I was thinking recently about how important drive-by traffic is in generating visibility for your business. I’ve been doing a lot of analysis on performance for our facilities, and overall the portfolio is doing really well, but I’ve never talked about the significance of drive-by visibility. The facilities we have on very busy roads are crushing it right now–they have high occupancy and we can’t raise rents fast enough. That doesn’t mean that you can’t succeed in a low-traffic area, but the locations we have that see over ten thousand cars drive by each day are continuing to lease way above market rent.
There’s been a ton of talk about management fees lately, which is a component of real estate that operators frequently undersell themselves on. For each of our facilities we have fees on gross revenue, tenant protection revenue, and a per-unit fee, and it all adds up to 12-15% of gross revenue in total. This is the money we use to hire contractors, oversee our call center, and keep our facilities operating.
Compared to people at our level, our fees are high. Some go as low as 5% of gross revenue, and frankly, that’s just unprofitable. The huge REITs (Public Storage, CubeSmart, etc.) charge at least 12% just to make money. Our management company’s revenue is about $1.2M, and we operate on around a 20% profit margin while charging fees higher than other businesses.
Businesses that aren’t charging enough in fees are going to feel the crunch when things turn south. When the market is strong, people make money by executing deals and refinancing. You can hide an unprofitable management company through continuous action. When things are tough, you’re forced to sit and hold and operate, and you need to set your business up to operate profitably. A lot of people are losing money on the management side of the business, and it’s insanely risky.
My goal has always been, and yours should be, to make sure the management part of the company is healthy and profitable in its own right. Don’t just guess, really crunch the numbers. There are a ton of components to management like collections, auctioning off units that haven’t been paid, property improvement, contractor management, hiring labor, and customer service that all cost money. It’s vital that you can continue to do this even if you’re not making deals.
Look at how the big-time property management companies charge, and model your business off of that. People look at deal fees and see the management as expensive, but it’s really near breakeven. But you need to keep your operations healthy and sustainable because those who don’t won’t last long when things get hard.
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