Third-Party Property Management Isn't as Simple as It Seems
Commercial real estate entrepreneurs should be very careful when considering a third-party property manager.
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One of the first questions CRE entrepreneurs must deal with when entering the industry is how to manage their properties. Some property owners choose to exclusively work with third-party property management teams, while others prefer a self-management approach.
For years, many people in the industry believed the choices related to property management were simple. It used to be most profitable to work with a property management company rather than take the self-management path because it frees up your time to work on other investments.
The times are changing, however, and while third-party property management is often the most profitable option, the decision about which property management organization to choose is more complex than ever.
Advancements in proptech complicate the choices surrounding property management
Twenty years ago, the decision about working with a property management company to manage your real-estate investment was less complex than it is today. The reason for this is that the proptech sector grows larger every day. Between 2013 and 2020, proptech deals exceeded $7 billion. Advancements in proptech complicate the decisions about property management in a few ways.
The first complication brought about by proptech is that it makes it more possible to self-manage your investment. If you're a CRE entrepreneur who was on the fence about self-management versus using a third-party property management company, proptech might be the difference in pushing you toward self-management. While self-management will always be more time-consuming, some of the time constraints are eliminated by property management tech tools, making it so someone with just a little bit of extra free time could more easily manage their own investments.
Smart technology allows building owners to monitor the condition of the building without a property manager and schedule maintenance when necessary. Other proptech tools allow building owners to find and vet potential tenants more quickly, which is typically a property management team's responsibility.
Many CRE entrepreneurs will still want to work with a property management team, despite the tech tools that make it easier to manage your assets without one. When you're vetting property management companies, you'll need to evaluate the proptech tools they use to run their business. Finding the company that uses the best tools can increase ROI because you'll attract better tenants.
Related: This Proptech Is On the Move
Being close to your investment builds expertise
When you're new to the commercial real estate industry, it can take time to learn the ins and outs of what makes a good investment. Often, this can be best learned by staying closely involved in your investment.
For this reason, some entrepreneurs choose to self-manage their properties while learning the game. When you're aware of what it takes to manage a property, you'll be more informed when choosing future investments.
Additionally, your choices regarding property management will have a huge impact on your relationships with your tenants. Many real-estate investors choose to have no relationship at all with tenants. Third-party property management teams who handle every aspect of the tenant relationships make this possible.
However, some entrepreneurs prefer to be more closely involved in tenant relationships to build a stronger understanding of what consumers are looking for in a commercial building. This leads to smarter, more informed investing.
Strong tenant relationships can lead to higher ROI in your investments, so if you're working with a property management company, you'll want to be aware of how they handle relationships with tenants. Vet your property management team before making a choice. Learn about how they handle conflict and how proactive they are in providing tenants a good experience.
You shouldn't simply choose the first property management team you encounter, and you also shouldn't always go with the least expensive option. Finding the right third-party property management organization can make or break your investment.
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Property management drives a significant portion of overhead costs
An improperly managed commercial real estate investment can drive overhead costs through the roof. A recent case study from property management company EZR Management found that commercial property owners were able to reduce their annual expenses by $32,000 by switching management. This shows that the right management team or system can be a huge predictor of profitability.
While entrepreneurs have seen the stats on how much a property management team can reduce costs, they haven't compared the difference in expense between the options. An expensive property management solution that isn't as effective as possible could actually drive costs higher.
CRE entrepreneurs should always perform a cost-benefit analysis before choosing their property management company or system. Look for inexpensive solutions that drive major cost reductions to produce the most ROI.
Related: What Is Prop Tech?