Finding A New Cost Equilibrium

by Andrew Mcconnell

Right now and for going forward, property managers are trying to understand and adjust their revenue and cost structures. What do I mean by this?

Shift the Mix of Fixed vs. Variable Costs

Historically managers' businesses have been comprised of mostly fixed costs (office lease or mortgage, employees, etc.) with some variable costs (marketing, contractors, etc.) Yet the revenues are entirely variable, meaning they were a percentage of rentals. More businesses coming out of this are looking to shift that mix. How can they get their costs more variable?

  • Reducing full-time staff
  • Utilizing more third parties and contractors for services they can turn on, off, up, or down as needed  

Look at ways to create less variability in income

Consider lowering your commission rate for homeowners, but institute a monthly "management and maintenance fee" for every home you manage. In the past this was not really necessary because homes would rent enough that people were in them, and cleaning crews were coming through. As rentals have slowed, this maintenance and management work is even more important, but its costs are not being offset by any rental revenue.

Consider expanding what you offer to the owner

Monthly cleaning fees, pool maintenance, lawn care; less frequent but pre-commitment on things like painting, HVAC maintenance, etc. Think about all of the things that someone would need who owns a home far away from where they live full time. Take these on as consistent fees for each home. Then use local partners on a variable basis to do the actual work. You have locked in your fees regardless of variable rental income, but you have made your costs variable to the amount you actually need/use it.

One example where this could flip

For years people gave examples of laundry services as profit generators for their business. They set up operations, and then others paid them to process the laundry. Right now, this is the opposite of what you want: a lot of fixed costs in leases and/ or depreciation, employees, etc., but no revenue coming because it was all variable. Getting back to having this be a variable cost I think will be a trend we can expect coming out of this.

Conclusion

Trading some of that variability for more certainty I think will help through times like this going forward. In essence it is getting back more to the "property manager" side of the business than the pure "rental manager."