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Having a vertically integrated property management (PM) team can offer numerous benefits for a multifamily syndication company. Vertical integration refers to the integration of different stages of a supply chain under the same ownership or management. In the context of a multifamily syndication company, this means bringing property management functions in-house and having them operate as an integral part of the company’s operations. At JP Acquisitions, we have a property management team that handles the day-to-day tasks associated with operating an apartment building. In this post, we will cover why having a property management company vertically integrated into a syndication firm can be highly beneficial. However, there are drawbacks to having an internal PM team which will also be covered in this post. Let’s jump in!
The Pros and Cons
1. Direct control and accountability: By having an in-house property management team, a syndication company retains direct control over the day-to-day operations of the properties. This allows for more accountability and the ability to implement strategies and improvements promptly without relying on external third-party managers. We must remember that one of the key reasons why multifamily is such a strong asset class is because of control. Unlike stocks, operators can govern and make decisions as they see fit in regards to the operation of a property. Having an internal PM team as opposed to relying on a third-party company only strengthens the control aspect.
2. Alignment of interests: External property management companies may have their own objectives and profit motives, which might not always align perfectly with the goals of the syndication company or its investors. A third-party company may choose to place a higher value on a company they have history with or with a firm that has more units under management with them. With a vertically integrated team, everyone is working towards the same objectives, creating stronger alignment of interests.
3. Cost efficiencies: While setting up an in-house property management team may initially require some investment, over time, it can lead to cost efficiencies. The syndication company can potentially save on management fees that would otherwise be paid to external property management firms. At JP Acquisitions, we’ve been able to provide our investors higher returns because of the savings we’ve had not having to reply on a third-party.
4. Seamless communication: In a vertically integrated setup, the property management team is closely integrated with other departments within the syndication company, such as acquisitions, finance, and asset management. This seamless communication allows for better coordination and decision-making across the entire organization. More so, communication is key when it comes to management and by having a vertically integrated team, a better experience can be provided to the tenants by being able to take care of their requests quickly.
5. Faster decision-making: External property management companies may sometimes have bureaucratic processes that slow down decision-making. With an in-house team, the syndication company can make quicker decisions, respond to challenges promptly, and capitalize on market opportunities more efficiently.
6. Customized strategies & Better tenant relationships: The in-house property management team can tailor management strategies to the specific needs of each property within the syndication company’s portfolio. This personalized approach can lead to better overall performance and tenant satisfaction. For example, a class-A asset doesn’t have the same needs as a class-C asset with Section-8 tenants. Having an internal property management team allows you to cater to the tenants of a property. In turn, this specialized approach allows for the property manager and maintenance crew to develop better relations with the tenants.
7. Value creation: Effective property management is essential for maximizing the value of multifamily properties. A well-run in-house property management team can implement value-add strategies, improve operational efficiency, and enhance the overall performance of the assets, ultimately benefiting the investors. The value that is created by any property management team (internal or external) can be measured partly at disposition. When going to sell the asset, the potential buyer will look at how much they will have to spend on repairs, how much room they can increase rents by, the historical occupancy of the property, and various other factors. An internal property management team that has the characteristics described in the preceding 6 points in this post will maximize the sale price leading to a win for investors.
While everything up until this point has been positive, it’s worth noting that vertical integration may not be suitable for every multifamily syndication company. Setting up and managing an in-house property management team requires expertise, resources, and commitment. At the end of the day, all of the functions and time spent doing those functions will be brought in house which means a bigger load will need to be lifted. With that comes the inherent risks and liabilities of be accountable for a PM team. More so, implementing a property management team or subsidiary under a syndication firm can be costly. It’s essential to carefully assess the company’s capabilities and resources before deciding whether to pursue vertical integration or to continue outsourcing property management to external firms.
Conclusion
Overall, there are many benefits to having a vertically integrated property management team for a multifamily syndication company. These benefits can lead to increased profits, improved investor relations, and a more efficient operation. Of course, there are also some potential challenges associated with having a vertically integrated property management team. The decision of whether or not to have a vertically integrated property management team is a complex one. However, for syndication companies that are looking to improve their operations and increase their profits, a vertically integrated property management team can be a valuable asset.
If you have any questions regarding the terms and concepts in this post or previous ones, don’t hesitate to reach out to either me (tedi.nati@jpacq.com) or someone on our team so we can help explain what is causing the confusion. If you’re interested in investing with us at JP Acquisitions, you can contact us via email (contact@jpacq.com), LinkedIn, Instagram, or our investor portal to set up a meeting.
As always, I hope you enjoyed reading this post as much as I have writing it. Best of luck!
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About the Author
Tedi Nati is the Managing Partner of JP Acquisitions. In his role he is responsible for broker outreach, establishing deal flow, underwriting, marketing, and assisting in the closing process. In addition to his role at JP Acquisitions, he is an Assistant Equity Underwriter at Cinnaire, a non-profit Community Development Financial Institution (CFDI). In his role at Cinnaire, he is responsible for assisting the underwriting team in evaluating and structuring real estate equity investments and assessing the risks and mitigants associated with such. Tedi earned his Bachelor of Science in Finance from DePaul University, where he graduated Summa Cum Laude. In his free time he enjoys reading, looking for multifamily deals, and working out.
Make sure to always do your own research before making any final decisions on buying/investing real estate, stocks, or other securities. I am not a CPA, attorney, insurance, or financial adviser and the information in this blog post shall not be construed as tax, legal, insurance, construction, engineering, health and safety, electrical or financial advice. If stocks or companies are mentioned, I sometimes have an ownership interest in them – DO NOT make buying or selling decisions based on my posts alone. If you need such advice, please contact a qualified CPA, attorney, insurance agent, contractor/electrician/engineer/etc. or financial adviser.
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