Private equity and VC-backed roll-ups are buying US property management firms poorly, leaving clients seeking new managers.
Peter Lohmann says 200- to 300-door companies sell for at least 1.5 times top-line revenue, or closer to 2 times for larger firms.
Lohmann's RL Property Management manages nearly 700 units at just under $3m revenue with 10% to 18% margins.
Private equity is paying up for property management companies
Residential property management is a thin-margin, unglamorous business that has become an acquisition target. Revenue per door is modest, but it is contractually recurring, needs little capital, and the fees come out of rent before anyone else touches the money, so buyers pay one and a half to two times revenue. Consolidators have bought up managers and often run them badly, leaving their clients available to whoever operates well.
Takeaways
Revenue per door drives the whole business. Lohmann says performance gets good around $150 a month per unit, a profitable business needs $200, and the upper $200s into the $300s puts a manager in the industry's top 10%. RL's profit margin has ranged from 10% to 18%.
Private equity roll-ups are leaving clients behind. Large private equity and venture-backed groups have spent years buying management companies across the US, and Lohmann says many run them poorly, so their clients shop for new managers. A 200 to 300 door company can sell for at least 1.5 times revenue.
The multiples rest on recurring revenue. Revenue is contractually recurring on one-year minimum agreements, capital expenditure is low, and fees come straight out of rent, so there is no accounts receivable and the cash conversion cycle can be negative. Larger companies fetch closer to two times revenue.
Start a management company, don't buy one. Lohmann tells anyone without small business experience to build rather than acquire, because the work is too complex to learn from scratch. Most states require a broker's licence, and he got his first doors through BiggerPockets forums and investor meetups.
Milestones show what the business can support. At 100 doors you can afford a first full-time employee and qualify for Crane, Lohmann's paid community for owners. The industry's median is 200 to 300 doors, and at 700 he has a leadership team and takes a month off each year.
In-house maintenance lifts revenue per door. RL's maintenance department supplies 35% to 40% of revenue, which few competitors have, and drives its roughly $350 a month per door. Backing maintenance out leaves revenue per door in the mid $200s.
The work resists subcontracting. Property management has a huge surface area covering continuously depreciating buildings, people's homes and money held in trust. Remote cleaning businesses can subcontract because they are glorified lead resellers, but Lohmann says management cannot be run that way.
Reaching 100 doors in six months
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On this episode 2
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