December 16, 2020
We love talking business strategy with property managers. Besides making obsessively detailed budgets, it’s one of our favorite pastimes.
While discussing the structure of growing property management companies recently, one of our larger customers (a property manager with 4,000 units in California) said something that really stuck out to us:
“If they’re not careful, property management companies can turn into accounting companies that don’t know they’re accounting companies.”
What does that mean? At a certain point, the amount of time and money you’re spending on accounting can overshadow your profits.
As every property manager knows: more doors means more transactions and more transactions means more accounting to do. Remember the first time you had to do bank reconciliations after adding that property to your portfolio? Yep.
But even as their portfolios grow, many property managers try to stick with whatever accounting solution they’ve been using.
They worry about the cost of hiring another accountant, or they try weighing all their options and end up in decision paralysis, opting instead to just stick it out.
Truth be told – their thought process isn’t unreasonable. Making changes to your finances can feel big, especially when you have plenty of time-sensitive issues on your mind. But eventually, the workload gets too large and they need more help, so many of them opt for hiring another inexpensive general bookkeeper.
Unfortunately, we’ve seen how hiring inexperienced bookkeepers to save money can result in compliance risks, painfully low margins, and all too often (dun dun dun…) back books.
Between payroll, hiring, and training costs, plus an industry-wide shortage of expertise in property accounting, property managers who choose to keep accounting in-house are faced with painfully low profit margins:
A property manager with 1,000 doors and an in-house accounting team:
- Earns only $16 in profit per door per month, with profit margins as low as 10%.
- Accrues upwards of $15k in costs to reconcile back books.
- Spends 80% of their time on operations and only 20% growing their portfolio.
Ouch. Is having an in-house team really that bad?
Since we’re numbers people (and property accountants) we decided to unpack all the costs of in-house accounting to see how it really measures up against hiring an external team. What we found was nothing short of staggering.
Take a look at this annual budget including all expenses for an in-house accounting staff of three, based on real numbers for class A office in the Phoenix metropolitan area.
Calculations based on:
- External accounting services charged at 7.99 per door
- Utilities, Benefits, Workers Comp, Overhead, Equipment based on a % of salaries as according to US Bureau of Labor Statistics
- Janitorial Services charged at $125 per month
- Internet Services at $45/mo based on small offices
For property managers of this size, having an in-house accounting team is costing thousands of dollars every month in salaries, office space, insurance, liabilities, and more. On top of that, there’s also the issue of scalability; the costs associated with hiring and training new accountants have created a substantial deterrent to growing their door count.
Are we biased towards the concept of hiring an outside property accounting company? Clearly! It’s no secret that we are, in fact, an outside property accounting company. But this article isn’t just a sales tool, it’s a perspective check for so many property managers who are stuck working within an outdated system. For other types of businesses, it might make sense to keep accounting in-house. But for property managers, it’s high time to consider alternative options.
If you want to talk it out, we’d love to hear from you – and we mean that.
Here’s a link to schedule a call with our Head of Finance. We could talk property accounting and business strategy all day (or surfing – if you’re into that).
Whether you decide to schedule a call with us today, or if you’re still in the research phase of your growth journey, we hope you remember one thing: you got into this industry to manage property, not to do accounting.