How to Compete with Venture-Backed Property Management Companies
Ethan Lieber from Latchel is our guest on The Property Management Show, and in this podcast we’ll talk about these behemoth venture-backed companies that seem to be entering the property management space in record numbers right now. We want to know why they’re here, what motivates them, and how smaller property management companies can compete.
- Venture Capital companies are interested in the business opportunities available in the property management industry, but the industry is difficult to dominate because of its fragmentation.
- Local property management companies have a competitive advantage over VC-backed companies because of the trust they hold with their community.
- Ethan believes that only three out of ten self-managing landlords are ever going to become your customer. Understanding this concept can help you narrow your focus when it comes to going after leads.
Why Is Property Management Attractive to Venture Capital Companies?
At PM Grow 2021, Ethan delivered a fireside chat on the topic of competing with these VC companies. Before we can get into strategies for competing, a lot of property managers may be wondering why. Why do these VC companies want to be in property management at all?
The obvious answer is this: money.
There’s a lot of money in property management. It’s a huge business opportunity. Traditional management services generate hundreds of billions of dollars. When you add in the ancillary services companies can provide, we’re looking at trillions of dollars.
Typically, local businesses have captured most of the market share.
Look at a national scale, and you’ll see where the venture-backed companies began in property management. They funded industry-specific endeavors like Appfolio and Yardley and Buildium and similar platforms. The entrepreneurs that backed those initiatives now want some of the market share that property management companies themselves have been earning.
Here’s an interesting statistic: the top 15 management companies only own 7 percent of multi-family properties in the U.S. No other industry behaves like this. When you take a look at retail, huge companies like Walmart and Amazon can come in and eat everything up. It’s easy. But, property management is one of the remaining industries where it’s hard for VC companies to dominate. That’s because the business is so fragmented.
Winner-Take-All Thinking Isn’t Part of Property Management
Generally, venture-backed companies have been drawn to industries with a winner-takes-all playing field. If you figure out what an industry needs, you can dominate the market. Microsoft figured that out early on and the government had to force them to break up and allow competitors.
A lot of VC companies have the goal of getting so big you’re a monopoly. But you don’t want to look like a monopoly because you don’t want to attract the government’s attention.
With property management, it’s hard to see a situation where someone is a monopoly and a winner that takes all. Zillow is never going to become a monopoly where there’s no room for anyone else, for example. Property management is one of the few industries that this will not happen.
The VC companies want in because the industry is so big. They don’t need to take it all. They know that just a fraction of the market will make them a lot of money. So, they want to eat up a lot of the market share, but local property management companies have a lot of competitive advantages. You’re probably not even competing for the same type of business as these VC companies.
Property Management and Industry Disruption
Another thing that VC companies look for is this – how ripe is an industry for disruption? Property management is very much a legacy industry. Historically, it’s been very inefficient. There’s a low use of technology and automation and AI. So it creates a space for companies to come in and leverage their technology and software platforms. Meaningfully higher margins are earned.
When you’re competitive, your business is more sustainable and fast growing, even if your acquisition cost is higher than your competitors. You may spend more money to get your next customer, but that customer is also going to be far more profitable. That creates a new playing field in property management.
If your margin is 30 or 40 percent while everyone else is at 6 percent because you can acquire customers at five times the cost they do, you’re going to grow faster.
Does it work for VC companies?
The challenge in property management is that acquisition costs are much higher for national companies. When you want to scale quickly, you have to be willing to pay that higher acquisition cost. If you’re spending $4,000 to acquire one landlord, you need to be sure about your ROI. The payback period will be more than a year. This means client retention is more important than ever. Losing money in the first year is a given, but if you hold that client for six years or more, you’re going to see a massive lifetime value.
Greg Crabtree is an excellent resource for getting a better understanding of your property management costs & cash flow. Check out our episode with him on “Managing Hits to Your Property Management Cashflow During the COVID-19 Pandemic,” as well as his presentation at PM Grow 2021.
VC Companies and Management Company Acquisition
Acquiring one door at a time is expensive. So, these VC companies have calculated their growth and decided to acquire property management companies instead of doors.
They’re paying a premium to acquire an entire company, but they’re making five times the profits that the local company was earning. The payback period is often a more efficient way to grow.
To make this effective, a lot of capital is needed. You need cash to buy up management companies. But, if it’s done in the right way, big profits are available. Only VC companies have the capital to compete this way.
The good news is this: local property management companies aren’t competing this way. You don’t want to buy management companies. You want to grow your business by acquiring additional owners, units, and doors.
Trends and Tricks for Local Property Management Companies
One trend we are seeing is that smaller property management companies are pooling their resources and consolidating. They believe they need to be bigger to compete.
It looks like a typical David vs. Goliath story. The key factor here is that local property managers are nimble. You also have local knowledge that cannot be replicated.
Some companies will want to consolidate or build some co-branding opportunities. You can join a franchise. So you’ll maybe struggle to maintain operations, but you’ll have the name recognition of the franchise. If you only manage five doors, people aren’t going to care (or even know) because they’ll see that recognizable name with your property management company.
A healthy market is not a monopoly market.
Here are some of the things a local property management company has working in its favor.
- You’ve earned customer trust already.
- People are investing in homes from out-of-state more than ever in this new economy. That means they’re more likely to look for local experts in the market where their investment property is located.
- You can improve your operations with a playbook on how to automate a lot of what you do.
- You can capitalize on collaboration with other property management companies and real estate professionals in your area.
Automation is really your secret weapon. Find better ways to operate because ultimately, it may be the only way you can compete.
Using Tech & Community Trust to Stay Independent
Smaller companies who want to stay independent can use technology to intentionally create efficient margins. Technology leads to cash flow. Then, you’ll be able to invest the cash or capital you earned to generate more income and grow the way you want to grow.
Here’s the best opportunity you have to compete with VC companies:
You have the opportunity to become a pillar in your community.
Maybe you belong to NARPM and other professional organizations. Maybe you’re in a leadership role in the local Chamber of Commerce. This is going to provide a better reputation than anyone in a VC-backed management company that works in your market but isn’t really in your market.
There might be a huge competitor buying companies in your area. But, they could be so far separated or removed from the community itself that they don’t know the trends and the way of life. You, however, know the business owners and the residents and you can build a sense of community that actually goes beyond the work you do.
Property management is still a relationship business, and it’s impossible for a VC company to replicate this.
Customer Service and Targeting the Right Landlords
At Latchel, Ethan says customer obsession is an important part of the way they do business. You’re building a service, which means you have to respond to what the customer wants. It’s an effort, but starting backwards can help you define your customer. A lot of people miss this.
Here’s an idea that Ethan has been working with lately, and he knows that some people may find it controversial.
There’s a specific psychographic when it comes to the business you target.
Out of 10 self-managing landlords, only three of them will ever be a customer.
Here’s what he means:
When you’re trying to attract new owners, you’re advertising to all 10 of those landlords, but only three are going to be receptive to your marketing. Those three fall into one of these categories:
- The accidental landlord who is not experienced and eager to work with a property manager.
- Landlords who are unhappy with their current property manager and want to look elsewhere.
- Investors who just bought a property in the area and they don’t know the market.
Institutional investors will also be looking for management services, but a lot of VC companies focus on institutional investors, so maybe you won’t want to compete for that business.
Work backwards. What does each of these customers want? The value you offer is that they don’t have to collect rent. They don’t have to spend a single second thinking about how their property is being leased. That’s a higher value you’re providing, and you want to look for the landlord who wants to not think about their asset. (for more on this, check out our interview with Steve Crossland on The Practice of Property Management Profitability.)
Narrow Your Target, Improve Retention, and Compete With VC’s
Most of you already know that the owners who think too much about their property are your worst customers. You want someone who trusts you to do it for them.
The owners you attract must match the way you operate. Otherwise, you turn them away.
Optimize your marketing and your services for those owners who are simply looking for peace of mind.
Retention is insanely important when it comes to growth and staying competitive. Keep your tenants and keep your owners. There’s less operational work. If you cannot retain your property owners, you’re probably not doing things right. Everyone has turnover from time to time, but if you’re spending more money to bring in new clients and then you’re losing them, it’s going to be difficult to stay competitive.
VC companies have to deal with turnover and lost clients more than local property management companies. You can plug those leaks faster, and you can also be there to pick up the customers VC companies are losing because you provide a different experience.
There’s so much more to talk about surrounding this issue, and we’d be happy to welcome you into the conversation. Contact us at Fourandhalf for all of your questions around property management marketing.