On The Property Management Show, we love helping people in the industry learn from the successes and failures of property management business owners. The feedback we’ve received on our How I Did It series has been phenomenal, so we’re bringing you another episode today.
Our guests are Kristin and Shawn Johnson, and they run a successful property management business out of Farmington, New Mexico, called Independence Capital Property Management. We’re talking to this husband and wife team specifically about what may help and hurt you while you’re building your property business from 100 doors upwards.
Introducing Independence Capital – Where They Are Today
Currently, Independence Capital manages about 500 rental properties, down from their high of 615 doors. Most of that portfolio is made up of single-family homes as well as some four-unit and six-unit buildings. They have been in business for six years.
As a husband and wife team, they have learned the importance of respecting each person’s role and talents. Their business starts with a solid relationship and a good marriage. While their skill sets are similar, their passions are a lot different. Kristin has a marketing background but prefers the sales and accounting side of things. Shawn is a helicopter pilot and needs to be constantly engaged, so does a lot of marketing and creative work.
Shawn sees the growth, and Kristin operates against it. The system works, and it works well.
The Big Lesson Learned: Being Quick to Buy
Kristin and Shawn said their biggest failure was twofold. They bought a portfolio of 295 doors, and missed a bit of due diligence. Several of the properties within that portfolio turned out not to be legitimate contracts, and they faced about $70,000 in lost value.
The properties in the portfolio were legitimate at some point, but while the portfolio was being sold, those properties were listed for sale, and the clients terminated after Kristin and Shawn took over. They had a clawback clause* specific to a client with a large percentage of the portfolio, but it didn’t extend to all the properties. There are many things they would do differently today.
*(A clawback clause allows you to regain revenue for lost accounts that may leave within 12 months of acquiring a portfolio.)
The second error was to push changes too quickly. Independence Capital enjoyed a high level of client satisfaction among their existing clients. There was a lot of trust. While bringing new clients on board, Kristin and Shawn expected those new clients would be just as happy. So, they immediately introduced their own fee structure, and that didn’t go so well. They upset a lot of clients, and they had to back off and take a deep breath. This caused a 17 percent loss, which was higher than expected.
Here’s the important takeaway: Even with all the losses and the stress and the mistakes, Kristin and Shawn said they would still do it all over again. That’s how property management companies grow. They experiment.
Focus on Integration: How to Make it Work
The previous management company had neglected a lot of maintenance and even charged owners for repairs that weren’t completed. Once they took over the portfolio, Shawn and Kristin had a line out their door and had to field about 450 phone calls a day. They had hired extra staff, but this was hard to predict.
There are a few things to remember when you’re integrating a new portfolio to grow your business:
- New clients deserve a personal phone call. This goes a long way, especially if they’re caught off guard by the purchase and they don’t realize they have a clause in their contract that says their account is assignable to someone else.
- Don’t change management agreements for at least 12 months. Keep the terms the owners know, but provide your own higher level of customer service.
- Don’t touch the tenants’ leases until renewal time. Kristin and Shawn had a zero-day grace period policy in place, and the company they bought allowed five days for rent to be paid. You want to keep your tenants happy and in place.
The Independence Capital Founding Story
Not everyone chooses property management as a career, but Kristin and Shawn did.
Kristen worked in real estate as a paralegal for a large investment company. Shawn was offered his dream job of flying helicopters in his hometown of Farmington, New Mexico. There was a huge need for good property management in that market, so they moved back and started their company. Their goal was to get to 150 properties. This goal was achieved in the first two years of business, thanks in part to membership in National Association of Residential Property Managers (NARPM). Then, they doubled in size the next year.
Independence Capital just opened their second office in Flagstaff, Arizona.
Kristin has a sister living in Flagstaff who was having a terrible time as a tenant. None of the property management companies would call her back when she wanted to see a home. From a tenant’s perspective, Flagstaff was a nightmare. So, Kristin and Shawn opened another office there since they had someone on the ground and able to help. The business is still run from Farmington, but Flagstaff is a strong rental market with high rents.
Know Your Market and Diversify When Necessary
The Farmington economy is driven by oil and gas, and it hasn’t been strengthening like the rest of the nation. A lot of jobs have been lost, and Farmington was ranked as one of the largest shrinking towns in the U.S. This means it made sense for them to diversify and look for other places to do business.
It’s also a good reminder to know your customer profile. Most of the clients in Farmington are accidental landlords. There are some intentional investors, but they’re not the majority. In Flagstaff, there are far more investors looking for professional management.
The First 100 Units: A Learning Curve
- Property Management Software
While you’re growing your business to 100 units, invest in property management software, even if you don’t think you need it. If you don’t have management software yet, get one immediately. Having the software in place before you land even your first unit will allow you to grow.
- Systems are Necessary.
Figure out your systems. As you grow, those systems become harder to implement. This is the most time you’ll have; once business starts coming in, you’ll feel like you don’t have any time to work on systems. Do it right away. Envision everything you see happening from the time you earn a listing to the time the tenancy ends. This will help you develop and implement your systems.
- Join Associations
Kristin says that because of NARPM and the people they’ve met there, growth has been fast and healthy. NARPM has a good vetting process and will introduce you to vendors and experts you wouldn’t be able to find otherwise. There are great educational opportunities, and you’ll meet a lot of outgoing, friendly professionals.
The biggest mistake that was made with the first 100 properties is a mistake that many new property management companies make. They took on any and all properties. It didn’t take them long to realize that they didn’t have to manage every door that came along.
It’s okay to be selective with what you’ll manage and what you won’t.
Not all business is good business.
Screen owners, and screen properties.
You don’t want to travel for 45 minutes to get to a home you’re managing. You don’t want to take on a house with a lot of maintenance, and you don’t want to work with an owner who cannot pay the mortgage. If you tell an owner that a property will only bring in $1,000, but the owner insists on asking for $1,500, you don’t want to waste your time.
Dropping from 615 properties to 500 properties was intentional. Kristin and Shawn work with Darren Hunter, a business coach, and they were willing to trim the fat and get rid of the junk. It wasn’t easy. You can raise your rates to weed out the clients that you don’t want to work with, but as Independence Capital found out, not all undesirable owners will leave, even when they’re told to pay more.
Eventually, Kristin and Shawn sent letters explaining that their business was going a different way, and their systems no longer supported the management of certain properties. Many owners were distressed to have to find new management. Most owners wished them well.
Pricing Property Management Services
Pricing is a mysterious thing. A lot of property managers don’t know what to do and how to price their services. It’s always a good idea to put your pricing on your website.
Independence Capital posts their pricing for Flagstaff because there’s a three-tier flat fee system in place, as well as a lease-only option. In Farmington, they have value-added services that complicate their pricing structure, and they’re working on posting them on their website.
What is the purpose of growth?
Shawn says growth builds morale, and staying stagnant in a business devastates that morale. Kristin says that people are here to learn and grow constantly, and business owners who can drive that kind of growth will provide wealth and jobs for other people, thus contributing to the greater good.
According to an article in the Harvard Business Review: “Significant value creation cannot occur without growth. So, the failure to scale has social as well as investor and managerial costs. It effects job creation and innovation throughout society.”
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