Why your first question shouldn't be "What is your management fee?"

As a property manager (PM) I often get calls from first time investors, or even seasoned investors asking the question: “What are the fees to have our property professionally managed?” In Grand Rapids, MI there are generally three fees: The management fee, the placement fee (or lease-up fee) and a renewal fee. The rates associated with these fees are easily outlined to the investor during a quick phone call. It often surprises me however, that the investor doesn’t dig further asking about different services, maintenance cost, the turnover approach, marketing, court and the eviction process etc. While mulling this over an interesting parallel can to mind. Imagine you’re a small business owner and a high ranking position opened in your company such as a CEO or CFO. Imagine putting an ad on Indeed which said: “ HELP WANTED Immediate position available as a CEO” Requirement: Based on salary requirements only.” This is a crazy idea right? Well it’s the same philosophy with PM. Landlords and property managers are all running a small business. A PM is hired to run that small business. To make decisions on the owner’s behalf, to negotiate leases, reduce vacancies, suggest upgrades and improvements, maintain the property, deal with tenant issues and complaints, market and show the property, follow state and federal guidelines the list goes on. Owners turn to management they realize they need help running their company. Imagine making this decision based completely on the management fee.

I am hoping to challenge you to dig deeper with the following thoughts.

Follow me as I show where you where the true cost are when owning an investment property and what to consider before hiring a PM.

Full service Property Management generally ranges from 7-10% of rents collected. If there is a company offering super low management prices, there are often other fees to make up the difference. We all have bottom lines to cover and the market is competitive. Let me challenge you to rethink your property management interview questions.

Let assume your rent is $800.00.

For 10% management this means $80.00 per month.

For 9% it is $72.00

For 8% it is $64.00

For 7% it is $56.00.

The difference between 10% management and 7% management is $24.00 a month. The reason I point this out is because owners don't lose money by paying one manager 7% and another manager 10%. The cost difference is very little.

Here is where the cost add up quickly.

Maintenance:

Ask the PM what does a service call cost? Many PM outsource 100% of their service. This means when they call a plumbing vendor you are being billed at $79.00 (minimum per hour) HVAC contractors the same. Generally handyman service is handled through a third party like Mr. Handyman. Obviously there is a markup fee added by the management company usually between 10% and 20% of the project to coordinate it for you. We use mostly in house contractors and bill $40.00 per hour and no markup on material. If you have a company that bills $50.00 per hour, within 2 hours of service on your property, you just paid for the spread between 7% and 10% management.

The goal for your property should be lower maintenance. The better product you offer to your tenants, the better that will treat it, the faster it will rent, and maintenance calls will be lower. Lower your maintenance and you will increase your cash flow. Think preventative maintenance, and quality material.

Turnover:

Ask managers how they handle marketing? When do you start marketing a unit? Do you market it while it is occupied? Do you show the unit yourself, or use a third party? How quick is the turnover process? These questions are very important. One day off the market on an $800.00 unit cost an owner $26.00 in lost rent. One extra day off the market makes up the difference between 7% and 10% management.

Here is what is done at turnover and is a systemized process to lower vacancy preparing the unit for a new tenant.

-Receive keys from departing tenant

-If the property has never been marketed then we wait until the property is rent ready and cleaned prior to taking pictures. If the tenant moving out was placed by our company, we place the property online, begin the marketing process during the tenancy of the current tenant.

-Damage inspection: Once keys are received we respond to the house within 24 hours to change the locks (for free) and to complete a damage inspection. This is compared with the move in inspection and the tenant is charged against their security deposit accordingly.

-We provide a report along with photographs to the owner outlining the condition of the property and what needs to be done prior to moving a new tenant in. We also suggest improvements and upgrades at turn over.

-Once the inspection is approved we coordinate the repairs with various vendors, and in house contractors. We also schedule general cleaning and carpet cleaning.

-Marketing: We pay an employee to take pictures, measurements, write an advertisement, upload pictures to market your property on nearly 50 sites.

-We answer dozen of calls on properties answering numerous questions prior to scheduling a showing. We screen through the unqualified tenants, with a goal of only showing your property to qualified prospects

-Showings: We send a leasing agent to show your properties every time a qualified person calls or schedules an online appointment. We do same day showings. On lower end units the cost of this is even higher as lower end distressed properties are hard to rent. Our leasing agent likely spent 5 -10 hours showing each unit of your prior to renting.

-Background: We check tenants employee references, landlord references, national back ground including criminal and credit check, draft lease documents (containing roughly 15 pages of customized documents) prior to moving a tenant in, along with supplying keys and explaining the lease.

-Move in pictures/video: Upon completion of the rent ready we take move in pictures and or a video of your property. We generally take 25-50 pictures per unit prior to move-in that is billed for in the placement fee. This requires an employee to make a trip to the house and to upload the pictures which are stored on our hard drive.

-Signs: We place a sign in the yard for higher local visibility.

-Website: We maintain a website to advertise and pay for a service to syndicate the listings.

Lock Changes:

There are managers that charge a lock changing fee at turn over. Some competitors charge between $100 and $200 each time. On a $800.00 monthly rental (with the 50% placement fee) your placement actually ends up costing $600.00 (with the lock change). Asking only what your management fee is will never uncover these turn-over fees. Changing locks is important between tenants, but there are solutions to make this cost minimal.

What happens if a tenant breaks their lease or gets evicted:

We offer a 12 month guarantee (although we are thinking about changing this since we are the only ones that offer this) This means is your tenant moves or gets evicted after 11 months we will place another tenant for free. Most companies offer 3-6 months. This doesn't happen often, but it will happen eventually. This guarantee could save you hundreds of dollars.

Collections:

What does your manager do if your tenants fail to pay rent? Do they pursue the tenant after they move out, or is this turned over to a third party collection agency? Remember every $30.00 you save or collect from tenants could represent 3% in management fees.

Tenant Screening:

Ask what the manager what their qualification process is to approve tenants. One bad tenant will cost hundreds and usually thousands of dollars. If your market allows, look at your qualification requirements and tighten those up. There are of course circumstances that you can’t prevent with tenants, but doing due diligence prior to them moving in is the best way to prevent lost rent and damage to your property long term.

Lastly, ask the company you are interviewing if the property manager overlooking your portfolio has a real estate portfolio of their own. Imagine hiring a property manager to make decisions on your property without having ever made the same or a similar decision on a property they own. This experience will give your manager a leg up. Knowing your manager is an active investor is an important key to having a well-rounded "CEO" in charge of your business.

Happy investing!