One part of my role that excites me is the opportunity to chat with both our current investors and those interested in learning more about what we do. I love being able to share our business story, especially our focus on our home markets of Austin and San Antonio, and hearing our investors’ perspective on the market.
On these calls, you may have heard us say, “we are operators by nature”, which in essence means we ensure the property operates smoothly, tenants are content, and the investment remains profitable for investors. The reality is, if you stepped into our office any day of the week you would see us strategizing with the property management team, scheduling cap-ex repairs, answering investor questions, and shopping comps. And that would just be a Tuesday morning.
A question that usually comes up on investor calls is, are we vertically integrated? Or, what is vertical integration in property management? Being a multifamily operator and being vertically integrated are two distinct concepts, but they can often overlap. Our response when addressing this question is that we implement a blend of strategies. Some functions, such as construction management, are managed internally while others, like property management, are entrusted to external partners.
In this article, we’ll explain why we find it beneficial to partner with a third-party property management company while on the other hand, we built a construction management and distribution business. We’ll also discuss what this choice means for our investors.
The Role of Vertical Integration in Our Construction Management Approach
As a Value-add is a strategy where an investor or property owner seeks to increase the value of a property by making significant improvements or changes to it. The goal is to enhance the property's appeal, functionality, and income-generating potential, which can lead to higher rental income, increased property valuation, and improved overall performance. View Definition and multi-housing development team, our approach for every asset always incorporates a component of either renovations or ground-up construction. Labor and materials are two variables that can dramatically impact our returns. In order to keep materials pricing as accurate and low as possible, we have a small team that focuses on sourcing and managing the distribution of materials. They also work in partnership with our General Contractor, who runs the construction teams.
How Vertical Integration Works in Our Supply Chain
At a corporate level, we buy the majority of our renovation materials from Asia. The items are stored in local warehouses and subsequently distributed to assets whenever they are required. This system has taken us years to architect and certainly doesn’t exist without a lot of planning. We buy all of our flooring, lighting, hardware, fixtures and even granite countertops ahead of time–months before they’ll wind up being used. We typically make 3-4 orders per year, always with an eye towards how much product we have on site, how much we anticipate we’ll use, and what delivery time is looking like. It’s a pretty sophisticated global supply chain game that we play on a very small and local basis.
The Financial Benefits of Vertical Integration in Property Management
The result is fantastic pricing for our assets, and gives us nearly perfect information from a budgeting standpoint. We know the exact costs for renovations because in most cases we already own the product. This helps us underwrite deals and achieve more attractive returns because we keep materials cost much lower than if we procured them elsewhere.
Self-Manage vs. Leveraging 3rd Party Property Management
The main argument for bringing management in-house is control. It theoretically gives you more control of the asset and business plan because there isn’t a third party involved. As we examined the cost-benefit analysis of bringing property management completely in house, it just doesn’t seem to make sense for us. When it comes to taking care of our tenants and overseeing the day to day property management, we believe it’s better to partner with the experts for a few reasons.
Staying Lean: The Cost-Benefit Analysis of Vertical Integration in Property Management
Having an in-house property management division essentially means starting another business from the ground up. If we brought property management in-house today with a portfolio of over 4,000 multifamily units, our 6 person team would balloon to over 100 people. We’re certainly not afraid of the work, but the amount of resources required to ramp up hiring and implement the necessary systems would create serious growing pains.
While we think property management is absolutely critical to our success, to us it falls in the category of working IN rather than ON the business. The pace of leasing, maintenance requests, and people management are all elements of the business that take time away from our true strengths: working with our investors, asset managing our portfolio, and finding the next great deal.
The same argument can be applied to property management companies: their systems make them very efficient and effective at what they do, which would be an extremely heavy lift to try and replicate. Large-scale property management companies, like the one we have partnered with, have corporate-sized departments that can be leveraged by smaller owners; for example robust marketing, HR, and accounting departments. Plus, their understanding of the nuances of tenant relations, compliance, and leasing operations is not easily recreated.
Attracting and retaining talent is crucial in vertical integration in property management, especially in a people-heavy business. And in our experience, the best talent wants to see a career path and growth trajectory. Assistant managers want promotion opportunities to become a manager. Managers want bigger assets, to get experience in a lease-up vs a value-add, or become a regional manager. Same story on the maintenance side. You have to be able to show your people where and how they can grow.
However, multifamily is a transactional market and every time an asset is bought or sold, it creates uncertainty for the team members on site. Will they be retained? Will they be looking for a new job? Are they loyal to the asset or to the company? By leveraging the scale of a management company with 50,000 units, we can make sure our very best people aren’t worried about the status of their jobs every other month.
Profit Motives Change with In-House Property Management
Once you decide to bring management in-house, your motives change, affecting your strategy for vertical integration in property management. If all of a sudden we have a headcount of 100+ employees, we would have a huge payroll burden and a bunch more overhead to absorb. Our fear is that you start looking at how many fees will be generated on every deal vs what the investment returns look like. That is a path we don’t want to head down. The art of real estate is one of our favorite things about the business–putting the deal together, imagining the future of the asset. If we’re just looking for fees, we lose that feel and wind up with mediocre deals.
Striking a Balance: Hybrid Vertical Integration in Property Management for Optimal Performance
The success of a property is greatly impacted by the property management team. When we have a rock star team we crush it. When there is an issue with the onsite team, we see property performance suffer. But, as we’ve highlighted, you can wind up with a bunch of other issues and challenges if you decide to do it yourself.
At the end of the day, we’re very involved in all our assets and feel like we have created a hybrid approach that works well, especially when it comes to vertical integration in property management. We spend a lot of time with our teams and at our properties (which is why we focus on Austin and San Antonio). And no matter what, we prioritize communication with our partners, playing to our strengths, and doing what continually drives success across our ventures.
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Andrew Campbell is a native Austinite and Managing Partner at Wildhorn. He is a real estate entrepreneur who first broke into the business in 2008 as a passive investor. In 2010 he transitioned into active investing and management of a personal portfolio that grew to 76 units across Austin and San Antonio. He earned his stripes building and managing his personal portfolio before founding Wildhorn Capital and focusing on larger multifamily buildings. At Wildhorn, he is focused on Acquisitions and maintaining Investor Relations, utilizing his marketing and communications background to build long-term relationships.