Property Management Fee Question

13 Replies

Hey everyone, 

I am analyzing a deal right now for a 26 unit apartment complex. I know on larger properties (50+ units) it is common to have an onsite property manager and the fees are between 4-6% plus payroll costs for the onsite manager. For a smaller complex like this, should I budget for payroll expense as well? The current owner self-manages the property so I cannot gauge a true management cost. Typically I would factor in $900/door for payroll cost plus a management fee.  Any thoughts on management fee % and payroll expense would be greatly appreciated. 

Mike

What class type is the property? How far away is it from stabilization? You may need someone onsite upfront at least.

I was asking the same question the other day and I have been hearing 2-3% plus payroll in my area of CA.

B property in B area. Asset is stable and fully leased. 

Michael,

For a smaller property like this you might want to factor in an 8% management fee + leasing/renewal commissions. This should allow you to have a professional local company manage the property for you. I do not foresee that they would need to hire someone extra on top of this.

The management company should include it in their portfolio of properties. Some management companies will charge you extra for computer fees, management software set up, copies, etc etc. ... the list goes on and on. (read the contract carefully)

If you do not want to use a management company you can "hire" one of the residents to function as an onsite supervisor for you and pay them through a credit to their rent. If you do this you need to consult a lawyer or an accountant to understand how this can be done without assuming too much risk/tax, and if you are allowed to do this at all in your state. You would probably also need to be involved with purchasing, vendors etc. 

From the numbers I have seen salary costs are much more likely to be $1000 to $1500 per unit. If you hire someone you need to be clear about local and federal employment laws, alternatively you can hire them as contractors. If so you need a very well worded agreement that they sign. Again make sure you speak to your lawyer about this. 

Finally, whether or not your hire a person or a management company you need to be clear about your expectations. You don't want to go past 3 months of operations if the results are not as you expect. (make sure you are clear on leasing, budgeting, purchase approval limits etc.

This was a long winded answer, but I hope this answered your question.

Christian

I pay 6% for my 20 unit. It's a standard property management company that does houses and small multis as well as a number of sub-100 unit apartment complexes.

Thank you all for your input. @Christian Brodin and @Jeff Kehl so 10% would be conservative and include all lease-up and other fees based on your experience. This would be the total cost of property management and there would be no payroll costs? Just want to confirm before I get back to the broker. 

Thanks again,

Mike

I would say so but it would depend on you finding the right PM company. Apartments take a more experience manager so a company that has a big staff already and does some apartments would be best. If you have some time, the best way to do it would be to pull a list of apartments in the area, find out who is managing them and see what they would charge.

I pay 4% for some larger properties (over 50 units) and 8% for smaller ones at 24 units and under.  I think you should work with the property management company and get them to look at the property and give you a budget.  On my larger properties I walk them with the property manager and work with them to figure out what staffing would be required to do this.  It might be that they can reduce your payroll expense by having a shared manager who comes from other nearby properties part-time.  Or they might say they need someone there and will give a budget to you for what they think they need.  Either way, it's critical to evaluate it together so you have something concrete to work with.  

There's also legal implications based on your location.  For instance in the People's State of California, you have to have a live-in manager for any complex over 16 units - so you have no choice about it in those instances...

Last thing to beware of: the leasing fees on top of the property management fees.  I have one smaller 4-plex that is away from all my other buildings and I have property management firm there overseeing it for me.  Their policy was to charge $500 (Average rent there is like $675) for each new lease they get signed.    That totally sucks.  National retention rates are like only 50% or so, so that means half of the units turn over every year and the manager gets to charge me that new lease fee.  That makes the property management rate go from 8% to closer to 11% when you calculate those fees in.  With your size property, you shouldn't need to do that - but check the agreement and make sure!

Good luck...

@Mark Mosch

That was a great reply and very informative. I noticed in your post that your paying a $500 leasing fee for new tenants. Are there any incentives for tenant retention or penalties for not renewing a certain number leases? If not this is an incentive for them not to retain the existing tenant. Always remember management agreements are negotiable, and if they're not willing to agree to certain concessions then maybe they aren't the right management company.

Michael,

Your 10% might be sufficient, but in this case there shouldn't really be any reasons not to use accurate numbers based on your communication with the management company. You can add a formula to your analysis that calculates lease/renewal comission based on turnover.

Make sure that everything in the management agreement is spelled out, including project renovation fees, leasing and renewal commissions, management authority to make decision on repairs with or without your approval etc. It is also good to clarify if you can get discounts using their insurance policy, and if they charge you a mark-up for this. 

Also make sure that they use 3rd party vendors (arms length, competitive bidding) to do work, unless they can give you a better price in-house. Most management companies will upcharge you on maintenance work (electrical, plumbing, paint etc) labor. The margins on just the management fee is wafer thin, and they will try to make money everywhere else.

I just remembered you want to make sure you clarify with them if they allocate any salaries to your property in addition to the management fee.

Christian 

Originally posted by @Michael Sjogren :

Hey everyone, 

I am analyzing a deal right now for a 26 unit apartment complex. I know on larger properties (50+ units) it is common to have an onsite property manager and the fees are between 4-6% plus payroll costs for the onsite manager. For a smaller complex like this, should I budget for payroll expense as well? The current owner self-manages the property so I cannot gauge a true management cost. Typically I would factor in $900/door for payroll cost plus a management fee.  Any thoughts on management fee % and payroll expense would be greatly appreciated. 

Mike

You may want survey some companies in the area and get an average percentage of what they charge.

Thank you all for your insight. I will reach out to some local property management companies. I'd ask for recommendations but I had a post taken down last time I asked about reputable property managers.

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