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?

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.

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.

@Joel Fine I own rentals in the better Memphis suburbs ( Collierville, Bartlet, Arlington, Cordova ) . For me, tenant replacement is not a taken-for-granted expense item. It is by far THE highest expense on a rental ( I always say that replacing a tenant costs like replacing an HVAC... ) . Therefore , I take all measures to avoid it : - Encourage the PM to get me a long-term lease and willing to do price reduction for that . - Make sure PM takes good care of the tenants. - Prefer families w/ kids in desired school districts ( how often will they want to move ? ) - Aim for lease expiry in the spring ( vacancies will be shorter, monthly rent will be higher ) - Don't nickel and dime with minor rent raise when you have good tenants I have been blessed thus far ( touch wood ) to have 85% renewal ratio which is HUGE on your bottom line but this comes with planning and work. Don't take it to be a PM derivative -much of it is up to you ! As for PM costs - I use 2 different PM's , pay 7%-8% collected rent, 50% lease up fee $0-$100 renewal . I don't negotiate on my fees, it doesn't mean much . I demand great service from them, and that's the biggest impact on your bottom line. My view is : Great PM - pay him even 10% . Bad PM - don't even hire for free.

@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 :)

14% is national PM average cost after up and extras.

@Joel Fine its funny you ran those numbers because i was doing the exact same this week as i was breaking down a market i saw as profitable until i incorporated the cost of a management fee. The charges i ran into were exactly the same as yours, as they where what i found 2-3 in the area to pose, and i didn't feel the property cash flowed enough with the integrated cost of a PM. Then i wondered if i even wanted to go with one for my first couple of properties until i scale up to where i might really need it and might have more negotiation with a portfolio of 5-7 properties. The other consideration i had was my market is mostly Condos, Row homes, Townhomes ect. not freestanding single family homes with yards. Aside from finding a tenant the upkeep on a 2br 1200 sq/ft condo isn't much. i don't know. If i could find a PM in my area with the terms some people have stated of 5-7% flat rate i would think more about it. the PM i have found just kill the cash flow on what could otherwise be a solid property. -Josh

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...

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What do you REALLY pay for Property Management?

Joel Fine

Rental Property Investor · Leander, TX · Member since 2018 · 183 posts · 264 votes

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?

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Doug McVinuaPro Member

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

@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

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