Forbes recently posted the article “How Property Management Franchising Stacks Up To Competing Industries.” That short article is a good primer if you’re considering purchasing a franchise but you’re unsure which direction you’d like to go.
There are surprisingly few articles out there for people trying to learn about property management franchises, so I’ve decided to throw my hat in the ring. Here goes.
As someone who has been in the property management business for almost 15 years and as someone who is also now starting to sell franchises, this is my personal take on the types of businesses available, and why property management is a smart play for the would-be entrepreneur.
First, to set the table on business generally. There are, surprisingly, not that many types of businesses to choose from. In fact, my impression is that there are only two types – with one distinction that matters. What I mean by that, is you can essentially have a real-time consumer business, or you can have a subscription-based business. This is the most relevant way to boil down differing business models for the sake of this discussion. So let’s start with the first type – the real-time consumer business model.
Examples of real-time consumer based revenue franchises:
- Cold Stone Creamery
- MOD Pizza
- Big O Tires
- Mobile services: pet grooming, auto detailing, mobile tire shops, etc.
- Great Clips (or any number of hair salons)
Most businesses (franchise and otherwise) fall into this first category. The business owner makes money at the time the consumer purchases something; a good or service. In some of the service based examples of these, the business owner invoices the customer and then has to track accounts receivable. The best and most successful among these real-time consumer businesses are the ones where it’s hard to see the bottom fall out, even in a rough economy. People will ostensibly always eat, always need haircuts, and probably tires for their vehicles. These businesses are often seen as relatively safe bets, and it’s why there are so many businesses that operate this way – this is the most common (and easiest to understand) concept of business.
One of the most obvious upsides to this type of business is that you generally have revenue on the day you open.
Some of the downsides to this type of business:
- Expensive initial costs and build-outs and expensive customized equipment
- High overhead expenses, including leases, and significant inventory (purchased from designated vendors)
- Significant staffing and payroll costs and headaches (including employee turnover, theft, and incompetence)
- Often unpredictable revenue, economic vulnerability, seasonality, extensive competition
- Probably the single largest downside is that your revenue is capped. Scalability is inherently limited. There are only so many hours in a day for scheduling services, and only so many customers you can fit into your salon/drive-through/restaurant.
The second category is a bit lesser known and is not usually what people think of when they think of owning a business. We’re talking about a subscription-based business, sometimes called “monthly recurring revenue” services. Smart business owners all over the world are now, as we speak, trying to figure out exactly how they can stabilize revenue by adding a subscription element. As one example, Panera Bread now offers a subscription-based coffee service. Just pay the monthly fee and you get as much coffee as you want.
Some examples of subscription-based revenue franchises:
- Planet Fitness (and any number of fitness/spa-type facilities)
- Allstate (and some other insurance companies)
- Property Management
There are simply not a lot of subscription-based franchises to choose from. These businesses do not make the bulk of their money from individual consumer transactions paid at the time a service or good is provided. This business model has pricing built upon an educated guess, often derived from aggregate data in terms of average business resource consumption per customer. In other words, the business owner is “guessing” how much time, how much investment of resources and manpower, etc. will go into maintaining each contract they bring on. Panera Bread is guessing that $8.99 is the magic number for unlimited coffee with their monthly coffee subscription. Some customers will exceed this cost, but most will (hopefully) come in lower and thus the subscription concept will prove profitable. It’s all about volume when it comes to a subscription-based business model.
These subscription-based businesses add customers via contract, and those contracts guarantee recurring future revenue, usually in the form of monthly payments. This is such an important concept that it bears repeating. These companies have guaranteed future revenue. Of course, contracts do expire, they are terminated, and as a general rule, nothing is forever in business. But for the most part, while the contract is in place, it is guaranteed revenue for these companies.
Think briefly about the psychology of a contract – especially one for a small amount of money. Maybe you pay for Netflix or iTunes or Pandora Premium. Maybe you pay for Panera’s coffee! (It’s good coffee, I’m strongly considering signing up.) Yes, you could cancel… but you probably won’t. It takes work to cancel a contract. If you feel you are getting any value at all from the subscription, you keep it going in perpetuity. This is part of the brilliance of the subscription model. McDonald’s has to hope customers will want their breakfast burrito each and every day, vs. the relentless onslaught of competitors in that fast-food breakfast market. No dollar is a given for the real-time consumer model. Every day in the consumer model is a battle for the consumer’s attention and money.
For my purposes here, I want to talk about the subscription-based property management business model (of course!) and why I think it’s such an under-the-radar golden opportunity for would-be entrepreneurs. One of the most interesting ways that property management is different – even among the subscription-based models – is that property management revenue is almost entirely guaranteed. If you are a member of a local gym, you can cancel pretty easily. Most memberships are month-to-month. The gym has little recourse to keep you paying your monthly dues. If you have a Netflix account, you can simply cancel the payment if you want. There’s nothing Netflix can really do about that.
In property management, however, your income comes directly from tenants in the properties you manage (technically, the landlord-your client-is paying you by allowing you to keep a portion of the rent as your fee, but in practice the money comes to the property manager from the tenant, and then the property manager pays the landlord.) Tenants pay rent over 99% of the time. Even during a pandemic, if you have a strong portfolio of properties.
Property managers have the legal strength to compel tenants to pay rent. This is an enormous distinction versus even the other subscription-based business models out there. No other business, subscription model or otherwise, carries the power of removing people from a home if they fail to pay the “monthly subscription.” Property management is a business where you don’t have accounts receivable, you don’t chase customers for payment, and your predicted revenue is guaranteed. Paying rent is the top priority for anyone renting a home. They will cancel their other subscriptions and non-essential expenses well before they decide to forgo paying rent. This makes property management unbelievably stable.
So, apart from the predictability of revenue, there’s the question of “how much does it cost to jump in with both feet and get a property management operation up-and-running?” Well, good news on that front.
No expensive built-outs are necessary for property management. No expensive equipment, no fryers, no grills, no expensive decor, no enormous overhead from a giant space.
With a property management franchise (any of them), you’ll pay the IFF (Initial Franchise Fee – usually around $35,000), and past that you basically need an office, a phone, a printer, and a scanner. You’ll need a vehicle – you’ll be on the road some of the time. There are some other expenses like software and insurance and a real estate license (and you can partner with someone who has a license), but beyond that, there’s not much you need to pay for to open a property management franchise. These means you have more money to grow your business – investing in marketing is where you’ll spend most of your first year. Building that book of business.
Ok, so I’ve established that starting a property management franchise is cheaper than just about any other business and how predictable the revenue stream is. Maybe you’re still wondering “How does that make it a compelling choice for that person who is just itching to start their own business, but with a proven business model?”
Buckle up, this is where things get really good. We’re going to do some math. Even if you don’t love math, you’re going to like this math – it’s the “picture your future money” money kind.
With property management, you’re building something. Every new account (we call them doors) you add is not like a customer buying a Big Mac. The Big Mac customer may not come back tomorrow or next week, but your property management customers are in it for the long haul. Doors in property management stick around -or subscribe if you will- to your service for about 3 years on average and sometimes much longer. This means that 1 door, if it makes you $120/month in management fees, is worth $4,320 over the course of 3 years. That’s 1 door. That’s over $4,000. With the right systems in place, that 1 door will cost you very little of your time. But let’s play this math out a little more.
If 1 door at $120/month is $4320 over 3 years, it’s $1440/year. Again, just 1 door. If you added only 5 doors/month, at the end of year 1 (60 doors), you would be making $7200/month. $7200/month = $86,400/year. So starting at $0 revenue when you opened your franchise, you could easily be closing in on nearly $100k/year at the end of year 1 at a rate of only 5 doors per month. Remember, you don’t have a lot of overhead to worry about, so most of that nearly $100k is yours to re-invest into the company or pay yourself a salary.
Even moderately aggressive marketing and even average sales-ability suggest that you could be closer to 100 doors added at around 1 year in business. If you added 100 doors that first year, you finish the year making $12,000/month or $144,000/year. This is your first year in business. Nice job!
So here’s what’s crazy about that money you’re now making as a RES Franchisee – you’re making that money without putting in 80 hour weeks. If you take a vacation at the end of year 1 to celebrate those 100 doors you added, you will make that same money the entire week you’re on vacation. You don’t need to be at the store, flipping burgers, making pizza, cutting hair, or changing tires, in order to make ends meet.
You put in the effort during business hours, and the accounts roll in. Every month is better than the month before, and every year is better than the year before that.
Can you picture where this is going? How does revenue look in about 5 years in? What about 10 years? You start hiring and training people when you want more freedom, and then you start taking more time off. All the while still growing your business. This is true wealth-building, and it’s almost entirely unique to property management. Once you get big enough and you’ve been in business long enough, you’ll add doors without even paying for marketing. The clients you already have, refer you new business and so on. Tenants become clients. It’s a self-building machine. You’ll always lose a few doors every year because the client decides to sell the home, move back into the home, etc. So you just need to add more doors than you lost to keep the revenue going in the right direction.
In any business, you have to ask yourself what your time is worth. In property management, we are building, not scrambling to make our daily revenue goals.
Better still, property management is about as recession-proof as industries come. People will always need a place to live, and 30% of Americans rent. People will always rent, and landlords will always need property managers. If you happen to run a RES Franchise, you also will be the most competitive property management option in your area. That means more doors, more easily.
The final, and possibly one of the most compelling reasons to consider property management is that property management is not income-limited in any real way. What do I mean by that? Well, let’s take an example everyone can probably relate to or picture. Chick-Fil-A. Surely there’s one near you that you’ve at least driven by or patronized. Many of them have drive-through lines that stretch well past the parking lot during peak hours. The thing is, Chick-Fil-A can only serve so many customers.
Even with multiple order takers 25 feet from the order window, and even with maximum efficiency in their kitchen, even with employees directing traffic, they run into a wall in terms of the sheer number of customers they can accommodate. This is true for every single one of the real-time consumer businesses. No restaurant can exceed the capacities of their kitchen and seating. No mobile business can exceed the capacities of their vehicles or the hours in a day. They’re all capped by the space and time they have available. This is all assuming they can get their army of minimum-wage workers to show up and execute, and assuming they don’t have equipment failures. Also, operating at capacity is something that does not happen most of the time, for most of these businesses.
The real-time consumer businesses, like Chick-Fil-A have to buy more locations in order to scale the operation. The mobile franchises need to buy more vehicles to scale their operations. Scaling these businesses is an incredible undertaking. All those expenses that went into the initial opening, have to be repeated.
Subscription-based businesses and specifically property management are not really capped at all – certainly not in the ways discussed above. Adding doors (subscriptions) does not add overhead. At least, not in a direct correlation. With the right property management model (this is a huge part of the equation), you can continue adding door after door after door, without compromising service, and without adding overhead. The number of doors that can be added to a property management portfolio is limited only by the number of rental homes in the area, and in a reasonably sized city, that could mean 1,000 doors or more under management. FYI, for those keeping track at home, 1,000 doors under management using the numbers above, is $120,000/month. Not a year, a month. 1,000 doors under management mean revenue of $1.44 million annually. How much overhead is subtracted from that number? A handful of staff and a few extra computers, and that’s about it.
The hardest part about starting a property management company is just that, starting. If you open a McDonalds, you will have revenue on day 1. The same is true for all of the other real-time consumer-based revenue franchises, and that’s their largest appeal. With property management, the first year is hardest. It’s a slow climb, where you’ve got to hustle and work and keep your head down to add those doors.
Personally, that tradeoff between instant gratification and building something that can be much bigger and built to last is a tradeoff I would make again if I had the choice. No question. Once you start your climb to the top of the property management mountain, there’s not a lot that can knock you off your path.
So that’s property management, in a nutshell. If done right, it’s a 9-5 job with evenings and weekends free. Go see your kid’s soccer games and enjoy life.
At RES, we’ve already done the hard work. We know how to do the most work in the least amount of time. Systems, process, efficiency. Customer service and results. Marketing and a value proposition that adds doors. Our business model is focused on adding those doors and putting the work in during business hours, so the rest of life can be truly enjoyed. There are a few property management franchises out there, but none like Real Estate Solutions. If you think RES might be the right fit for you, reach out to us at Franchise@RESrents.com and we can set up a conversation.
by Greg Weik
Filed under: Property Management, Uncategorized