistakes to Avoid
Today, we’re talking with Brad Larsen, Founder/Owner of Larsen Properties in San Antonio, about The Top 10 Property Management Mistakes and How to Learn From Them. These tips will help avoid the pains of growing a property management business. We are excited to bring in Brad, who:
- is a retired army captain.
- earned a master’s degree in business administration.
- runs a property management company in the ultra-competitive San Antonio property management market.
Larsen Properties started in 2011 and has already emerged as a market leader in the San Antonio area. Brad will share 10 mistakes that he wished he had known about when he first started Larsen Properties.
#10 – Waiting Too Long to Hire Business Development Talent
Larsen Properties waited until they reached 250 homes under management before hiring a business development manager for their company.
Brad was first introduced to the idea of hiring a business development manager from the Leading Property Managers of Australia. This is one of the first things you must do if your intention is to grow. As a business owner, you are doing so many things from payroll to operations that you simply cannot commit to dealing with 4-5 appointments/week. Also, Brad recommends on not waiting too long in implementing a solid CRM platform, like LeadSimple, to systemize follow-ups to help your property management company. Combining those two areas will help your business development manager effectively do their job, as well as you being able to passively oversee the activity that is going on with your lead generating efforts.
Think about compensation as well because your model needs to be sustainable. Do a base salary and a percentage or a commission based on the lifetime value of that client. You want a motivated sales person, not a converted Realtor.
A great tip to convert a higher rate of deals is to consider having a portfolio manager go with your business development manager to appointments so that the potential client can meet the person who would be their point of contact. That helps a conversation start about tenant handover procedures, what will happen to get a home ready for the market, etc. Speaking the language is important, and the prospective owner will appreciate talking to someone who will actually manage the property.
Larsen Properties recommend that 100 homes is when you should start to seriously consider hiring a business development manager. At that point, you have more than enough to manage and you have enough income coming in from management agreements that can help you pay for that talent investment.
#9 – Not Establishing Metrics Early
Larsen Properties started a spreadsheet a few years ago that helps them track metrics
Track your metrics religiously every month. You can make adjustments quickly and discover where you are spending incorrectly. Key performance indicators (KPIs) that Brad likes include:
- Staffing to revenue ratio – staffing expense costs compared to annual revenue. The magic line in the sand is around 50 percent, and it might fall between 40 or 60 percent. If your total revenue is $1 million and your staffing expense as $500,000, that’s half of your revenue spent on staffing. It’s where it should be. Smaller companies can run their staffing at about 40 percent. If you’re above 60 percent, you want to look at that metric and see if you’re spending too much on staff.
- Sundry income to management revenue ratio. Sundry programs are small programs like eviction protection, early termination fee, late fees, rental guarantees, and any other things you may have against your management fee revenue. In Australia, it’s tracked at .25. So, for every management dollar you earn, you could/should be earning an additional 25 cents of additional revenue. At Larsen Properties, they’ve managed to earn 70 cents on every dollar above and beyond their management and leasing fees.
Pro-tip: One of the ways Larsen Properties is able to earn 70 cents on every rental revenue dollar is by charging a pet administrative fee. That covers the property manager’s ability to cover any damage that a pet causes above and beyond the security deposit. It’s a creative way to earn that sundry income.
#8 – Not Joining NARPM Right Away
It took Brad 2-3 years before he got really involved with NARPM
NARPM – the National Association of Residential Property Managers – provides resources, leadership, and mentors. A lot can be learned at broker-owner conferences and other events. You learn how your peers solve common problems in innovative ways. Check out NARPM.org if you’re not a member yet. There are state chapters as well, which provide excellent speakers and opportunities. You also get facetime with vendors, which helps you get to know the people behind a product/service.
#7 – Not Establishing Enough Points of Difference
You need to create some points of difference between you and other companies. It should be easy for you to attract a specific category of clients who have a unique need; you can be the company that:
- Has an in-house maintenance company.
- Does videos that no one else does.
- Offers an eviction protection program.
- Works in a specific part of town.
- Offers a single point of contact. (Larsen Properties’ point of difference)
- Specializes in working with investors.
As you can see, there is probably something you already offer that the rest of your competition does not. There has to be a way to create a point of difference between you and your competition that will set you apart from everyone else who is managing homes. At Fourandhalf, we can personally attest that companies that are able to differentiate themselves with a unique value proposition usually see the best results. Work out how to differentiate yourself, especially before you launch a big marketing plan. (This is something Fourandhalf can help you with.)
#6 – Making Bad Hires
Brad admits that his strong suit is not in hiring people.
At some point, everyone will make a bad hire. The old adage, hire slow and fire fast, holds up, however, there is no perfect solution. A few ways to conduct interviews is by:
- Do a panel interview after the initial telephone interview. Have your general manager and one or two other employees interview prospective new team members, and have a discussion about who to hire.
- Turn the process over to someone else who will be good at hiring the right people.
- You can also use a PEO, which is a payroll provider company that contributes HR help. You’ll get benefits at a much better rate.
There are performance concerns and culture concerns. Low performance is easier to measure and coach. A culture fit can be more difficult to address. That’s where having many different people interview a prospective employee can help. You want to understand the personality and make sure there’s a drive and a competence that will help your company. To put it simply, you want to hire people who care.
#5 – Dealing with the IRS
Larsen Properties kept getting hit with fines before instilling quarterly audits to keep things accurate.
Make sure your 1099s are in order to send your owners every January. Go through your process, make sure it’s watertight, and make sure you have good taxpayer identification numbers for the people you manage because the IRS will fine you on every incorrect one. This can be a headache. Larsen Properties tempered these fines by instilling quarterly audits to help keep things accurate.
You also want to file all your tax returns for your LLCs, if you have those set up. When you have an LLC with no revenue, it can be easy to forget to file. Get a good CPA who can manage this process for you. What seems like a little thing can lead to a huge IRS fine. A good bookkeeper will save you money.
#4 – Handling Vendors/Maintenance
Larsen Properties had to downsize their maintenance department to be more profitable
Everyone is going to have to do maintenance and there are different ways to handle it. If you run an in-house maintenance company, stay small or go big. Don’t be in the middle because you won’t make money. An in-house maintenance guy with a van might be all you need and that is what Larsen Properties does with a portfolio of 600 doors. The middle is having two to five staff members working on maintenance. The reason this didn’t work for Larsen Properties, is that over the course of a year, you will have downtime and it will kill your profits. Keeping all your staff people busy full time when you’re a medium sized maintenance company won’t work. If you have 15 or 20 maintenance trucks out on dispatches all the time, you’ll make money. However, the middle range is not profitable.
Talk to vendors who you’re looking to hire and secure discounts from them. Most software programs allow you to pay vendors a discounted rate. You have to negotiate that rate. Maybe you get an invoice for $100, and you have negotiated a 10 percent discount with a vendor. So, you write a check for $90, and now you have a 10 percent margin of profit just by doing that one thing. It can work up to thousands and even hundreds of thousands of dollars. Maintenance and management go hand in hand, so a preferred vendor list will help you from the very beginning.
#3 – Not Embracing Yelp and Google and Review Sites
Larsen Properties has a 4.8 average with 160 5-star reviews on Google
Make sure you’re present on Yelp, Google, Angie’s List, the Better Business Bureau, and any other review site available to you. Get past the point that you’re mad at Yelp. Everyone complains that anyone can say anything about you on Yelp. Turn your attitude around and embrace the review platforms. In the long term, they will probably be white noise. People will put a diminishing value on them, because at some point it all evens out.
Right now, you want to embrace review sites and make yourself stand out. It’s another good point of difference to have great reviews. Most of your clients and tenants are happy, but they won’t review you without you asking.
#2 – Failing to Implement
Brad learned quickly that by not implementing new and innovative ideas, that he would be losing money.
This is almost the biggest mistake you can make. If you fail to recognize a good idea and use it in your business, you’re missing a huge opportunity. If you see something at a conference and it sounds like a good idea, but then you go back home and forget about it, you’re making a mistake.
For example, Larsen Properties learned about tenant liability insurance at the Minneapolis National NARPM convention. He learned how one can earn thousands of extra dollars a year by implementing a program like that. It was a no-brainer. However, if he hadn’t implemented that immediately, he would have been out thousands of dollars over the past couple of years.
Write things down with a pen and paper. It can be easy to take notes on your phone, but writing something down physically is a tactile response and it will stay in your brain. Then, organize those thoughts later on and you can get to work. Complete the things that will make you more revenue.
#1 – Utilizing Set-It and Forget-It Instead of Measure and Improve
Good companies can fail in growth by thinking that they will hire a marketing company and stop thinking about marketing. Or, maybe they’ll implement Appfolio or Rently and think they don’t have to do anything more. Business growth requires that every system is always providing measurable indicators.
Make sure your employees are responsible for certain aspects of your business and you can compensate for performance. Everyone should be aligned behind a single purpose. Manage your process and make decisions about how to improve your systems on a regular basis. Pick up on what’s out there, then come back and put it into your system. That will get you to a new point. Implementation is critical.
These are 10 major property management mistakes that you want to avoid making. If you enjoyed this topic, make sure to subscribe and leave a review for The Property Management Show on iTunes. If you have any questions about growing your property management business, feel free to contact us at Fourandhalf.