Are you thinking about starting a property management company? Property management is a thriving industry, and managing properties for others could be your chance to build a business that grows year after year.
Succeeding in this industry requires more than just an understanding rent collection and property maintenance, but how do you get started? This guide is here to help anyone who’s thinking about starting their own property management company. If that’s you, then keep reading. We’ll explain what it takes to get your business off the ground.
Property management involves looking after residential and commercial properties for their owners. Real estate investors and property owners typically hire the services of a property management company to take on the day-to-day operations of residential, industrial, or commercial real estate.
The duties of a property management tasks may include:
- Advertising rentals and screening applicants
- Arranging the viewing of properties and regular inspections of units
- Organizing and coordinating scheduled maintenance as well as repairs and professional cleaning services
- Addressing tenant complaints
- Managing issues with problem tenants and implementing eviction processes if needed
- Basic accounting and handling payments for insurance, maintenance bills, and utilities, as well as overseeing rental income
- Regular reporting to property owners
Property managers play a key role in delivering peace of mind to property owners while ensuring tenants are satisfied with their living or business space.
Revenue for a property management company is generated by charging a percentage of collected rents paid by the tenants.
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The property management industry, a vital sector within the larger real estate market, plays an important role in maintaining and enhancing the value of properties, whether residential, commercial, or industrial. It encompasses a range of activities, including tenant management, property maintenance, rent collection, and financial oversight.
The property management industry is a significant and growing sector of the economy. In the United States alone, the market size of the industry is estimated at $115 billion in 2023.1
The demand for professional property management services is expected to rise in the coming years, making it an attractive sector for aspiring entrepreneurs. One reason why the property management industry is growing is due to the increase in rental properties. With the rise of the gig economy, more people are opting to rent than buy, and as a result, landlords need professional help to manage their properties. Additionally, the growth in the residential and commercial real estate sectors is expected to drive the demand for property management services even higher.
Why Start a Property Management Company?
Here are just a few reasons to consider:
Steady income: With many people choosing to rent instead of buy, there’s a constant stream of potential revenue.
Variety: No two days will look the same. You’ll deal with different properties and various client situations.
Growth potential: The property management sector shows steady growth projections for the next decade and beyond.
Steps To Start A Property Management Business
Step 1: Research Licensing Requirements
The first step when starting a property management service is understanding and researching the licensing requirements, as they vary by state. Most states require property managers to have a real estate broker’s license, but in some states, such as Montana, Oregon, and South Carolina, property managers can work under a property management license rather than a broker’s license. Visit your state’s real estate commission or licensing board website to understand the specific requirements.
Once you’ve identified the type of license you need, learn more about the details of the licensing process. This typically involves education, an examination, and an application process. It’s important to factor this into your timeline, as it will impact your other startup steps.
Step 2: Write a Business Plan
Starting a property management company involves several steps, and writing a business plan is right at the top. But why is a business plan so important? While lenders usually require one, there are more reasons to create a solid plan. I’ll provide a few reasons why it’s a valuable first step.
Number 1, creating a business plan provides a roadmap for making essential decisions. It helps you understand who your customers are, what services to provide, and how to price these services. It equips you with the information you need to make sound choices for your company. It also lays out a guide to navigating the property management landscape, showing you the path to optimal business growth. In essence, the choices you make now will determine the direction of your property management venture.
Next, a business plan is not a random list of ideas; it’s a document where you work out the kinks and outline your goals. It doesn’t matter if they are big or small, short-term or long-term; it’s where you plan, assess, and chart a course to reach them. It acts as a primer, allowing you to set and track your progress, making it simple to assess if your goals are being met. This way, you can stay focused and always know if you’re on the right path.
Last, a business plan demonstrates your property management company’s potential for financial success. Here, you’ll prepare income statements, cash flow projections, and other specifics to provide an invaluable sneak peek into whether your services and fee structure can deliver a profit.
Related: How to write a business plan
Step 3: Source Funding
Setting up a property management company comes with its share of costs. From getting the required licenses and credentials to setting up your office space, there are quite a few expenses to plan for. But don’t let the cost factor deter you. There are several ways you can fund your new business.
The first and most common method of starting a property management business is to use your personal savings. This is the most straightforward way, as you don’t have to worry about approval from lenders or repayment of loans. If your savings are not enough to meet all your needs, there are several outside sources of funding available that can bridge the gap.
Business loans from banks are commonly used resources, and for good reason. They typically offer lower interest rates and extend over long repayment periods. However, banks usually require borrowers to have good credit scores and something valuable, like a home, to serve as collateral. There may be times when banks find a loan application too risky to approve on their own. In these cases, they could use a Small Business Administration loan guarantee to lessen their risk and approve your loan.
Another common source is getting help from family and friends. This can be a quick and flexible way to get the capital you need, but it’s essential to approach this option with caution. Make sure to draw up a clear repayment plan to avoid straining your relationships.
If you need a smaller amount or if traditional lending options are unavailable, microloans can be an effective alternative and are often provided by local economic development organizations. In addition to funding, some of these organizations also provide business training to help you get your company off the ground.
Step 4: Register the Business
Starting a property management company involves several steps to properly and legally set up your business. Here are some key steps you should focus on:
Choosing a business structure: The structure you choose for your business will impact your liability, taxes, and administrative requirements. The four main types of business structures are:
- Sole proprietorship: This is a one-person business that’s simple and affordable to start. It’s the easiest way to set up a business, but it doesn’t provide any protection between your personal and business finances.
- General partnership: If you’re planning to start with one or more partners, this might be a good option for you. However, as with sole proprietorships, it doesn’t provide a divide between personal and business finances.
- Corporation: This setup treats your business as a separate legal entity. It provides liability protection, which means your personal assets are generally shielded from company debts or legal issues. However, it’s more complex and costly to set up.
- Limited Liability Company (LLC): An LLC provides the liability protection of a corporation with the relaxed administration of a sole proprietorship.
Related: Comparison of business structures
Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.
Some popular LLC formation services include:
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Business name registration: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.
During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.
Property manager licensing: You need the right licenses to operate a property management company and the specifics depend on your state’s policies. Some states require a Real Estate Broker’s License, a Property Management License, or both.
Obtain business licenses and permits: Depending on your location, there will likely be a variety of general business registrations needed before opening. This could include a business license, seller’s permit, and Employer Identification Number (EIN).
Step 5: Set Up Operations
Setting up the operations for a property management company is the next step, and here, you start taking your business from the conceptual stage to reality.
One of the first tasks in this phase is deciding on the location. Many property management companies initially operate from a home office, offering the advantage of low overhead costs. As the company grows, leasing commercial office space may become necessary to accommodate more staff, provide a professional meeting space for clients, and enhance the company’s visibility.
Next, it’s time to create clear operational policies and procedures to cover all aspects of your operations, including tenant screening, maintenance management, rent collection, and eviction procedures. Your policies should be fair, transparent, and compliant with local and federal laws. They not only help your team understand their roles and responsibilities but also ensure consistency. There are a number of property management software tools to help in this stage, in addition to streamlining the management of properties, tenants, and financial transactions, all from one platform.
Last, identifying and partnering with reliable contractors and service providers is necessary for the ongoing maintenance and prompt addressing of property-related issues. A strong network of professionals, such as plumbers, electricians, and landscapers, ensures you have the capacity to keep the properties in rentable condition.
Step 6: Prepare to Launch!
Starting a property management company is a detailed process that involves several steps, and while we’ve covered the core steps, there are many smaller tasks that need to be addressed. These will vary by business, but here are a few to consider:
Business insurance: Insurance policies like general liability, professional liability, and errors and omissions insurance are available to cover risks like property damage, tenant lawsuits over injuries, and claims of mismanaged funds.
Setting up bookkeeping: Bookkeeping tracks daily transactions, taxes, and financial statements. You can choose to hire a bookkeeper or utilize accounting software like Wave Accounting (FREE) or Quickbooks to manage your finances.
Contracts: In property management, several types of contracts are fundamental, including property management agreements, lease or rental agreements, and service contracts with vendors. RocketLawyer and Law Depot have free and inexpensive templates that may be helpful, but consider consulting with a lawyer to ensure your contracts are compliant with all laws and regulations.
Opening a business bank account: A dedicated business bank account helps track business expenses, manage cash flow, and maintain clear financial records separate from personal finances.
Creating a marketing strategy: To let potential customers know about your new business, you’ll need a robust marketing strategy. This will include creating a logo, building a website, and using social media and other marketing platforms. Connecting with local real estate agents and brokers is also beneficial, as they can refer clients to your company and provide insights into the local property market.
Common Questions When Starting A Property Management Business
How much does it cost to start a property management business?
Starting a property management company can cost between $2,000 to $10,000 or more, depending on your location, services offered, software needs, initial staffing, and insurance requirements. Some of the main expenses include:
Insurance: $2,000-$5,000 Policies like general liability, errors & omissions, and liability insurance will likely be the largest upfront costs.
Office setup: $2,000 – $5,000 Depending on whether home-based or operating out of an office space, you will need to budget for furniture, computers, and supplies to set up a functional office space.
Property management software: $1,500-$3,000 Initial software setup costs for programs to track details of units under management, digitize paperwork, and accept online rent payments.
Licenses and permits: $200 – $1,000 Covers state licensing requirements and business structure formation.
Marketing: $1,000 – $5,000 Initial marketing costs can include website development, online advertising, and print materials such as business cards and brochures.
How profitable is a property management business?
The profitability of a property management company can vary widely based on factors like location, market conditions, and the scale of operations. However, we can make some general assumptions to estimate potential revenue and profit.
Let’s assume a small-scale property management company manages 50 properties. The industry standard for management fees is typically around 8-12% of the rental income. If the average monthly rent per property is $1,500, and the management fee is 10%, the monthly revenue per property would be $150. For 50 properties, the monthly revenue would be 50 x $150 = $7,500. Annually, this equates to $90,000 in revenue.
Operating expenses for a property management company can include office rent, salaries for employees, marketing, insurance, and software subscriptions. Assuming moderate operating expenses, let’s allocate about 50% of the revenue to cover these costs. So, the annual expenses would be approximately $45,000.
Therefore, the estimated annual profit before taxes for this small-scale property management company would be $90,000 (revenue) – $45,000 (expenses) = $45,000.
What is the NAICS code for a property management business?
The NAICS code for a property management business is either 531311, which is classified under Residential Property Managers, or 531312 Nonresidential Property Managers.
The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.
Related: What is a NAICS code?