How To Open a Property Management Company

Do you have an interest in real estate management? Do you enjoy working with people and fixing problems? Are you knowledgeable about landlord/tenant laws? Are you organized and a good communicator?

If so, you may consider launching your own property management company.

Responsibilities of property managers include:

• Collecting rent and following up with delinquent tenants
• Showing properties to prospective tenants.
• Screening tenants and processing applications.
• Performing credit or background checks.
• Handling leases and lease renewals.
• Resolving tenant complaints.
• Repairing and maintaining leased premises.
• Hiring repair people and subcontractors.
• Conducting move-in/move out inspections.

If this business holds interest for you, follow these steps to open your own property management company.

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Get Licensed and Certified

There are associate degrees and bachelor's degrees in property management, although they are not mandatory for a property manager. However, most states require a real estate broker's license to manage properties as a property manager, mainly if you handle leases and collect rent payments.

Real Estate Broker's License

To get a license, you first take a pre-license education course. The education course covers real estate and contract law, real estate finance, and property management. Then you take a written exam and apply to your state's real estate licensing board.

Certifications

Property managers do not need a property management certification. However, a certified designation such as CPM may give you a competitive advantage. To become certified, you complete certification classes and pass an exam.

• CPM – Certified Property Manager – Certified by the Institute of Real Estate Management.
• CALP - Certified Apartment Leasing Professional – This is a certification for on-site property managers of apartment complexes.
• RPM – Residential Property Manager - The National Association of Residential Property Managers (NARPM) certifies property managers of 100 units or more over two years.
• MPM – Master Property Manager – NARPM also offers the highest designation for property managers of 500 units or more over five years.

In addition to licenses and certifications, you should know the property management laws in your state. Fair housing laws and landlord/tenant laws are fundamental when dealing with rental properties. A local real estate attorney can help you get up to speed and be a great resource as you move forward.

Create a Business Plan

Once licensed, it is time to create a business plan. A business plan helps organize your ideas for your property management business.

Elements of a sound business plan include:

• Business description
• Management team
• Target market
• Skills needed
• Services offered
• Startup costs
• Pricing of services
• Expected revenue
• Marketing plan

When writing your plan, determine your goals and challenges. For example, do you want to manage properties for real estate investors? Or handle a large complex of apartments?

It is helpful as well to know your limitations. For example, how many properties can you handle? Who will run the business? Can you manage repairs and maintenance yourself? Or will you hire employees or subcontractors to do the work?

Knowing the answers to these questions helps focus your business plan.

Decide on a Business Name

The next step is to choose a name for your property management company. When choosing a business name, give it serious consideration. Think of a name that is professional, memorable, and easy to spell.

There are many do's and don'ts for creating a business name. For example, avoid having your name confused with another business.

Also, consider how the name looks when abbreviated. For example, suppose you incorporate your name in your management company, and your name is Benjamin A. Davis. Unfortunately, its abbreviation is BAD Management Company. Not something you want to broadcast to potential clients and tenants.

Additionally, be sure your name isn't already registered or protected by trademark. Check the Secretary of State Division of Corporation's registry in your state.

Also, you can check if a name is under a trademark by accessing the Trademark Electronic Search Service (TESS) at the United States Patent and Trademark Office.

Determine Your Business Entity

There are many choices of legal entity when starting a new company. However, some are better than others in offering liability protection and tax advantages.

Property management companies are often subject to lawsuits—for example, negligence or unlawful evictions. Therefore, select a business structure that protects your personal assets from your business operations.

Sole Proprietorship

The most common business structure is a sole proprietorship. The benefit of a sole proprietorship is that all income or losses are part of your individual tax return. However, you are personally responsible for any business debts or lawsuits.

Corporation

A corporation is a separate entity from the business owner. All profits, losses, and liabilities are part of the corporation. Therefore, the business owner is not personally responsible for any claims arising from business operations.

However, there is a problem with double taxation. Double taxation occurs when you pay taxes on corporate income and your personal income tax return for corporate revenue received. By applying to the IRS for an S corporation, you can solve the double taxation issue.

Limited Liability Company (LLC)

A limited liability corporation (LLC) has the advantages of both a corporation and a sole proprietorship. An LLC offers protection against personal liability like a corporation. It also allows the business owner to receive tax treatment similar to the sole proprietorship.

Partnership

If you have a partner or partners in your property management company, you may want to form a partnership. However, this business structure lacks corporate protection. Therefore, you and your partners are liable for the debts and claims against the business.

If you want protection from personal liability, you may consider forming a corporation or limited liability partnership to protect you from personal responsibility.

Register Your Business

Once you settle on your business structure, register it with the Secretary of State in the state where the business operates. You can find the documents to file your business entity at your Secretary of State's office website.

Apply for Employment Identification Number (EIN)

After registration, apply for an Employment Identification Number (EIN) with the IRS. This number is a taxpayer number for your business. You use the EIN to file taxes, open bank accounts, and apply for business licenses.

Apply for Permits and Licenses

In addition to having a real estate broker's license, you will need a business license for your company. The business license allows you to operate a business in your city or state.

Check with your local and state business license departments to see what permits and licensing you need for your property management business.

Determine Fee Structure

A critical aspect of your business is getting paid. Property management companies generate revenue by charging fees to the property owner and sometimes potential renters. A typical fee structure might include:

• Property management fees – range from 7-10% of the collected rent
• Tenant acquisition fees - equal to one month's rent
• Lease renewal fees - equivalent to one month's rent
• Application fees - generally $25-50
• Maintenance fees – fees vary for repairs and upkeep

Your property owners pay the majority of these fees. However, prospective tenants often pay for the background checks and application processing.

Fund Your Business

How much do you need to get started? The costs for starting a property management company can range from $2,000 to over $10,000. A one-person venture who can use a shared office space or have free office space needs little money. However, if you are launching a new office space with several employees, you will need financing for your business.

Be sure to know all your setup costs, for example, costs of business formation, websites, office space, and property management software. And calculate your ongoing expenses such as property maintenance and payroll.

Find Office Space and Set Up Your Office

Office Space

If you are a one-person operation, you can work from your home office or lease a small, shared space. This is an option if you do not have clients come to your office.

However, as you expand, you may need an independent property management office. First, check if there are any zoning laws in the area that will affect your business. Then consider other factors when leasing commercial property, namely, adequate parking and accessibility for your customers.

Equipment and Supplies

Organize your office with the supplies and equipment you need for your business. You will most likely use a computer, printer, photocopier, fax machine, cell phone, and perhaps a landline. Additionally, you may need business cards, flyers, and stationery.

If you plan to do repairs yourself, you will need tools and equipment.

Property Management Software

Get property management software to operate your business. A good software program will allow you to automate all aspects of your company and generate reports for your clients.

Look into a program that manages your accounting, tracks lease renewals, and handles property maintenance requests.

Hire Staff

The biggest challenge that property managers face is hiring and keeping employees. If you do not have a good staff, your tenants will be unhappy, and in turn, the property owners will be unhappy.

There are many legal aspects to know when hiring employees. For example, if you have a handyman fix tenant properties, are they independent contractors or employees?

An advantage of using independent contractors is that you do not have to pay employment taxes, benefits, or worker's compensation. However, an independent contractor may have other clients and jobs. Therefore, if you need a dedicated on-site maintenance person for your company, you will have to hire an employee.

Advertise and Market Your Company

There are many ways to get the word out about your new business.

Contact investment property and apartment owners in your area. Send mailers about your company. You can request mailing lists from property management trade associations or your local board of realtors.

Set up a website listing all your services. Out-of-town investors may look for property managers in your area to manage their rental properties.

Word of mouth advertising is essential in the real estate industry. Reach out to real estate agents in your area and tell them about your services. Also, join property manager referral networks so potential clients can find you.

You can even place local advertisements. However, know what you can and can't say when advertising your property management services.

Get Help Forming Your Property Management Company

There are many legal aspects to opening and operating a property management company. However, a properly managed property management company is a profitable one. Therefore, first, consult a local business attorney or use a reputable online business formation service to set up your business structure. Then find a real estate lawyer who can assist you with ongoing landlord/tenant disputes and property issues.