The success of a property management company is inextricably intertwined with the rental housing market. When more people buy homes and vacancy rates grow, and your income nosedives. But if the percent of the population renting increases, your business succeeds. A tighter rental market and rising rents are good news for property managers, and that’s been the situation throughout the United States for the past several years.
Rising home prices have priced many American families out of the housing market, with 43% of non-homeowners unable to afford to buy a home. Of those who rent, 43% live in a single-family home and 57% in an apartment building. In January 2019, the average rent paid nationally rose to $1,471, and have risen steadily for the past three years.
After years of a booming housing market, driven by low interest rates, the market has started to cool. The Fed began raising interest rates in 2018, which impacts the borrowing rate for many homebuyers. Historically, when interest rates rise, buyers are more hesitant to purchase a new home. With less demand, prices begin to drop.
With fewer renters exiting the rental market and buying homes, demand for rental housing grows tighter. In many markets, renters have enjoyed more bargaining power as there was less competition for apartments. But the third quarter of 2019 saw decreases in the vacancy rates for all but one geographic area in the country. Lower vacancy rates combined with higher demand will drive up rents, which will lead to those who can afford to buy a home exiting the rental market, and the cycle begins again.
The rental market is predicted to remain strong for the next several years. The realities of the housing market have contributed to strong growth for property management companies, and there are now 280,000 property management companies in the United States. Many landlords prefer to take a hands-off approach to managing their properties, unwilling to receive phone calls from tenants about clogged pipes at 2 a.m. A strong rental market attracts investors, who, in turn, hire a property manager to supervise their buildings.
Property management companies typically charge either a flat, monthly fee per-unit, or a percentage of rents. If you choose a percentage model, rising rents leads directly to higher revenues. Standard add-on fees include upcharges of 10-15% to a handyman’s bill, postage and filing fees, annual renewal fees, and inspection fees. The industry generated $76 billion in revenue in 2018, and in one survey, 83% of property management companies reported that their revenues had grown in the last two years. Of those who reported past growth, they also expect to grow over the next few years.
Another indicator that right now is an excellent time to enter the property management business, or plan on expansion, includes the shifting landlord pool. More and more, new investors are buying properties outside of the area in which they live. Coastal investors cannot find the returns they want on the coast, so they are moving into markets where they lack experience. They are turning to local property managers to advise them on both buying properties and to manage them.
Many older landlords have begun retiring and selling their buildings to younger investors. Younger investors want access to data and analytics, which is one way that you can distinguish your services from competitors. Still, they are also far more willing to outsource than previous generations.
Whereas your landlord of fifty years ago would perform light maintenance and repair tasks themselves, or only turn to a property manager if a tenant became difficult, younger investors prefer a more hands-off model. They want to partner with a trusted property manager and be relieved from the day-to-day responsibilities of owning buildings.
