Start a management company from zero doors or buy someone's 40-door book?

Run the numbers before the philosophy. 40 doors at, say, $1,400 average rent and 9 percent is about $60,500 a year of base fee. That doesn't pay one experienced manager plus software plus insurance, let alone the acquisition note. So whatever a book seller tells you about "instant cash flow," 40 doors is not a business, it's a part time job with a debt payment attached. The book only makes sense to me as a bolt-on where the marginal cost of those doors is close to zero because you already have the staff and the platform.

@ledger is right on the arithmetic and I'd add the part that bites you on an acquisition. You buy the doors, you don't buy the owners. Management agreements are usually cancelable on 30 to 60 days notice, sometimes less, and every one of them is a different vintage with a different fee schedule and different approval limits. First thing we did on a book we took on was read all of them and sort into keep, reprice, release. About a third of them were priced below what it cost us to service the property. Losing those was fine. Explaining a repricing letter to 40 owners in month two was not fun.

Starting from zero is slower and cheaper and you own every clause. I voted for zero.

Dumb question but who actually sells a 40-door book? Is it always retirement, or do people sell because the doors are bad and they know it?

@compass both happen. The ones I've seen listed were a broker winding down and one guy who wanted to go all-in on sales. But there's also the seller who has 40 doors of C class scattered across four counties, one tech, and a maintenance backlog, and the reason the price looks cheap is that servicing that portfolio is miserable.

On the licensing piece @plumb raised, I'm mid-process now and it varies a lot by state, some require a broker license to collect rent for others, some have a separate property management license, some carve out on-site employees. Get that answered in writing before you plan either route, because it changes who has to be on the payroll on day one.

I own the properties and it's shaping who I'll hire. A manager who bought his doors and hasn't met me feels different from one who got my name from another owner. Referrals are apparently how most of these firms grow anyway. So from where I sit the zero-door route builds the exact asset you need.

What does the ramp actually cost though? If you start at zero, you're still paying software, insurance, trust account setup, and your own living expenses for a year or two while you're under 50 doors. That's real money out the door with no revenue against it. Nobody in this thread has put a number on that and I think it's the number that decides it.

@tally that's the honest cost and it's why I think the answer changes with your cash position, not your preference. I hit a version of this on the ownership side. Growing organically was the right answer right up until my time was the constraint and then buying capacity became cheaper than building it.

If you can eat 18 months of thin income, start at zero. If you can't, you're going to take a book on bad terms because you need the revenue this quarter, and that's the worst reason to buy anything.

If you do buy, underwrite the retention curve and nothing else matters as much. Ask for door count by month for 36 months, owner names redacted is fine, and the churn reason for every departure. Then ask what percentage of the doors sit with owners who hold more than three properties, because concentration cuts both ways, and how many are owner-occupant adjacent, the accidental landlord who'll sell the house the minute the sales market loosens up.

A seller quoting a multiple of gross management revenue is quoting you a number that assumes his doors stay. They partly won't. Price the multiple off the doors you think survive year one, and hold back part of the payment against actual retention at month 12. If he won't take a holdback, he's told you what he thinks the curve looks like.