SS290: Outsourcing vs. Building an In-House Team

SS290: Outsourcing vs. Building an In-House Team

The classic real estate investment dilemma, do I hire a third-party management company or do I build my own property management team? In this episode, Charles discusses the trade-offs of outsourcing your property management vs building your own team.

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Talking Points:

  • The decision to outsource property management or build an in-house team is one of the most important choices for a multifamily investor. Ultimately, the right choice comes down to scale, geography, and your primary business focus.
    • As a general rule of thumb: If you own fewer than 100 units in a specific market, outsourcing is usually the most cost-effective path. If you are approaching 1,000 units and want total operational control, it’s time to look at building an in-house team.
    • Let’s break down the pros and cons of both decisions.
  • Third-Party Property Management
  • The Pros
    • Speed and Scale: You plug into an existing infrastructure. You don’t have to build a new team and a business from the ground up.
    • Focus on Growth: It frees up your time (and your team’s time) to focus entirely on acquisitions, capital raising, and investor relations.
    • Market Expertise: A good local PM already knows the submarket’s tenant demographic, hyper-local rent comps, and reliable local contractors.
    • Day-to-Day Operations: The PM handles evictions, fair housing compliance, and late-night emergency maintenance calls, insulating you from day-to-day brain damage and legal risk.
  • The Cons
    • Misaligned Incentives: Third-party PMs generally charge a percentage of gross revenue. Their goal is to maximize top-line income to increase their fee. Your goal is to maximize Net Operating Income (NOI) to force appreciation. They aren’t always incentivized to keep maintenance expenses low.
    • Lack of Control: You are one of many clients. If your 20-unit building is competing for their attention with an institutional client’s 100-unit building, you might get their B-team handling your property.
    • Hidden Fees: Beyond the baseline management fee, many PMs charge lease-up fees, renewal fees, construction management fees, and maintenance markups.
  • Building an In-House Team
  • The Pros
    • Ultimate Control: You dictate the exact tenant experience, branding, and standard operating procedures. You solely decide when to push rents and when to prioritize occupancy.
    • Perfect Alignment: You can tie your in-house staff’s bonuses directly to the property’s NOI. When the asset wins, they win.
    • Value Creation: Once you surpass the “break-even” threshold of units, every additional property you buy becomes highly profitable to manage, as your fixed overhead is already covered.
  • The Cons
    • Massive Fixed Overhead: Before you manage a single unit, you need a manager, accounting, HR, legal/compliance, technicians, software, etc.
    • Distraction: Dealing with payroll, employee turnover, and complaints will inevitably pull your focus away from finding and funding new deals.
    • Geographic Limitations: An in-house team is highly efficient in a concentrated area. But if you want to buy a property three states away, you have to build out a brand-new local infrastructure from scratch, which ruins your economies of scale.
  • Finding your tipping point for considering moving from third-party management to in-house depends mainly on your scale, density, and your investment strategy.
    • Scale. How many units do you own or control?
    • Density. Where are the units located, and how close are they to one another? Also, how large are the properties?
    • Strategy. What is your investment strategy? Do you purchase on-market properties? Do you spend a lot of time and money finding discounted off-market properties? Do your properties need extensive renovation? Find out where you add the most value, and focus on that.
  • Additionally, you can also do a hybrid setup. Where your property manager handles all day-to-day operations, you have your own technicians and contractors whom the PM calls when there is an issue, and you manage/oversee all larger projects and renovations. You could also hire a part-time or full-time asset manager who consistently oversees your properties and property managers. It is much easier to hire one really good asset manager and some technicians than to have a whole property management team.
  • Lastly, taking property management in-house is starting a brand-new business. You will need to find, hire, train, and retain employees. It requires more entities, insurance, bookkeeping, accounting, an office, phones, software, etc. All of this is just to enter an industry with very tight margins.
  • If you are interested in learning more about how to build a multi-family team, check out episode SS284.

Transcript:

Charles:
Should you outsource property management or build your own team and take full control? I’ve broken down the real costs, benefits, and operational challenges of both options, and the right answer usually comes down to three things. Welcome to Strategy Saturday. I’m Charles Grillo and today we’re discussing outsources versus building an in-house property management team. We’ll compare the pros and cons of each option.

Charles:
Explain what an in-house team may make financial sense, and cover the major costs and responsibilities investors often overlook. Let’s get started. The decision to outsource property management or build an in-house team is one of the most important choices for a multifamily investor. Ultimately, the right choice comes down to the scale, geography, and your primary business focus. As a general rule of thumb, if you own fewer than 100 units in the specific market, outsourcing is usually the most cost effective path.

Charles:
If you’re approaching 1000 units and you want total operational control, it’s time to look at building an in-house team. Let’s break down the pros and cons of both decisions. Third party management the pros speed and scale. You plug into an existing infrastructure. You don’t have to build a new team and a business from the ground up. Focus on growth.

Charles:
It frees up your time and your team’s time to focus on entirely on acquisitions, capital raising, and investor relations. Market expertise. Good property manager already knows the local tenant demographic, hyper local rent comps and reliable local contractors day to day operations. The PM handles evictions, fair housing compliance and late night emergency maintenance calls, insulating you from day to day brain damage and legal risk.

Charles:
The cons misaligned incentives. Third party PMS generally charge percentage of gross revenue. Their goal is to maximize top line income to increase their fee. Your goal is to maximize net operating income and a Y to force appreciation. They aren’t always incentivized to keep maintenance expenses low. Lack of control. You are one of many clients. If your 20 unit building is competing for their attention.

Charles:
With an institutional clients 100 unit building, you might get their B team handling your property. Hidden fees beyond the baseline management fee. Many PMS charge lease up fees, renewal fees, construction management fees and maintenance markups. Now building an in-house team. The pros ultimate control. You dictate the exact tenant experience, branding and standard operating procedures. You solely decide when to push rents and when to prioritize occupancy.

Charles:
Perfect alignment. You can tie your in-house staff’s bonuses directly to the properties and why, when the asset wins, they win. Value creation. Once you surpass the break even threshold of units, every additional property you buy becomes highly profitable to manage. And as your fixed overhead is already covered, the cons massive fixed overhead before you manage a single unit.

Charles:
You need a manager, accounting, HR, legal, compliance, technician, software, etc.. Distraction. Dealing with payroll, employee turnover, and complaints will inevitably pull your focus away from finding and funding new deals. Geographic limitations. An in-house team is highly efficient in a concentrated area, but if you want to buy a property three states away, you have to build a brand new local infrastructure from scratch with ruin to your economies of scale.

Charles:
Finding your tipping point for considering moving from third party management to in-house depends mainly on your scale, density, and your investment strategy. Scale. How many units do you own or control density? Where are they located? How close they are to one another? Also, how large are the properties strategy? What is your investment strategy? Do you purchase on market properties?

Charles:
Do you spend a lot of time and money finding discount and off market properties? Do your properties need extensive renovation? Find out where you add the most value and focus on that. Additionally, you can do a hybrid setup where your property manager handles all day to day operations. You have your own technicians and contractors whom the PM calls when there is an issue, and you manage oversee all larger projects and renovations.

Charles:
You could also hire a part time or full time asset manager who consistently oversees your properties and property managers. It is much easier to hire one really good asset manager in some technicians than to have a whole property management team. Lastly, taking property management in-house is starting a brand new business. You’ll need to find, hire, train and retain employees.

Charles:
It requires more entities insurance, bookkeeping, accounting and office phone software, etc. all this to enter an industry with very tight margins. If you’re interested in learning more about how to build a multifamily team, check out episode 6284. That’s SS 284. I hope you enjoyed! Please remember to rate, review, subscribe, make comments and potential show topics that Global Investors podcast.

Charles:
Com. If you’re interested in actively investing in multifamily real estate, go to Syndication superstars.com. Enjoying the waitlist for our one on one mentoring program? Again that syndication superstars. Com look forward to another episode next week. See you then.

Links Mentioned In The Episode:

  • SS284: How to Build a Multifamily Investment Team

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