You’re not alone. The property management sector has been plagued with profitability problems for as long as it has existed.
The rental economy depends on a steady supply of landlords, properties, and tenants, and when there’s a short supply of any of these, agencies lose out.
Well, we’ve had enough of that. Commissions under pressure (again) to come down below that 7% mark following a short supply of properties, with PMs hoping to make up their lost commissions with higher rents.
That strategy isn’t going to work in the long run, so let’s talk about strategies that will.
This one isn’t just about taking a punch of the ticket when you call in a tradesperson to do maintenance (although you should definitely be doing this!) It’s about extending your network and making it work harder for your business.
Building strategic relationships with service providers that are likely to be used by either your tenants or your owners puts you in a position to sell or recommend those products or services.
And that is how you put yourself in a position to earn a commission or referral fee.
Common partnerships with property management businesses include insurance brokerage, tradespeople, connections and utilities services, and compliance services. But you can look beyond these. The question to ask is who else in the community shares your goals and visions? What businesses complement yours, and vice versa? Who do you commonly share customers with?
Gardeners, dog-sitting or cleaning services, house-sitting services, furniture stores, even local restaurants - build or join a network of local businesses and help each other out with more paid referrals.
Yes, if you’re wondering: you could be offering a referral payment of your own for any owners that become clients. And also yes: that would still make it one of the cheapest ways to acquire new customers.
Stop us if you have heard this one before: an agency charges a bare minimum commission, and then tries to recoup profit margins through things like postage fees, printing fees, and other administrative charges. The landlord or owner calls out these charges as bogus, and doesn’t want to pay $3 for printing. They ask instead to be invoiced by email - which has no charge.
There are three things wrong with this picture. First, the agency depended on fees based on the owner not having preferences or issues with paying for things like printing. In the age of customer experience, nobody is in a position to dictate to owners whether they will be charged for printing, regardless.
Second, it looks like nickel-and-diming because it is. The fees aren’t for valuable services rendered; they’re clearly inflated to help the agency make more money. And that’s where the problem is for most owners: there is no perception of value exchange.
Thirdly, it lacks imagination. Assuming you can’t do much about low commissions, there are still plenty of other valuable services you could be offering to your owners in exchange for a reasonable fee that show value for money.
These services don’t need to break the bank - t could be as simple as providing them 24/7 online access to their property portal or hub (in Console Cloud, the Owner Portal), or managing special contractors on their behalf, or providing the gold-class service experience.
And as far as administrative fees go, consider bundling them as one set admin fee, regardless of anything else. That way you can respect your owners’ preferences and wishes without shortchanging your business.
When we talk about which properties are the most profitable in your portfolio, we are really asking two questions: (1) which properties generate the most income, and (2) which cost your business the least to manage.
We all know that income - expenses = profit. In a property management context, working out profit means being able to rank your properties from best money-makers to worst (or money-takers).
To rank your portfolio, you’ll need to know the income per property, less the effort and time spent managing that actual property - not what it costs you on average to manage all properties. Then you’ll need to line up your properties from most profitable to least. Your bottom 10% might be costing your business more than they bring in. And for these properties, the best you can do is sell or fire this part of your rent roll.
If you take the time to rank your portfolio by income vs effort, you’ll likely find a portion of your rent roll that is actually uneconomical to keep. The 80/20 rule applies to property management as much as it does anywhere else: 20% of your rent roll takes 80% of your time to manage.
And with profit margins so slim in property management, it is critical to weed out those who are not making you enough money. They are preventing your business from growing.
If you have Console Cloud, skip to the next section. If you don’t have Console Cloud, your property managers could make a call based on gut feel to identify which 10-20% of properties take the most effort to manage. From there, focus on working out the income v effort of just those problem children, by looking at all fees and commissions each one earns.
Then calculate how much time (as an hourly rate) it takes to manage each problematic property per week. Average that out over a year and then subtract your income per property from the approximate expenses to manage it. There you have it: the true profit and worth of those properties to your business.
And now: if you’re on Console Cloud, rejoice! There’s a better, more scientific way to do it!
In Console Cloud, you can use Analyticsᐩ to calculate and rank your portfolio based on the actual amount of money each property earns for your business, and how much effort it actually takes your business to manage.
The longer you have been on Console Cloud, the more data Analyticsᐩ will have to calculate your rent roll’s portfolio, and the more accurate it will be. To get your ranked portfolio, just click into the Work v Income report. It will generate a live, interactive view of your rent roll, ranked from most profitable to most uneconomical.
Besides being so much faster, Analyticsᐩ uses your actual office data, so it is far more accurate and unbiased than a human could be. It properly accounts for the amount of human time it takes to manage that property by looking at the amount of activity related to it, and the time spent on those activities in Console Cloud, and it properly accounts for all income related to it.
We know you shouldn’t do it. You know you shouldn’t do it. But with a cut-throat market full of agents ready to discount their services to win owners away from your business, it’s pretty hard not to.
The problem with discounting is this: a 2% drop in commission does not equal a 2% drop in revenue. In the below example, a drop of 2% in commission actually equates to a 37.5% drop in income for that property.
Where commission is 7%
Property x 7% Commission = income p.w. x 52 weeks = annual income
$500 rent p.w. x 0.07% = $35 x52 = $1820
Where commission is 5%
Property x 5% Commission = income p.w. x 52 weeks = annual income
$500 rent p.w. x 0.05% = $25 x52 = $1300
Difference between these commissions
Discounting from 7% ($1820) to 5% ($1300) resulted in a 37.5% drop in income.
If you haven’t already, pull together a menu of every little thing your business does to manage a property. Include this in your presentations to the owner. And then ask: is there something in here that other businesses usually charge for, that could be included in the commission, such as a lease renewal fee or admin charge? Is there perhaps something else we could include the commission that we normally don’t charge for?
During the negotiation process, make sure that the owner understands the difference between what is included in your commission fee, versus what is included with the discounters down the road.
Flat fees are not for everyone, but they do create an alternative to discounting. If you are finding it difficult to keep or grow your rent roll because of discount-dave down the road, you could go this route.
To get an idea of what you should be charging, calculate what income you would need across your rent roll to be a sustainable business. Charging a flat fee structure also has the advantage of equalising the importance of all properties in your portfolio—so low work owners become the most valuable to your business, and high work ones become the least, regardless of rent.
Property management is ultimately asset or wealth management. The agency who wins a client will be responsible for using that owner’s asset to grow an owner’s wealth.
Instead of focusing on commissions in the negotiation phase, focus on what an owner’s long-term goals are with respect to the property. While nobody can control the market, if you can demonstrate how you would help them reach their financial goals, you may find they care less about the commission.
To make this one rock solid, include some statistics. How much has the rent increased per property across your portfolio year on year? How much are the homes in your portfolio worth versus the rent they yield? What is your arrears follow-up like? What else have you done to improve your owners’ asset values?
All of the above is nice in theory - but if an owner won’t see eye to eye with you despite the above strategies, it might be time to straight out handle their objections. Chief amongst these is ‘I can get the same service cheaper elsewhere’.
If you charge the market rate for your area, point them to evidence of this, and be sure to walk them through what is included in your service above and beyond what others agents provide. It’s possible they don't understand that for most agencies, this is their only major revenue source. Without it, most agencies could not afford to stay open.
Then, make sure they know what danger lies ahead when going with agencies that discount their commission.
Most likely owners will end up facing one or more of the following problems: