Property Mgmt Fee Margins
Anyone have a general idea what the margins look like for pm fees?
Given that the pm teams comp is recoverable, what are the additional overhead costs for the pm company that they’re on the hook for?
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This is tough to quantify because a lot of the overhead is allocated between properties (i.e. the property accountants aren't covering a single property), and ultimately depends on the services the PM is providing (e.g. is it simply onsite property management while ownership is dealing with the accounting and leasing aspects, or is it comprehensive management where ownership is pretty much entirely hands off).
The margins will vary based on services provided as generally the fee structure isn't going to change much as it's priced based on market rates (typically 2-4% of EGR).
I am at a small fund now but worked for a large mega fund who was vertically integrated. I can say that regardless of scale, you essentially hope to cover your costs with property management fees. Overhead could include higher-level management costs (district managers, website, SEO, marketing professionals), corp software expense, corp travel, legal/litigation costs (significant portion of real estate litigation occurs at the property and pm level) etc… I have also been with a RE company when it went public and the bankers assign a de minimus multiple to PM revenue/income, as a result.
No private company ive worked at has had PM fees be able to cover 100% of OH (salary, rent, software licenses) etc. Ownership would cover the shortfall using their deal profits.
So how does Greystar and Lincoln Property Company cover their costs?
Do Multifamily PMs ever own the landscaping company, plumbing company, valet trash company, etc. to make more money?
Yeah I’m not sure the math is adding up there. If pm was truly a cost center than why would anyone do it. I think if you can get it to scale in the right markets then it could be highly profitable. Just do the math. Say you have 3M sf of office that generates 100M in EGR. That’s 3M in fees a year. You can’t tell me salaries/benefits for a few people and maybe some accounting fees (which could also be passed through the properties) add up to 3 million dollars.
Office PM is a different ballgame. I work for an office developer and because of the size and rents, it pays for itself.
300,000 SF office at $50 PSF is $450,000 in pm fee at 3%.
300 apartments at $2000 per month is $216,000 at 3% with no vacancy. What I’m trying to show is office just scales much better from a fee perspective.
It's not a cost center. It is a massive profit center. What happens is how value multiples are assigned. It is in the best interest of a vertically integrated firm to shave as much of the PM cost as possible because that drives up NOI. With profit multiples being 2x higher on the asset side than the PM side it makes sense to shave profits from the deal for the GP to cover shortfalls in the PM business.
Well, the base property management fee itself is actually pretty low margin. You’ll often see something like 8 to 12% of rent, but once you factor in staffing like for property managers, leasing agents, maintenance coordinators, and the software, office costs, insurance, and just the general back-and-forth with tenants and contractors, there’s not a huge amount left on that base fee alone. It’s usually thinner than people expect.
Even if maintenance costs are “recoverable” the PM still has to manage it all like triaging requests, chasing vendors, handling emergencies, and dealing with tenant communication, which really takes a lot of time and people resources.
Where the business tends to work better is through scale and add-ons like leasing fees, renewals, inspections, and sometimes small markups on maintenance or vendor relationships. Thats where a lot of the actual profitability comes from.
So yeah, the core fee alone isn’t usually where the real margin is, it’s more of a volume and services model rather than a high-margin one.
Property management companies can be profitable at around ~5k (and sometimes below) units assuming you've dialed in your overhead, keep your fixed costs down etc. The main way to do this is to push as much of the corporate admin into the properties as possible. There will be some things that you can't do (Accounting/regionals salaries, etc.), but you can charge an invoice processing fee, bill back for check cutting, charge for travel time to the properties, etc., that may have some margin added to it.
A few ways I've seen property management companies try to do this:
PM firms usually turn profitable at around 200 units. Where the fuck are these super high numbers coming from?
The higher numbers are mainly talking about run of the mill multifamily. 5,000 units to break even is still very high, I would say it's closer to 2,500-3,000 these days unless you're somehow starting a property management company and can't do any of it yourself.
No idea what those posts above were talking about it being a cost center though.
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