Episode 8 - Asset Management vs Property Management

Welcome back everyone to Owner Occupied. We're here with episode 8 and as usual, I'm really excited to get into the heart of what we're talking about today. So I'll keep it short and sweet here at the top. On today's show, we do a deep dive on asset management versus property management. What is the difference there and why does it cause frustration and confusion for property managers and real estate investors alike? And then we move on from there and we discuss the possible standardization of the property management industry, what it might look like to have a standard scope of service for property managers and how that might be helpful or harmful to property managers and the general public. So thanks again for tuning in today. Let's get right into it.

Good morning, Peter. How are you?

Hey, I'm doing well, Russell. How are you today?

I'm doing really well. We landed a new client and it's my net— the next month for me is just going to be consumed with, with the new work, but I am very excited about it. It's a new—

that's great.

So it's good.

Good news. Yeah.

I'm excited about the topic we're going to talk about today because it's— you're trying to standardize the industry, the, the property management industry, but you're also thinking about it in doing that, thinking about two different approaches, asset management versus property management. Is that the right division?

Yep, that's right. Yeah, and I think it would be fun to kind of go through a little bit of the difference between asset management and property management.

And then property management is a— would you say it's a lower level management than asset management?

Yes.

Okay, so what is property management in your mind?

So property management, I think, is what most people think of when they hear, oh, I'm a property manager, or I'm a landlord. It's the blocking and tackling. So what does that mean? Well, it's collecting rent, dealing with maintenance, leasing, pretty much everything having to do with the individual units at a property. So if you picture like the— I think the easiest way to think about this is if you picture a huge apartment, like a downtown apartment building with 250 units. If you've ever lived at one of those or visited, One of those. You know, there's people that work on site there and they're kind of showing the units, they're collecting rent, they're the ones you're gonna reach on the phone if you call in with a problem. And so those folks are called property managers and they are skilled at dealing with people, they're skilled at quickly and efficiently solving problems, diffusing tense situations, screening tenants, keeping occupancy up, getting leases and lease renewals signed, answering questions about the property, things like that. So, you know, that is, that is property management. And that's what most people I think have in mind when they hear the phrase property management. And where it gets interesting is when you contrast that with what's called asset management. So for a lot of people, that, that phrase may be unfamiliar. It's, it's really just, if you picture again, that large apartment building example, there's a bunch of people kind of behind the scenes with big properties and big real estate developments that are, that are more responsible for the strategy, that more so than the execution. So when I think about asset management, here's what comes to mind. Property acquisition, property disposition, financing, the strategy of real estate investing, the branding of a property, the positioning of the property within the marketplace, meaning is it high end, is it low end, is it middle market, budgeting for the property. So how much money can we allocate for things like capital improvements? Um, and then forecasting. So sort of taking a look at the macroeconomic factors in a given neighborhood or city and projecting out, you know, what's this gonna look like down the road? So that's all kind of back office type functions, and it requires a completely different skill set from somebody who's, you know, running around, uh, dealing with a maintenance request or a, a late rent or a missed rent payment. And the reason it's of interest to me is because when someone hires a property manager, they may not realize it, but I think a lot of them are actually expecting a certain amount of asset management functions to be provided by the property manager. And most property managers are not really set up to do that and are not charging for that. And so for me, as a, as the owner of a property management company, it can be frustrating when a property owner starts asking me a bunch of questions about asset management type activities and is sort of expecting that almost for free as a part of me managing their duplex. And my feeling is kind of like, listen, buddy, like, I'm not your asset manager. I can't tell you how to get rich off real estate. I'm just here to collect the rent and make sure that the place doesn't burn down. But on the other hand, I can appreciate, you know, their perspective as well, because they kind of feel like, well, hey, you're supposed to be the property manager. I mean, isn't this your job to know about, you know, everything having to do with the property and the city and the real estate in the market? So, you know, it's, it's, it's that old issue of client expectations, right? And when property management isn't something that's like super well, well understood in the marketplace, this is what happens is just everyone kind of makes up in their own mind what a property manager should and shouldn't be doing.

And so is it a, is it a competitive thing where maybe somebody underbid you by shaving services off of the property management service and then charging fees? Or is there confusion in the marketplace when, as a property owner, I'm comparing two different property management quotes. Is that a, is that a, is that a problem? Or is it people— if I, if I buy a Toyota from one store, they offer me this and somebody else offers me a lease or a different financing package, I sort that stuff out. How is, how is this similar or different than that kind of transaction?

Yeah. I think when people are sort of comparing property managers, they don't even know enough to sort of ask about this type of thing. And so they're, they're probably sort of inadvertently comparing apples to oranges without even really realizing it, because some property management companies are much more set up to provide this type of advice and, and backend support and have experience doing it and are maybe even accounting for that in the management fee. And other firms just have either no experience or they just don't think of it as part of what they offer, and so they don't account for it in their price. So it's, you know, the, you can think of the dividing line here, at least in, in our market, is right around 100 units. So anything over 100 units, it's well understood by the, by the operators in the space, both, both the clients who tend to be institutional and very sophisticated investors,. And the property managers who are typically a much larger, uh, multi-state type property management company, they both are very clear on this. And so the, the owner of the property will have usually their own in-house asset management team who is then overseeing a number of assets, you know, maybe in different markets. And they'll hire a fee manager or a third-party manager to operate the building. And they would never approach the fee management company for advice on when they should sell their building. It just wouldn't, you know, it wouldn't, you know, be silly. It'd be like, you know, it'd be like asking, uh, your car mechanic to give you a root canal or something. It's just not their skill set, right? Um, but within what I call sub-institutional scale, or sort of, uh, the type of property that you and I would own and that I do own, you know, single-family rentals all the way up to 40, 50, 60-unit apartment buildings, The owners of those assets don't typically have like a separate asset management team and don't have much experience with themselves. And so they're sort of expecting that to come along with what we're providing.

So, so if I've got an— if I've got a duplex and my property manager's managing it, if I'm— I get the— I think I have a real clear understanding where the, where the property manager roles are, that on-site example that you gave was very helpful. But I would consider if you're going to know how much rent to charge. That's one of the primary reasons I think I would hire you is that you would get the right rent, which is going to get it filled and maximize the rent. It's kind of the number one. For me, that would be the number one reason I would hire you. And I might mess that up. And that would seem to entail what you described as asset management, understanding the position in the market— high, middle, low— and some understanding or conversation with me about that or how we could position that. So that's at least one element that's sort of asset manager that I would expect in the property manager role. Do you, do you have something else in mind there?

Well, I agree with what you just said. I think that's a totally reasonable expectation. You know, the owner of a duplex is expecting the property manager to set the rents, and we do do that. And I, I think that's appropriate. I think what I mean by positioning is more about like, you know, we sometimes get owners approach us and say something like, hey, I'm getting ready to renovate my— remodel my property. What should I do? Like, when I remodel it, like, can you give me advice on that process? And then, and so help me pick out, you know, what types of finishes and fixtures and how we should rearrange the floor plan in order to maximize rent. And at that point, I'm getting a little uncomfortable because it's like, well, I don't really know what your goals are. I don't know, you know, your total financial picture and how much money you have into this property. And I don't have, you know, it would probably take me half a day to sit down and run a few different, you know, tally up maybe 3 different options in terms of finish quality, and how much that would cost. And then also do like a market rent analysis for each of those 3 finish levels. And try and figure out how much rent you could extract and then sort of, you know, calculate a return on investment for each of those. And, you know, now you're just kind of getting way beyond property management, in my opinion. I feel like the property owner, you know, they're the one that should be making those decisions. And it's like, we'll manage it for you, but I can't tell you how to, you know, how to, how to maximize your yield on cost for your particular asset. I mean, it's, you know, it's one thing when it's a big apartment building and all the units are the same. But when you're dealing with ones and twos all over the county, you know, it'd be a massive amount of research for each individual one to try and get to that level of understanding of that little teeny tiny submarket, right?

As I was listening to you, I was immediately translating it to the political world. And I am, I am ready at a moment's notice to give you a thumbnail perspective on what the legislature is likely to do with a particular issue. Yeah, which is not nearly the same thing as when you're paying me to get the legislature to do yes or no, right? That's a completely different analysis. And I get this from what you've said about adding value to every interaction. But if someone came to you and said, should I, should I have stainless steel appliances or not? You could answer. And there'd be a certain level of interaction. But you're taking on a certain responsibility because you're asking me as an expert. And in order to give you my expert opinion, it would take me at least half a day.

That's precisely correct. Yeah, you really sums it up well.

Yeah. Okay, so in that, and the buyer doesn't know necessarily, and again, translating it to my world, the buyer doesn't necessarily know that somebody's actually an expert, analyzed it, and come to this conclusion versus someone that's winging it off the top of their head. If you said yes to stainless steel in the first interaction, you might come to that conclusion after you studied it for half a day. And the answers would sound the same, but they'd be completely different. Right. So understanding that difference that you're talking about between property management, asset management, and seeing where some of that fraud is, you're taking steps to, to maybe standardize it or try to address this in the marketplace?

Well, I would like to, and I think If in discussions with property managers across the country and clients, you know, customers who hire property managers, there's a huge disconnect, you know, and every property manager will attest to the fact that the level of expectation that the customer has rarely matches what the property manager is expecting to provide. And part of that has to do with the asset management versus property management topic that we've been discussing. But it actually is even much broader than that. Because there's just so many things that can go wrong when you're managing a property. I like to say, when you mix real property, money, and people, there's a lot of opportunities for problems and, and issues. So Because of that, there tends to be a lot of friction between property managers and clients. And if you talk to anyone who's ever hired a property manager, I'm sure they have horror stories about, can you believe my property manager did this or didn't do that? I just, you know, and they're so frustrated. And then property managers have, you know, could talk for days about, you know, oh, and this client, you know, was wanting me to go over to his house every week for a year to forward his personal mail because he said, well, he moved out and that's my job as a property manager. And You know, just, it's endless. And so my thought is, in order to fix this, you have to have some sort of a standard scope of service. It's really almost a definitional thing of like, what is property management? And if you think about, you know, when you, when you go to a car mechanic, and you ask for an oil change, that's a very well understood activity, you know, you would be very shocked if you came in for an oil change and you got the car back and they had changed out the headlights or something because, you know, there's, there's language around the pieces and parts of a vehicle and the service work that, that's being done on it. But in property management, the language that we have is kind of primitive and generic, and it's not even consistent between property managers. You know, what one property manager calls a leasing fee, another one might call a letting fee, another one might call a vacancy fee or a marketing fee. So what that means is it's very difficult as a, as a client, as a property owner or investor who's looking to hire a property manager, it's very difficult to compare property managers because they all kind of use their own little language. Their pricing structures are completely different. And their scope of service is completely different. And by that I mean, you know, what activities are they doing as a part of their property management package for you that's included and what is not included? There's just 100 little edge cases with, with property that you never really know, even as a property manager, like, is the client expecting me to do this just sort of as my regular property management duties, or is this kind of above and beyond? So a really simple case might be something like an eviction. So handling an eviction, if that's needed, you know, is that included in the regular property management fee? Or should I expect to pay a separate fee for that as a real estate investor? And that's something that does usually get talked about during the sales process. But there's, for that one obvious example, there's 100 others that don't get discussed. And then when it happens, it's a big surprise. And the property owner is frustrated that they got charged extra because they felt like it should have been included. And the property manager on the other end is kind of like, this guy wants everything for free. You know, he's just expecting me to give him the world for $50 a month or whatever. So my idea is, hey, let's, let's try and bring some standardization to what actually property management is at this, at the sub-institutional scale.? Because if we can do that, I think everyone's going to be happier. The property managers are going to be happier, the customers are going to be happier. It's going to be easier to sort of streamline and improve our operations because we know exactly what we're doing and what we're not doing. And just, you know, the example I go to is buying shoes. So I mean, imagine if the shoe manufacturers had not standardized on sizing. And so Nike and Adidas and Reebok all had their own little sizing chart because they felt like, well, You know, it's actually really important about the shape of the foot, not just the length. And then the other guy says, well, it's actually really the width is super important too, so we have a separate dimension for that. So you can shop by length. And, you know, and you can imagine they'd all come up with their own little brand names, and they're all— there are special little ways of measuring it, and they'd talk about how much better theirs was than the other guy. And how frustrating would that be as a consumer? You're trying to buy a pair of shoes, and now you've got to bring out a dictionary to figure out all these different sizing arrangements. And the way I would pitch this is, would you buy more shoes or less shoes if that was the situation? And I feel like you'd buy a lot less shoes because you'd just be so frustrated about the whole thing that you'd just, you know, you'd rather not even mess with it. So if we could bring some sort of standardization to property management, I feel like people would be more likely to use a property manager because they would feel more comfortable because they would feel like they understood it and they knew what was included and they wouldn't be afraid of suddenly at the last minute the property manager pulls out the contract and says, "Well, you signed here that this wasn't included," and no one wants that. You know, it's a horrible feeling as a customer. So that's my pitch, just kind of standardize and streamline the industry. I floated the idea around with a couple of property management friends of mine. They all hated it. So I don't know how much— it could be a long road ahead of me. I still believe strongly in the idea, but we'll see.

I'd like to talk a little bit about the hating it. I was, as I was thinking of the competitive place, you probably have a contract that you think is clear. You know how much money it's gonna generate. Typically it allows you to evaluate new business and guide and direct your business. If someone across town has a contract that works for them in that way as well, and they don't feel like they're being deceptive to their, to their customer, then any standardization is gonna, is gonna touch how much money somebody makes per door for their existing business. So it would certainly have to be rolled out over some time, but I could Is it, is it, is it nefarious property owners, or is it just a different way of doing business and explaining to the customer?

Um, well, I think that all makes sense. Um, and the folks I mentioned this to kind of brought up similar concerns. They really view their service as like a differentiator. You know, they all have their own little way of, of what they include and how they charge and the way they position themselves in the market. And they felt like they didn't want to be commoditized and just, you know, ranked up against a bunch of other property managers and sort of made to be on the same plane. I think maybe they had this idea that if you standardize the scope of service, then all that's left to do is compete on price. And I don't think that's true at all. Again, if you go to the shoe example, just because we have a standard sizing chart doesn't mean there's not a massive amount of room for creativity and branding and positioning and a high end and a low end and a middle end and 3 different things you can choose from and many different styles and sizes and many different styles and materials. So just because we standardize on a few common terms and definitions And because we define what property management actually is, you know, that doesn't mean that every property manager is going to be the same. Anything but, you know, it's anything but that. So, you know, how it is I can explain that better and, and kind of sell people on that, I'm not sure yet. But I'm hoping through conversations like this and getting feedback and maybe doing a better job of, of promoting it and, and describing the advantages. So one thing that comes to mind as an advantage is A big issue with property managers is when you acquire a firm. So we talked previously about, you know, we've acquired another property management company earlier this year, and those customers, the clients that, you know, that belong to the contracts that we bought, they weren't thrilled, right? Because not only now were they dealing with a company that they didn't sign up with, But the way we did things was fairly different than how the other property management company was doing things. And in certain ways, it was significantly different. Everything from, you know, when we would call for a maintenance approval to whether or not we were holding the security deposits, to whether or not we had like an escrow account that we would keep. So they were just dealing with change after change, in addition to the frustration of sort of being sold off to another company.. And so we had pretty significant churn or loss, customer loss through that process. And that is very common in the industry if you talk with some of these big companies that acquire other, other contracts. So if you could somehow, if you could start to standardize again, the scope of service between companies, that would make acquisitions much more streamlined and, and simpler, which is actually good for everyone. It's good for the seller because they can now command a higher, uh, multiple or premium. For their asset because on the acquisition side, you're going to have much less churn. The customers are going to be much more likely to stick with the buyer because the scope of service is going to remain fairly consistent between those companies. I think that's good for everyone. I don't know quite how to explain it. I feel like maybe it's more clear in my mind than it is with what I'm actually saying.

I think you're communicating it well to me and Hopefully people will give you some feedback on social media and we can have a more extended conversation as we think through this. The benefits to the customer are really clear and apparent to me. And the risk or the potential downside is readily apparent. And your explanation about the increase in multiple for the property manager was, was good and probably could be spelled out a little more if I'm planning on keeping it forever. I like to, when I put out bids, I always, I put a minimum on what I think it takes to do the job well. I won't offer a bid below, I'm happy for them to sign it, and if you sign that, I think it will work. And then there's increasing confidence levels. The more you do, the more likely I am to win. And so I increase it from there. The idea of setting a— if you call yourself a property manager, you have to do these things. Then it becomes if you're resisting that minimum standard, you're, you're trying to hoodwink someone or deliver something that's below the, what we would say is a minimum standard. And you're regulated in Ohio, right? Yep, we are. At that standard. So if, I mean, again, we're just talking it through here, but I would, I think I would aim at that minimum standard and then let people differentiate whether it's adding things from the asset management side Or saying our service in this minimum standard includes these features, which you could then sell, which might do that. So what's your process for either advancing your idea, coming to more of a consensus in the industry? What steps are you taking right now?

Yeah, so real quick, and then I'll jump to that. I had a— I was sharing this idea with a colleague, and he, he put it well. He said, yeah, it sounds almost like GAAP for property management, with GAAP being GAAP, Generally Accepted Accounting Practices. And if you're not familiar, GAAP is basically a way of handling accounting within a business that is standardized. So every public company and most large private companies all use these generally accepted accounting practices or principles when they are preparing their books. And so when you go to buy a company and you look at an income statement or a balance sheet, if that company has prepared it using GAAP, you can feel pretty confident about what you're looking at. And accounting firms have sort of gotten together and said, okay, we're all going to agree that this type of transaction should be classified as income, this type of expense should be classified as cost of goods sold, this type of asset should be depreciated over this length of time. And they all have agreed and standardized on this. Now, does that mean all public companies are exactly identical because they all use the same accounting method? No, of course not. But it is a way of providing a base of common language and, and operations in the financing side of things. That makes a lot of things a lot easier. So in terms of where I'm going from here, well, I had the idea that I could put together a working group comprised of stakeholders. I'm starting to sound like a politician myself here, which would be obviously owners of property management companies. And also, I wanted to include as well some members of the public or the consumer, which would be real estate investors who hire property managers, excuse me, real estate investors who hire property managers to get their perspective on, you know, what is their opinion of how, what's included in property management and what isn't. And then maybe even to bring in some vendors from the property management industry who are also very connected with, you know, how different companies do things. And because they're— and because their products and services typically have to integrate with many different property management companies, I think they actually would be in favor of this because it's a lot easier to make a product or service for an industry if you have a good feel for how that industry works and it's fairly consistent between industries or between companies within an industry. So I have the idea here to put together a working group and start to sort of hammer away at some of these definitions and standard scope of service items. Obviously, it's not something I'm going to be able to do by myself. If it was up to me, I would just, you know, basically enshrine my existing management agreement and, hey, that's the standard now. But, you know, that wouldn't— you know, I think it'd be much better to get a variety of inputs.

Have you thought about collecting other contracts and see how much uniformity is, is really out there among maybe big public companies or, or the size that you can get ahold of to understand where the gap is on paper, and then focus on those areas where, where you identify a significant gap.

Yeah, I think that's a great idea. And if I remember right, I believe that some states even have a standard management contract that's sort of prepared either by the, the state realtor association, or maybe even the state, some of the administrators who enforce the laws of the state. I believe there are some states that have these kind of standard property management agreements that most of the bigger firms use, but I think they all have their own addendums and stuff. So yeah, I think that's a good point that might be worth digging into.

And just another idea that came up when you were talking, since it's more attractive to the, to the consumer, a lot of people who are self-managing will download a standard lease from the National Apartment Association or something like that. You might be able to develop a, what you call your standard property management agreement and, and serve that up as a tool for consumers. And if consumers are adopting it and interacting with property managers, they may become more interested in the work product that you're developing and lend more voices to it.

Yeah, yeah, I think you're right.

So that seems like a good overview. It's as if you had enough time in your schedule to add another big community service project on your plate, but I think it could be good for the, good for the, good for the industry in Ohio.

Yeah. And, you know, it ties back to, if I think about sort of my broader mission for this business, for RL Property Management, my management company, you know, for a while, our sort of mission or purpose, we had basically being a good steward of our clients' property. And providing a great experience for residents. I think it was something along those lines, if I'm remembering the language right. And that was a great mission for many years and was a, was a great way to start. But what really got me thinking about this is because I really wanted to, I wanted to go further, because I felt like provide— being a good steward of our clients' investment properties and providing a good experience for residents That's no longer exciting. And I don't think it's actually enough because in my mind now, that's actually a given. It's like, of course, we're going to do that as a professional property management company. That's the bare minimum we should be doing. And that's not enough to get the team excited about coming into work and making a difference. So I got to thinking, how could we, you know, what actually are we trying to do around here? And how can I capture that spirit in a concise way and in a way that's gonna sort of rally people around a broader cause? And so that's what led me here is I really wanna make the industry better. And I think if you actually look at sort of the trustworthiness scores, I mean, you see these surveys come out every few years They always make the news about how— I think number 1 these days is always like a nurse. Nurses are super, super trusted among the general public, and doctors are up there, and clergy, and firefighters. And then, of course, then there's like accountants, and then down toward the middle is like lawyers, and down at the bottom is always like used car salesmen. And then, actually, a realtor is usually quite low on that list. And I think property manager is right in there, is anyone is very untrusted among the general public. And I think a lot of that comes back to what we've been talking about, this inconsistency of service and missed expectations going both ways. And what's interesting about property management is it's a fiduciary activity, and a fiduciary activity is, is built on the back of trust. I mean, you have to have trust A fiduciary means that you've, you've employed someone on your behalf to go out and act as an agent of yours with your best interests in mind. So like a doctor is a fiduciary, you trust that they're acting in your best interests and not just going to recommend a more expensive surgery because they can make more money. You trust they're going to recommend the best procedure regardless of cost. Accountants are fiduciaries. Lawyers are fiduciaries. You know, financial planners are fiduciaries. These are professionals that are expected to put your interests above theirs. And property managers are as well by law in Ohio and in most states. But the trust gap between all the other fiduciaries and then property managers is immense. And I think a lot of it just comes back to having no standard scope of service, which means every time you hire a property manager, it's like, You have to relearn everything about what they're doing, what they're not doing, what you're going to be charged for, what the definitions are. So that got, you know, I had kind of been thinking about all this for years. And then finally, I was like, all right, well, someone's got to step up and start to standardize this industry so we can rebuild that trust gap and make property managers like a well-respected professional fiduciary in the minds, in the minds of the public, rather than just this totally fragmentary, very ill-understood, you know, redheaded stepchild of realtors type, which is the way they're sort of viewed right now. So that's a little bit of the background.

It's gonna be a long road. Well, and you're equipped to, you're equipped to head down that road. And we look forward to seeing the comments on the social media, improve your idea, and see what this work product develops. Thanks for talking about it today.

Yeah, thanks. This is fun.