How to start property management: seven gates to the first hire

What to take away

Read the rental market first

The first step in how to start property management is reading the market you intend to serve. Vacancy, rent trend and new supply decide whether you fill units and what you charge.

Pull three numbers from sources you can cite. Rental vacancy by metro comes from the Census Bureau's American Community Survey, and fair market rents come from HUD. Add your state apartment association's quarterly report and days on market from the two largest listing portals.

Rising vacancy with rising supply means you compete on service. Falling vacancy with flat supply means you raise the fee at renewal.

Nobody knows next year's vacancy in advance. Refresh the three numbers each quarter. Let them set your territory, your fee and your hiring pace.

What it costs to open

Ranges below are typical for the United States. Your state sets the real numbers.

Management fees run on rent collected. Residential management commonly takes 8 to 12 percent of monthly rent, higher for single-family. Leasing fees run from half to one month's rent when a new tenant signs. Some firms charge a flat monthly fee per unit instead.

The seven gates

Gate 3 hands gate 4 the account details the management agreement has to name, and gate 5 hands gate 6 the only response time an owner should ever be shown.

Gate 1: What the license permits

Write to your state real estate commission and ask, in writing, which license the company needs, which license the responsible person needs, and whether managing for a single owner changes the answer. In many states, property management is regulated as real estate brokerage, so the company holds a broker license and the person in charge must qualify as a broker or work under one. Ask the same question about trust accounts. Keep the reply.

Pass condition: a written answer, plus the list of applications to file — the broker and entity license applications. The authority map for this trade shows which other bodies also have a say.

Gate 2: The entity and the tax accounts

Form the entity at your state secretary of state, file the trade name if it differs, obtain the federal employer identification number from the IRS, and register with your state department of revenue for anything the company collects or withholds. The IRS page on starting a business covers the federal side. State and municipal registrations are separate and none of them reminds the others.

Pass condition: the entity exists, the identification number is issued, the license applications are filed.

Gate 3: Three accounts, not one

Operating, owner funds, tenant deposits. The last two hold money that is not the company's. Trust account rules — your state real estate commission's statutes and regulations on broker trust funds — govern the owner funds account, and your state's residential landlord-tenant act (the Uniform Residential Landlord and Tenant Act in the states that adopted it) governs the tenant deposit, including interest, whose name is on the account, and the written receipt and move-in condition list the tenant must get.

Pass condition: three accounts open, and bookkeeping that tags every trust dollar to an owner, a tenant and a unit from the first deposit. That tagging is what makes gate 4's agreement writable.

Gate 4: The paper, reviewed before use

A local attorney reads the management agreement and the lease — for a residential portfolio, the standard forms published by your state apartment association — against the statute and the municipal ordinance. Every clause flagged as unenforceable comes out. It does not stay in as a bluff.

Write one screening standard, then check it against the federal Fair Housing Act and HUD's fair housing rights and obligations, and against your state or municipal civil rights commission, which may add protected classes and restrict credit or criminal history checks.

Pass condition: signed-off agreement, lease, notice forms, an inspection form with a photo protocol, and one screening standard every person who speaks to an applicant has been trained on.

Gate 5: The after-hours test

This is the gate that gets skipped, and it is the only one an owner can catch you failing.

Route a number to whoever will actually answer at 2 a.m. Run five or six simulated calls across a fortnight. Time the whole chain: answer, triage, dispatch, arrival, closeout. Write down who was asleep and what broke.

Pass condition: a response time you have achieved, not one you intend to achieve. That measured number goes into the management agreement, and the operating day it implies is now what you have committed to running.

A worked example. Suppose the test shows a median of 41 minutes to answer and a worst case of 3 hours 20 minutes when the on-call contractor is already on another call.

The honest agreement says 41 minutes typical, and names the escalation path for the worst case. The dishonest one says "24/7 emergency response" and leaves the owner to discover the rest.

Gate 6: The first owners

Approach owners who are visibly self-managing: owner-posted listings, small landlords in county assessor or county recorder data, sellers whose properties did not sell. Show them the measured response time from gate 5 and the deposit handling from gate 3, because those are the two things a self-managing owner does worst alone.

The Small Business Administration's general guidance for new owners covers the wider planning work.

One method that scales. Download the county assessor's parcel list and keep the single-property owners whose tax mailing address differs from the property address. Mail each one a one-page letter quoting your measured response time. Re-run the list every quarter, because the roll is public in most counties.

Pass condition: agreements you can serve at current staffing, and no discount without a written end date. Finding owners at volume is the next question, not this one.

Gate 7: Hiring from measured hours

Track hours per unit for one ordinary month, split into leasing, maintenance coordination, accounting and owner communication. The first hire is justified when the hours consumed exceed the hours available, and that point arrives at a different door count in every market and building age, so measure it instead of borrowing a number. The role the records usually justify first is a leasing and office coordinator; maintenance coordination and bookkeeping follow, in-house or contracted.

Pass condition: a month of honest time records and a role description built from them. What each role is accountable for turns that into a job posting. Only once gate 7 is stable does a second territory become a real question.

Common questions

Can any gates run in parallel?

Gate 4 can start while gate 1 is pending, because the lawyer needs the statute rather than the license. The rest wait on the gate before them.

What if the regulator does not require a license?

Then gate 1 produces a dated written statement to that effect, kept on file, and the question is asked again on entering a new state.

How long does the sequence take?

Longer than the plan says. Gates 1 and 4 both wait on offices you do not control, so file the license application first and open the lawyer conversation second. The gate table gives typical elapsed times per step.

What is the most expensive mistake here?

Signing an owner before gate 5. Everything else can be fixed quietly. A broken response promise is discovered by the owner and the tenant in the same week.