Real estate investors who are successful understand that a property manager is a valuable asset, not an expense.
Property managers can help you to increase the return on investment and keep your rental properties occupied. They also free up time that allows you to focus on expanding your real estate business.
How do property management fees work?
The fees charged by property management companies are generally structured in two ways: either as a fixed monthly fee or as a percentage based on the amount of rent collected.
Percentage of monthly rent
Most property management companies charge between 8% and 12% of monthly rent. Based on an average 10% fee, if your rent is $1200 per month, the monthly property management fee will be $120.
Management companies charge a fixed monthly fee for vacant properties. Management companies may have to do more work when managing vacant properties, like inspecting the property weekly for possible break-ins and squatters.
Fixed property management fee
Some property management firms offer a flat fee instead of charging a percentage of the monthly rent. The fixed fee is usually based on the type of property, the square footage and the services offered.
The fixed fee for property management is usually around $100 per month, although the fees vary depending on where you live. A flat fee might appear to be an attractive deal, but management companies that collect a fixed fee are not as motivated to maximize your rental income.
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Additional property management fees
Property management fees may not be all-inclusive. A property management company will often charge extra for services beyond the monthly fee.
Contract setup fee
The majority of property management companies charge an initial setup fee of around $300. The contract setup fee includes:
- Creating your account for bookkeeping purposes
- If needed, you can open a bank in your own name.
- Helping you to obtain any necessary business or tax licenses
- Initial Property Inspection
- If you bought a turnkey property, you will need to coordinate the transition to a different property management company.
Overseeing vacant property
A property management company may have to work harder when managing a vacant home than when it is occupied. This is because more problems can arise.
Water leaks or security lights can occur unexpectedly because utilities are left on during showings. Even in the most desirable neighborhoods, the longer a rental property is vacant, the higher the chance of it being vandalized or broken into. The property manager should visit the rental property at least one time per week to help minimize the risks.
Leasing vacant property
You can reach millions of potential tenants by listing a vacant rental on websites like Rentberry, Zillow, and Rentals.com. If you are a remote investor in real estate, you will still need someone to show your vacant property to potential tenants.
Some property management companies do not charge a fee for leasing a vacant home, but most collect a lease fee equal to half to one month’s rent.
Landlords can save money when it comes time for tenants to renew their lease. Management companies often charge a minimal fee or even no fee for lease renewals if the tenant is willing to negotiate.
Late payment service charges
Rent not being paid on time is a common reason for landlords to charge late fees. A late fee does not always translate into additional profit. Some property management firms will retain between 25 – 50 percent of the late fees collected to compensate for the need to chase the tenant in order to collect unpaid rent.
Repairs and maintenance
Property management companies that are the best will either have a network of vendors they trust or a full-time, in-house maintenance team. Repair and maintenance costs are likely to be lower because vendors give management companies preferential pricing in exchange for their business.
Ask about the markups on labor and supplies when you interview potential property management companies. One caveat. Many management companies charge around 10% of your project value as a fee to ensure that the work is completed properly.
Routine inspection fees
A residential rental property is inspected from the inside out, as a general rule, every three to six months. Regularly inspecting a home can help to identify and correct small problems before they grow into larger and more expensive ones, as well as ensure that tenants are not damaging the house.
Some property management firms will perform a semi-annual checkup at no cost. Some property management companies may require you to pay each inspection in exchange for lower monthly fees. You should ask the property management firm to send you an inspection report with photos and videos to verify that the inspections have been done.
Evictions and collections
It is not common, but you may have to evict your tenant because they are not paying rent, causing problems in the neighborhood, or damaging your rental property.
Some larger property management companies have the experience to handle residential evictions themselves, while others contract the work out to a local law firm that specializes in evictions. You can expect to pay an eviction fee that is around $500, plus any legal fees.
If you win the case in court and are awarded a judgment for eviction, collection agencies, and attorneys will charge a fee that is usually about half of the money recovered.
Contract termination fee
A fee is usually charged for early termination of the property management contract unless the landlord breaks the contract “for cause”, e.g. the manager does not perform as per the contract.
The termination fee can be very different. It could range from a month’s lost income for the management company to suing a landlord for breach of contract.
Factors that affect property management fees
The amount of your property management fee will be based in some way on how much work it takes to maintain and improve the condition of your property and maximize its rental value and income. A small building with 3 or 4 units, for example, is more labor-intensive for a property management company than a rental single-family home.
The following factors will affect the amount of property management fees a landlord pays:
- Type of property, such as a single-family home vs. multifamily property or a short-term property.
- The size of the property is based on square footage or the number of bedrooms.
- Property condition: Older properties require more maintenance and repairs than newer ones, even though they are updated.
- In general, areas with better ratings attract more tenants and have fewer issues than those where school districts are poor or amenities are scarce.
- Full-service pricing vs. pay-as-you-go pricing. Some property management companies charge lower monthly fees for minimal services, such as handling maintenance requests and rent collection, but offer landlords a-la-carte pricing or pay-as-you-go pricing on repair costs, inspections of the property, and lease renewals.
- Property management costs are affected by market competition. In some smaller markets, property management fees can be higher because there is less choice and competition for landlords.
Is hiring a property management company worth the cost?
It may not be the best choice for all property owners, but it is definitely worth the extra expense for most real estate investors. Before hiring a property management company, it is crucial to know what your goals are. Understanding the key questions that you should ask a prospective property manager will be crucial to your success.
What are your expectations from the property manager you hire?
Ask yourself what you need in terms of property management.
You’ll need a local property management company if you are a remote investor. They will take care of your tenants and deal with the daily issues. Investors who have rental properties in the area where they live may choose to manage the property themselves.
You can link your bank account and generate financial statements from your dashboard as an owner, instead of relying on a property management company.
Does saving a few bucks a month make sense?
Be careful to not underestimate the time required to manage a property, or the types of tenants that your property may attract.
Property management companies that are good will have a network of handymen and contractors with preferential pricing plans. These savings can be passed directly on to you.
The location of your rental property and the potential tenants will also influence whether or not you should hire a property management company. Rental properties in low-income areas and Section 8 housing may generate good cash flow, but dealing with tenants and repairs can take a lot of time.
What is a real estate manager?
Consider a few what-if scenarios if you are still on the fence about whether hiring a property manager is advisable.
Consider how you will handle the advertising of your vacant property, screening tenants, signing a rental agreement, and handling tenant issues as they arise. You may find that contractors are less willing to respond to your needs and charge more because they don’t have a lot of business.
Do you know the laws that govern your locality, including the State landlord-tenant laws as well as the Federal Fair Housing? If you don’t take the right steps to collect past-due rent, enter a property, or ensure the property is habitable, then you could find yourself in trouble with the law.
How to find a property management company
Property management can consume a lot of time, especially if you are already busy. This is one of the biggest benefits to having a property manager.
Time is money, as we all know. You can use the time saved by letting a property manager manage your rental property to analyze ways to grow your business or rental portfolio.
When you are ready to start your search, here are some tips on how to find the right property management company:
- You can ask for referrals from other real estate investors and lenders. Also, real estate agents, who are members of the same investment group as you, like BiggerPockets, may be able to help.
- Use sites like the National Association of Residential Property Managers to find property managers in your area.