Owner Occupied Episode 15 - Deep Dive on VC-Backed Property Management Companies

Welcome back to Owner Occupied. We are here with episode 15. I'm Peter Lohmann, and as always, my co-host Russell Lowery is here as well. The topic of discussion today is VC-backed property management companies. Russell and I do an overview of the space. We start with an introduction to residential property management, just kind of giving some context on the discussion. Then we roll right into the list. I produced a list on my blog talking about 12 VC-backed property management companies. So we go into a few of those in detail and pull out some common themes. And that naturally flowed into a discussion about payments, which we really, we got into some quite intricate details on why exactly payments is such an important part of property management and the payment volume and the different ways that payments have historically been made and are currently being made from tenants to property owners. And then we kind of sum up with my closing thoughts on VC activity in property management. So let me stop the introduction here and we will jump right into it.

We're back with another episode of Owner Occupied. How are you doing today, Peter?

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

I'm doing well. The, the subject for today, property management and the VC involvement in the property management world has been fascinating to me. So I'm eager to dive right in. But I thought before we start, again, I don't know who's listening and it always helps me to hear, but why don't you explain exactly what property management is?

Yeah, happy to do that. And I think it makes sense to do so. If nothing else, just to sort of narrow the scope a little bit for the topic of VC involvement, because property management is a huge industry that covers everything from managing a mall to a 400-unit apartment complex to a retail strip center. So what we're gonna be talking about today and what my area of expertise is in is residential property management of third, uh, third party, meaning managing properties that we don't own, in what I call scattered site, which means not a 450-unit apartment building but a bunch of ones and twos and some smaller multifamily. So everything from single-family rentals to like a 30 to 40-unit apartment complex. And so the property management industry is a bunch of small companies for the most part that manage these units on behalf of the property owners. And of course, some property owners manage property themselves. They don't hire a third-party manager, they just self-manage. And that's not really, you know, relevant to what we'll be talking about today. But it's an interesting area of the business as well. So, you know, I'm in third-party property management. We manage almost 500 units. I don't really own— I do own a small handful of those, but for all intents and purposes, I don't own any of that. And so there's, there's certain dynamics that get set up when you have a third-party property manager that's, that's dealing with the day-to-day of the properties, but they don't own the properties. And so, you know, there's, there's some scale that can be had there. There's challenges. There's a lot of ins and outs. And I'm sure we'll get into some of that as we get going. So does that seem like a good overview? Does that leave you with any questions?

And before we dive in a little more, I want to clarify at least a couple things that you brought up. A little more on the, that self-managed development versus the third-party developer. It makes a lot of sense when you're talking the single-family residence, that scattered site situation makes sense for the single, but for a 12, 15, 30-unit complex, why don't you talk a little bit about what that looks like, third party versus self?

Yeah, so that type of property can be self-managed as well. And it could be as simple as the owners, just a guy who wanted to get into real estate and has a flexible job. And so he can run over or she can run over and do the showings and meet the maintenance guy and perhaps even lives at the property, all the way up to, you know, an institutional-grade company who owns maybe hundreds of those types of complexes and has in-house property management. And so they have a whole team within their company who will manage the properties, and so there's no third party involved.

And so that, that one's never likely to just sub out a unit or a territory, they know, they believe they know, they're experts in that area as well. They're not looking to hire any help on there. The self-managed may or may, the smaller self-managed, that 30-unit, the one-off may drop in and out of that. They may mess it up and say, I don't want to deal with that, or their business life may change. Okay. That makes sense. And so, of the 4, you mentioned managing a mall, a major apartment complex, the scattered site, and even a strip mall. Are there, do you know the unit economics for each of those types? Are there property managers that do all of those or? Or is it if you do one, you kind of specialize in one of those four?

Generally, you're going to specialize especially on the residential side. I think commercial property management, which would be like the retail strip center, you know, the restaurant, the office buildings, you know, those generally are all going to be kind of lumped in together as commercial property management. Okay. Those I have heard now, I don't know a lot about that side of the industry. I know a little bit. I have heard that there's not much money in that. The real money in that side of things is in the leasing. And in fact, often the leasing is done by a different group than the group handling the quote property management, which would be like the rent collection and the maintenance calls.

So you just confused me a little bit because when I studied at the, at the Lohmann School of Property Management, I got, I got maintenance leasing and rent collection is property management. And you just said for commercial, that the leasing may be subbed out of that to where they're just doing, they're just doing maintenance. And so walk me through that again. So, and those two on separate on residential. So that's unbundled on the commercial side?

Exactly. So typically what you'll see on the commercial side, is that rent collection and the dealing of with the maintenance will be handled by a commercial property management company. And sometimes those are handled, you know, some— a lot of times these big brokerages will have a commercial property management side of the house. But then the leasing, you know, picture, picture leasing up a 5,000-square-foot office space, you know, in a downtown office building. That is often done by a totally different group than the folks who are managing that building. And that can be for a variety of different reasons. And I've heard that the good money is in the leasing because these leasing brokers will capture 5 or 10% of the lifetime value of the lease. That's like their fee for filling it. And they sometimes also get paid, you know, if they're representing a tenant and they're, say, they're working with a small business to find them a new office. That's called tenant rep. And there's, there's money to be made in doing that as well. It kind of in the same way that you can make money as a buyer's agent, you know, if you're helping a couple buy a home or something. So I don't know hardly anything at all about management of industrial properties. Maybe we could have Chris Powers as a guest. Good luck. Yeah, I'm sure he's not in demand. So yeah, but obviously my area is residential and— okay, take everything I just told you with a grain of salt.

Got it. It's helpful for me to think through it as I, as I, as I add these categories. And so, so primarily when we're talking about VC investment in property management, when I look at or think about it, we're talking investment in residential property management as your focus is on. Okay. So, so then my question is, why Why is VC money so interested in residential property management? Aside— we'll get to the numbers, but why are they interested in the first place?

Yeah. So just to back up for a moment, what we're kind of referencing here is a blog post I wrote about a week ago. I produced a list of about 12 VC-backed property management companies. Each of which, each of which has raised anywhere from $1 million to $77 million in venture capital. And specifically here on my list is groups who are literally managing property. There's probably hundreds of, of affiliated companies and startups within the property management world that have raised venture capital, that are doing things like providing software services to property managers or interesting ways to lease property. And, you know, there's just tons of sort of ancillary activity in the space. But I'm talking specifically about companies that are literally managing the properties, collecting the rent, dealing with maintenance, and doing the leasing. Now, as to why venture capital is interested in property management, that is a great question. I have a few ideas and things that I've heard kicked around when this topic comes up. The space. First of all, you know, a VC would say the TAM, the total addressable market, is huge. You know, if you figure there's, I don't know, there's probably around 150 million households in the United States, something like that. Maybe you would know, Russell. But, um, and roughly half of those are rentals, some, you know, somewhere around that. So just think about that. And then if you also think about the fact that everyone's rent, you know, your monthly rent payment, if you do rent, which is roughly half of adults, that's their largest monthly expense typically. So the amount of money that's flowing through residential property managers as a whole is, it's absolutely unbelievably large. Okay, so you've got a huge total addressable market. Now, obviously, most of that money flows through the property management company and sort of up to the property owner, the landlord. But property managers do capture, you know, some percentage of that rent as a part of, you know, or as a fee for their service. And so I think venture capital sees that. I think they see also an antiquated, fragmented industry that has been slow historically to adopt technology. I think they see a lot of inefficiencies and paper-based processes and workflows. I think venture capitalists and their sort of affiliated startup founders see kind of a land grab where it's like, let's just get these houses and apartments under management, and we'll figure out how to make it profitable later. That's kind of the classic VC model where it's like, you know, you run out, you grab land, and then you figure out how to build your house on it later. You don't, you know, so, you know, I think there's a lot to be said about what I just said. But on the other hand, it's, it's also much more difficult, I think, than it appears from the outside to actually grow and scale a property management company. And it will be, I think, within the industry, there's a lot of discussion around, hey, is this, is this problem going to be solved by sort of a traditional property management company that leverages or builds out its own technology? Meaning, is this going to be solved from the inside or are we going to see a classic Silicon Valley disruption where the Uber of property management comes in founded by people who have no experience in the industry and it's those fresh eyes and that optimism and that tech-first approach that's going to allow them to sort of crack the code? Warren Buffett famously said that if he could figure out a way to efficiently manage properties at scale, residential rentals is the largest untapped investment opportunity. I think a lot of these guys have read that and really taken it to heart. So I think that maybe sets the stage a little bit about why and how, or why this money is flowing in. Okay.

And so if I think of it as total addressable market, I think of that market in two ways. And you, you may have answered it, and I was taking notes and I missed it, but it sounded to me like I can view it one way and say, there's a bunch of money here. I would rather that money flow through my fingers and I will make that money because there's lots of it. Or I could approach it and say, and I think of Uber and Lyft and this sort of, and say, hailing a taxi is a miserable experience. I've got a better way for you to get a ride from point A to point B. Yeah. And so I can fix this problem. I can offer a better mousetrap. What I heard you describe was more in the first category. There's a bunch of money and I'd rather have, I'd rather have it than you have it, as opposed to the, this is an awful process for renters or property owners. And I can provide a better service to those renters and property owners than they're getting in the current market.

Yeah, there's definitely something there. I think every, almost everyone, including, you know, obviously many startup founders and many VCs has had a bad renting experience. I think almost everyone has dealt with a scummy landlord or didn't get their deposit back or was, you know, experienced the frustration of trying to find a property to rent and being unable to get people to call you back and things like that. So as soon as, you know, you hear someone start talking about property management, the entrepreneur or the venture capitalist in you is immediately like, okay, there's something there because this, this industry is not working. It's not smooth, it's not easy, it's not frictionless. So surely there must be a way to come in and sort of solve that, just like you said, in the same way that Uber made it really easy to get a ride from point A to point B. And there is something there as well. I think that's worth putting out there on the table. I do think at least some of these companies were founded by people who had that thesis more so than the total addressable market. But they're like, hey, this is a pain point for renters. And on the flip side, for property owners too, it's difficult to find a property management company. And a lot of property owners and landlords have been burned by their property managers. And so there's pain on that side as well. So, you know, in fact, that was sort of one of the reasons I started my property management company was I was, I was feeling the pain from both sides of that equation. And I was like, hey, there must be a way to do that better. Now, I didn't have ambitions to raise $10 million or anything. I just thought I could make it work here in Columbus. But yeah, definitely agree on that side as well.

And it's not the, it's not the main point of what we want to talk about, but I think for understanding the market and why the money's coming in, could you spend a little time on what the pain point for the owner is? So I don't think there's money in solving the problem for the renter unless you control property. So if you've got a pleasant renting experience, I'm thinking, say Airbnb, you still need product to service those people. So that's, that's, that's that's sort of a different problem set than I say, if I've got owners who I've got property and I just want a more pleasant property management experience, what are some of the, what are some of the unpleasant problems that property managers have that I mean, that property owners have that if property managers are offering a solution, then owners will find their way to them?

Yeah, well, I'll give you the list. I mean, I hear it every day. So One of the big ones you often hear is communication. So you hear from property owners that they never hear from their property manager, or they have a hard time getting ahold of them when they have a question. You also hear, you know, the fees are too high, or I'm getting fee'd to death, I'm getting nickel and dimed. You hear a lot of that where people don't understand how and when and why property management companies are charging them various fees. You, you hear just sort of the classic, like, my property manager can't get my property rented. So, you know, vacancies is an issue. You hear about large, expensive repairs. Property owners get frustrated when they feel like they overpaid for a problem at one of their properties, because the property manager either hired the wrong person, or hired themselves, or hired, hired someone then and then didn't properly manage the project. You also hear about accounting and financial issues like, I didn't get my statement on time, I didn't get my disbursement on time, the accounting doesn't make any sense, I don't have what I need to do my taxes. So it runs the gamut. And I think a lot of this, you know, I've talked before on this podcast, so I think there's a big part of this that's driven by just people don't understand what property managers do. There's not a clear scope of service that's well understood by the general public. And so some of this is just like property owners thinking that property managers are going to do X, Y, and Z when that's not in fact what property managers do. So that's part of it. But it's also just very difficult to manage property at scale and do it well. And I think a lot of property managers kind of outgrow their capabilities. You know, they start hiring people, they start managing more and more properties, and suddenly they become overwhelmed. And they just can't keep up, or they have a key employee leave and they only have 3 employees. So now they, you know, one-third of their capacity is destined, you know, is taken away. So that's the pain, you know, from the property owner side, uh, that, that could, you know, could drive some change in the industry or drive some dissatisfaction.

Okay, so if we've got 2 buckets for this VC money flowing in, uh, the total addressable market, and the, the monthly rent that's passing through is, is just a big number. And then the dissatisfaction. You created this list. And why don't you tell us a little bit about the list that you created? And then if you would, why did you create it? Or what was your thought process behind looking at it?

Yeah, and I'll start with that. I mean, I just got curious for myself, like, how much venture capital activity is there in my industry? Because I kept hearing, it seemed like every other month I was hearing about some VC-backed property management company that I had never heard of, you know, closing around or whatever. And I was like, well, hold on, like, you know, I tend to keep up with what's happening in my industry. And I kept hearing about these companies that I had never heard of. So I just sat down one day, I'm like, all right, let's get to the bottom of this. I want to know who these companies are, how much money they've raised, and just generally, you know, where they're operating and what they're doing. So I just spent a while, I asked around my network, I did research on Crunchbase, which is like the TechCrunch, like, database of venture capital. And I'll clarify that, you know, I'm not including here private equity-backed property management companies, of which there are actually quite a few, and including some really big ones. Not because I don't like them or something, it's just that there's very little publicly available information about how much was invested and when. So I thought just to keep the scope tight, I was just going to talk about venture capital. I also think that venture capital, um, the model of venture capital is like grow big fast. And that, that I think is, is slightly different to private equity. Private equity, I think, is okay with making a great return over a long period of time. Whereas venture capital is kind of like, you need to 10x or we're just— you should just stop. So it creates a certain, you know, grow or die mentality that we'll see how that, you know, how compatible that is with property management. I'm sure we'll talk about that. But So yeah, so we've got 12 companies here that I found. They, like I said, they've raised, you know, the number 1 on the list is a company called MYND, M-Y-N-D. They're out of Oakland, California, started in 2016. They've raised $77 million. I won't read off the whole list here, but you can, you know, we'll link it in the show notes. And yeah, I just literally just did a little summary of each company and it was really interesting to kind of see it all in one place. And now I feel like I've got my head wrapped around what's happening. And interestingly, I think 7 out of the 12 were founded in the last 3 years or so, which is kind of incredible, 3 to 4 years. There's just a lot of money flowing into the space right now.

I got my mind around the list. I read it and I've been thinking about it, about the space a little bit. And so I suspect we're going to be able to drill down on this more than this once. But what I saw from your list is You just rank them by order of money and then how they sort of describe themselves. Have you done thinking about what problem they've tried to solve or what problem they're trying to solve or who they think their customer is?

I did do a little bit of that. I didn't include it in the blog post, but I kind of made like a half jokey summary of what each of their sort of theses was, you know, some of these guys, their whole thing is like, well, we're just going to sublease. Like, that's our model. We're going to rent it directly from the owner and then we'll sublease it. And that's, you know, that used to be called a master lease arrangement that's been around forever, actually, in property management. Some of them are like, we're going to integrate it like Knox Financial, for example. They've raised $14 million. They're trying to integrate, they're trying to be like the whole financial solution for an investor. So they're doing the funding, they're doing the financing, they're going to handle the taxes, they're going to be like your financial advisor, and they'll be your property manager.

From purchase through taxes.

Yep, exactly. Yeah. And then, of course, you know, as you might expect, some of these guys are building their own software, and they feel like software is the key to making this work at scale. So yeah, they each have a slightly different take on it. If you kind of read through the fluff and the marketing, you can, you can sort of uncover what it is that differentiates them from just another property management company. So I spent a little bit of time doing that.

So maybe it's just my, my brain. I'm— the Integrate is totally familiar to me, and I can see what you're doing there, the software, you're you're trying to design a software solution to cover what you think are inefficiencies in the current thing that you can out-tech them. I think I could piece that together. Why don't you explain to me again, the master lease arrangements that was very familiar to you, but it didn't— I am— I'm renting 100 units. And I think I somebody's willing to rent me their 100 units and know that I'm going to pay, and then I can keep the difference on what I can rent them out to someone else?

That's pretty much exactly it. Yeah. So the company will rent it directly from the owner for some, you know, close to market rate. And it could even be a long-term lease, like a 2-year lease or something. And so then that company will turn around and sublease it to a tenant and take on a lot of the risk of ownership. Actually, it's almost like a triple net type arrangement from the commercial world. So it's, yeah, it's, you know, I don't know a whole lot about that model. I just know that I've heard of it before. It's not something that, you know, a startup founder invented 2 years ago. It's— I've heard old timers actually talk about, well, that's actually the way you should do property management because of X, Y, and Z. And it does simplify a lot of issues when, you know, the owner's getting the monthly rent every month and, and you as a property management company are sort of the tenant directly. And then you can deal with your subtenant and all the associated issues without involving the owner, which does make things a little bit simpler.

But the owner would then— it seems in that there, it seems like that might be an expensive way to do property management from the standpoint of you, if you don't have a good handle on what you think the property's renting for, it just buries your fee. You're not paying quote unquote property management fee, you just prepaid it in.

Yeah, it's like an arbitrage, right? Like, you better know that you can rent it out for $100 more than you're paying the landlord. I don't even know, I think sometimes the maintenance is included or not included. I think there's a lot of different ways you could run that.

Yeah. I would think of that as sort of a— when I hear that, and I could be wrong, and if any listeners want to correct it, but there are various used car markets that simplify it. CarMax will— We'll make it very easy for you. We won't haggle negotiate. Come on, we'll give you a price for your used vehicle, or you can pay our price, our no-haggle pricing. Well, you've paid for that service, whether you put a dollar value or not, you're getting less for your car or you're paying more for your car. Exactly. Paid for that convenience. And you may or may not know what the cost of that was. And it seems like for a master lease, if that's attractive to someone, if they know what they're paying for it, it could be a good deal. But it could also— I would suspect that's because of the risk involved for the person that's writing that check, that you may be paying a premium for that, that hassle-free experience. Correct.

Although I think for a lot of owners, they're fine with that because individual property owners who actually dominate— if you look at the total number of units of rental properties, most of them are owned by mom-and-pop type investors— they are very sensitive to a disruption in rent. So I think in a lot of cases, they might actually prefer to have 24 months of uninterrupted rent payments, even if they were $100 or $200 lower, Right.

You've taken the risk off the table.

Yeah, exactly. Yeah. So that's not something an institutional investor would want. And also an institutional owner or investor will have multiple units that will kind of smooth out any vacancy, you know? So anyway, we're kind of—

No, that's good. I got it. And that helped, that really helped clarify that for me. So I would presume in that class, if I've got 1,000 single-family renters, 1 or 2 or 100, of those things, the risk for somebody who has a large number of those units is, it makes a lot of sense. It can work for both parties. And you spread that risk around. That makes sense. So I've got that bucket for those things. The next one I'm wondering about, so you've got the master integrated and software. Those are the 3 categories. So for your list, if I, if I look at your list, which I encourage anyone who might be listening, look at the list and see the summary. The next step I would take is to try and identify which one of those buckets they're fitting in— the master lease, the integrated, or the software solution. And there may be some overlap, but those three broad categories. The other thing I would assume is for scale reasons, are they Are they focused on a, on a region? So when you look at these 12, did you notice a geographic location perspective? Yes.

Okay. Yeah. And that's all of these companies, from what I remember, are geographically constrained, some to a single city or a small handful of cities, some to one state, and some to a handful of states. And that's typical for property management because, again, you're dealing with— you almost have inefficiencies of scale. I mean, there's some efficiencies of scale, some of your back office stuff, but other parts of the business become harder and harder to deal with as you scale up. Property management is one of those industries where the regulations differ wildly by state. And even within a single state, they differ from city to city. And so what, what, and not only do the regulations differ, but actually the way you do business can be very different. What is customary in that area, in that region, in terms of how property management is done, how it's charged, and even the language that's used to describe property management functions can be different. So it's not as easy as just putting out a piece of software and rolling it out worldwide or across the United States. These, you know, these companies are growing. Well, they can grow in two ways. One is by organically acquiring new customers, either through, through some type of marketing, and it could be paid marketing. And then the other way is by acquisition, you know, by acquiring another property management company and then rolling it into their, into their existing company, which can be a faster but also risky and more expensive way to grow. So And you see both of those methods being used by most of these companies, I think.

There's at least a couple of interesting things that minimize the scale, and I suspect each of these companies is addressing that in some way. But you mentioned the regulatory differences. What are the consequences to regulatory differences just in your state, across Ohio? How might that look different if I said I wanna, focus on Ohio, what would that— how might that look different?

Sure. Well, you know, if you— if your company was based in another state where property management is very lightly regulated or possibly not regulated at all, you may be shocked to learn that in Ohio, property management is, is an activity that can only be done by a licensed real estate broker who must be registered with the Ohio Division of Real Estate. You have to have 2 years of experience. You know, this is not something you can just go pay a fee, take a test and get the license. So like my brokerage here, RL Property Management, I'm the broker and the folks that operate underneath me, some of them are licensed real estate agents and some of them aren't. Certain activities can only be performed by licensed real estate agents, and all of the functions of property management can only be done under the supervision of a licensed broker. So if you're some VC company out of California and you want to open up a shop in Columbus, you have to find an Ohio licensed real estate broker in order to do so. And that is not easy to find. So then you're going to do what you're going to send one of your people in there to go get licensed or maybe try and acquire a company who has a broker on staff that you can integrate. So, so that's just across the whole state. But then even within city to city. As another example, which we've talked about before, source of income discrimination, which means certain cities have made it illegal for landlords to discriminate against Section 8 voucher holders. Is the short version of that. And so if you manage property, I think in Cincinnati, and also it was just passed in Akron, the city of Akron, if you manage property in one of those cities, you cannot, for example, put in your advertising no Section 8. And if someone applies and they have a Section 8 voucher, you can't decline them just because they have a voucher. Now, we could spend all day, and maybe we already have, talking about this, but That's just one small example of how it's difficult to scale and grow a property management business because you have to be super aware of all these, you know, little intricacies. Now, could you ignore that and be fine for a while? Absolutely. You could completely ignore these details and probably operate for a couple years without an issue. But the Ohio Division of Real Estate, for example, you know, once they find out you're operating a management company without a license, they're going to come after you fast. And they're going to, you know, they're going to bring fees and they're going to bring potential, you know, other actions against your firm and your employees.

So, yeah, that's happening around the country, different states, jurisdictions. And so each of these VC-backed companies is going to have to figure out how they're going to operate and niche. The other thing I've heard you describe before is, and one of the reasons I would hire a property manager, is determining exactly what the rent is. I could guess, I would have no confidence in my number for what I could rent my house out for if I moved to a new one. But I'd be willing to pay for that expertise and the consequence could be significant. So, but I don't dismiss the idea that tech could be engaged in that to some degree. Why don't you talk about how you go about assessing the rent for property, not even in a state, but in a city, but a particular neighborhood, and how you expect these VC companies can address that problem.

Yeah. So that is definitely, you know, one of the values of hiring a property manager. And that speaks to, you know, there's certain functions of property management that have to be done locally. You know, you, you almost need someone local to do what you described, which is like perform a market rent analysis. You need someone who's boots on the ground, knows the neighborhoods, and knows, has a feel, has their finger on the pulse of the rental activity in that city. Even just as, you know, going as recently as the past few weeks, things can change quickly. So And that, that can be augmented by tech a little bit. You know, there, there are a lot of websites out there actually who can help you estimate the market rent. And you can do research of comparable units for rent. You can do that online, of course. But it does take a local touch to kind of speak to those numbers with confidence and then stand behind it and actually say, yeah, well, We think we can rent your specific unit for this specific dollar amount. So the problem more generally is how do you tie a traditional software startup, a VC-backed software startup company, which wants to scale and grow incredibly quickly and wants to make everything tech and make everything automatic, make everything, you know, it's all about the user experience and But you also need for property management, I mean, someone has to be there to give the tenant their keys, someone has to be there to deal with the maintenance. So there's a lot of it that is tied to like a specific location. And there's no getting around that there just isn't. So a lot of these groups are solving that problem in different ways, you know, either by having sort of isolated property managers on the ground, who are, you know, maybe contractors, maybe W-2 employees of these companies. Some of them are partnering with local realtor groups and sort of trying to leverage the realtor network to do some of this work. Some of them are trying to sort of hire contractors on an as-needed basis with almost no real local presence. So yeah, there's a lot of different ways to try and attack that, but it is, it is very challenging. I mean, even for a non-VC-backed, very traditional property management company like mine, it's challenging. And I live here. So it is, it's no trivial task.

You've opened my eyes to a problem that it was confusing to me. And I think I have clarity on it now. But the rent, there's these push for rent registries. And And it didn't make sense to why people were investing so much energy to get a public roll of how much everyone is paying in rent. And it makes, one, I'm not sure that's gonna be good for renters from the standpoint, if you had to guess for mom-and-pop solo practitioner types, are they maximizing rent or are they leaving meat on the bone? I mean, if they're overcharging for rent, it'd be vacant. And so it seems like most mom-and-pops could rent for higher, but they're de-risking by charging below market rents.

Is that— And that is usually the case, yes.

That's your experience, it's usually the case. So a rent registry, that was publicly available would allow some of these VC types to charge more rent and reduce the inefficiency in the market that are in the mom-and-pop and make more money. And renters would be paying more, not, not less.

Yeah. Yeah. That's certainly plausible. It makes sense to me.

I, that's a, that's a, it's, I got to tease that out mentally. I'll be thinking about that a little bit. So So the on-the-ground for the rent and then for the maintenance, have you seen, have you heard of this app, TAKL, T-A-K-L?

It doesn't ring a bell.

I don't know if it's in Ohio. It was popular. It was active in California, but you could schedule a lot of routine maintenance activities. And you'd get various bids. So, so something I had, I paid someone to change my ceiling fan, and, and that probably would drive you nuts, but not my, not my strong suit. But I got, I entered that into the Tackle app. They had prepaid pricing for a bunch of services. They had 5 people who said they could do the job within 2 hours. I clicked on one, they came out, they repaired, they installed my ceiling fan and left.

That reminds me of Thumbtack, or there's a few of these.

Yeah. Okay. Is that a, is that a tech solution to the property maintenance issue? Or is that not certainly not the scope of the property management, but one element of the maintenance issue? Would that be a tech solution for that maintenance?

It could be a part of it. Um, I don't— I have not seen those apps and services work well for anything beyond the use case you just described, which is kind of like the textbook. It's extremely simple, very narrow scope, very easily defined problem. I have a ceiling fan, there's the ceiling fan mount. Please install it right in and out, 2 hours. But when a tenant calls you and says it's, you know, the tenant calls at 2 a.m. and says the heat, the heater just turned off and it's, you know, it's 10 degrees out in February. You know, there's no app that's going to get somebody out there, you know, within the hour. But we will have someone out there within the hour because we have the infrastructure built to do that. Right. The other— I mean, there's a lot of use cases where this breaks down. Like the other one is turning over a unit when it's vacant. You need someone who knows that property and has a certain amount of experience to go in and, okay, the tenant just moved out. I need to prepare the scope of what needs to be done to get this unit ready to rent again. Send that, send that to the owner for approval and then make sure all that work happens. That's the, that's what you're paying a property manager for is like being very attentive to your property and your bottom line. You know, also that's, that's the other thing I didn't mention. I'm sure that guy charged you probably more than my company would have charged our client to go and do the same thing because we have an in-house maintenance team and we have a vested interest in keeping our costs down for our clients so that they stay with us. So from a convenience and a homeowner standpoint, the solution you described is perfect, you know, and I could see using something like that on my own home if I didn't, if I didn't own a property management company. But I don't think it scales for, you know, managing 500 units, you know, in 15 different cities. Everything from, you know, you have to make sure that the folks you're dealing with are licensed and insured and bonded and, you know, your tenants. The other part of that is you've actually— so you're contacting that guy directly. But in the case of a property management company, the property management company is contacting that guy and saying, I need you to go to this other person's house. It's not me, actually, I'm just the manager. So now you've got like 3 people in the communication loop, and he's trying to schedule with the tenant. Yeah, it— right.

Do you get hit up by payment— this is another, this is another little tangent, but I think it's important— payment processing firms who try and capture your business and they just want to process the payment, the rent payments for you?

Occasionally we do, but that has long since been baked into the core property management software. Pretty much all, I mean, all of them do it. So it's, it doesn't really make sense because it's, it's all integrated.

So it's integrated into the software you're using. So if I'm a, if I'm, if I'm a company that is interested in the payment prompt, they want the transaction volume, they're interested in the transaction itself, not sort of the underlying relationship with the customer as much as that. That transaction fee. And so if I'm that company, I'm interacting with your, your software provider. Exactly. I'm not trying to roll up that individual property management company. But when you talked about the total addressable market, if, if my interest was payment processing and transaction volume, not not even the property management aspect of it. I just want the transaction volume. That's a lot of money and a lot of transaction volume that I might be willing to eat cost on the other thing because my primary interest is in rolling up transactions that I can then charge to other people.

Yeah, that there— of course the transaction volume is, is unbelievable. I mean, even at our dopey little company, you know, I say that on the grand scheme of things, we're fairly small, you know, we're running through multiple millions of dollars of rent runs through our accounts every month. Um, maybe not quite that much, on the order of a million dollars of rent flows through my company every month in rent that we collect and then distribute out to property owners. It's interesting though, because the tenants, of course, don't want to pay any fees to pay their rent. That goes without saying. No one does. So, and most renters are coming sort of the history here is that you paid your rent by check, right? You mail a check to your landlord or you drop it off at the office or whatever. That's kind of like the base case, and that was free for everybody. It was free for the landlord, it was free for the tenant. The bank was absorbing that cost. Some people who don't— the unbanked would pay with money orders. Those are actually pretty expensive, relatively speaking. I don't know much about that world, sort of where that transaction fee ends up when it's all said and done, but it's free for the landlord to accept that again. Of course, there was a huge push to digitize all this. And, you know, it's funny because you get— I pay all my vendors with check. And I don't really know, everyone's like, how could you? That's so crazy. I'm like, what's your alternative? Like, I don't— it's not clear to me what other people are doing exactly. But maybe that's for another day. But as far as receiving rent, of course, we're trying to move to paperless. And we actually have moved to paperless. And so now tenants pay rent online. Well, what does that mean exactly? Well, once you dig into what that actually is, tenants are paying with essentially an e-check, which is an ACH transaction. So it's a bank-to-bank transfer. It's as if you wrote a check, but you're doing it digitally. It still is cleared in the same way and it still takes a few days to clear. That's why. But there's fees involved. Because the bank, for whatever reason, doesn't absorb that cost, someone has to pay for it. And so what ends up happening in the world of property management is typically the property management company absorbs that fee. Now, the fee is small. It's like 25 cents or 50 cents per transaction. So it's not a huge deal, but it does add up. And so some property management companies make the tenants pay that fee. Most, I think, absorb it. Some probably charge it back to the owners. And now you might be wondering, where are credit cards in all of this? Well, credit cards are pretty much nowhere in all this because credit cards charge a large fee. You know, it's like 2, it's like 2.9% or 1.9% of the, of the total transaction amount. And when you're paying a $2,000 rent payment, that's real money. And so you'll see tenants, of course, super savvy tenants would like to pay their rent with credit card because they can get the points, right? Because that's— but you'll notice that for any large transaction, if you go to buy a car or pay your mortgage or pay your health insurance premiums or pay your rent, credit card is rarely an option because of that reason, because credit card fees are so high. And so we will turn on credit card payments and allow it if tenants request, but they have to pay the fee. And I forget what it is, like 2.75% or something like that. So It is interesting you brought up payments because we— there actually is no great solution for payments yet within property management. There's no instantaneous, low-cost solution. E-checks or ACH is the closest we've gotten to that, and it's still not great. It's still not free, and it takes a few days to clear.

So, so if it's, it's per transaction, right? So $25 to $50 sense. And so it makes a total— it makes a lot of sense for me if I'm in the transaction processing business, and I want those to go after the software company. For you as a, as a, as a property management company, it's, it's $250. If you're paying 50 cents per transaction on 500 units, it's $250 a month that you're paying for that convenience of the ACH transaction so you don't have to touch a piece of paper, easy $250. And so that's not enough of an expense for you to try and look for a solution if it's baked into your software.

Well, and it, it's so appealing relative to the alternative, which is manually entering paper checks, right? So when compared, when viewed through that lens, you're like, yeah, I'll pay $500 a month to not have to deal with all that. The other interesting angle about payments and property management, and by the way, this has nothing to do with my VC list, but we'll talk about it because it's interesting anyway. When you receive a rent payment, it's, it's very, it's a very unusual relationship that exists between a tenant and a landlord. When you receive a rent payment from a tenant, And you actually deposit that and accept it, you are implicitly stating that you are okay with what's going on with that tenant. And what I mean by that is you cannot accept a rent payment one day and the next day file for eviction and claim they didn't pay the whole amount or claim that they were late. So the courts have, have long held that if you've, if you're accepting rent from a tenant, whatever this current situation is with what's going on, you're cool with it because they don't like you. They don't like the idea of you sort of talking out of both sides of your mouth or grabbing with both hands. I don't know what the appropriate analogy is here, but the courts have long held that if you want to evict a tenant, you cannot accept rent from them. You need to— which basically means you can't accept partial payments. So if a tenant pays half the rent, and you accept it, you cannot then file for eviction on that same tenant. So if you want to file for eviction or— I don't know, I'm saying this, I'm not getting a good job of doing a good job of explaining this, but I think you're getting what I'm, what I'm saying.

No, I think you got it. A partial payment is a payment. It's only partial if you have agreed to that with a tenant. If you take it exactly, then you've moved on.

And even with things like late fees, say that the lease states that there's a $50 late fee if it's paid after the 5th, but you've been accepting the rent on the 7th for a year without the late fee, you cannot then all of a sudden enforce the late fee, you know, arbitrarily. You actually would have to provide 30 days notice to the resident, hey, starting this day, we're no longer accepting late rent without the late fee, blah, blah, blah. So why I'm mentioning all this is that payments are actually really important to a property manager. It's not as simple as someone ordered a widget off my website. It's like, if tenants can unilaterally make payments on their account, they could do something like pay $10 a month. And then you're like stuck, you can't evict them until the following month, you have to, you'd have to go in and manually turn off their ability to make payments. Whereas in the old days, when you're accepting paper check or money order, or even cash, someone's coming into your office trying to pay rent, you're in your you're looking up their account, you're like, this isn't the full amount, I can't accept it. But if they can go online at 2 a.m. and submit a partial payment, now what do you do? And the other thing about payments is tenants tend to build up— in some cases, they'll build up balances across different things that they owe. They may owe rent, they may owe a water bill, they may owe a late fee, they may owe, you know, a lease violation fee for having a pet, something like that. So again, if their rent is $600, but they have $300 in fees, and they pay you $600, now what do you do? Do you just accept it and hope you try— hope they pay the extra $300 the next month? Or do you accept, you know, do you, do you take $600 and you apply half of it to the fees and half of it to the rent? But now you've accepted a partial rent payment. And how does the online payment logic play into all this? So it's actually kind of an interesting— there's a lot to it. There's a company called Domuso, which is a VC-backed payment— payments, rent payments processing company targeting not our industry, but the large, the large 100+ unit rental property owners and institutional landlords who are dealing with actually different software like Yardi and some of the big property management software groups. But Domuso was founded by Keith Wasserman and some partners. Keith is famous in our circles. He's a big real estate syndicator, but he knows a lot about the space and his group does, does angel investing and VC as well. So I thought I would mention Domuso because I think if I'm remembering right, they have taken a lot of time to solve some of the issues that I've just described around payments because they understand what's important to payments from the perspective of a property management company. I—

and maybe it's just an idea for us to plant a flag in and think about it, but transaction and payment processing, transaction volume, dollar volume, and payment processing are areas when we're— there's, there's online banking and e-banking and that sort of thing that people are trying to solve friction in that area. And the volume that you've talked about in the total addressable market could be solving some problems in that area that make the investment in the space make more sense, not just from, I'd like to capture the property management dollars, but I'd like to make myself attractive to the much bigger dollars that are swirling in the in the payment processing world as well. It could— there could be something there, but, but, but we'll see. Is there something else you wanted to address on the list, or did we pretty much cover it?

Yeah, we're, we're hitting— we're coming up on an hour here, so I don't want to take too much longer. I think, you know, if I just take a step back and summarize, you know, people sometimes see me talking about this and they think that I'm down on VC and property management. I wouldn't say that I'm down on it.

I'm—

I have a healthy skepticism because I think property management is extremely, extremely challenging to do well. And if you don't do well, your customers are out the back door, right? And most property management companies, even ones that are well run, are experiencing 10 to 15% annual churn. Meaning if I start the year managing 100 units, by December 31st of that year, I've lost 85 to 90 of them. Not necessarily because I did anything wrong, but because people are transacting, they're selling their homes or they're selling their rental, rental properties, especially in this market. And then you add to that trying to roll up a bunch of these companies. And maybe you'll, you'll, you let a few things slide, because you're growing quickly. And now suddenly your churn could easily, easily be 30 to 40% annually. And so you just paid all this money to acquire a 1,000-unit portfolio of rental properties to add your fancy VC-backed management company, and now 350 of them were out the door within the first year. What are you going to tell your investors? So I think it can be done, and I think there's a lot of really smart people, uh, in the space. You know, I've talked to several of these guys. Um, so the founder of Darwin in particular, Ryan, I'm quite friendly with him, you know, and he and I have had long discussions that, you know, that that guy, and I think a lot of these guys, they know what they're doing. Okay, these are smart people. But there's just some very challenging pieces and parts of property management that even I, you know, underestimated when I came into the industry. You know, I came into industry a lot like these guys, you know, I thought I was a hotshot engineer, how hard can this be? You get into it, and you realize, wow, there's a lot going on here. So I wish these guys all the best. I hope they're successful. I think it'll be really interesting to see how this plays out. We can't, we can't sign off without mentioning Castle. Castle was a VC-backed property management company that, that failed. They were founded, I think it was, let me pull it up here. Castle, they were founded in 2015 in Detroit, they raised, they raised $13 million. And they were done 3 years later. So that made a lot of waves in our industry. And I'm guessing all the companies on this list have heard of Castle and, and learned the lessons that can be learned from that group. Um, so yeah, very interesting, and we will see what happens.

Well, thanks. I got a lot out of it. I hope our listeners will as well. As always, I would love engagement on it. If, uh, if we got something wrong or you have some insight that we may have missed, uh, feel free to engage with us on, on Twitter. And I do encourage, if you haven't, we'll link to the, to the blog post. Look at the companies and look at their models. It's worth spending some time on.

Yeah, well, thanks, Russell. This is another great episode, and we'll talk to everyone next week.