The Difficulties of Vertically Integrating a Property Management Team into a Multifamily Syndication Company

Quite often, you’ll hear that multifamily real estate is a “passive” way to make money. However, let us be honest; that’s only a half-truth. There are a number of positions/roles an investor can be in, in which managing an apartment building is anything but passive. From the perspective of a limited partner who invests their money with a syndication firm, which then manages the deal for them for a fee, real estate is a “passive” investment. However, if you put yourself in the shoes of a syndicator, making real estate investing “passive” for limited partners is literally the foundation of their business. That being said, who is it that really makes real estate a passive investment on behalf of the parties involved in any given transaction? You guessed it, the property management team.

You may be asking yourself, what does anything written thus far have to do with integrating a PM team? Nothing besides showing you how critical a PM team is to the success of an investment and how property managers make real estate investing passive. They are the foundation of what fuels the returns for any given project. They’re the people who make the tenants feel comfortable, make sure the property is safe, handle maintenance requests, and much more.

With that in mind, there are two ways to go about property management from the standpoint of a syndication firm. A syndicator could either hire a third-party property management team or they could build a PM team internally. Depending on the market, hiring a third-party property management company may not make financial sense, especially when dealing with a small number of units. Third-party companies charge upwards of 10% of EGI for smaller deals, which eat up cash flow faster than any investor would like to believe. Even when hiring an outside PM team for a larger property or portfolio, a syndicator doesn’t have the control/leverage that allows them to maximize returns. For these reasons, a vertically integrated property management team is something that acts as a distinguishable characteristic for companies in the syndication space.

At JP Acquisitions, we have an internal property management team that we’ve been building out over the past year. We’ve experienced firsthand how difficult the PM business can be, but also how rewarding it can be. If you want to know in detail why any syndicator would want to face the headaches that come with integrating a PM team, we covered that in a post titled “The Benefits of Having a Vertically Integrated Property Management Team in a Multifamily Syndication.” The TL;DR of that post is that a vertically integrated PM team saves on costs, as a result of increased control, which when said costs are run through a cash flow waterfall essentially means the investors is likely to receive a higher return. Nevertheless, in this post, I will describe from a high level some of the challenges that we continue to face or have resolved at JP Acquisitions as we seek to grow our PM team internally.

Challenges

1. Resource Allocation: For every project, we underwrite by building a cushion (i.e., margin of safety) for general repairs/maintenance and various other expenses that aren’t fixed. However, there are always unforeseen problems that arise, and we’ve learned that we need to be accounting and accruing for certain expenses that we had not predicted. The takeaway here is that being able to gauge when a certain repair or maintenance request needs to be done or accrued/accounted for is a skill that takes time to build. As we’ve grown, our team has been able to understand what maintenance requests take priority. Experience is your best friend in any venture and especially in the property management space. I’ll note that depending on the strategy, asset class, and area, the needs and wants of the tenants change. Over time, we’ve developed a sixth sense as to what the tenants in our target market need and want. We continue to be hyper-conscious of the factors that keep tenants satisfied, which has resulted in low occupancy rates in our portfolio.

2. Scaling: For a moment, let us run some quick math on the margins/numbers of an in-house property management company. As a reminder, PM companies get paid off a percentage of effective gross income (gross income – vacancy). At $1M in EGI and a 5% management fee, the take-home is $50,000. Considering today’s economy, $50K is just enough to pay one full-time property manager depending on the market. Within the market we operate, it would take roughly 60 – 70 units to hit $1M in EGI. Currently, we have 24 units, and being able to compensate our team has been what I like to call a “growing pain.” In other words, sacrifices have been made in terms of time and compensation with the end goal in mind of scaling JP Acquisitions. Putting it into perspective, it’s realistically 2 companies we’re growing considering one is a syndication firm and the other a property management company. As a side note, for those looking to endeavor on a similar path as the one we’re on, be prepared to say “no” to many personal leisure activities that arise, share equity with partners, or a combination of the two previous points.

3. Expertise and Experience: Property management requires a different skill set and expertise compared to syndication and real estate investment. While educational platforms online help to understand and learn both skill sets, there is nothing that compares to real-world experience. Similar to how we learned how to navigate the closing process, we had to learn a whole new process when it came to property management. Thankfully, our PM team at JP Acquisitions had the skillset required to handle a wide variety of repairs, but learning how to communicate with tenants in a professional manner was learned entirely through trial and error with little help. In addition, building strong reporting metrics and systems to schedule various maintenance requests is something that we continue to work on without the use of expensive PM software. The beauty behind maneuvering our way through these challenges is that our team grows to better understand the nuances of multifamily properties, which in turn helps sharpen our decision-making skills to better support our investors.

Conclusion

This post has been a deep dive into what it means to vertically integrate property management operations in a very early stage multifamily syndication firm. The insights that have been written about here are a culmination of the ‘growing pains’ we’ve been through and unlikely to be talked about from the same business standpoint by large firms who have the financial resources to relatively quickly hire and scale a PM team.

As we continue to grow our property management team and portfolio at JP Acquisitions, new challenges will arise. The mindset that we have at our company is that every challenge is an opportunity to grow. As of writing this post, I’m proud to say that while we’ve had our fair share of difficulties, we’re at 100% occupancy and have outperformed our underwriting across the board.

If you have any questions regarding the terms and concepts in this post or previous ones, please reach out to either me (tedi.nati@jpacq.com) or someone on our team so we can help explain further. If you’re interested in investing with us at JP Acquisitions, you can contact us via email (contact@jpacq.com), LinkedIn, Instagram (jpacquisitions), 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!