Hiring a property management company is a proven way to bring in more revenue with less work, but how much do they actually charge? As with so many things, the answer is “it depends.” Property management firms vary widely in the scope of services they provide, so start by asking yourself what you want a property manager to do for you.
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 a more ‘hands-off’ approach.
Fees also vary by location, the type of property, and the estimated man-hours involved in providing property management services.
This post will discuss types of property management agreements, additional fees that may apply for each management style, what to keep an eye out for when entering into an agreement with a property management firm, and how to decide whether hiring a property manager is the right decision for you.
There are two basic ways fees break down. You’ll either pay your property manager a percentage of the monthly rent or a fixed monthly property management fee.
As a baseline, expect to pay a typical residential property management firm between 8 and 12% of the monthly rental value of the property, plus expenses.
While most property managers charge a percentage of the monthly rental payment, some companies may offer a monthly flat rate per unit. This may or may not be a good deal for you depending on your property’s rental value and the scope of services covered in the agreement, among other factors.
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 expensive. A good property manager will always be worth the money.
It’s not uncommon for additional fees to pop up from time to time. Here are a few common fees that many property management firms will charge when applicable.
Vacant Unit. Some firms charge one month’s rent upfront. 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 companies only collect fees when there is a tenant on the property. If the property is vacant, they may charge a reduced fee or no fee, depending on your agreement.
New Tenant Placement. Some managers may charge a new tenant placement fee, a bonus structure for getting a tenant into a lease, or, a fee of around 50 percent of the first month’s rent for any new tenant placed. However, you should not generally run into more than one of these up-front fees. Most companies only charge one of these fees. You shouldn’t have to pay all three unless the company has minimal or no ongoing monthly expenses.
Maintenance. 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 per crew member, for example, plus materials. Don’t be blindsided, though. Your agreement should set a limit for how much your property manager can charge.
Evictions. Unfortunately, from time to time, some tenants just don’t work out. 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. Property managers may have a fee for delayed payment. Whether it’s a late payment from a tenant or the property owner, charges can apply. On average this is 25–50% of the collected late fees.
Set Up Fee. Some firms charge a one-time set-up fee for new clients. Make sure to read the contract carefully and understand when one-time fees apply so you’re not surprised.
That’s a lot of potential fees to monitor, but keep in mind that most of the additional fees above 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 work themselves and turn to a management company for limited services like tenant screening and 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. From the second month’s rent onward, you won’t have to pay an additional fee.
The percentage may be smaller with short-term or seasonal rentals, but not by much. 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.
Splitting smaller fees and revenue. 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 dryers, if you have them.
The 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”, “rent due” or “rent collected?” There’s a big difference. A property management company that only gets paid a percentage of rent collected has an even stronger incentive to keep rent payments coming in.
Ask for a trial period of 3-6 months so that, if it’s not a good fit, you’re free to find another property manager without the cost of breaking a contract.
These days, you wouldn’t spend $15 on Amazon without reading customer reviews first. The same goes for hiring a property manager. Usually, you’ll find client testimonials on the company’s website. If testimonials aren’t readily available, ask for them. If a company isn’t willing or able to provide them quickly, this is a red flag. Find another property management firm.
Right away, you should benefit from having fewer day-to-day responsibilities with your property. Of course, you can expect a transition period of a few months when handing over the reins to a property management company. But, take notice if your PM company continues to need oversight and supervision. This may be a sign they’re not suitable for you. That’s why a trial period in your contract is important.
Once you’ve found the perfect fit to manage your property, consider how else you can benefit from their expertise. Property managers are a wealth of knowledge and can offer insight into what other investments may be right for your real estate portfolio. If you’re lucky, you may get more than a manager, perhaps even a partner for future investments.
Communication is key to any lasting partnership. In the long run, the fees aren’t as important as the communication between you and the manager and the 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 with the resources to do it.
Property management is not a one-size-fits-all approach. As discussed, the best property management companies will create a plan and approach that best fits the specific needs of your property. This means that many factors can affect how the final pricing comes about.
Before entering into any formal agreements, spend time researching all your options. Find local companies online, ask friends and investment connections who they’ve worked with, and then interview your top choices. Depending on your location, your options could vary greatly in terms of the size and specialization of the property management companies available. Wherever you’re located, the next two tips can help you make the right choice:
A property management company works for you, which means they should adapt to your needs, not ask you to change plans for them. Every investor’s needs are different.
A good PM company will be able to accommodate YOU, not fit you into a cookie-cutter approach.
Hiring a property management company means you’re hiring additional brainpower to maximize your investments. You want to hire management with expertise in areas you’re unfamiliar with. This way, you can call on their experience to both manage your property and share advice that can help you grow your portfolio over the years.
Make sure you come prepared with a few property manager interview questions. This will help you find the right company for your needs and investment style.