When is it worth it to go in-house and vertically integrate?

In regards to a firm's strategy, why do some real estate firms outsource property management to a 3rd party versus building an in house property management/asset management team or hiring a leasing company versus hiring brokers in-house or even hiring a GC versus being the GC yourself? I know companies that do both? when would it make sense to delegate these tasks and think about it from an ROI perspective on the time spent to manage and lease versus outsourcing everything and paying slightly more but saving time?

would it make sense in NY Metro markets such as NYC, LI and JC with higher rents to lease yourself and save commission as well save the 6% property management fee once you scale and putting all these employees on payroll? pros/cons? thanks

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Comments (8)

Feb 24, 2020 - 10:46pm
SBPref12, what's your opinion? Comment below:

you forgot about the Exit Ops! then going to an M 7 business school, then getting a buyside associate role at Blackstone!. Then having more exit ops to pay for the hair plugs!

Feb 22, 2020 - 12:17pm
Edifice, what's your opinion? Comment below:

I am but one data point, but here are two things I learned from working with a very large owner / operator in NYC:

  • both leasing and prop mgmt fees are much lower than they would be if those people were salaried (considering total cost of insurance, retirement plans, more difficult to fire unproductive employee vs firing outside contractor)

  • many large firms still do these in-house but in a slightly more obtuse way: they set up separate corporations for each responsibility you described, and bill themselves (their investors) the fees to carry out the work

“Doesn't really mean shit plebby boi. LMK when you're pulling thiccboi cheques.“ — @m_1
  • 3
Feb 25, 2020 - 7:55pm
b3h3lit, what's your opinion? Comment below:

+1. I work as an auditor and there's a shocking amount of related party activity in real estate. We typically spend a couple pages on the notes to financial statements just detailing the transactions that occurred with different related parties.

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  • Investment Analyst in PE - Other
Feb 22, 2020 - 10:53pm

Just one data point but worked a small shop that was syndicating deals, did in-house pm to collect the fees. Those fees essentially paid the salaries of the pm employees and investment/am/accounting/etc teams. Was just a way to keep to keep the place afloat.

Feb 26, 2020 - 12:35am
Ricky Rosay, what's your opinion? Comment below:

Property management is a business where profit margins are very thin at the entry level, and directly proportional to scale. In other words, you need to bring a ton of SF/units under the PM umbrella for the fee machine to start generating real profit. Think of it this way: in-house PM is still going to require management systems, a core staff (and their benefit costs), effective service contracts, etc. whether you have 5 units or 5,000. Many businesses are not interested in managing a business that requires that kind of scaling, as that in turn requires huge numbers of staff and overhead expenses.

Most Helpful
Feb 26, 2020 - 1:41pm
thebigragu, what's your opinion? Comment below:

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