Single-Family vs. Multifamily: The Difference in Fees

There is a common misconception in the real estate industry regarding commission. So How to choose between a single-family or multifamily property for your real estate investing portfolio. In this episode, you’ll learn about the difference in fees and costs between single-family and multifamily real estate investing.

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Single-Family vs. Multifamily: The Difference in Fees

What are the major differences when it comes to managing single-family versus multifamily? How does the unit economics change? I understand that in single-family, you can take a much larger fee. For those people who assume, “I can get more money in my pocket. This is good,” but they’re losing the leverage, what are you seeing?

We’re going to make math simple and pretty here. Typically on the single-family side, ideally, you'd get 10%. Let's say you had 100 units, you get a 10% management fee and your average rent is $1,000, that's a decent amount of money. That's 10,000 a month but at 100 units, you probably need a full-time bookkeeper and maybe somebody to answer your phone. That's two employees.

In a rate of pay, you're looking at probably $7,000 if you want to pay well and be competitive. You have to match the taxes. That $10,000 that you’re excited about is reduced to about $3,000 and then on top of that, you've got your rent for your office space, insurance and office supplies. That profitability goes down tremendously.

If you’re like me, I appreciate the leverage so I’m okay and good with that because it’s helping me achieve other long-term business goals. It’s allowing me to meet people like you, get investment opportunities and have more entrepreneurship opportunities but some people might not want that. In multifamily, I'm able to hire talents. They are able to do a lot of the admin tasks because they're at the property day-in and day-out.

They're handling the vendors and dealing with the maintenance calls. The property is paying for this talent and not the management company. I love that because, at the end of the day, I can have one complex with 100 units, the same number of units that I would have with a single-family and arguably, have the same profit with less work. I still have to have people but somebody else is paying for that talent.

As a property management company, it goes back to knowing who you are and what you're good at.

To me, it's a matter of how you look at it. I have very well-respected colleagues in the industry that are like, “Single-family is where it’s at.” I'm like, “I ran a company. I know how much we paid.” Their conversations were endless like, “How do we degrade expenses? We're spending the most amount of money on people.” To be profitable in single-family, I feel like you have to have a lot of single-family. At the most, we had about 1,600 single-family homes when I left. That's a lot.

You benefit by having all the tenants ideally in 1, 2 or 3 buildings that are very close to each other but with that, you also have a unit mix or floor plans that are more consistent. It’s not just the floor plan but everything inside of the floor plan too. Let's not talk about furnished but let's assume the countertops, the doorknobs and the light fixtures. When you have maintenance issues across 100 different single-family homes, they're going to have different interiors. I'm imagining that adds a lot of complexity to maintenance and servicing problems as they arise.

Not only that but when you have single-family homes, you have different clients so they all have different expectations in terms of what you're allowed to do. You better have a good system of documentation in place so that when that call comes in, you know exactly what that specific owner needs. Not only in the multifamily arena is it easier because you have a very consistent product but it's also much easier to manage. Those clients arguably are different than single-family home clients. They've been in this arena for a while. They understand the risk is different and what has to happen for this operation to work. Their mindsets are a little bit different than maybe perhaps the single-family homeowner.

The single-family asset class is slowly becoming institutionalized and with that, expectations are going to change in terms of what people expect from their property management company because if you're a large institution and you've played in the multifamily space and you're buying portfolios of single-family rentals, you're probably buying them piece by piece and then you want to manage them centrally.

What perspective do you have on how that transition will be where you've got institutional investors with expectations and potentially got firms that are not necessarily set up to do that? If you're a multifamily-only firm and you're being pushed to go manage a portfolio of 20 to 50 single-family homes, what is going to happen as the industry moves in that direction?

At some point, you get to say no and I can respect that. If this isn't your niche, let me know. I don’t think it serves anybody to force someone to do something that they're not good at. Property management goes back to knowing who you are and what you're good at. I love large clients. I love the one client I have that gave me 850 doors but what I've learned is that my ability to serve diminishes when I say yes to things I shouldn't have said yes to in the first place and my client is upset.

If I don't want to diversify, I need to be okay with that and own that. If I want to be able to have a business that is scalable and grows with where we're ultimately going, then I have to implement systems that will allow me to be scalable. I have to consult, get coaches and people who've gone before me and learn from their failures before I even get to that point. I read an interview you did with Tim Draper. He said, “Be willing to look at the world in a new way.” That resonated with me. We're all in this space where if we're going to grow, we have to be willing to look at the world in a new way.

When you have a client and they're as big as the 850-unit client, the assumption is they're going to be buying real estate. Sometimes, if you’re an institutional investor, you buy a portfolio. Buying a portfolio means some of these assets aren't so great and some are. I've been in a situation where we want to buy 1 building but the seller wants to sell 5. We have to figure out the price.

The idea is, “We're going to buy 1 of these buildings that aren't very nice but there are at least 4 that we like.” The economics would work out for us. How do you handle situations when that isn't an expectation investors have? As a property manager, do you say, “I’ll take the best four but I won't do the one,” or do you reluctantly take it on because there's an implicit expectation or be explicit and set expectations?

That is my real-world life example. There is this one particular client that has a lot of products, most of which are distressed. What I said was, “That's fine. I'm going to manage these distressed assets. While you're looking to sell them as a package, there are certain components or properties of yours that I will not lease. They are a liability to me and you. I will not put butts in beds for you. I will make sure, however, that it's a building that doesn't crumble to the ground. I will make sure it's maintained. I’ll have a watchful eye over it. However, in the interim, I won't do anything.”

You need to understand what you're buying, what you have, and your limitations.

Some of these buyers that are looking at the portfolio are saying, “Are you willing to manage it?” To me, that's only if you're willing to put your money where your mouth is and help me turn this around. If you expect me to turn this property around when all you're going to go do is put paint on the wall, not going to address the fundamental issues of HVAC and plumbing and I'm going to have disgruntled, yelling and screaming people, the money is not working for me.

I need to be your partner. We need to partner together and I need to know you have my back so that I can produce for you. At the point in which you invest in me and the property and I don't produce, that's a different conversation but I need you to understand what you're buying or what you have and know my limitations. I can't sell you something that I can't produce. It doesn't work.

I've worked with several different property management firms. Some are very eager to do business. Once 3 months, 6 months or 12 months have passed, you realize you're nowhere near the proformas. You’re getting this massive budget request and hearing for the first time that you’re supposed to synch money into this.

This happens all the time and then people switch to new property management firms. I can appreciate why as well because as an institutional investor, we will take quotes from property managers and they'll help us underwrite. Sometimes, we're going to look at 3 or 4 different proposals and say, “Firm A can get better revenue with lower cost so something must be wrong with firm B, C or D because they're putting too much cost here.”

Budgeting is a very critical element. It's a delicate balance too because as a property manager, I know, especially you, have a lot of passion for the properties that you manage. You spend your whole life focusing on these units. You've got residents there and you want to see these places be places where people can live and enjoy themselves rather than life safety liability.

How do you balance what's required on the CapEx side? Sometimes, you could go in and make this property amazing but the rents won’t justify it or maybe you can but the investor isn't on board. How do you balance what you think should happen in the property versus what the investor thinks? How do you handle that?

I always think it's important to ask your investor in the courting stage, “What was your proforma? Tell me what you expected to happen in year 1, year 2, year 3 and year 4 because I need to understand where your expectations are.” I've been teased that I'm the deal killer because I come in with this black hat mentality like, “This is going to go wrong.” I don't want to be that and yet, I'm going to look at your proforma and go, “It’s doable.”

Fortunately, like in the case of your asset, we've managed it before so I had the upper hand in knowing how it performs. I knew whether the budget that we created for you was accurate or not but oftentimes, it's first and foremost understanding what their expectations are and then going in and assessing yourself like, “Can I do this?” You've got to do the market research and be realistic.

We got out of five years worth of concessions. In some of the markets we serve, it was concession after concession. You've got rents that are drastically under market. What we as property managers need to be able to do is to analyze, “Here's your rent roll. Here's where the market should be but unfortunately, because these are $50 to $100 to $125 under market, your 1 proforma is probably going to take us 2 or maybe 3 to get me up there again. It's going to take me a while so we have to adjust your expectations a little bit.”

If you say, “I'm not willing to adjust my expectations. This is what I expect.” I’ll go, “Do you want to hire me? I'm going to give it a good try and do my very best for you. I'm going to be passionate and show up to the arena and fight every day but I can’t sleep at night because I've told you this is what I anticipate is going to happen.”

The most important part of the relationship is you tell me what you want and I tell you what I want. I tell you what I can do and you tell me what we can do. We agree to continue to go down this road together. When we meet the bumps and the hurdles and it doesn't exactly happen the way we thought it was going to be, we've already talked about it. I'm not selling you again. I can't trust this on people enough. Stop selling a bill of goods that you cannot cash. It does not do anybody any good. It’s bad for our industry.

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About Zain Jaffer:

Zain Jaffer is an accomplished executive, investor, and entrepreneur. He started his first company at the age of 14 and later moved to the US as an immigrant to found Vungle, after securing $25M from tech giants including Google & AOL in 2011. Vungle recently sold for $780m.

His achievements have garnered international recognition and acclaim; he is the recipient of prestigious awards such as “Forbes 30 Under 30”, “Inc. Magazine’s 35 Under 35,” and the “SF Business Times Tech & Innovation Award.” He is regularly featured in major business & tech publications such as The Wall Street Journal, VentureBeat, and TechCrunch.