So, you made the call to hire a property management company to free up your schedule, but sifting through the various fees has proven to be just as time-consuming. How can you quickly and accurately calculate your anticipated costs?
This article explores the typical fee structures that property management companies use. Understanding these fee models can help you negotiate the best rates for your property.
Property Management Fee Structures
Percentage-Based vs. Flat Fee
There are two standard property management fee models: a percentage of monthly rent or a flat rate. Management companies also charge separate fees for specific tasks and services.
Percentage fees are a percentage of the gross monthly rental income, typically 5%–10%. The advantages of this structure include incentivizing the property management company to increase rental income. It works best for lower to mid-range properties, but a percentage fee can be costly for class-A properties with higher rental rates.
Flat fees are a fixed monthly dollar amount determined by factors like rental property type and size. The main advantage of flat fees is cost predictability. With a consistent monthly fee, property owners can easily budget expenses. However, some argue property management companies are not motivated to maximize rent under flat fee models since their earnings don't fluctuate based on revenue.
Flat fees work best for high-end properties where percentage fees would be too costly given the larger rents. The fixed rate helps keep costs reasonable.
Hybrid models can offer a balance between percentage-based and flat fees. In this structure, the property management company charges a lower percentage fee and includes a fixed monthly base fee. This approach can provide cost predictability and still incentivize the property management company to maximize rental income.
Property management companies might offer tiered rates, especially for owners with multiple properties. Under this model, the percentage fee decreases as the number of properties or units under management increases.
On top of the percentage-based or flat fees, property management companies charge additional fees for certain services, such as:
Tenant Placement Fees
These are a percentage of the monthly rent amount, often 50%–100% when the property manager secures a new tenant. In 2022, the average tenant placement fee was around 70.6% of the monthly rent collected.
A one-time, flat fee is charged for an initial property inspection of a rental unit. It covers the time and work spent assessing the property's condition. This fee will vary depending on the size and type of property you own.
Fees for Lease Renewal
Property managers usually charge a fee when tenants renew their lease. It could be a flat rate or a percentage of the yearly rent amount. On average, this fee is approximately 30.33% of the rent and covers the property manager's work in handling lease renewals.
Contract Setup Fees
There can be an initial fee of up to $300 for creating the property management contract. This one-time fee helps cover the administrative costs of establishing the contractual relationship.
Property managers charge to cover the time and legal costs of evicting a tenant. The specific fee amount varies depending on the eviction process in each state.
Negotiating Property Management Contracts & Fees
Assessing Needs & Comparing Prices
Start by assessing your specific needs. Consider aspects like tenant screening, rent collection, maintenance, and whether on-site staff is necessary. Take into account the type and size of your property, and clearly outline the essential services based on your property's unique characteristics. This will help property management companies customize their services and pricing in their proposals.
When comparing the fees and services offered by different management companies, pay close attention to their fee structures and consider any additional charges that might apply to specific services.
It's always a good idea to build relationships with budget-friendly contractors who can handle repairs and scheduled maintenance for your property. To keep your expenses manageable, consider setting a reasonable budget for monthly or annual maintenance costs. As a rule of thumb, maintenance expenses usually make up roughly 8% of a property owner's overall operating costs.
One savvy way to keep your property in great shape is to prioritize preventative maintenance. By staying ahead of issues, you can often avoid major, costly repairs down the road. When evaluating a property management company, inquire about its approach to preventative maintenance. Do they have an in-house team for this work, or do they hire external services? Make sure to scrutinize and eliminate any services that don't bring tangible benefits to your tenants or your property.
Property owners can protect themselves from unpredictable fee hikes by confirming that the contract terms limit annual fee increases to a specified range, such as 3%–5%.
Length and Renewal
The initial term and auto-renewal of most contracts typically span one year, but this duration can vary. Confirm you are comfortable with the length of the term. Pay attention to auto-renewal clauses and understand the details surrounding them.
Standard contract terms can serve as negotiation points for better fees. You might consider agreeing to a longer contract term in exchange for reduced fees.
Termination Clauses and Notices
Check the contract for details about ending the agreement. There may be an early termination fee for canceling before the end of the contract term. However, you should confirm no extra fees apply for concluding at the specified contract end date after proper notice (typically 30–60 days).
You should also verify that you can terminate the contract immediately in certain situations, such as management company negligence.
Consider requiring the management company to get multiple quotes for significant expenses or renovations. You may also want to set a limit where expenses above a certain threshold need advance approval before proceeding. These negotiating points give investors more control and oversight over their investment property.
The contract should clearly outline the service standards the property owner should expect. It can include how quickly the management company handles maintenance requests, how long it takes to find new tenants, and more. Having these standards in the contract guarantees the property management company provides a certain level of service.
Property owners should decide how frequently they want to receive reports like financial statements and rent collection summaries. Regular reports help monitor a property's performance and provide insight into investment decisions.
Finally, verify the contract has ways to resolve potential disagreements between the property owner and the property management company. These can include:
Next Step: Choosing a Property Management Company
Besides pricing and contract options, investors should also evaluate the property management company’s reputation, communication, and value.
As part of the evaluation process, you should look at the property management company's reputation and reviews. It can give a good indication of how they perform and how satisfied their customers are. Check online platforms like Expertise.com or Propertymanagement.com for reviews of different companies.
Look for a property management company that values transparency and good communication.
Signs of a transparent company include open communication, easy access to financial data, straightforward pricing, responsibility, documentation, and high ethical standards.
Value for Money
Consider the value for money, which includes reviewing the cost and the quality of the property management company's services. Excellent property management services can increase property values and keep tenants happy, while poor services can do the opposite.
It's about more than finding the lowest-cost option. Investors should verify they are getting the best services for the cost.
Close to half of rental property owners hire a property management company to reduce landlord duties. Understand property management fee structures and additional service charges as part of the evaluation process.
Estimate costs across providers and negotiate the contract terms upfront. Focus discussions on setting clear maintenance budgets and limits, prioritizing preventative repairs, and removing unnecessary services.
The right property management partner can handle operations smoothly, allowing property owners to focus on other priorities.
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.