Episode 19 - Bonus Episode with Q&A

Welcome back to Owner Occupied. I'm here with a very special episode. As regular listeners may have noticed, we wrapped up season 1 a couple months ago toward the end of the summer. We did 18 episodes. I had a blast with Russell recording those and a few special guests. We took a break at that point. We both needed just a chance to focus on some other things for a while. We wanted a chance to evaluate the podcast and think about how we enjoyed it and if we thought we were providing value to our audience. So we are mid-season right now. We're between season 1, which is what I think of as those initial 18 episodes, and season 2. So for today's episode, I'm doing something completely different and unique. I'm going to be monologuing. And with today's episode, I'm going to do a Q&A. So I've selected— let me see, I picked— 7 questions, uh, from Twitter actually, and I'm going to answer those. They all generally relate to property management, and I thought a podcast would be a great format to really go in-depth on these answers and provide some color and, and really kind of share my thoughts. Because these 7 questions that I picked from Twitter I thought were especially interesting or high-quality type questions that I could really, you know, deliver some useful information or some value. So the, the context of these questions is I was recently a guest on Chris Powers' podcast, The Fort, and really enjoyed my episode with Chris. You should go and listen to that if you like my stuff. You'll, you'll probably enjoy that episode. But prior to that episode recording, Chris, as he normally does, put out a question on Twitter. Hey, what questions do you have for Peter? He's going to be my guest. Tomorrow on the show. And so there's a lot of great questions that got generated from that, and unfortunately he and I just didn't have time to get to all those during his episode. But the questions were so good, and I'd actually done some, some work preparing to answer most of these questions that I thought I would just kind of roll those over onto owner-occupied here and, and just take a stab at answering them myself. So here we go, let me jump into this. First question, it's from Chris Davis. He says, what processes, agreements, client vetting, etc., have allowed him to increase the stickiness of revenue per door of his customer base? And he has a part 2 to this question, but let me, let me answer part 1 here. Okay, so there's a few things that we do to increase— well, that's kind of a 2-part question in and of itself. He's asking about stickiness, which is one thing. And then he's also asking about revenue per door. So let me first address stickiness. Property management by its nature is a very sticky business. In other words, if you succeed in getting a customer to sign up with you, it's very likely that they're going to remain your customer for quite a while. You really have to mess up in property management to make someone want to terminate the agreement and go find someone else to manage their property. Mostly because it's just a pain in the butt, right? You gotta, you know, de-manage with one manager and start up with another one and transition the keys and the security deposits and the lease. It's a disruption for the tenant. It's, it kind of messes with the financials for that year. So it's hard. So it's naturally a sticky business, which is great. There's a few things we do to increase that even further. One of them is we sign 1-year agreements with our property owners. And that's pretty standard. So if you want us to manage your duplex or your single-family rental, we're going to make you sign a 1-year property management agreement. And we actually, for larger properties or larger portfolios, we will even require a longer agreement. So if you're bringing us 10 or 15 or 20 units, we may ask you to sign a 2 or 2.5-year agreement because all the work of onboarding that property, we're actually kind of in the negative for the first year or two even before we've become familiar with that property, the tenants, the client, and we really start to make back the initial investment in getting everything up to speed. Okay, the other thing you can do to make your service sticky is to just do a great job, right? I mean, if you're, if you're doing a good job for customers, for your clients, for your tenants, they're more likely to stick around. So you can measure that, um, with, you know, Net Promoter Score is a great way to do that, NPS, and just get a sense for how you're doing from the perspective of your customers. Okay, revenue per door, uh, he's asking about revenue per door here. I could probably record a whole podcast episode on that. If you own or operate a property management company, you need to know your revenue per door, which is just a measure of if you take your entire gross revenue for your whole business, and you divide it by the number of doors you manage, that's your revenue per door. You really want to be targeting like minimum $200, it'd be better to be closer to $300 for that revenue per door number. And there's a lot of ways you can drive that revenue per door. Of course, you can increase your monthly management fee, and you can do that on— you don't necessarily need to increase the monthly management fee for new customers, you can simply increase it at renewal time, kind of like the cable companies do or the phone companies where, you know, your contract comes up for renewal and the price goes up. It's unfortunate, but the reason they do it is because it works. They offer low introductory teaser rates and then, you know, they can increase after that first year. So that's one way you can do it. You can also introduce ancillary revenue streams. I have a blog post on that on my website, peterlohmann.com. If you click blog, there's a post about a bunch of different services and products you can offer to your clients and tenants as a way to drive ancillary revenue. The other thing you can do is other lines of business, and we do this. We have a maintenance division in-house, and that maintenance division really drives our revenue per door up quite a bit relative to just offering property management. So other folks do this by offering brokerage services. So there's a few options here for driving revenue per door. Okay, let me get to the second part of Chris's question. He says, more fundamentally, how does a property management business increase the multiple on its earnings? Okay, so what he's referring to here is if you go to sell your business, you're often going to be valued as a multiple on your earnings. Or earnings is another word for net profit. So some common small business multiples would be like 3x, 5x, 7x earnings. So if your business generates $1 million a year in profit, a 5x multiple means you could expect to sell that business for $5 million. So he's asking here, how do you increase that multiple? How do you drive it from 3x to a 5x to a 7x? So a couple things to mention here. Again, I'll refer to my blog. I just wrote a blog post on valuing property management companies. Again, go to my website peterlohmann.com, click on blog. I think it's the most recent blog post as of this recording. Um, I'll summarize— well, before I summarize how to drive your multiple up, let me just mention the fact that property management companies, when they're smaller— and by smaller I mean probably less than 1,000 doors, they're generally going to be, um, they're generally not going to trade on a multiple of earnings. Instead, they're going to trade on a multiple of gross revenue, usually right around 1x gross revenue is kind of typical, plus or minus. Or they also may trade around like a per unit, like a dollar per unit figure, like a $1,000 per unit or $2,000 per unit, something like that. Um, to be valued on, on your multiple, on a multiple of your earnings is preferable generally, uh, but not always achievable for a business that's this small and kind of specialized as a property management business. So that said, I, you know, to speak to the question in general how to drive up, to drive up the value of your business. I have a few things to say about that. You need to work on the quality of your properties. So the higher end, nicer homes and apartments that you manage, that's going to drive the value of your business. You need to watch out for customer concentration. So the more units you have with a given customer, you know, that's perceived as risky for a buyer. So you can picture if you have 100 units, they're managed by, or they're owned by 2 clients versus 100 units owned by 25 clients. The first scenario is much more risky for somebody who's looking to buy your business, and that risk is going to be reflected in what they're willing to pay for it. Um, up-to-date contracts is another thing I look for, or that we try to do. Uh, keep your property management agreements up to date so if you do go to sell the buyer can see that everyone's kind of on a standard contract, the terms are similar, the fees are similar, and something you're going to want to include in that contract is an assignment clause. That's going to make it easier for a buyer to acquire your business. A big one is bookkeeping. So if you own or manage a property management company, you should be running on what's called the NARPM accounting standard, NAS for short. You can Google that, there's lots of information, but it's a standardized accounting system that most third-party property managers are using these days. It was developed a few years ago and kind of took off like wildfire, like a wildfire throughout the industry. So in addition to running on the NARPM accounting standard, I would highly encourage you to make sure that your accounting is completely up to date. In other words, don't be running 5 or 6 months behind on your bookkeeping. You need to make sure that it's up to date and accurate so that you could quickly show to a prospective buyer, hey, here's our year-to-date financials. That's going to make them feel comfortable with, you know, what they're looking at, and also it tells them something about how you run your business that you're able to keep your accounting up to date. The last thing I'll say on this topic before we move on to the second Q&A question is it's kind of paradoxical, but the more work you're doing as an owner in your business, the less it's worth. Let me say that again. The more work you're doing in the business, the less it's worth. You might be thinking, how could that possibly be? I mean, the harder I work, the more it should be worth. But as the owner, or as the seller in this scenario, you're going to be out of the picture, right? The buyers buying the business, they have their own ideas about what they're going to be doing with it. They may be looking for, you know, kind of a passive investment or a business to add to their portfolio of businesses. They don't want to be dependent on the seller or some other person to make the business work. So if you're so entwined in the operations of your business that it would completely disintegrate 6 months after you left, that is not an attractive type of business for someone who's interested in buying it. So you need to work to extricate yourself as the owner of the business if you're looking to drive up the multiple on earnings that you're hoping to get on an exit. Great question, Chris. Thank you for that. All right, question number 2. I'm probably going to butcher these names, by the way. I apologize in advance. This comes from Jonathan Terolosi. He says, can you describe your greatest challenge you faced in working with tenants and what you have done to mitigate the likelihood and frequency of these occurrences? Another good one here. I would say the biggest problems that we have with tenants are security deposit disputes. So any landlord has probably been through something like this where tenant moves out, they leave the place trashed, or they owed rent, so you don't return the deposit. Or maybe you return part of the deposit and you withheld some of it for damages or cleaning, and then the tenant comes back at you with a lawsuit claiming you improperly withheld their security deposit. It can be very painful and stressful as a, as a property management company owner or as a landlord to deal with this. And for us, you know, that's probably been some of our greatest challenges, especially early on, was trying to work through these trying to figure out what's the right move here. Do we, do we settle? Do we fight it? You know, do we think we were in the right? How's a judge going to view this? You know, if we settle, is that going to set a precedent? You know, you end up doing a lot of introspection about what's really important and, you know, what are the long-term ramifications for your business depending on, you know, how you decide to deal with it. So we've been through multiple of these over the years, and the way we try to mitigate this, there's a few things that we do. One is if we see that a tenant, when they move out, made what we call an A effort, meaning it was clear that they tried to do a good job getting the property cleaned up, emptied out of personal belongings, etc. We try to return the full deposit. So it's kind of like you get an A for effort. So if they got 90 to 95% of the way there, we return 100%, even if we find maybe a couple items we could have, you know, under the letter of the law withheld. And the idea here is it's just not worth it. It's not worth the risk to my firm. It's not worth the risk to the property owner to hold up, you know, over a few dollars and risk a lawsuit. So that's been, you know, that's been a little bit of a game changer for us. Getting that figured out and implementing that throughout the firm has reduced the likelihood and the severity of these when they do come up. The other thing I have to recommend, unfortunately, is to settle. If you're able to settle a security deposit dispute for one month's rent or just the remainder of the security deposit, and you feel that this tenant is, you know, has the potential to really hold you up in court, and particularly if they're working with some sort of free legal service, unfortunately— well, there's two things that are unfortunate. One is a lot of people don't have access to quality legal representation. That's unfair and should be addressed. The other side of that coin is those who have access to free legal advice and legal service, it really distorts the balance of power or distorts the outcomes for legal disputes. Because if one person is, you know, the meter's running for every minute that they're engaging with this dispute, and the other one has literally no incentive to, you know, reach a resolution because it's not costing them anything. So if there's even a 1% chance of a payout, they're going to keep going with it. You can see how that kind of quickly spins in the favor of the person with free, uh, with free help. So if you find yourself in a scenario like that, settle quickly and settle often, move on with life. Uh, the time you'll spend messing around with that is gonna be much better off, you know, reinvesting in your business, recruiting, optimizing systems and processes, marketing, sales, pretty much anything you can do other than messing around with some tenant is going to have a higher return on investment. Okay, thanks for that question again. Number 3, this is from Alex Holman. He says, how do you think about tenant service? Does it impact rents, NOI, retention? And sort of as a follow-on with that, he says, how do you prioritize tenant incoming tenant requests? Then he's got a second part of this question I'm gonna, I'm gonna come back to. So I'll talk about tenants and tenant service for a minute. We spend a lot of time thinking about the tenant side of our business. So we really think about our business as two customers, right? We have clients, those who own the property and have hired us to manage it, and the tenants who live in the properties that we manage. And we have legal duties and responsibilities to both of those customers. We have a fiduciary duty, which is a special duty that goes above and beyond just a normal contractual obligation with clients. And that's, that's per Ohio law, and that's the law in most states. And then our duties to the tenants are spelled out both in Ohio law as well as the lease. So in thinking about tenant service, we believe that doing right by the tenant is in the owner's best interest.. And for that reason, and also because we think it's the right thing to do, we put a, we prioritize providing a great experience for residents. And that goes, you know, that doesn't, doesn't mean just keeping good care of the property. It means for the entire tenant experience, from seeing the rental listing to applying, to touring the unit, to signing the lease, picking up the keys. Paying rent online, you know, renewing the lease, and then all the way toward the end of the tenant lifecycle, the move-out experience and the security deposit experience that we just spoke about. We really believe that making that whole customer experience as great as it can be, within reason, is going to generate— well, it's going to do a few things. One, it's going to make our lives easier because a happy tenant is a happy property management company. A tenant who feels that you value them and you've taken care of them is just quite frankly not going to bother you. They're not going to call, they're not going to email, they're not going to knock on your door. They're just going to leave you alone. And that's honestly what you want. So that benefits us. And if you keep care of tenants and you demonstrate to them that you're thinking about them and their needs, they're more likely to keep care of the property and renew their lease. And that makes me look good to the owner, right? If the owner sees that the property is being well maintained and the lease is getting renewed, they're going to feel comfortable with the management company that they've hired. So it's really, it's kind of a win-win here to do a good job for tenants because we think that that really does drive NOI for the owner, which is good for us. So it's just an all-around good thing in terms of prioritizing incoming tenant requests. We have a full-time occupied maintenance coordinator is what we call that position. And just for a sense of scale here, we're currently at about 580 rental units. And that person, that's their whole job is as the requests come in, they evaluate them to see if, you know, is this an emergency or is this a loose doorknob on a closet, right? That's like kind of the scale that it goes from. And they're going to also determine if something is in the— is an owner responsibility item or if it's a tenant responsibility item. Okay, second part of Alex's question here: do you ever feel that your incentives are misaligned with clients? Great question, and it's something that we've spent a lot of time thinking about here at RL Property Management. Let me speak first to the standard arrangement for property managers, and then I'll mention our kind of unique take on that. And then finally, I'll get to the meat of the question, which is there are a couple ways I think our incentives are misaligned with clients, and I'll talk about that. So first, how are most property management agreements structured? The default is a 1 month's rent leasing fee or maybe a half month's rent with a percentage of collected rent as the monthly management fee. So say like 10% or 9% or what have you, just depending on your region. And the problem we saw with that from the beginning is really twofold. One, the leasing fee sets up a bad incentive where the property manager is incentivized to fill vacancies almost at any cost, right? So if the property's been vacant for a while, the owner's getting antsy, the property manager is like, man, we really got to get someone in here. The temptation is to just quickly lease the property to the first person who walks through the door with a security deposit. The owner is then happy because the lease, the unit is now occupied, and the property manager makes that big fee, that can be equivalent to like a whole year's worth of management fees. The problem is, taken to extremes, or even if you're not paying close attention, even if it's not done intentionally, you can end up placing bad tenants very easily because of that sort of unconscious desire to fill the unit as quickly as possible. So we don't think that's a good incentive. Actually, in a way, you're incentivizing turnover if you think about that. So the other problem is that percentage of management fee, and I talked a little bit about this on Chris's show that I just did. That really doesn't make any sense, right? Because the lower the rent is, the lower the management fee is. Well, what— that just makes no sense at all because those properties are actually harder to manage. The higher-end, you know, Class A, Class B properties with the higher rents, you're going to make way more on a percentage basis, but they're actually easier to manage. So if anything, that percentage should be like inverted. So what we did is we just charge a flat fee. We picked a flat rate management fee, and you can see it's right on our website if you're curious, rlpmg.com/pricing. And we just set that flat fee equal to what does it cost us to manage an average rental unit, add a little bit of profit margin, that's what we charge. It's very simple. So do we ever feel that our incentives are misaligned with clients? I do in two minor areas, if I'm being completely honest. One is the maintenance department. So we have a maintenance department at RL Property Management. We have 7 full-time maintenance techs that work directly for our company, and we send those guys out to do work on our customers' properties. And you can see there's almost an inherent conflict of interest there where we're the ones, you know, in theory making money on the maintenance side, and we do make a small profit margin on our maintenance department. But we're also the ones who are in charge of dispatching them. So we're the ones who decide if and when they should go to our property. So, you know, there's an argument to be made like, well, you know, you're kind of like, you're setting up a scenario where you could send someone to do work at a property that wasn't really needed just so you could make money on it. The reality is that doesn't happen because we deliberately keep our maintenance techs we keep the maintenance department understaffed relative to the amount of work that's available. So if anything, we're always overwhelmed with work in the maintenance department at our company. There's never a scenario in which we're like digging around looking for work to do really. And in any case, the property owner has approval over a certain dollar amount. And to sort of back that up in another way, Of course, the property owner's reviewing the bills and invoices. They get a statement every month. So if we were just needlessly spending money every month, they would obviously notice that there was all this money going out for no reason, and either the work wasn't performed or it wasn't necessary or what have you. So it would kind of be self-correcting pretty quickly. All right, second thing that I see, the way we've set up our management fee, it's that flat rate per month regardless of the rent amount, and it's also regardless of occupancy. So even if a unit is vacant, we still charge a management fee. And the reason for that is, you know, I always tell clients when they ask me about this, they say, why do you charge a management fee while my property is vacant? And I say, well, do you want us to manage it while the property is vacant? And they always kind of, well, yeah, okay. So, and the reality is actually managing a vacant unit, if anything, is harder than managing an occupied unit because, you know, there's a lot of risk that goes with a vacant unit, especially here in Columbus in the winters. You got to worry about frozen and burst pipes if the furnace breaks while no one's living there. You got to worry about break-ins. The owner's unhappy. Insurance companies don't like it. So a vacant unit is no, you know, it's certainly not doing me any favors to sit around with a vacant unit, even if I'm collecting the management fees. So some owners see that as a conflict. I don't really see it as a major issue, but I can see, you know, how someone might bring that up. So I thought I would include that here. Okay, so I've got, uh, 4 more questions. I think I'm actually going to break this episode into 2 parts because this is— we're already, uh, over the half hour mark. And I think I'm gonna stop this here. We'll try to publish this episode quickly, and then I'm gonna save these remaining 4 questions and we'll, we'll do a part 2 here. So thank you so much for listening to Owner Occupied. I hope you're finding this valuable. I'd love to hear from you on how you like this sort of solo monologue by me, sort of in between seasons here. And if you, if you have any suggestions or ideas about season 2, what you might like to see or how you might like to see that format, I'm sort of still formulating those ideas in my head right now, and I'd love to hear from you. So thanks again, and we'll talk to you soon.