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Advice from the CEO of America’s Largest PM Franchise with Lukas Krause

Advice from the CEO of America’s Largest PM Franchise with Lukas Krause

Today, I am talking with Lukas Krause, the CEO of Real Property Management.  RPM is now the largest property management franchise in North America with more than 270 offices in 46 states, that manages assets worth more than 13 billion dollars.  That’s billion with a ‘B’.

In this interview, we discuss what it takes to run a successful franchise and what trends RPM plans on leveraging in the near future in order to maintain their competitive advantage.

This is a conversation you don’t want to miss.

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Topics covered:

  • (00:50) – The Franchise Playbook
      • (01:08) – The fundamental differences for franchises vs a group of corporate owned offices.
      • (02:20) – Lukas explains the key determining factors for people who choose the franchise option.
        • (02:40) – Demystifying the space and accelerating progress.
        • (02:57) – Leveraging the experience and wisdom of experts.
        • (03:08) – Making use of a complete team.
  • (03:59) – The Role of CEO
      • (04:26) – Lukas discusses his day to day functions as CEO.
      • (05:57) – Lukas shares his thoughts on how a corporate organization is run from a management structure perspective.
  • (07:21) – Leadership
      • (08:02) – Franchisee buy-in.
        • (10:23) – Providing benefits of scale to smaller sized franchises.
          • (10:37) – Training and support.
          • (11:33) – Using scorecards.
      • (12:42) – Discussing the pros and cons of market regulation.
        • (13:06) – Formalizing property management training.
  • (14:55) – Running a Profitable PM Company
      • (14:55) – RPM’s brand messaging philosophy and target niche.
        • (16:24) – Ensuring brand quality in a franchise scenario.
          • (16:39) – Using metrics and benchmarks.
      • (17:37) – Operational efficiencies to achieve scale.
      • (19:25) – Discussing the role of software vendors in the marketplace.
      • (21:57) – Profitable ancillary business opportunities.
        • (22:40) – The dangers of ‘shiny object syndrome’.
      • (24:42) – Lukas shares his thoughts on the key thresholds and milestones in the growth expansion process.
        • (24:48) – Revenue per unit.
        • (27:35) – Examples from the larger franchises in the RPM network.
  • (28:55) – Tying It Together
    • (29:29) – Advice for early operators trying to graduate beyond referral growth.
    • (31:24) – When to operationalize sales and marketing.
    • (34:32) – Thoughts and advice on outsourcing.
    • (36:22) – Lukas closes by sharing his opinions on where the industry is headed over the next five years.

Where to learn more:

To learn more about Real Property Management and to follow their progress, head over to their flagship website, RealPropertyMGT.com.

Transcript:

Jordan: 0:00:00.0 Welcome closers. Today we have another episode of The Profitable Property Management Podcast coming at you. This is Season Three on profit.

0:00:07.9 I’m your host Jordan Muela, and every week I interview world class property management entrepreneurs and industry experts who share actionable insights to help you grow your property management empire.

0:00:16.5 Today, I am talking with Lukas Krause, the CEO of Real Property Management. RPM is now the largest property management franchise in North America with more than 270 offices in 46 states, that manages assets worth more than 13 billion dollars. 0:00:34.6 That’s billion with a ‘B’.

0:00:35.4 And today, we’re going to discuss what it takes to run a successful franchise and what trends RPM plans on leveraging in the near future in order to maintain their competitive advantage.

0:00:46.4 Lukas, welcome to the show.

Lukas: 0:00:48.2 Hey thanks for having me.

Jordan: 0:00:50.4 So Lukas, I want to get right into it. I want to start here. 0:00:54.1 What are the rules that are different? What’s the playbook, per se, of running a franchise, and how is that different than an organization that’s just running a bunch of corporate owned satellite offices? What are some of the fundamental differences?

Lukas: 0:01:08.0 Yeah. Franchise relationships are a little different in the sense that it’s a partnership. They each are independently owned and operated and really, the whole model behind franchising is along the lines of leveraging other people’s capital to grow and expand.

0:01:18.0 You develop your systems and processes and expand using those individuals who are entrepreneurs and want to jump into their own businesses.

0:01:25.5 As a franchisor, we help get them ramped up. So it’s different in the sense that we go through training, support, help them with not only sales tools, but operationally, on how you manage these businesses day to day.

0:01:38.0 A lot of times, it’s people who don’t come from the real estate space. 0:01:41.1 Quite often, they’re individuals who may be looking for a business opportunity. We almost called them expats from corporate America, and they’re just looking to start their own thing.

0:01:51.2 And a lot of people have been gravitating to the property management space given the attractiveness of it.

0:01:55.7 You have recurring revenue, healthy margins, and a growing segment as more of our nation becomes renters.

0:02:03.0 And so, kind of the key fundamental differences is there’s oversight from the franchisor and provides additional support than say an independently owned and operated, to they don’t have any accountability or extra supervision when it comes to 0:02:13.9 [Inaudible] trust accounts, making sure you’re complying with fair housing and those types of things.

Jordan: 0:02:20.1 Got it. So, for the folks that end up deciding to go the franchise route, what do you think is the key determining factor, as opposed to doing it on their own?

What is the feedback that you get? Is it more the back office versus support? Is it more the branding? What do you think tends to be the lynch pin decision for folks that go that route?

Lukas: 0:02:40.0 I think it demystifies the space. Really, our whole model, and the model of any franchise concept, regardless of real estate, property management to food, it’s about accelerating your ramp rate.

0:02:50.5 Eliminating some of those mistakes you make with your wallet.

0:02:54.0 Because, anyone who’s been around property management knows, you’re going to make a lot of mistakes.

0:02:57.5 And so, can you leverage the experience and wisdom, not only of the franchise support, but the 300 other franchisees that we have to help them get to a good place and avoid those costly mistakes.

0:03:08.6 On top of that, it really is having a team behind you that will have experts and the marketing side, the operational side, the public relations, to guide you through that journey.

0:03:20.5 And so, that’s kind of the key, I think, the upside of joining in a franchising organization.

0:03:25.3 When you’re on your own, obviously, you know, you’re on your own a little bit. 0:03:29.6 There’s greater upside potential because you don’t have to pay what is a royalty, but it’s kind of that risk reward equation.

0:03:34.8 So most people who go into it and say they want a franchise, they’re going to have a higher likelihood of success, but they know, in exchange for paying a royalty.

0:03:43.3 Those individuals who are going to do it on their own, higher risk reward equation and not maybe have to pay that royalty off the top line.

Jordan: 0:03:49.0 Ok. That’s a really fair explanation. I love that.

So, everybody that’s listening to this is more or less familiar with the franchise concept. Let’s go a little bit deeper, talk about what it’s like actually running a franchise.

0:03:59.0 What’s interesting about your role, is that you’re acting in a CEO capacity, actually being able to function as a CEO.

0:04:06.7 Whereas, for a ten person, 20 person organization, that organization needs a CEO, needs a tenth of a CEO.

And the reality is, you’re doing it for 10% of your time and the rest you’re doing sales calls, managing people, whatever it may be.

0:04:18.8 So what is the day to day function in acting in that CEO capacity look like for you?

Lukas: 0:04:26.7 Well, I appreciate you giving me credit that I fully operate as a CEO. I could tell you, transitioning in, I coach a lot of leaders on how to remove your day to day responsibilities.

0:04:36.2 And I could tell you, that was the number one mistake I made of just letting go of some of those things I had as the COO, before transitioning into the CEO.

0:04:43.6 The nice part about it, like you said, is to focus on more long-term vision of where we’re going as an entity.

0:04:48.4 Doing great things like this and getting the word out about our brand and spreading, kind of the gospel of property management in general.

0:04:55.8 Because our industry needs to grow and mature, and it’s great to see so many groups like yourself, NARPM, pushing things forward. 0:05:03.0 Because we need to grow as a space.

0:05:05.7 And so, I get excited about doing that and spreading the word of property management. 0:05:09.4 But it really is important. We’re in a dynamic time and so it is a lot more fun to step back and look, “Where do we need to be in three, five years from now. Rather than chasing my tail and putting out the fire that has to happen in the next minute.”

0:05:21.8 And it’s, of course – you’ve got to stay grounded. 0:05:24.4 One of the key things, I do like to be involved and have that situational awareness so that I’m well dialed in to what’s going on at the ground level.

0:05:31.7 Because very quickly, you can get almost aloof and disconnected from what is really happening in the day to day business. 0:05:38.6 And that doesn’t make you a strong leader.

0:05:40.0 So, you do need to strike that healthy balance of staying strategic, thinking about the business at a high level, but also engaging in being a part of the department meetings and even getting out and talking with our franchisees and their team. Often.

0:05:53.1 So you know what’s going on. Because you make much better decisions when you’re well informed. 0:05:57.3

Jordan: 0:05:57.3 What are some of the distinctives of how the corporate organization is run from a management structure perspective? And have you seen shifts in that from when you first joined the organization?

Lukas: 0:06:07.7 Yes. It’s a natural evolution. 0:06:10.2 When I came on a little over six and a half years ago, it was a small organization.

We had about 120 locations and it was kind of – we were a victim of our own success. 0:06:20.7 We were growing so fast and throwing resources at it without much rhyme or reason. 0:06:26.7 Just plugging holes.

0:06:29.3 And as I was actually consulting and advising before jumping on. We stepped back and really re-tooled our whole fundamental operation or backbone.

0:06:35.8 And that meant getting department heads with seasoned experience. Not only in property management but in other verticals.

0:06:42.3 And seeing where, “Ok, we need to have people with this kind of property management experience.”

“No, we can leverage people with agency experience and marketing.” 0:06:48.5 And just balancing that out.

0:06:51.0 And so, it’s been fun as we’ve been able to grow now. Actually we have over 320 locations in North America.

And it’s been able to have department heads and create, you know, people who are looking at the business at a higher level and be more proactive rather than reactionary.

0:07:05.1 And when you’re kind of growing and you don’t have those – the right talent or bench, you can be chasing your tail and you’re in firefighter mode, which can be very damaging because you’re just kind of tackling whatever’s in front of you rather than building something and sustainable and that can grow and expand in the future.

Jordan: 0:07:21.7 Sure. So let’s talk about some of the actual challenges of being in your position and leading franchisees that have that autonomy, that entrepreneurial spirit as you describe.

0:07:30.3 Franchisee buy-in, no doubt, is a recurring ongoing issue. 0:07:34.3 Folks that, they see the idea, the concept, they’re excited.

0:07:37.4 But for whatever reason, in many cases, we can kind of get in our own way when it comes to staying on track and – staying on the game plan.

0:07:47.0 What does the organization – what kind of challenges do you face in terms of being able to get each franchisee to receive the full benefit that RPM can offer once they’ve made that commitment and come on board?

Lukas: 0:08:02.4 The key is actually understanding what their objectives are and what they want to accomplish.

0:08:04.6 And franchising is all about persuasion. You can dictate within your franchise agreement, but you can’t require.

0:08:11.4 And as you know, I mean, you’ve been through training and leading individuals, you have to inspire and influence individuals, but they have to have that desire. 0:08:18.6 They have to have that desire they want to continue to grow.

0:08:20.2 And so, when we understand what their objectives are, then we can align the support. 0:08:25.3 We have our business coaches who work with them regularly towards their plan.

0:08:27.9 And so, one of the biggest things we do is an annual planning exercise. It looks at all aspects of the business.

0:08:33.2 Whether it be operations, marketing, even really how they monetize accounts, and to really build that up.

0:08:42.5 And so, when we support them, it’s tailored to those objectives. 0:08:45.7 We may have an individual who’s at 300 units and they’re very happy to be there.

0:08:49.9 There’s someone else who might be at 700 going, “I need to grow even further. Or, you know what, I look at it, I have 700 properties but I’m not making much money. Let’s get into the core of my operations.”

0:09:00.5 And so, it’s kind of the joke we’ll use of, you know, someone runs into the hospital and they have a nail in their head but they’re saying their ankle hurts.

0:09:07.1 You really want to take the nail out and help them, but they’re not going to listen to you unless you address the ankle. 0:09:13.5 And so, it is managing personalities.

0:09:16.8 And you tapped into this entrepreneurial, and everyone has different objectives on what they want to accomplish. 0:09:20.9 But also, strengths and weaknesses. And you have to tailor to that.

0:09:23.5 And so, our whole philosophy on supporting franchisees has been around kind of the accordion approach.

0:09:31.2 Spreading, expanding and tailoring to their specific needs and wants versus trying to dictate something. 0:09:37.1 Because, really, you’re going to meet unnecessary resistance.

0:09:41.0 And so, it is tapping into truly what they want to accomplish but also what strengths and even what financial wherewithal they have.

0:09:47.5 Because you can get real aggressive on the marketing side but if they don’t have the funds, you’re setting them up to fail.

0:09:54.5 And so, maybe you go to more of a grass roots effort based off of those limited resources.

Jordan: 0:09:59.2 Ok. So I want to talk about the intersection of the custom tailoring that you just brought up, while also recognizing that there is supposed to be benefit that comes from scale.

I’m thinking about benchmarking. 0:10:11.1 There’s supposed to be insights that the franchisor should have that a couple of guys at the bar at a NARPM event might not have. 0:10:19.9 Because the reality of it is, the level of transparency and organization isn’t quite there.

0:10:23.3 So, how are you able to both provide some benefits – on the level of those benchmarking insights – while also realizing that you cannot compare a thousand unit company and their metrics to a hundred unit company. 0:10:37.1 How do you balance that?

Lukas: 0:10:37.6 That’s a great question. It’s a fine line to balance. We start on the early stages of going and doing aptitude tests and personality profiles and targeting out what their financial reserves when someone jumps into the business.

0:10:49.4 And so, we start day one working with them on what their plan is and what their targets are for their growth.

0:10:54.6 So, we will also augment their training, because they go through a six week onboarding process and then a week in Salt Lake City for onboarding training.

0:11:03.2 But we will augment their training with different things based off their strengths and weaknesses.

0:11:06.8 Say they’re not overly strong on selling. We will add extra sales courses to help them through that process. 0:11:13.8 And so, we’ll kind of pick and choose different platforms to put in front of them like that.

As they graduate and get rolling, the same thing, they have a support resource that’s meeting with them weekly. 0:11:25.9 And we’ll change and tailor the support plan based off of where they are at.

0:11:29.0 And so, that’s kind of where we change. Is more of the training and how we support.

0:11:33.3 But what we do is – normalization is, we actually provide score cards. And they have benchmarks based off the size of the offices. 0:11:40.3 They get those monthly.

0:11:40.9 And what we’ll do is dig into all their financials. The expense side, the revenue side, and we also look at the operational metrics. 0:11:47.5 And how effectively they’re doing the move in process or move out process. Whatever it is.

0:11:52.3 And so they get benchmarks, but we compare those based off of like sized offices. 0:11:57.1 And it’s getting more refined as we get larger. 320 it’s still, you know, getting to statistically significant sample sizes is challenging because you have – ok, how many offices between 800 and 1000 and how many between 1500 up? 0:12:10.8 They can be small samples.

And so, as we grow and expand, that data set gets tighter and tighter. 0:12:17.8 And so it is a delicate balancing act as we refine those things.

Jordan: 0:12:20.4 Yeah, makes sense. But I love that you’re actually taking the approach and trying to have apples to apples comparisons. Even within the network.

0:12:26.3 You mentioned previously that one of the capacities that you act in is spreading the gospel of property management.

0:12:32.4 We’re all hoping for category expansion. Some of that will happen naturally through the market, some of that is individual brands actually being able to create more category awareness.

0:12:42.0 How do you think about the role and the opportunity or threat that market regulation represents?

0:12:48.5 We look at markets like Australia where there’s an inversion in terms of self versus professional property management.

0:12:55.5 How do you think about the opportunity or threat of regulation in the US?

Lukas: 0:12:59.6 I think regulation will be a positive thing. As you know, the barriers to entry in our space our quite low.

0:13:06.0 We’re very active in the education side. We helped develop NARPM’s 101 Certification Program.

0:13:09.3 We believe in giving education back because when you get your real estate license in most states, you know, it’s 120 hours, 150 hours. You maybe get two, three hours of training on property management. 0:13:21.6 So it’s about formalizing what kind of training is out there.

0:13:23.9 And so, that’s first and foremost. 0:13:25.5 But as I look at regulation, I think it’s important because we do need to raise the standards.

0:13:29.7 We have some amazing property managers out there within systems and dependents, but they’re being pulled down by those individuals who may be well intended but not well heeled. 0:13:39.6 And that can be a problem to us.

0:13:41.4 So I see a great benefit there, and I think it’s important as we see more competitors coming in that it helps to raise the competitive set because it will also, hopefully – you know, steel sharpens steel – that we all can get better and have a stronger space with more opportunity.

Jordan: 0:13:54.6 So this whole idea of the lemons market theory, which for those listeners that haven’t heard of it, is basically the notion that in a situation where a consumer cannot access quality, they default to paying somewhere between what the price would be for a high priced item and a low priced item. 0:14:12.2 Basically it’s just an average of the two.

0:14:13.8 The problem is, that if you’re selling high priced goods, that doesn’t work economically. 0:14:18.3 So it creates an opportunity to push out higher performing vendors and to enable lower performing vendors.

0:14:26.9 Right now, when your average investor, when your average accidental landlord, wants to hire a property manager, what are the metrics that they should go to?

0:14:34.5 Yeah, there are things like Yelp reviews, but a lot of it is gut feel and doing due diligence and research.

0:14:40.9 There is no – there certainly is no governmental agency that is giving star ratings or anything like that.

0:14:46.9 In my mind, brand is a non-governmental factor, a non-regulatory factor that ultimately can pierce through a lot of that noise.

0:14:55.4 RPM has obviously invested in brand, what’s the thought about the kind of customer consumer facing brand messaging that you guys invest in right now? And who are you targeting?

Lukas: 0:15:07.5 Well, obviously, you’ve seen a seismic shift from accidental landlords to intentional investors.

0:15:11.9 And so, we’ve been very focused around understanding really what we are in the business as. It’s wealth creation. That’s our job when it’s all said and done.

Jordan: Well said! Well said.

Lukas: 0:15:21.3 And it’s about positioning ourselves in that way. And a brand is really a product of multiple impressions and you reinforce it each step of the way through how you operate.

0:15:31.1 And so, it can be eroded very easily if you give them a bad experience. 0:15:33.8 Not only the Yelp review, but it just taints and erodes that brand equity.

0:15:40.0 And so, the key for us is consistency on the operational side. 0:15:43.5 And delivering that superior experience time and time again and calibrating our performance so that brand can have meaning.

0:15:49.6 As you know, the space is so fragmented today. 0:15:51.8 It’s, again – we manage a little north of 50,000 assets. It’s still not even a fraction of a percentage point of our space.

0:16:01.6 And so, it’s very important that each touch point we reinforce that so that brand actually means something.

0:16:07.7 And so, you have – not only when you have over 50,000 you have not only homeowners, but you also have the residents and the tenants on that side that you need to balance.

0:16:15.0 And so, that becomes challenging because the brand can mean two different things. Because you have your responsibility to the homeowner but you also have responsibility to the resident side. 0:16:23.6

Jordan: 0:16:24.1 So talk to me a little bit about the fragility of the brand. Particularly in a franchise scenario.

0:16:28.4 The brand ultimately can only weather so many storms. How are you guys able to kind of manage that brand without fully being in control of it? What does that dance or that balance look like?

Lukas: 0:16:39.9 Yeah, it’s a difficult balance. I’d say it’s one of those where we’ve been looking at more metrics on the operational side, and a big push we’ve had to digitize everything we do behind the scenes so that we can provide that benchmark data.

0:16:52.3 But also have visibility in where there might be gaps or underperformance. 0:16:55.6 Not only at an office level, but it gives an owner-operator the ability to see where maybe one of their departments or an individual employee is not carrying their weight.

0:17:04.8 And so, then you can start to calibrate by providing those benchmarks.

0:17:09.9 And so, that’s really the big picture where we want to take it. Is to have standard benchmarks across each category, each position, each size of the life cycle of the business so that we can ensure that it’s a consistent feedback loop for, not only our offices, but us managing it.

0:17:23.3 And that can be difficult. Because, as franchises, they’re independently owned and operated. 0:17:29.4 So, we want to be involved but at the same time, you can’t be overly involved because they’re not your employees.

0:17:35.0 And so, it is delicate with joint employer on some of the restraints that we have as a franchisor.

Jordan: 0:17:37.5 Got it. Yeah. That makes sense. Let’s go back to talking about some of the operational efficiencies.

0:17:43.4 Again, this topic of scale keeps coming up. 0:17:47.9 In your all situation, there’s presumably a lot of data that you’re sitting on. There’s a lot of insight – accumulated insight, or at least potential insight, that is really what data represents.

0:17:57.0 Oftentimes, it’s not unlocked, we hear words like AI, or big data being thrown around. But we’re still in the front side of really unlocking that potential.

0:18:06.2 What opportunity do you see for the franchise in that regard? And for the market more broadly, as we move from these all crusty silos to hopefully having more free flowing operational data moving around.

Lukas: 0:18:20.7 I think the customer ultimately benefits. 0:18:22.7 If we can provide data, not only to demonstrate how responsive we are, how timely fashioned we do things – so, whether it’s how quick you can place a tenant, how quickly you respond to maintenance work orders, you can demonstrate that tangibly to the customer.

0:18:35.6 I think that’s where the greatest benefit is. As an organization trying to aggregate that data, we’re working through how you normalize the collection.

0:18:43.6 Because it’s great to have all these data collection points, however, if it’s not normalized, the data’s almost useless.

0:18:49.9 And so, it’s actually a big initiative. We started almost four and a half years ago as we’ve been refining our data collection points.

0:18:56.4 So that we can start to feed back to the customers data on how our offices perform and use that as a tangible differentiator as we move forward.

0:19:04.5 Because, as you mentioned, today it’s kind of just this abstract concept where they say, “Yeah we provide great service. Our Yelp reviews are ok.”

0:19:13.4 Well, how do you quantify it? It needs to be measurable. And that’s one of the things we’ve been working on quite a bit over the last few years.

0:19:19.0 And as we get better with it, you’re going to see more of that in the next couple of years. Much more public as that data set gets more refined.

Jordan: 0:19:25.8 What kind of optimism do you have around the situation with vendors in this industry?

You’ve got vendors like Buildium, AppFolio, Rent Manager, Propertyware, all kind of somewhere in between a policy of a truly open ecosystem versus a fairly closed off ecosystem.

0:19:45.9 Do you think that there’s going to be ongoing pressure on vendors to embrace a more open ecosystem?

Do you think that this industry is any more forward or behind any other industries that you’ve worked with in that specific regard?

Lukas: 0:20:00.6 I think it’s going to be more of a pull strategy. So if folks are going to open up, it’s because their customer ultimately demands it.

It’s the property manager, you, me, everyone in our space, I think that will dictate it as – if I’m sitting in that seat of running Buildium, Propertyware, Yardy, AppFolio, whatever it is, obviously you want to control it.

You want to preserve – there’s issues as you open up with more things touching and pinging your system. You as a, obviously as a data guy, and a tech guy, would know that quite well.

0:20:27.3 I think what’s interesting is, we start to see these different solutions coming up in little niche products.

0:20:34.1 And so, right now it’s kind of challenging because you go, “I can see value in one of these products, but how many different platforms do I need my team to have at the local level?”

If they’re punching in and out of four different disparate systems that don’t talk to each other? That’s painful.

0:20:51.1 And so, I do think you hit it on the head that we’re in the very early stages of this. 0:20:53.8 I think it’s going to be, kind of cream will rise to the top.

You know, if there’s great value add systems there, either they’re going to get acquired or they’re going to be rolled in. 0:21:05.7 And it’s going to be driven by the customer’s demand pulling those things through.

0:21:10.0 It’s very interesting because one of the other benefits of what those property management software platforms have, they see this as a data play.

0:21:17.3 I mean, they’re collecting that data and that information. That’s probably one of the most valuable assets they have. 0:21:22.2 And so, it’s about how do I retain this customer.

0:21:25.9 And so, folks are making some significant investments in whether they’re building, buying or implementing other platforms because I want to retain you.

0:21:33.1 One of the things that’s painful to make a switch from a platform to a different platform. 0:21:38.2 But the key is, really retaining that customer because you have this unpredictable annuity.

0:21:42.5 And then, all of a sudden you have this data that you can also monetize after the fact.

0:21:45.9 So it is very intriguing and I get a lot of calls from different investment groups who are circling around the space and I can tell you, there’s a lot of private equity looking at this and evaluating it.

Jordan: 0:21:57.1 Ah, great. So let’s pivot right off of that. 0:21:58.4 So, the opportunity that is associated with running a residential property management business – there’s a bunch of adjacent businesses that are around that.

You’ve got the brokerage side, maintenance, title escrow. You could take it in a bunch of different directions.

0:22:10.1 But the reality is that if you’re enterprising, I’m sure you have plenty of folks within the RPM system that own more than one business. 0:22:19.3 And this is just one of the investment classes that they’ve jumped into.

What do you view as being some of the relevant ancillary business opportunities that you’re really well-positioned into if you have a successful property management business?

Lukas: 0:22:31.6 So let’s start with what we encourage. We actually encourage folks to be lazor focused, because we still believe this is such an untapped space.

0:22:40.5 As you mentioned, there are a lot of ancillary opportunities, and we almost say shiny object syndrome.

Just within property management alone, you can get into single family, you can start to get into common interest communities, HOA’s, where are a whole different animal, to multi-family, and you get this proliferation of focus. 0:22:56.9 You can almost be ineffective at all of them.

0:23:01.0 And so, we do kind of preach that they stay disciplined on their core business. 0:23:06.3 As they get to a level of maturity then we encourage maybe branching out and participating in some of those other activities. 0:23:11.1 Especially as they get more established, seasoned, they understand the differences.

0:23:18.1 Someone gets approached by a common interest community management, they get excited, they look at the dollars. But those things are different.

0:23:23.0 And they’re very difficult to manage, and they can be very lucrative, but you need to know how to understand how you price that, position it and support it. 0:23:31.6 Or you may lose your shirt on it.

0:23:32.7 So that’s kind of some of the other areas where you can get involved in the key space. But as you mentioned, just being in the real estate space, and you’re talking with these investors and working with them, the transactional side on the sales is a great place, the lending side, there is a lot of places you can get involved.

0:23:47.9 The maintenance side is a big piece and even some of the back end services, whether it be snow removal, cleaning, kind of the maid type services.

0:23:59.0 There is so many different ways you can monetize, kind of ancillary parts of this business. 0:24:04.9 But you can see why we say stick to your core because there’s probably two dozen other things you could do, which would be great but a lot of people aren’t overly effective once they start getting divided attention.

Jordan: 0:24:13.7 Sure. Get traction, get inertia, make thing A work before you jump to B and C. I get that.

0:24:20.8 So, on that point, what’s your basic view of the cycles of infrastructure investment and then the yield that comes from that?

0:24:28.3 Some people talk about maybe – 100 units being one first barrier to cross, and then 400, and then 1000.

And at each stage, you’re staffing up, you’re building more infrastructure, and then you’re hopefully stopping and getting some benefit from that.

0:24:42.6 What do you think of as the key thresholds or milestones in that growth expansion process?

Lukas: 0:24:48.1 I’ll give you some ranges. I think one thing that’s important that often gets neglected is that revenue per unit.

0:24:53.6 There are folks who are very effective in monetizing it and that can accelerate that life cycle when you staff up and how you support it. And it gives you more margin for error.

0:25:01.0 I do think you have that kind of the infancy of the business, which might be that 70 to maybe 110, 120.

0:25:08.2 Some people might be able to do it with kind of a part-time resource supporting them, or one full-time.

0:25:13.5 As you get through that phase, you start to now maybe have to have someone who compliments you or another key resource.

0:25:20.0 Then you get into maybe that 200, 250 range where you start to get a few different resources, but they’re still wearing lots of hats. 0:25:28.7 And so, it truly isn’t this departmental approach.

0:25:31.5 Again, as you get more mature and if it’s an easy – let’s just say it’s a portfolio that’s not well diverse in the sense that it’s similar properties, it’s very close, same kind of management, you can get to a more departmentalized, and maybe that 3-500 range and it starts to get more mature typically over that 5-700.

0:25:53.7 That next leap, I see as anywhere between that 800 and 1200 range. 0:25:58.3 And that’s that big leap where a lot of folks struggle.

0:26:00.1 Because now it’s a mature business, you have your department heads, but you have this whole other layer of management. These vice presidents, and those are big ticket items.

0:26:08.6 And so, someone who’s making great money at that size looks at it and goes, “Ah, is it really worth the risk reward equation to spend $100-200,000 dollars on these VP type levels to help my business go to that next level?”

0:26:22.4 That’s a tough decision and I think you see a lot of people, I think they taper off because they just run the equation and go, “I’m making a great living.”

0:26:30.2 Because these are very lucrative businesses if you monetize them correctly.

0:26:33.4 And so, that’s I think the crux of that next position. But from there, you know, 2000 up it’s a whole other animal. 0:26:39.5 It becomes a major business.

Jordan: 0:26:42.6 You know, it almost seems like the further you scale, the more committed you have to be in order to keep going.

0:26:48.1 And the worse idea it becomes to attempt to scale unless you’re really sold out on that process.

0:26:57.6 To do it half-hearted, which you could say that about anything in the business, whether that means getting into multi-family or growth just for the sake of growth.

0:27:05.9 But, in general, we definitely see some dipping points where past 1000 units, if there’s not a lot of scrutiny being applied to the numbers, if there is no one acting in a CFO function on a part-time, full-time basis, it really doesn’t matter, we’re definitely seeing some struggle there.

0:27:23.3 There’s a lot of theses and a lot of beliefs about the benefits that will come from scale, but from what I’m seeing, some of that is still untested.

0:27:35.2 What do the larger franchises in the RPM network look like? In that above 1000, do you have quite a few franchises that are in that category?

Lukas: 0:27:42.8 Yeah, but you nailed it. We have the same thing with that somewhat – I hate to say complacency because there’s a negative connotation, but there is a comfort. 0:27:50.5 And the risk reward equation just doesn’t seem as attractive.

Because, again, the business is kicking off great to get the returns, but there’s another big commitment. 0:27:59.3 And I think you captured it quite well.

The commitment is – is adding that head count. Maybe expanding your office space. Tying in to a bigger lease. Or even buying the building and leasing it back to yourself.

0:28:10.8 And so, I think people get to that size, they start to look at that commitment and go, I’m doing what – this can be a difficult business as we know. It can be very litigious.

0:28:18.0 And so, they go, “Ok, maybe I should diversify my interests and go somewhere else and not put all my eggs in this basket. I have this great resource and I’ve optimized it to this level.”

0:28:29.0 And so, we do see those individuals, I think, get to that size. And, you know, we have people like that over the 1000 mark who may have 12 employees up to 25.

0:28:37.2 And it just depends on who their structure – again, with the size of their portfolio, what’s the mix?

0:28:43.3 Are they getting into common interest communities? Are they getting into multi-family? Those factors can, I say, complicate but add overhead as you maybe get into different verticals within property management.

Jordan: 0:28:55.7 What is your advice on growth for younger operators?

One of the recurring patterns that we see is that there’s a really hard transition going from referral based growth to leveraging paid advertising.

0:29:07.6 In many ways, these things are not particularly dissimilar. And the scale set that you would just intuit from knowing your craft, being in the marketplace, connecting with people, doesn’t necessarily translate well at all to running an SEO campaign, figuring out pay-per-click, etc. 0:29:23.1 What’s your advice for early operators that are trying to graduate beyond just referral growth?

Lukas: 0:29:29.9 We preach diverse lead sources so that you’re spinning on your web.

What are you doing for a referral? What are you leveraging in your own personal network? Cultivating leads from as many avenues as possible.

0:29:41.6 We believe that way it somewhat insulates you. And having that diversity in lead source so that you’re not just relying on one piece.

0:29:48.8 The referral lead source is one I’ve seen quite often. People get excited about it when it starts to pay dividends and then they stop because they forgot it almost was a 90 day ramp up of knocking on doors, making those introductions that that’s now paying dividends 90 days down the road.

0:30:04.7 And so now that it’s paying dividends, I can step back. 0:30:06.9 Or I’m busy and I’m starting to work and I have to lease these homes out.

0:30:10.1 The key there is also to have the dedicated resource to business development. 0:30:13.9 I think all too often, property managers make the mistake of trying to wear too many hats.

You know, having the business developer get involved in leasing and do these things. 0:30:24.1 And without having that discipline? Guess what? “I’ll take this call”, and then…that lead? It doesn’t get picked up.

And as you know, as well as I do, if that phone doesn’t get answered? Guess what? It goes to the next. And they dial down.

0:30:38.0 You spend a lot of money on that lead, whether it be hard dollars or sweat equity, knocking on doors. Answer the phone and make sure your whole team is committed to that. 0:30:48.0 Have redundancy in place so that you’re picking that up. And that’s the key.

Jordan: 0:30:51.7 Yeah. I mean, if you’ve earned the lead, close it. If you’ve earned the client, keep them. Retain them.

We see a trend, in general, with, I would say, small businesses across the board. I don’t want to pick on property management, but I would say that we tend to see sales and marketing as effectively non-operationalized.

0:31:09.5 Meaning, the widget, the management, the rent collection, that’s the good or service and the area of focus. But sales and marketing tends to really be non-operationalized and in many ways, a second or third-class citizen.

0:31:24.0 What’s your advice on the timing of when to actually, fully embrace that? Which, ultimately, if there’s not a butt in a chair and it’s a part-time role, in my mind, it’s a real bell weather of the overall commitment for that function within the business.

Lukas: 0:31:40.2 It starts day one. It’s a culture of growing and selling and making that a priority. As a small business owner, you dictate the culture of what your business is.

0:31:47.4 Everyone else will take cues from you. It’s your business, that phone is a priority. You train, you teach on that. You cross train. 0:31:55.0 You reward. You put financial incentives.

If you close a deal, that everyone benefits so that everyone knows that’s the priority. 0:32:02.3 And so, not only dedicating the resource, but following up with your actions.

0:32:06.5 If they see you not answering the phone when you’re on business development? Guess what happens? 0:32:10.4 You sent signals and reinforced that’s ok.

0:32:14.0 Great ideas – we’ve seen individuals – what they’ll do, they’ll ring a bell every time they close a deal and then they hand out five dollar bills to every team member.

0:32:21.2 Again, just putting that in the minds of all your employees. 0:32:24.0 If you have ten, 15 employees – if they know they’re going to do that, guess what? They’re going to be more proud and thinking through that same mindset of, “Oh, I want to get some extra money. I know people.”

0:32:32.5 All of us know people who may have investment properties. I want my accountant, I want everybody thinking in terms of, “How do I build this business?” Be vested in it.

0:32:41.9 So to me, it starts with day one, setting the tone, that culture. And reinforcing it every step of the way.

0:32:47.4 If you do that, you’re more likely to succeed on kind of keeping that growth engine and that trajectory going the right way.

Jordan: 0:32:54.7 I love that. So that was really soft. That wasn’t making it as black and white as I did. You got to hire a BDM or you don’t. 0:33:02.0 Your point was much more accessible.

Regardless of what scale you’re at, just make it really clear that you actually care and this is a priority. 0:33:08.9 And this is with the sale side of the business. The brokerage side gets. The brokerage side, you don’t kill, you don’t eat.

0:33:14.2 The blessing and cursing of our side of the business is recurring revenue. You used the word complacency earlier. There’s some truth to it. 0:33:21.1 But that which is – if not financially but also emotionally and culturally incentivized is what gets paid attention to.

Lukas: 0:33:28.4 But it’s that service demands, right? And so then you end up after you close the business, now I have to support that account.

0:33:33.4 And so, that’s where often people get distracted and pulled away. 0:33:36.6 Everyone knows they should answer the phone, but they haven’t set the tone and discipline from day one that either they gave themselves dedicated resources, like you said, like day one make sure you have a business development manager who’s managing this.

0:33:48.2 And then, not asking them to do other things. 0:33:51.5 Or if the business development manager’s out, that the rest of the team’s cross-trained to be able to step up and at least take those calls.

0:33:57.9 And I think that’s the key, is showing that discipline and putting those processes in place so the phone gets answered.

0:34:05.4 Because you can’t be there 24/7. If you have only one resource, they’re going to get pulled away. Even if you do the right things and keep them disciplined and focused on just business development.

0:34:13.6 And so, I think that’s the challenge that the brokerage side doesn’t have. Right? 0:34:19.3 As much as you’re doing some showings, but you’re always there, you’re accessible.

0:34:21.0 It’s not the same work. I mean, this is why I think this industry has kind of flown under the radar a little bit. Because it’s work.

0:34:27.3 And that’s why a lot of realtors don’t want to do property management. Because it is.

Jordan: 0:34:32.1 Well, there’s not doubt about that.

How do you think about outsourcing? As you’re mentioning the demands of just doing the day to day routine, a lot of folks are looking to outsourcing to fill in some of those gaps.

What’s your overall perspective on the opportunity or the appropriate leverage that outsourcing could represent when done well?

Lukas: 0:34:49.0 I think outsourcing is a great vehicle to help folks lever up. You can turn basically an expense into a variable expense and that allows you to scale.

0:34:57.3 I think you need to know who you are and what you want your business to be. Folks can get themselves in trouble with outsourcing too many elements.

And it becomes a management of vendors versus management of your business. 0:35:08.4 And I think there’s just a healthy balance to strike.

0:35:11.1 But it’s about knowing yourself. 0:35:14.4 I think a perfect way to look at it is the maintenance side of the business. You get large enough, you can take that in house. But that introduces operational complexity. 0:35:20.8 Those are more employees to manage. That can be a lot of work.

0:35:23.6 A lot of times, we’ll have individuals, who just based off their skill set, we’ll recommend: Outsource all of it. Make it easier. Just have a maintenance coordinator that manages your vendors. 0:35:34.1 That will work.

0:35:35.1 And so, to me it’s more about what the vertical is, what the element is that you’re outsourcing, how it fits into your overall plan.

0:35:43.3 Because there’s a lot of great solutions out there that, you know, you can leverage. Whether it be virtual assistants, external vendors, to different software platforms.

0:35:50.7 And they all have a place, but you have to tie into what your objectives are and what are your strengths and weaknesses.

0:35:56.2 You know, individuals who may be have a great accounting, finance background, they’re not going to leverage an outside CPA from a different accounting group.

0:36:04.3 But if it’s your weakness and you’re scared of it? And if you don’t think you can manage it? Outsource it. Get the help, get the expert. Have that accountability.

0:36:12.2 Because, guess what? You’re not going to be able to manage and oversee it the way you should. 0:36:16.0 And so, it is kind of figuring out personally what are you strong at and what are you weak at.

Jordan: 0:36:22.5 Love it. So, I want to kind of close here talking about the opportunity of where the industry is headed.

We see outside capital coming into the industry, we’ve even seen some fully blown Silicon Valley software first and basically, just incidentally, property management second companies coming out here.

0:36:42.5 There’s some trends and there’s definitely some shifts that are kind of blowing. What do you think is going to be the same and what is going to be different about our industry five years from now?

Lukas: 0:36:52.8 I think it’s going to change dramatically. I think probably what we run the risk of is it’s an attractive space with a lot of attention and there’s going to be a lot of providers.

0:37:01.3 The risk of commoditization. 0:37:02.4 How do you distinguish yourself in a space. 0:37:05.0 Just give you an idea – alone, in 2017 there were over 34,000 new property management businesses started.

0:37:13.6 Not all of them end up coming to fruition, but there was 34,000 businesses that designated their primary function as property management.

Jordan: 0:37:21.1 Wow, that’s a really interesting data point. Wow.

Lukas: 0:37:22.8 And that trend’s been growing. It’s, you know, was in the kind of the mid 20’s three years ago and it’s just been accelerating.

0:37:27.7 So, again, we have natural attrition in some of those, you know, fall out. But you see that acceleration and more if you look at property management as a search term. That’s doubled on a national level in the last three years. 0:37:40.7 So we’re seeing attention in that space coming.

0:37:42.5 So I’d look at it as a great thing, creating awareness and having more professionals in the space.

But, as that space gets more crowded, how do you stand out? How do you differentiate yourself?

0:37:52.1 I think that’s so important as we look at it because technology’s going to come in, it’s going to naturally disrupt it and we’re going to have to figure out where does it make sense.

0:38:00.6 Because I think technology will be a great thing and can be used in the right way. But right now, it’s so early and I think people, especially, as you said, there’s a lot of firms popping up — Silicon Valley throwing dollars at it – that aren’t fully formed ideas.

0:38:12.9 But they’re like, “I want to address this piece.” 0:38:15.2 And so, again, we’re in this early stages. Some of these things will shake out, some of them won’t.

0:38:20.8 And so, it’ll be this evolution. But I really look at how to avoid commodification. Because, you know, everyone today looks and feels very similar. And how do we really provide something that’s different and value add.

0:38:33.5 I’m going to throw it back to what I told you before. I said as our whole – kind of what we embody as a system is, we’re in the wealth creation business. Now how do we help them, clients, make more money? 0:38:43.9 If we can do that and demonstrate that? To me, you can stand out.

Jordan: 0:38:49.0 Love that. Great advice. Getting clear on your positioning, understanding, just being realistic about this notion that there’s a lot of other businesses that look like you. And that’s ok, as long as you actually do the work to stand out.

0:39:01.0 What I think, my belief is that a long-term business plan does not look like simply cost cutting and fee maxing.

0:39:08.2 Those are tactically relevant things to do in the near term, but that cannot be a long term business plan. The future of the business has to be bigger than that.

0:39:16.6 I really appreciate you coming on the show today. If folks want to find out more about RPM as a franchise and what you’re up to, what’s the best place for them to go?

Lukas: 0:39:25.3 Our website, RealPropertyMGT.com

Jordan: 0:39:29.6 Alright. So guys, let’s keep eyes on what Lukas and RPM are up to. Definitely an interesting player in the space and I appreciate you coming on the show and carving out some time for us.

Lukas: Hey, a lot of fun, thanks for having me.

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