A Guide on How to Start a Property Management Company in USA
May 26, 2021
Have you been thinking of starting a property management company?
Congratulations. You have come to the right place. In this article, we've put together a guide on starting a property management business for those who wish to begin their entrepreneurship journey as property managers in the USA. According to Appfolio, the cost of starting a property management company in the USA is relatively low compared to other business ventures at $2,000 - $10,000.
Due to its low cost and chance of a high return, starting a property management business is an attractive business opportunity if you have what it takes to succeed.
Let's check out the step-by-step guide on how to start a property management company
Step 1. Create a Business Plan
Imagine embarking yourself on an entrepreneurial trip to a destination called success. One can't quickly get to their destination without a map. Similarly, the first thing you should do before starting a property management company is to prepare a business plan. A well-thought business plan helps an entrepreneur as the road map in their entrepreneurship journey. Without it, an entrepreneur is putting themselves at risk of getting lost along the way.
The next question is what you should include in a business plan?
Here are essential points that should be available in every property management business plan:
• Market analysis
• Competitive analysis
• Customer segmentation
• Go-to-market plan
• Logistics & operations strategy
• Cash flow
• Long-term strategy
A great business plan helps you see the bigger picture, plan ahead, devise strategic decisions, and improve the likelihood of your company's success. It can also serve as an essential tool for an investor to determine if your property management company is the right business for them to invest in.
If the idea of creating one is intimidating you, hire a professional business consultant to help you with it. It would help you tremendously to find one who has extensive experience in the property industry.
Step 2. Register Your Business as a Legal Entity
Once you have your business game plan in place, now is the time for you to prepare for the second step of starting your own property management company, registering your business. There are three types of business entities in the USA:
• LLC (Limited Liability Company)
LLC: An LLC is easily the most popular option for new entrepreneurs as it protects each owner's assets and property if the business fails. Another advantage of LLC is its pass-through entity, meaning your net income is taxed as a personal income in the state.
S-Corporation: If you want to reduce your tax obligations, an S-Corporation may be for you. Just like an LLC, an S-Corp is a pass-through entity. The essential advantage of an S-Corp over an LLC is that less of your income must be filed under self-employed income. But not every business qualifies for an S-Corp, and it requires more operational restrictions.
C-Corporation: The last one is C-Corporation or C-Corp. This type of entity is suitable for the larger companies preparing to go public and have an ambitious plan to conquer the international market. Its requirements are more complicated than the first two and very specific. However, once your company is established as a C-Corp, your business is completely separated from you. It gives you the ability to procure credit, eligibility for an IPO, and be taxed as an entirely separate entity.
Step 3. Obtain The Right Property Management License and Certifications
You need to check if you need a property management license or not depending on the policies of the state where your company is registered. Each state in the USA has specific licensing requirements if you are starting up a property management business. Most states require business owners to own a Real Estate Brokers License, allowing the licensee to practice property management and real estate sales activities.
Meanwhile, some states require Property Management License that limits your activities to just managing properties.
Only six states in the USA do not require any real estate licensing if you're starting a property company. These states are Idaho, Maine, Vermont, Massachusetts, Maryland, and Kansas. However, in Kansas, you do need to be certified for Commercial Property Management.
Even though it's not required, consider getting yourself a property management certification. Not only do you get to brush up your skills, but it also makes you more competitive as more and more clients prefer to work with experienced and knowledgeable property managers. Another advantage of getting a certification is that it allows you to connect with industry professional associations and trade organizations.
Check out NARPM and IREM for comprehensive property management certification programs.
Step 4. Set Up Your Office and Online Presence
Suppose you start your property management business with a small budget. In that case, you may want to set up your office from the comfort of your home, if you have the necessities for smooth operation such as the Internet, PC/laptop, phone/mobile, and a dedicated quiet space for work. Since an average person spends one-third of their life working, you might as well want to design a workspace that promotes a balance between well-being and productivity.
When your rental property management finally takes off and gains profit, move on to the bigger space as your business grows. Set up a website and social media for your online business presence, think of it as a virtual office where your potential client can visit, get to know more about services you offer, why your company is the best property management in town, and eventually contact you. Especially since COVID-19 has changed the way businesses interact with their clients, stepping up your digital strategy is something you must integrate in your business plan.
Step 5. Hire Your First Critical Five Team Members
When should you start hiring people for your property management business? Great question.
A good entrepreneur knows that it is important to hire people at the right time. But what if you are a first-time entrepreneur and you have no idea when to do it? While answers may differ, one general rule can be applied to every new business. That rule is to hire only when your cash flow allows you to do it.
This is why it is essential to include an operational and logistics strategy streamlined with your cash flow forecast in the business plan. You will get a clear view of the hiring calendar and which position needs to be filled in, even before starting the business.
When hiring people for your property management business, the next thing to consider is to hire the right ones. Stats show that 23% of new businesses failed in the USA because they didn't have the right team running the business. And bad hires are one of the top three reasons startups failed in their early years of operation.
Alan Hall, a Forbes Contributor, highlighted five types of employee every new business needs to have. Who are they, and what do they do?
The Leader: It can be the company's founder or a strong figure within the organization who can become the company's face. He should be trusted, looked up to, and the person people sought advice to. Ideally, The leader has natural coaching and nurturing ability that he can use to motivate and influence other people.
The Expert: On the other hand, the expert does not necessarily need to have people person skills like the leader does. One thing that stands out from the expert is their strong knowledge about the industry they work for, in this case, the property industry. The expert knows everything about your company's competitors. They also use their creative skills and produce services that are desired by the market. Lastly, they can resource and build a fruitful relationship with vendors and investors.
The Financial Guru: There has to be someone in your company you can trust for the ins and outs of your money. Without The Financial Guru, your company's chance of survival slims down as cash problems are the second-highest startup killer every year in the USA.
The Strong Strategist: The characteristics that a strong strategist needs include the ability to focus, reading trends, and putting together an actionable business strategy. A good strategist covers the business area where the leader and the expert may have missed, such as using analytics and data to produce data-driven decisions. They also make sure that the company's business strategy is executed correctly by the executors.
The Executor: He makes up the most workforce in the company. They are the ones who are facing your clients and running your business's daily tasks. An excellent example of The Executors is the receptionist, salesperson, HR, and an IT person in your company.
Step 6. Leverage Technology for Your Business Growth
In this era of cutting-edge technology, speed matters for every business. One way you can get ahead in the competition is to deliver the best and fastest property management services to your clientele. Your company needs to benefit from the latest technology to keep the daily operations smooth and quick.
Let’s go over some paid and free automation and optimization tools for your property management company that can help you up the game!
Pricing: $0.80/unit - $3/unit.
AppFolio offers an all-in-one solution with accounting, marketing, leasing, and management functionality for multifamily and single-family, commercial, student housing, community association, and mixed portfolio property managers.
• PackageX Mailroom
Pricing: Starting at 10,000 deliveries for $94.99/month - $113.99/month
PackageX Mailroom is the smartest and most efficient digital mailroom software. It allows its users to organize, automate, and operate their mailroom with data-driven insights using PackageX digital mailroom software.
Mailroom is easy to use, highly scalable, and works across industries, including:
- 🎓 Higher Education
- 🏡 Real Estate
- 👨💻 Virtual Offices
- 🏢 Co-working Spaces
- 🛎️ Hotels & Restaurants
Pricing: Free 30 days trial. Starting at $8/month - $17/month.
Quickbooks is an online accounting software that tracks expenses, customise invoices, run reports, and more. Perfect for small businesses.
• G-Suite by Google
Pricing: Free plan - $18/user/month.
G-Suite is Google’s productivity tool that you can access in one account. From Gmail, Calendar, Drive, Document, Spreadsheet, Keep to Meet.
Pricing: Free plan - $299/month.
Mailchimp started as an email marketing service provider, but then it grew into a full blown online marketing suite providing a wide range of services from creating simple website to analytics tools.
Step 7. Set Up Your Property Management Business Pricing Structure
Getting the right price to sell your services may be tricky, but there are things you can do to find the proper pricing structure for your property management business.
Engage with your potential clients and ask them to give a price range they are willing to pay for the services you offer. This important data point lets you see how your potential clientele perceives your company and its services. You may also need to keep yourself updated on your competitor's pricing structure and the services they offer. And lastly, educate yourself about national and international housing market forecasts.
It is very important to set up the right pricing strategy for your property management small business. Remember to make it sustainable, enough for you to be competitive but profitable. Below are approximate fees for a new property management business:
• Setup fee: It is a one-time fee charged to property owners as a cost of setting up an account to be managed by your company. In general, it costs around $300 or less.
• Monthly management fee: Typically property managers charge between 8% - 12% depending on the size of the property and services offered. For example: if the size of the property is ten units or more commercial properties, a property manager can charge a lower percentage between 4% - 7% per property. And a higher percentage of 10% - 12% for smaller properties. A 5% fee for a property with $100,000 monthly rent would be a $5,000 fee for you. And a 10% fee for a property with $5,000 monthly rent would be $500.
• Tenant placement fee: You can charge a fee to the landlords if you place a tenant into their property, whether it is a flat fee or in percentage. The most common ones are half-rent to a full month rent fee.
• Vacancy or Leasing fee: It is a one-time fee for when a unit is vacant. This could be a full-month rent fee or a percentage of the rent, approximately between 50% - 75%. It usually covers services like staging the unit, listing, viewing, screening potential tenants, to moving the tenants in.
• Eviction fee: If you are offering this service to your landlord client, you may charge a few hundred dollars per eviction plus court costs.
Tips to Grow and Effectively Manage Your Property Management Business
We have compiled a few tips that can help you grow and efficiently manage your property management business. Let’s have a look!
• Invest in building your brand and deliver a unique value proposition. Remember that service businesses are all about reputation and relationship.
• Optimize social media to educate your audience and build a loyal following. Not only because it is free and easy, but it is also one of the most powerful branding and marketing tools right now. Create a business account as it gives insight into your audience. Once you have the account set up, create consistently, focused, and relevant content for your market. Remember always to give value first before you start selling them something.
• Hire freelancers from freelancing sites to help you with social media management, listing management, virtual assistant, and content creators without hiring a full-timer for the job.
Frequently Asked Questions About How to Start a Property Management Company
Q. How profitable is a property management company?
A. On average, most property management companies in the USA make make 20% profit from their revenue. It is expected that the global property management market to 22,04 billion USD by 2023. Getting your property management business to profit depends on your ability to manage your business. But if you do it right, it is quite a lucrative market.
Q. Do property management companies make a lot of money?
A. In 2020, the USA housing market combined value hits $36,2 trillion, making it the highest gain in 15 years due to the widespread shift to remote work during the COVID-19 pandemic. A survey by NARPM shows an average property management company in the USA is making 20% profit from their revenue.
Q. Is property management an excellent business to start?
A. If you have the experience, skills, capital, and network to begin with, starting your own property management company can be a profitable business to be in.
Q. Is a property management company worth it?
A. The housing industry is one of the most lucrative industries as people will always need a home to stay. So, if you manage to find your niche and scale your business, yes, it is worth it to start your own property management company.
Q. Why do property management companies fail?
A. Running out of cash, bad hires, poor reputation, charging too little, and failure to use technology to speed up the process are the most common reasons why property management companies failed.
So there you have it, a guide on how to start a property management company. Just like any other business venture, starting a property management company can be a challenging, arduous journey. This type of company can be profitable if you get the basics right. It takes skills and years of experience in the industry to build a property management company and turn it into a profitable company.
But if you are passionate about working in the service industry, have an extensive network, appetite for risks, competitive in nature, ready to take on new challenges, and in it for the long-term, starting a property management company might be for you.