DGS 12: The Future of Property Management with Steve Murray

Learn from Steve Murray of REAL Trends about what research says about the future of property management and where it is heading.

You’ll Learn…

• REAL Trends is a research firm worth following [1:51]
• The demographic shift toward renting [3:45]
• Causes for lower home ownership driving the rental increases [5:14]
• Insights from the informal poll at NARPM Broker owner conference of 600 managers [6:51]
• Factors driving a healthy long-term rental market for single-family residential. [7:29]
• Property Management industry compared to Real Estate Brokerage industry. [9:10]
• The ideal client – When property management becomes necessary for investors [9:58]
• Vacation rentals and alternatives to long-term rentals [10:54]
• There will be a lot of renters, but what about property inventory? [13:03]
• Consolidation through acquisition is a trend [13:48]
• The barrier to entry into property management low, but… [15:23]
• Staffing costs are increasing [16:51]
• Flipping vs buy and hold [19:18]
• Inventory for renters vs. the demand for rental homes [20:07]
• Property management is tough – what is the good news for the future? [20:52]
• An idea for targeting brokers [22:55]
• Property Management is an industry in its infancy that presents an opportunity [24:08]
• A novel idea for targeting developers and new homes [26:44]
• The surprising fastest growing group of renters – accounting for half of all growth in renters! [27:39]

Tweetables

Resources

http://REALTrends.com

Transcript

Jason: Welcome! If this is your first time listening, then thanks for coming. The DoorGrow Show is a podcast for residential property management entrepreneurs that are interested in growing their business and life. If that is you, be sure to subscribe and rate us in iTunes and join your fellow DoorGrow Hackers online at doorgrowclub.com, our free community for property management entrepreneurs. I’m your host, Jason Hull, the founder of OpenPotion, GatherKudos, and of course, DoorGrow. Now, let’s get into the show.

Welcome to episode number 12. In this episode, I’m hanging out with Steve Murray of REAL Trends. Steve Murray is a gentleman who is speaking at the NARPM Broker/Owner Conference here in 2016. He was sharing a lot of data, a lot of insight. I found it really fascinating. I was really excited to get him to come on the show and just talk a little bit about some of that. You can check out a lot more info on some of the stuff that he had shared on the DoorGrow blog. On doorgrow.com, we posted some of the content from his slides and his PowerPoint presentation. Here we get to talk with Steve about the bright future of property management. There are a lot of little nuggets and takeaways so listen carefully.

Steve, welcome to the DoorGrow Show.

Steve: Nice to be here, Jason.

Jason: Why don’t you give us a little introduction about yourself and REAL Trends?

Steve: REAL Trends, we’re in our 30^th year. Primarily, we are consultants, research firm, and publisher to residential real estate firms, brokers, property managers, some top-producing teams, and companies that serve the industry. We have about 54,000 readers amongst our publications. We have about a dozen CEO Conferences a year, which we’ve been running for many years. We rank the top brokerage firms, the top agents, and teams in the country. Generally, try to stay busy helping people with their businesses.

Jason: In short, you guys are really well plugged into anything to do with trends in real estate and what’s going on in real estate, in general, as well as property management.

Steve: Yeah, the residential real estate field. We don’t know an atom about commercial real estate or land development per se, but brokerage property management with services related to those businesses, we’ve got a decent amount of knowledge about them.

Jason: Fantastic. One of the topics that you spoke about at the NARPM Broker/Owner Conference, which was really interesting, which was red meat for me being in the industry as well, was what you foresaw based on your data as to the future of property management. I’d love to get into that. Feel free to throw out numbers because I love that stuff and I know you guys are all about that stuff. Tell us a little bit about what you see as some of the key things that are going to be happening with property management here in 2016 and beyond.

Steve: You start with some basic demographic fundamentals. You have over a million new households a year being created in the country. Homeownership rate has fallen from 69% 12 years ago to about 63 1/2% now. For people who don’t understand aggregate numbers, that’s a shift of about 6 million or so households that once would’ve been in homeownership are now not owners. But people still have to find a place to live.

Increasingly, we find people are looking at scattered single family homes, if you will, or duplex to quadruplex to live there, particularly Generation X or Gen X and Millennials. The homeownership rate among Boomers and traditionals is still as high, if not higher, than it was years ago for that generation. Gen X and Millennials are 4% to 7% points lower in homeownership than the Boomers were at their age. We’re seeing affordability issues. The job market for young people is not as good as it once was. Household incomes are growing only slowly over the last seven years, about a little less than 2% per year, while housing prices are going up 6% to 10% a year. Young people are having a hard time getting into their first home.

Mortgage underwriting standards, the requirements for down payments. We’ve got the student loan debt issue with young people who have to include whatever student loan debt they have. All of that adds up to younger people want to live somewhere. They may cohabitate with members of the same sex or opposite sex. They may be married without kids or they may be married with kids, it doesn’t matter. A lot of young families cannot afford to get into homeownership as soon as their predecessor generations.

What that means is we now have, I think in our report we identified the fact that there are some 14 million single family residential investment owned properties and another 7.7 million duplex to quadruplex units owned by investors. The information is sketchy but it looks like that’s about double the number it was 15 to 18 years ago.

Jason: Okay. It’s doubled and it’s not slowing down, is what you’re saying.

Steve: No, it’s not. As you saw in the conference, the NARPM Conference, when we did a very unscientific informal poll of 600 property managers in the room and we asked them, “Is most of your business privately-owned single family investment?” People like me or you or people we know own 2 to 6 to 10 units, and all the hands went up. That’s their primary customer quickly as they build up 5 to 10 units. Then, we ask them a key question, “How many of your investors are selling their investments right now?” I think 3 hands out of 600 went up.

Investors who invested well, no matter when they bought or where they bought, if they invest correctly and they rent correctly, they’re earning 6% to 8% to 10% to 12% on their investments. If you sell and take a gain, first you gotta pay your capital gains taxes own it unless you of course do some 1031 exchange. Where are you going to get 6% to 10% returns if you sell those today? Where are you going to get that? There’s no place to get it.

Where you rest is easy as you do in single family or small multifamily projects. We see a confluence of events, basically. We see a growing number of Gen X and Millennial families being formed, households being formed. They want a place to live. They want to get out of mom and dad’s house. There are still a record number of Millenials living home, there’s still a record number. They don’t want to be there forever. They want to have their own place.

You’ve got that. You’ve got investors holding huge numbers of entry level single family homes. People are going to be renting longer than, perhaps, the prior times. What that means is the market for single family residential or two to four family residential is going to continue to be very strong for investors, which means it’s very strong for our residential property managers. All of the demographics point to a very healthy market for single family residential property management.

Jason: Let’s talk about property management as a whole, like bird’s-eye view. Property management is a newer category in business. Back 10, 20 years ago, property management as a category almost didn’t exist. People would just say they were such and such realty even if their core business was managing properties. There’s been a shift, I’ve seen, that this is developing and evolving into its own category separate from brokerage. How do those compare in facts?

Steve: I think where we did our research was toward aggregate look. Brokerages of $64 billion to $65 billion revenue business a year, property management is $38 billion to $39 billion. It’s a huge business. Why is this coming to pass? Those people, like myself, if I have two properties in a managed community, I can handle that, two or three. If I get the four or five, six properties, handling the rental, collecting the money, maintaining repairs. About that point what you do if you’re that well-off, you can afford that number of properties. Unless you’re really a great handyman and you’ve got a lot of extra time, you’re going to hire someone to start doing that for you. Because it just becomes a bit overwhelming other than somebody who really has the time and a good do-it-yourself or knows how to take care of things.

Jason: Yeah. Those are the ideal client for property managers. They love the people that come with multiple doors.

Steve: Oh yeah, absolutely. Speaking about four or five doors, you’re going to start seeing more and more of those people who shift to using a property management. On top of that, we have this phenomenon of the Vacation By Owner, Vacation Rental By Owner. You have Airbnb. You have all these different kinds of property now going into rental pools. Short-term vacation rental intermediate term, seasonal rentals. You’ve got this whole group of people or property owners that are renting on for varying terms. We shouldn’t overlook that because that’s a big part of the market as well.

Jason: Yeah. I’ve noticed that in clients that are in coastal areas or resort-like areas, vacation rentals is a big part of their business. They have really nice margins on those properties. Of course, the work is a lot steeper because there’s so much more turnover but they can get some pretty good margins off their clients.

Steve: Yeah. I talked to a brokerage client of mine last week. There are large residential brokerage companies. But unknown to the outside world, over the last 20 years, they now are managing 7600 single family rentals in their property management company, which is a very large residential property management. They have over 2200 vacation rentals. Adds up to a very large business, which if managed correctly is very profitable on top.

We see that demographics are going to drive the demand for single family investment owned properties and the rental of those along with vacation rentals. Yes, most people, maybe they can manage one or two. As we know this have become a great investment class. As we see more and more people looking at them that way, as they own more than four, we call that the magic point, they’re going to want somebody to manage those for them. There’s a great opportunity for well-run residential property management companies.

Jason: If the residential rental market is growing, you’re saying this is going to drive the demand for this. What about inventory?

Steve: As we found in our very unscientific study, investors are not in a habit to sell at 6% or 8% or 10% earning investment, cash on cash return for money market funds paying ½ point or bond funds paying 1 ½ point to 2 with a lot of downside risk if rates go up. We appear to be for this industry a great opportunity because what else is going to happen next?

I mentioned this at the conference because I’ve seen it happen in residential brokerage. What you’re going to see is consolidation. We know that some of the larger firms like Berkshire Hathaway Home Services and Realogy are very open to a client residential property management, but what we’re seeing more of the action is at the privately-owned regional brokerage level. A large firm in [inaudible [00:14:17] now has a portfolio of 1900 homes. A large firm in South Carolina started from scratch 8 years ago now has 1700 homes. They’re doing some of it through acquiring small property management companies that have 100 to 150 to 200 doors, where maybe the couple, husband-wife or two brothers have owned it and they’re off doing something else and they want to sell it because it’s time intensive.

Residential property management, don’t get me wrong, is not some simple business where you show up at [9:00] AM, go home at [3:00] PM and call it a day. It’s a demanding business. Typically both landlords and tenants. I get a call at anytime of the day or night from one of my three tenants saying, “Hey. The garage door opener quit,” or “the garbage disposal.” Some things are really time sensitive. Others you can get to in a day or two. But you’ve got to be able to respond to these people. You’ve got people that don’t pay their rent.

Jason: The barrier to entry, you had mentioned also, is relatively low for property management in a lot of different states. There will probably be a lot of people coming into property management starting boutique management firms.

Steve: I think so. You do have liability. You do have to be very, very strong on your accounting, your insurance, your escrow accounts, all kinds of factors. It does take paying attention to the details of the business.

One of the challenges is it’s difficult to make money until you have a little bit of size. You can make a little bit of money if you’re doing all of the work yourself. The stories we get are different. We know some are very profitable at 150 units. But realistically, it’s 200 or more before you really start making reasonable returns and owning that kind of a business. The nice thing about this business economically is it scales very nicely. That is you can expect to earn better margins the larger you get.

Jason: Yeah, that makes a lot of sense. If you grow, if you can systematize it, leverage technology, create systems within the organization, you can reduce your cost per door.

Steve: Yeah, that’s a good point.

Jason: Yeah.

Steve: Absolutely right.

Jason: One of the challenges that you have mentioned also is that staffing cost are increasing, in general in the marketplace. For property managers, this will be a challenge moving forward. There’s great opportunity. It’s going to be blowing up, but it seemed to be that you were suggesting that those that have the best technology will be the ones that are winning.

Steve: Yeah. You’ve got to have information systems to track your rentals, your repairs because your landlords are going to require it. They want a report on what’s going on, when the money is coming in, what the expenses were. You can’t scale without a system to do that.

On top of which is I mentioned at the conference, the demand for entry level or mid-tier level employment, the compensation of these people is rising because good people that can take care of stuff like a property manager, they have to be reasonably intelligent, they have to be diligent, they have to know how to use Excel or a CRM system or a transaction management system or they have to be able to learn a property management system that manages all this. They have to deal with customers, landlords, and tenants over the phone. They have to know how to use credit or tenant screening services and the regulations coming out of HUD on what criteria you could use to accept or reject a potential tenant. They get more complex. This is not necessarily a $10 an hour job anymore.

Jason: Right. There’s a lot of room to screw things up. The liability is big.

Steve: Yeah, it’s awful. The liability is awful. I thought I could handle installing a new light switch until I found out that if I didn’t do it correctly and something happened to the house, I’d be exposed to enormous liability. That’s when you hire a bonded electrician. Like I said, if you have 1 or 2, maybe 3 units, if we’re talking about 6, 8, 10 units, there’s always stuff that’s going to go up.

Jason: Right.

Steve: Maybe you could do it yourself and you feel comfortable or you’re going to have somebody who could manage it, suppose you’re a property manager and you’re managing 1000 of those units.

Jason: Yeah. Another question I have is a lot of investors out there get really attached to the idea of flipping houses. It’s just so buzz-worthy. There’s so much conversation about flipping, even in the whole auction market. What data maybe would be beneficial for property managers to relate or convert these people to a buy and hold strategy?

Steve: I don’t have good input on that, Jason. We don’t have a lot of expertise on how flippers look at things. I have several clients that are actively engaged in that, have been for years. These tend to be people that aren’t buy, hold, rent.

Jason: But in short, the buy and hold strategy is a good strategy moving forward since it’s going to be a growing market. Inventory is probably going to become more and more scarce as the demand for rentals goes up.  Do you see the supply meeting the demand? What would that have to do with rent prices?

Steve: Right now, as far as single family, the demand is probably 400,000 to 600,000 units more than the supply per year.

Jason: It’s good for investors to see this and have this foresight.

Steve: Yeah. Condo go up, townhouse, single family, we look at all that. I think they’re building around 600,000 to 650,000 units a year. The demand is probably a million to a million and one.

Jason: For a property manager that’s already got things in place, maybe they’re struggling because I’ve talked to a lot of property managers, it’s not really always a fun job.

Steve: Right.

Jason: What is the best news in the future of property management that you see coming?

Steve: First of all, as I said earlier, it’s still a very fragmented market. There’s a lot of business that’s not using property management yet. Nobody’s really marketing to those people because nobody’s really looked into how to reach them. How do you reach a guy who has 40 units and present the idea of, “Let me handle this for you. You don’t have to worry about it. It’s not a huge charge to have me do it. 8%, 10%, 12% of your gross annual rental,” something like that. “We make sure all of our people are bonded. We’ll take care of the repairs, make sure they’re done right. We’ll make sure and collect the rent. We’ll do that.” A lot of people also don’t like to have to call a tenant and say, “Where’s my rent check?”

Jason: Right. It can get awkward, especially if it’s late.

Steve: Yeah. That’s number one. Number two, there’s still a huge amount of the business held by property managers that are managing from 50 to 300 units. There’s no real precised data we’ve been able to come up with it. But based on the people I spoke to at NARPM, it’s clear that there’s a lot of consolidation that could happen.

The last thing is some of my brokerage clients, how they built property management is they went to their agents and said, “Look, you can’t be in property management in our brokerage. There’s too much liability. You turn them over and we’ll give you a continuing stream of the income we get for bringing those to the company.”

What’s to stop a property manager who’s independent of a brokerage from going to agents with brokers who don’t have property management and say, “Hey, if you’ll bring your investor on single family to me, I will pay you a portion of the revenues for bringing me those clients on an ongoing basis. You don’t have any liability. You don’t have any responsibility.”

Jason: Great. Yeah. I would imagine if you can really sell the broker on the liability, they’ll probably just refer business to you.

Steve: Yeah. You get small firms with 5, 10, 20, 40, 50 up to 100 agents that don’t want to go into business. I can offer your agents an alternative where we’ll manage it for them and pay them a share of our revenues for having referred the business.

Jason: Sure, because the liability is so high. Agents could lose their license. It could really affect the brokerage.

Steve: Oh yeah, go ahead and screw around with escrow accounts or some hostile communications with tenants and watch what happens.

Jason: Yeah, it can get ugly really quickly.

Steve: No way you and I believe this is an easy business. If it’s easy, everybody would do it.

Jason: Right.

Steve: What we’re saying is it’s an industry in its infancy. The rules of the road are known pretty well. We know the economics of it. Now, there’s an opportunity out there to build a decent size business that will produce really good returns.

Jason: Looking at brokerage, would it be possible to extrapolate? Because in brokerage you’ve got a certain number of properties. I think you mentioned this. They start out as For Sale By Owner. But then when they actually go to sell, they list with an agent.

Steve: Most typically, yeah.

Jason: Property management, being a new wave, a new concept and idea, that maybe is largely intact. How do you see that maybe in the future playing out? Because there’s a huge rental market. There are tons of rentals, there are tons of landlords out there. Property management is probably a really small percentage of that so far.

Steve: Yeah. Nobody has exact numbers on how many investments, scattered single family investment is owned by people that own two or less who aren’t using property management. My instinct from everything I’ve read says it’s a huge part of the market. Are those people going to stay with one or two? Are they going to get out of them? Or are they going to sell? Or are they going to add more because they’ve had some success? The minute they start adding more, especially we get to that four number, from prior research we did the invariable investor, we find that people then tend to flip to using property management. They tend to do that.

The market is really good right now. If a home is priced right, it’s going to sell. If it’s in the entry level price point, unless there’s something horribly wrong with it or they just mispriced it or it’s just an awful neighborhood, it’s going to sell. We don’t see a lot of inventory in that entry level area where you’d find most of the scattered single family investment is in the lower fourth of the marketplace in terms of price. That’s where you’re going to find most of them. There are middle and high-priced homes that are rented, just not nearly the units, that first quartile list.

The key thing for property managers and the opportunity is primarily that entry level market. What we haven’t seen yet, interesting enough, is somebody marketing to going in and buying new homes from developers and going with the purpose of turning them into rentals.

Jason: That would be interesting.

Steve: We haven’t seen somebody goes in and says, “I’ll buy the first four of those units. I’ll buy them.”

Jason: Do you think that would be a good advantage for property managers to go ahead and start doing something like that if they have the funds?

Steve: I think to let a builder know that you’re available to any investors who buy these that you can handle their management for them is not a bad idea at all.

Jason: That would be a good strategy.

Steve: Yeah.

Jason: The other interesting thing that you pointed out at the conference which I thought was pretty fascinating was the fastest growing group of renters, which I don’t think we even mentioned in this conversation yet.

Steve: The over 55 group.

Jason: You mentioned the over 50 crowd, fastest growing group. Does that mean that they are a significantly large group?

Steve: I’m looking at my data here. The over 50 age group rise was from 10 million to 15 million. This is in the last 10 years.

Jason: Compare it to the market as a whole.

Steve: I have to look for it.

Jason: Yeah.

Steve: According to the Joint Center for Housing Studies in Harvard and other sources, the over 50 age group grew rental went up by 50% in the last 10 years, from 10 million households to 15 million households. They accounted for half of the growth in rental households in the last 10 years.

Jason: That’s a really big deal.

Steve: Right, huge deal. What are people doing? There are people like me perhaps, my wife and I, we’re going to sell our big house. Do I want to immediately buy another one?

Jason: No. You probably want some flexibility.

Steve:  I want some flexibility. I may in fact want to do that for a few years until we really see are we going to stay here? Are we going to move to the Sun Belt? Are we going to Arizona? Are we going to stay in Colorado? You’ve got all kinds of people making those decisions.

Jason: Kids do you want to be near?

Steve: That’s exactly right.

Jason: Yeah.

Steve: Let’s keep in mind over 7, 8, 9, 10 people got [inaudible [00:29:35]. Their equity in their house got clobbered. If you’re older and you’re thinking about retirement, the last thing you want to do is risk your equity. Keep in mind, over 50 encompasses a lot of people. 60, 70 or older. They don’t want to deal with the arts. They don’t want to deal with repairs. They want somebody else to deal with all that stuff.

Jason: But the thing you also mentioned about them is they’re great renters.

Steve: Tend to be. Because tend to be the old generation were great renters.

Jason: They value the property. I thought that was a really interesting thing. I’ve really noticed property managers targeting that group for renters.

Steve: Myself and some of my friends here in Denver area, our best tenants are in their 60s and 70s. As long as you take care of what needs to be taken care of, your rent check arrives right on time every month.

Jason: Yeah, fantastic. I love that.

Steve: Yeah.

Jason: Cool. Steve, I really appreciate you coming out here on video and audio hanging out with us on the DoorGrow Show. It sounds like as a whole, property management future is bright. It’s changing.

Steve: It’s fragmented. There’s consolidation. It’s still a growth business. As you get to scale, it’s a profitable business with a large demand.

Jason: Sounds fantastic. Sounds like there’s a good opportunity still for property management, big opportunities for those that can figure out how to do it right.

Steve: Right. Jason, thanks for having me on.

Jason: Hey, I really appreciate you coming on. I’m excited to see what new stats and numbers you come out with in the next year or two.

Steve: We’ll do it again next year if they have us back.

Jason: Awesome. Keep us posted.

Steve: We will.

Jason: Alright.

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