I'm somewhat new to Real Estate investing, so I analyze lots of deals as a way to learn. I want my analyses to be as accurate as I can get them. I've been concerned about the accuracy of my estimate for Property Management expense. At first I was using 10% because in many metros, that's what PM's take from the monthly rent roll, but then I realized that was only part of the story. • Each time a tenant moves out, a PM charges 1 month's rent to place a new tenant. If tenants stay on average for 2 years, that's an extra 1/24 (one month out of 24) of rental income going to the PM. 1/24 = 4.2%. • Most PMs charge a renewal fee if a tenant re-ups. Again using the average 2 year stay, that means the PM is collecting that fee every other year (think of it as: in even years, the tenant re-ups; in odd years, new tenant). Let's say that's another $100 on a $800/month unit. That's 1/8 of a month's rent, every 24 months - another 0.5%. • Each time a tenant re-ups, I'll want an inspection of the property. Call that $75 - again, every other year. Add 0.4%. So we're looking at • Base fee: 10% • Tenant placement: 4.2% • Renewal fee: 0.5% • Inspection fee: 0.4% • Total: 10+4.2+0.5+0.4 = 15.1% Of course, this will vary across markets and between PM's. In some areas PMs charge less than 10%, or less than a full month's rent for a tenant placement. And if your tenants stay longer than 2 years, then your placement fees will hit less often. But the point stands: the base rate is only a part of the net cost of PM service. I'd love to hear from other BP'ers: what do YOU use for PM cost in your analyses (or what are you actually paying). Anyone?

@Joel Fine excellent question! I've spoken with a lot of different turnkey companies and it annoys me so much that they never include placement or renewal fees in their pro-formas (not that you should trust their pro-formas anyway). I think on average over time it will probably be closer to 15% like you have calculated, but in reality, its going to be lumpy.... a $1,000 placement fee could wipe out half of your return for the year! For my projections (to be conservative) I'll assume an 18 month lease with two different PM lines. The first line I have the standard 8% PM fee, and on the second line, I'll do a placement fee in year 1, a renewal fee in year 2, and then a placement fee in year 3, etc. That may very well equal 15% on an annual basis, but for me it helps to think about them separately as the 8% should be constant, but the second line will be variable. For my homes in Memphis, I'm paying 8% PM fee, 75% of one month rent for tenant placement, and $150 renewal fee. I also have an optional 2x/ year property inspection for $80 (I've chosen to get it done once a year). This is not the cheapest I found in Memphis, nor is it the most expensive. It's in the middle. Finally, I had a rough start to my first two turnkey purchases. I've learned the hard way to value of a good PM and I have no desire to independently manage them remotely. A great PM is worth their commission, but a bad one will drive you crazy (and cause you to lose money).

@Joel Fine I was in the same boat. The reality is that bigger really is better. Ask @Ben Leybovich and he will tell you I am doing the wrong thing too. I need to sell all this Chicago stuff that gets snowed on and go buy a 200 unit value add in Phoenix :)

What do you REALLY pay for Property Management?

Matthew McNeil

Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes

7y

Originally posted by @Joel Fine:

I'm somewhat new to Real Estate investing, so I analyze lots of deals as a way to learn. I want my analyses to be as accurate as I can get them.

I've been concerned about the accuracy of my estimate for Property Management expense. At first I was using 10% because in many metros, that's what PM's take from the monthly rent roll, but then I realized that was only part of the story.

Each time a tenant moves out, a PM charges 1 month's rent to place a new tenant. If tenants stay on average for 2 years, that's an extra 1/24 (one month out of 24) of rental income going to the PM. 1/24 = 4.2%.
Most PMs charge a renewal fee if a tenant re-ups. Again using the average 2 year stay, that means the PM is collecting that fee every other year (think of it as: in even years, the tenant re-ups; in odd years, new tenant). Let's say that's another $100 on a $800/month unit. That's 1/8 of a month's rent, every 24 months - another 0.5%.
Each time a tenant re-ups, I'll want an inspection of the property. Call that $75 - again, every other year. Add 0.4%.

So we're looking at

Base fee: 10%
Tenant placement: 4.2%
Renewal fee: 0.5%
Inspection fee: 0.4%
Total: 10+4.2+0.5+0.4 = 15.1%

Of course, this will vary across markets and between PM's. In some areas PMs charge less than 10%, or less than a full month's rent for a tenant placement. And if your tenants stay longer than 2 years, then your placement fees will hit less often.

But the point stands: the base rate is only a part of the net cost of PM service.

I'd love to hear from other BP'ers: what do YOU use for PM cost in your analyses (or what are you actually paying). Anyone?

Joel, I've been very fortunate to have a great PM whom I've used for 10+ years. They charge me a flat 6% of the gross collected rent with no additional fees such as what you've listed in your post; with the exception that I reimburse them for advertising when there's a vacancy.

4 Reply

Account Closed

Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes

7y

Originally posted by @Joel Fine:

I'm somewhat new to Real Estate investing, so I analyze lots of deals as a way to learn. I want my analyses to be as accurate as I can get them.

I've been concerned about the accuracy of my estimate for Property Management expense. At first I was using 10% because in many metros, that's what PM's take from the monthly rent roll, but then I realized that was only part of the story.

Each time a tenant moves out, a PM charges 1 month's rent to place a new tenant. If tenants stay on average for 2 years, that's an extra 1/24 (one month out of 24) of rental income going to the PM. 1/24 = 4.2%.
Most PMs charge a renewal fee if a tenant re-ups. Again using the average 2 year stay, that means the PM is collecting that fee every other year (think of it as: in even years, the tenant re-ups; in odd years, new tenant). Let's say that's another $100 on a $800/month unit. That's 1/8 of a month's rent, every 24 months - another 0.5%.
Each time a tenant re-ups, I'll want an inspection of the property. Call that $75 - again, every other year. Add 0.4%.

So we're looking at

Base fee: 10%
Tenant placement: 4.2%
Renewal fee: 0.5%
Inspection fee: 0.4%
Total: 10+4.2+0.5+0.4 = 15.1%

Of course, this will vary across markets and between PM's. In some areas PMs charge less than 10%, or less than a full month's rent for a tenant placement. And if your tenants stay longer than 2 years, then your placement fees will hit less often.

But the point stands: the base rate is only a part of the net cost of PM service.

I'd love to hear from other BP'ers: what do YOU use for PM cost in your analyses (or what are you actually paying). Anyone?

I agree, those are discouraging numbers. In Arizona we do things a bit differently than California or Texas. Keep in mind that a Property Manager makes *MORE money to fill a vacancy* than to keep tenants happy. (What do you think their incentive is . . .?) Bummer, eh? That's why in AZ we don't do what people in CA & TX do. Because we've figured this out! Let me show you how to get rid of the Property Manager altogether and make mucho more:

https://www.biggerpockets.com/forums/600/topics/58...

1 Reply

Nathan GesnerBusiness Member

Moderator

Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

7y

This is a good analysis. I wish more people read the fine print and calculated the true costs like you've done. I've seen PM companies charge as low as 4% management fee but it jumps to over 10% when you consider all the add-on fees they collect.

The DIY Landlord Book4.7248 Reviews

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5 Reply

Doug McVinuaPro Member

Property Manager · Queen Creek, AZ · Member since 2016 · 608 posts · 426 votes

7y

@Joel Fine Not all Property Managers charge fee structures like you're experiencing. Good, caring PM's exist that want owners to be successful while still making an honest dollar.

I was with an attorney for a very large flat fee ($75.00 per month) PM firm one day and he was proud to convey that the average gross per door was $250 per month and the average tenant duration was 8 months. $75.00 per month is clearly total BS marketing and if I had an 8 month tenant duration I would be pissed as an owner.

I take great pride in the service we provide with only 2 fee's to owners, a lease up fee and a % per month. The lease up fee is needed as it's actually a lot of time to market, show, screen, lease and do the move-in etc. I don't consider the leasing fee a profit center given the value of my time, prepping the property, showings, lease, move-in and then the first month or two is generally higher service volume with a new tenant.

I believe in most situations we are far better off keeping the tenant happy enough to want to stay put and avoid the turnover. Unless a tenant is bad it's much better for the owner to renew and the owner is who I owe my fiduciary. Yes, I have a right to an income but my obligation and fiduciary is with the owner. The needs of the owner come before mine so in good faith I never turn a property over unless it needs it. I have one right now that I just don't like the tenant and agreed to do a lease up for free because it helps me, the owner was indifferent. It's an easy lease up and won't cause vacancy and I get rid of a difficult tenant that is a time sucker.

PM industry gurus for years have been promoting the fee's as additional income. I like income don't get me wrong but I'm happy taking my % per month with good owners that own decent properties and let us do our job.

Another fee to be careful of is the PM charging the tenant a monthly fee. In AZ I believe that fee drives away many good tenants. Many good tenants are smart and realize the owner should be paying the PM fee so they avoid those properties so now the ones charging the tenants are left with a less than desirable pool of tenants. The owner thinking they are saving money is likely losing money as they get a lower quality tenant and all the issues that go with them.

Sorry for rant, it's early on a Saturday and I need more coffee!!! lol

[email protected]602-751-7577

7 Reply

Courtney Jones

Rental Property Investor · Dayton, OH · Member since 2016 · 210 posts · 160 votes

7y

I guess I am blessed as well. My property management charges me a flat 10% of rent er month. I do not pay extra for the resign of a lease. I do not pay extra for the yearly walk through. I pay a full months rent to find a new tenant if needed.

1 Reply

Andrey Y.

Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes

7y

Originally posted by @Joel Fine:

I'm somewhat new to Real Estate investing, so I analyze lots of deals as a way to learn. I want my analyses to be as accurate as I can get them.

I've been concerned about the accuracy of my estimate for Property Management expense. At first I was using 10% because in many metros, that's what PM's take from the monthly rent roll, but then I realized that was only part of the story.

Each time a tenant moves out, a PM charges 1 month's rent to place a new tenant. If tenants stay on average for 2 years, that's an extra 1/24 (one month out of 24) of rental income going to the PM. 1/24 = 4.2%.
Most PMs charge a renewal fee if a tenant re-ups. Again using the average 2 year stay, that means the PM is collecting that fee every other year (think of it as: in even years, the tenant re-ups; in odd years, new tenant). Let's say that's another $100 on a $800/month unit. That's 1/8 of a month's rent, every 24 months - another 0.5%.
Each time a tenant re-ups, I'll want an inspection of the property. Call that $75 - again, every other year. Add 0.4%.

So we're looking at

Base fee: 10%
Tenant placement: 4.2%
Renewal fee: 0.5%
Inspection fee: 0.4%
Total: 10+4.2+0.5+0.4 = 15.1%

Of course, this will vary across markets and between PM's. In some areas PMs charge less than 10%, or less than a full month's rent for a tenant placement. And if your tenants stay longer than 2 years, then your placement fees will hit less often.

But the point stands: the base rate is only a part of the net cost of PM service.

I'd love to hear from other BP'ers: what do YOU use for PM cost in your analyses (or what are you actually paying). Anyone?

Don't forget the utilities and "yard cleanup" (2X per month!) your PM will charge you during turnover/vacancy. Ask me how I know :P

What do you REALLY pay for Property Management?

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