You’ve reached the point in your real estate career where you feel like you might benefit from some help. Maybe you need a maintenance team. Maybe you want the benefits of having a company help with legal issues. It’s possible you just want to sit back and collect rent while a Property Management Company handles everything. Maybe you are even considering selling your property instead of renting it out. The only question is, How much does Property Management Cost?
This is a loaded question with many different answers. Like all things, some management companies are better than others. Naturally the best property management companies will cost more to use their services.
If your goal is to find the cheapest Property Management company, you might want to rethink that strategy. They are charging less for a reason.
So, How much should Property Management Cost?
On average, a Property Management Company will charge 5%-10% of your monthly rental income.
Usually the more units you give them to manage for you, the better the deal will be. Sometimes they they will let you pay a smaller percentage if you have more units for them to manage. Remember, you can deduct property management expenses on your taxes at the end of the year.
5-10% of your rental income is a lot of money. Make sure you receive all of the benefits you should be. If you are paying 10% or more, they had better have an excellent marketing system. However, If they can get you a 95%-100% fill rate, it might make sense to go with the company that costs a little more. Full units = More revenue. (Obviously)
Standard Property Management Costs
Here are the fees you will have to pay a property management company. These fees below are the bulk of how much your Property Management costs. These fees are usually charged every month.
Percentage Of Rental Income:
In my experience it is best to pay a monthly percentage of your rental income. This incentivizes the rental company to work as hard as possible to fill all of your rentals. If your units are not full, they do not get paid. They will only be paid off a percentage of your rental income.
Make sure that your agreement states they will collect a percentage of Rent Collected each month, not Rent Due for each month. This way if a tenant does not pay rent, then the Management company does not get paid either.
If your agreement says they should be paid based off of Rent Due, you will owe the management company money whether or not your tenants are paying their rent! It’s best to incentivize your Rental Company.
Flat Rate Monthly Fee:
Some management companies will charge a flat rate each month for each unit they manage. This can be convenient because it means you can plan on a solid number to pay every month. However, there are downsides to paying a flat fee every month.
Paying a flat rate is fine, but only if the company has an incentive to fill your units. If they charge a fee regardless if a unit is rented out, that is not good. A vacant unit can go unfilled for months this way. They will not work as hard to fill your units if they are guaranteed a check. You want them to have an interest in filling ALL of your rental units they manage.
Find a company that only charges this flat rate if the unit they are managing is rented out. Specify they collect payment from Rent Collected, not Rent Due. This will be a crucial part of your contract you sign.
This can be a decent deal, depending on the actual cost of each unit to be managed. You can measure if the cost is right by finding out the percentage of total revenue they would be getting. If it’s in the 5%-10% of your monthly revenue range, it is a reasonable offer.
Different companies charge a wide range of flat rates. It can vary depending on the location, the quality, and the size of the unit. Bigger cities can charge a bit more because of advertising difficulty. It costs more to advertise in bigger cities because of competition.
Keep reading to see more fees you might come across.
The extreme high end of Property Management Cost:
I have seen some Property Management companies cost as high as 15%! That is on the extreme end of things. You do not need to pay that much. This is basically a rip off.
These companies often manage luxury high end commercial properties. This is how they get away with charging so much. The value they provide is having a wealthy client base to market to. Even then, 15% is a huge cost to pay for property management. These companies take advantage of owners who need to find tenants or face foreclosure. Do your best to stay away from these sharks.
I’d recommend paying no more than 10% of your rental income. Even that is a bit high.
The extreme low end of Property Management Cost:
Some management companies will offer their “services” for less than 5% of your rental income. Be very careful allowing them to manage your units. There is a probably a reason they are so cheap.
Here are a few-
- They could be Brand New: Maybe they just started and only manage a few units. This means they are more than likely inexperienced. While it’s possible to find a new company that has experienced team members from a different venture, this is rare.
- They don’t Market: Some Property Management Companies just handle collecting the rent and respond to complaints. They don’t have a marketing team, and expect you to find tenants to fill your units. It is almost pointless to hire this type of management company.
- You will be on your own for lawsuits: Again, this defeats the purpose of having a management company. If they do not offer legal representation in a tenant landlord dispute, there is no point to hiring them. You will be responsible for covering lawyer costs either way, but the management company should be responsible for helping you with the process.
- The Company just wants a check: This is the worst. Some companies are managed by, well, lazy people. They sign up owners with promises of cheap costs. In the end they are inattentive to tenants and do a poor job in general. This can be devastating for you as a property owner if they lose tenants or mismanage your property.
It may be tempting to save money by hiring a low cost property management company. Quality service costs money. You will probably be better off paying the standard fees between 5%-10%. Anything less shows weakness in the company, anything more is probably too much.
Side note: These rates can be a bit higher in extreme circumstances. If you are in doubt, contact several companies to compare rates for your specific area.
Extra Property Management Costs
Each Property Management Company can have different extra costs. Here are a few additional fees that you might come across. These fees will all vary from company to company.
Set Up Fees:
Some companies will charge a Set Up Fee when you first sign up. This will cover small things like property inspections or notifying the tenants of management change. This fee should be under a few hundred dollars. Not all companies charge this fee, but it’s good to be aware of.
Fees for maintenance can be included in the agreement you make and covered by your standard monthly fees. However, there might be some extra costs you should be aware of.
The Company might require you bankroll a reserve maintenance fund. Your Property Management Company might ask that you to keep a balance in an account to cover any extra maintenance issues. You should discuss these options with the company. Every company does things differently.
You can ask that they simply take care of issues under a certain amount. For example, you can ask to only be contacted if repairs cost more than a few hundred. This way the management company can just use the money in the account for repairs and not bother you for trivial repairs. Set an amount you are comfortable with.
The account will generally hold a balance equal to 1 months rent. Usually this is where the security deposit is placed.
Keep in mind that your management company might only deal with collecting rent. Make sure to clarify how they handle maintenance issues.
Tenant Placement Fees:
Some Management Companies will require extra money for marketing the apartment, signing leases, and background checks. This can either be a flat rate charge per unit or it can be a percentage of the monthly rent. Tenant placement fees can be separate, or can simply be tied into the general agreement you make with the company.
Sometimes your management company will need to kick out an unruly tenant. Unfortunately that will cost you money. Most companies charge a few hundred dollars, plus any associated court costs that come with the eviction. This can be charged to the tenant, but you might have to get a lawyer to collect this money if the tenant refuses to pay.
Early Lease Termination:
There are occasions where your tenant will break the lease they signed and move out. Sometimes your Property Management Company might charge you several hundred to break the lease. This is because the money they were guaranteed by contract is now being voided.
You should be able to charge this fee to your tenant for breaking their lease early. It is just good to be aware of this issue.
How many rentals do I need before I Find a Property Management Company?
Now you know all of the costs associated with property management, but the question you should ask yourself is if you really need one.
A good rule of thumb is to manage as many units as you can on your own. This way you are collecting more rental revenue and are more profitable.
Single homes for rent can actually cost a higher percentage of rental income to manage. It is difficult for a property management company to justify managing a property for less than $100 a month. Multiplex apartments usually can be managed for cheaper because there is more revenue coming in.
If you only have a few units to manage, it might just be best to continue managing them yourself until the cost makes more sense.
If you have more than 10 units, it might be a good idea to look at property management company costs. 10 units is manageable for some full time owners, and for others it can get difficult. Just remember your time is valuable, and paying someone else to manage them will give you more free time to find and acquire more rentals.
Be sure to vet your Property Management Company thoroughly before you hire them! Do a google search and see what their current tenants say about them. Spend some time reading reviews and seeing what tenants are saying.
Check out their social media. If they do not have one, they are already behind on marketing. You can probably do better. They do not need to have a massive following. Just a presence where renters and potential renters can contact them through facebook or instagram.
It would be best if they have team members that buy and manage their own units as well. This way you know that they have experience.
The company you choose should offer full service management. You should basically just collect the checks every month. You are paying them to do everything else.
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