Long-time readers know we never had real mentors, nor worked elsewhere in real estate. Instead, we’ve built our investment and property management businesses from first principles.
We ask: What is the problem we’re trying to solve, and what is the best way we can think to solve it, taking into account what we’ve learned about human nature and incentives?
That has led us to be a little different from most real estate businesses, including in this way:
Most property management companies have in-house maintenance staff. Why don’t we?
Two key reasons:
1. We don’t want to manage a subscale home services business
Have many acquaintances who own or have owned home services companies (plumbing, roofing, demo, general handyman, etc.), so am aware of just how challenging those businesses are to run.
You have to recruit and retain a bunch of blue collar workers, who are culturally pretty dissimilar from the white collar types we need in the rest of the management business.
Particularly in California, running what is effectively a construction company comes with all kinds of regulatory complexity, starting with the fact that the company needs to be licensed as a general contractor. We already deal with *so* much complexity in our core businesses that I am allergic to adding more unnecessarily.
To properly run a maintenance business, you need to maintain inventory (lightbulbs, AC filters, door knobs, etc.). This means tying up a bunch of our cash in items that need to be securely stored and accounted for.
You also probably need to provide transportation to your maintenance employees. That means leasing or buying a fleet of trucks, which comes with even more cost and complexity, including finding secure overnight parking for when the trucks aren’t in use.
Finally, and perhaps most importantly, you have the problem of capacity utilization. At their core, home services businesses are about hiring a team of people you pay every two weeks, then getting them to go out and do work which you can bill at a mark-up over the cost of their time. Doing this efficiently is *really* complicated, even assuming you have people who are inclined to give you an honest day’s work. Now, imagine some portion of those people instead want to spend a few hours every day playing video games (or worse) on their phones, in your trucks, with the clock running.
2. We don’t want to create misalignment with our investors and property management clients
All of the above issues and complexity would be fine, if we could charge a very large mark-up over our operating costs. (After all, that’s why people buy or build home services companies.)
But this would raise a much more fundamental problem:
Our core businesses (1. raising investor capital to buy buildings, and 2. charging a fee to manage property) only exist because a few hundred rich people trust us with their assets.
We never, ever want those people to wonder, when we fix something at their building, whether we’re fixing it because it actually needs to be fixed, or whether we just want to make more money.
OK, so how do you handle maintenance?
We have cultivated a small group of family-owned companies (not our families!) which handle most of our repairs.
In each case, we are their single largest customer, giving us plenty of pricing power and the ability to get them to fix things they get wrong.
Because of our volume, they never have to worry about marketing or not having enough work to do.
Because they are small, they avoid the capacity utilization problem I outlined above… it’s much easier for the head of each little company to manage 4-5 people than it would be for us to manage 20.
Because they are family-owned, and employ mostly family members, they have less of a problem with people slacking. And (knock on wood), in >10 yrs of running things this way, we have yet to experience a single incident of real theft from a tenant’s apartment. (We did have one bogus one ~nine years ago.)
Because they are independent companies, recruitment, transportation, etc. are their problems, not ours.
In effect, we are getting the pricing benefits of our scale, while avoiding the complexity of managing a large, in-house maintenance operation.
Is this arrangement permanent?
Not necessarily. We could certainly imagine getting to a point where we have so much volume that our existing companies are unable to cope, such that the service we can provide our tenants declines to a level below which I find acceptable.
As always in business, you have to keep the main objective in mind (in this case, building a large, sustainably profitable property management business to compliment our investment business) while being flexible about how you achieve it.
If you are or intend to be the long-term owner of Los Angeles apartment buildings and you need thoughtful property management, please email me at moses@adaptiverealty.com and we can schedule a time to discuss.