As we have discussed many times in this space, a good bit of our time each week is dedicated to talking with investors both new and old. It’s one of my favorite parts of the job, as I’m passionate about telling our multifamily business story, and especially our focus on our home markets of Austin and San Antonio. We think multifamily provides the best risk adjusted returns, is the most secure asset class etc, etc–I’ll spare you the whole conversation here.
On those calls one of the questions that inevitably comes up, no matter if we’re talking to a massive institution or an investor just getting started in real estate, is how we handle property management. And rightfully so. What they are really asking is whether or not we self-manage, or if not when we think we’ll bring it in house.
Our response is always the same: we use a third party management company and don’t have plans to bring it in house.
We are certainly not against vertical integration, and have a long list of strategic initiatives that will benefit our business and our assets as we continue to scale. This includes our in-house construction management and general contractor, overseas product procurement for our renovations, captive insurance programs and more. We just don’t think property management is one of those things that makes sense for us to build out. In today’s article, we will highlight the reasons why.
Multifamily is a hand to hand combat sport. Day in and day out, the onsite teams are interacting with residents and prospects leasing units. The success of our business plan is greatly impacted by the team we have onsite. It’s a people business. When we have a rock star team we crush it. When there is an issue with the onsite team, we see property performance suffer.
Attracting and retaining talent is a big key to success in our multifamily 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.
That growth path comes with having a big portfolio. Not 10-20 assets, but hundreds of assets. So that when you find the right folks, you can keep them engaged and happy because they know there are growth opportunities. With a labor market as tight as Austin and San Antonio both are, employees have lots of options to look at, and we want to make sure we can attract the best talent to our assets and team.
This also works in reverse. Multifamily is a transactional market. Everytime 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?
Our goal is to make sure our very best team members know they are loved, and they are always welcome in our portfolio. We don’t want them worrying about looking for a job as deals are bought and sold. The benefit of having a 3rd party company is the added scale you get–so that when there is a transition you can keep your best employees within the portfolio.As a company that aspires to have 5,000 – 7,000 units, we are at an inherent disadvantage relative to larger shops. 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.
Focus on the business.
There is an old adage that you can focus ON your business or IN your business. While we think property management is absolutely critical to our success, to us it falls in the category of working IN the business. The pace of leasing, the maintenance requests. The management of people, the HR logistics involved. Those are all elements of the business that take time away from where our true strengths and passions lie–working with our investors, asset managing our portfolio and finding the next great deal.
If we brought property management in-house today, with a portfolio of nearly 3,000 multifamily units, we would be looking at hiring over 80 people. We’re certainly not afraid of the work, but the amount of time and energy required to ramp that up and do it justice would be at the expense of everything else, and I guarantee we’d see some property performance slippage–there would simply be too much going on. You’re now so busy working in the day to day elements that we’re not focused on the business and overseeing the portfolio the right way. That’s a disservice to our investors to our assets and to the team members we’d now directly employ.
Profit motives change.
Once you decide to bring management in-house, your motives change. If all of a sudden we have a headcount of 80 employees (instead of the 5 we currently operate Wildhorn with, you now 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.
Best of both worlds.
The main reason 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. But, as we’ve highlighted, then you wind up with a bunch of other issues and challenges.
We think we’ve actually solved the control piece in a pretty good way: maintaining a very tight and aligned relationship with our management company. We’re both based in Austin. They’ve built a great mouse trap to hire and retain talent. We have a direct line to the senior most people in the company. And with our scale, we’re one of (if not the largest) clients they have. We’ve been able to create our own teams within their organization, from accounting to regional management on down, that work just to support the Wildhorn portfolio. We have input on hiring and firing (without having to run the HR) and meet regularly to discuss our pipeline and growth plan. In many ways, while they are a third party business it often feels like we do have our own in-house management team.
At the end of the day, we’re very involved in all our assets. Our teams know us. We spend time in our deals (which is why we focus on Austin and San Antonio). We’re focused on our people and their success. But as we examine the cost-benefit analysis of bringing property management completely in house, it just doesn’t seem to make sense.