As with so many things, the answer is “it depends.” Property management firms vary widely, and much of the answer depends on the scope of the engagement. Just what do you want a property manager to do for you?
Any arrangement a property owner makes with a property management company is one of delegation. One owner may only want to delegate certain tasks and functions to a property manager, while remaining very ‘hands-on’ in other areas. Another owner may want to take an almost complete ‘hands-off’ approach.
Fees also vary by location, the type of property and the estimated man-hours involved in providing property management services.
Typical Fee Agreement
As a baseline, expect to pay a typical residential property management firm between 8 – 12% of the monthly rental value of the property, plus expenses.
Some companies may charge, say, $100 per month flat rate. This may or may not be a good deal for you, but most property managers charge the small percent of the monthly rental payment.
Other Possible Fees
- Vacant Unit
Some firms charge 1 month’s rent up front. You may run into this fee if you are trying to engage the property management firm while the property is vacant. This gives them the cash to pay a real estate agent a commission for placing a renter on the property, or to pay the costs of advertising, repeatedly showing the property to prospective renters, as well as the cost of preparing lease paperwork (which can take hours).
- Tenant Occupied Unit
Some management only charge when there is a tenant on the property. If the property is vacant, they may charge a reduced fee, or no fee at all.
- New Tenant Placement
Some managers may charge for a new tenant placement fee or bonus structure for getting a tenant into a lease. Or a fee of 50 percent of the first month’s rent for any new tenant placed is not unusual. However, you should not generally run into significant multiple up-front fees. Either they have a first-month rental fee, an upfront fee, or a big percentage of the first month’s rent collected. Though, normally you shouldn’t have to pay all three unless they have very low or no ongoing monthly expenses.
Some companies retain their own maintenance crews, full-time. If this is the case, you will have to negotiate what routine maintenance services are included with your monthly percentage, and what they may pass on to you in extras. You may see labor charges of $20 to $45 per person, for example, plus materials. You shouldn’t be blindsided, though. Your agreement should set a limit for how much your property manager can charge.
Unfortunately, from time to time, eventually some tenants just don’t work out. Some lose their jobs and become unable to pay their rent, while others prove to be irresponsible and a disturbance or nuisance at a property. Most likely a property manager will charge a fee to go through the tedious process of evicting a tenant which is typically around $200-$500 per eviction, plus any applicable court costs.
- Late Payments
They may have a fee for delayed payment; on average this is 25 – 50% of the collected late fees.
These are for fairly broad engagements, where the property manager is doing all the heavy lifting in obtaining and working with tenants, (including any collections and eviction activity that may arise, along with routine home maintenance.)
Some owners prefer to do much of that themselves and just turn to a management company for tenant screening, as well as recruiting. For this arrangement, where there is no ongoing maintenance activity on the part of the property management company, you may just pay a one-time commission of 50-100 percent of one-month’s rent for anyone they bring in who signs a 1-year lease.
The percentage may be smaller with short-term or seasonal rentals, but not that much smaller. (It’s just as much work recruiting a short-term renter as a long-term one!)
In some cases, you may see some costs passed on to you – especially where the manager is charging a low monthly percentage. Examples might include an advertising fee in connection with placing a tenant, an annual inspection fee, and some sort of reserve, so that the management company has some cash on hand to take care of unanticipated, but urgent, expenses.
You may want to look into how you split up pet deposits collected and bad check fees (generally whoever gets stuck with the most bank costs should get the bulk of this one!) Also, notice whoever gets to keep the income from vending machines and coin-operated washers and driers, if any.
What to Watch For
Contract language is important. Look in the contract for how you will be paying the manager. Does the contract say that you will be paying them out of “rental value” or “rent due?” Or will you pay them out of “rent collected?” There’s a big difference. A property management company that only gets paid a percentage of rent collected has a big incentive to do its job.
On the other hand, a manager who gets paid based on “rent due” expects to be paid even without a renter, or even without collecting from a delinquent renter. From your point of view, you want to pay your manager out of collected rent. That is, if the manager is charging a 10 percent fee per month, and the rent is $1,000, they send you $900, every month. If there’s no tenant, or they can’t collect, they don’t send you anything, so they don’t collect anything, either.
Ultimately, engaging a property manager is entering into a partnership. In the long run, the fees aren’t as important as the communication between you and the manager and quality of the service your manager provides. A good company can take charge of the maintenance of the property, for example, and wind up getting you much more rental value and price appreciation than you thought possible. However, you need to be willing to provide them the resources to do it.
With the best property managers, paying a little bit more is a wise investment, because it helps enhance the value of your property, and they help retain quality tenants; studies have shown hiring a property manager can cut your vacancy rate in half. Conversely, going cheap with a property management firm can wind up being very expensive. Here are some property manager interview questions that will help you determine which company you should hire.
Writing about personal finance and investments since 1999, Jason Van Steenwyk started as a reporter with Mutual Funds Magazine and served as editor of Investors’ Digest. He now publishes feature articles in many publications including Annuity Selling Guide, Bankrate.com, and more.