Hello all. This is my first question posting on Bigger Pockets, and is a topic I've been wondering about for awhile now.
I bought a duplex while 20 years old in college, and am still holding it 7 years later. I lived in the house for 2 years, and since then I have been renting it and managing it on my own, until this year when I decided I really would prefer to be arm's length away from the action and would rather hire a property manager full time.
My house is near a university, and typically the house leases to college students. Due to this, there tends to be higher-than-normal turnover (once a year or every 2-3 years).
My concerns are related to the fees payable to the manager and making sure I'm keeping as much of my money as possible. I paid the company 1-month's rent to lease the place out to new tenants, plus 10% per month to manage. First of all, is 1-month's rent pretty typical in the industry? I've asked around and it seems to be somewhat consistent. What about lease renewals? Should I expect to pay 1-month rent every time a lease is renewed, or is this typically a lesser one-time charge?
As a follow-up, if the lease renewal charge is indeed expected to be less, how do you keep the manager incentivized to have the tenants renew, since the manager would earn much less if they stayed, versus if they left and they then were able to sign someone new for the full one-month's rent?
Finally, in a high-turnover neighborhood like mine, has anyone found that a property management company will work with you to lower their leasing fee with this in mind? It's one thing for a management company to charge 1-month's rent to find a tenant that lives there for 10 years, but it's quite another to get charged 1-month's rent every single year for 10 years. Quite a difference in cash flow.
Sorry for the long post. Any thoughts would be extremely helpful. Thank you!
@Joseph Jackson I can't really speak for your area, so I don't know what is customary there. However, I can tell you how I charge in NC. For me, it's 1/2 month's rent to find a tenant and 8% monthly management fee. I don't typically charge anything upon renewal as my paperwork is set up to automatically renew the lease for a year in student areas, so I don't have to do any new paperwork. If I have roommates moving out while some are staying, and I just have to make a few changes on the lease and resend (plus do background checks), then I charge $100 lease writing fee.
It does seem like it incentivizes property managers to have higher turnover, but at least for me, I'm always hoping tenants will stay. I suppose I would rather not do the work of marketing and finding a new tenant if I can help it. Maybe I'm not charging enough and I would prefer turnover if I was making more? Who knows? I will say - I have no control over how long people stay. There is really nothing I can do to attract long term tenants vs. shorter term tenants. I'm definitely not encouraging people to move after a year, and my customer service is good to the tenant, so I'm doing what I can on my end to keep them happy.
Student focused rentals are simply going to have higher turnover. So will high end rentals. It's is just the nature of the type of tenant you are marketing to. Students will graduate and move for employment. High end tenants will eventually buy a home of their own. It's just the nature of the beast, and something to factor into your returns.
I don't really have any advice other than to keep looking for someone who charges less. One reason I am able to charge a little less than my competitors is that I own the company, I don't have an office outside of my home, etc. My overhead is very low. Other management companies in my area charge a full month's rent for lease ups, but they are almost all larger companies with lots of employees to pay and a building to upkeep.
@Dawn Brenengen Thank you so much for your response. Very enlightening and helpful.
Just curious - do you both run your own property management company and invest in rentals on your own?
You nailed it on the head - I went with Miller Valentine Group, which is a large property developer and manager in this region. I went with them on the recommendation of my realtor, who I trust, and also because they a reputable company that I knew from working at a couple commercial real estate brokerage houses in town, so I felt the risk of them being bad was not very high. Frankly, I didn't interview other companies or individuals as at the time I had a lot going on and just needed someone to take over soon, and I just also was too naive to really know what to look for out of a manager to begin with. I just wanted someone to take it off my hands and let me attend to my life.
But this, just like any experience in life, has been a good way to learn and expand my knowledge on what works and what doesn't, and more importantly what to look for next. They've done a good job overseeing things, but I've had a couple issues, and then there's the price.
Dawn, your philosophy, knowledge of how investing works and what landlords are looking for, as well as your pricing model is really very appealing to me. How would you suggest I find someone like you in my local area?
I'm thinking that when I buy my next property I'd like to try a new property manager and compare the two to see which I like better. Long-term my intention is to continue to have managers oversee things for me.
Hi @Joseph Jackson ,
Great post and topic. Your line of thinking regarding how fees incentivize your property manager is spot-on. In fact, I just wrote a blog post about this very topic
Give it a look and if you enjoy, or have any other thoughts, please leave a comment.
As a property owner, you have every right to question all of the fees you are being charged and negotiate them.
Like @Dawn Brenengen , I own my property management company and have decided to make my pricing model different. I own investments for my own account and knew what I would look for in a property management agreement.
If you are looking to replace your manager, I would certainly suggest considering independent real estate professionals who may have greater flexibility to adjust pricing and service to your expectations.
Good luck, and keep us posted.
As a property manager, I agree with everything @Dawn Brenengen said. She is right about not having control over when people leave. So, unless your property manager is evicting people at the end of the year, then they are not making more money with high turnovers. Even if I made a full month's rent every year, I would rather people stay too. It is a lot of work to turn over a property.
If they charge you a full month's rent every year, find another manager. $100 to $200 per year should be the max for renewals.
@Joseph Jackson I do both run my own management company and have my own rentals. I only own four rental properties, but I'm about to buy a fifth!
As far as finding another property manager, there are the usual BP responses - ask folks in your local REIA for a recommendation, BP recommendations, etc. I would suggest going to the second or third page of Google for "Cincinnati property managers" and see if you click with any of their messages. Then interview a few. Also, in my area, there is a Property Management Council at our Board of Realtors, and it's mostly comprised of small companies. You could see if your local Board has such a group and get a list of the members. You can call around to get pricing structures and interview those that seem like a good fit.
Most people find me through personal referrals, though. Ask everyone you know, put a post on Facebook asking everyone, not just "investors." You would be surprised at how many people own rental property who do not consider themselves investors.
Michelle Na Turnover really is a lot of work! I'm interested in the psychology of investors who think our interests are not aligned with theirs when it comes to turnover. On the surface, I would agree that we get paid more when there is turnover, so therefore, we must enjoy turnover. However, I just know that's so not true for myself, and I wonder if I'm the exception or if most PMs would agree with me.
@Dan DeMott Michelle Na Thank you all for your thoughts and for posting. Having an idea of what you are all thinking when it comes to lease renewals, what's fair and what's not, and where to find new PM's is a lot of help.
Since all of you are property managers, what are your thoughts about hiring an independent property manager on to oversee my portfolio, but then they decide to get out of the business and go do something else? Another reason I went with the larger company was because I know there will be people changing careers, quitting, etc, and a larger company will be able to oversee this transition fairly well.
What do you tell investors who have asked about this before?
A follow up question may be, if I were to want someone else to take over for my PM before the lease is up on my house in August of 2015, how would that transition take place? This may be something I'd consider if I'm looking for more investor-aligned and fee conscious PM's. Since the PM used their drafted lease to have the tenants sign, the tenants have only ever dealt with one person and don't k now who I am, etc, how would all of this transition over into someone else taking over? The same question would apply if the PM I currently have were to quit and I would need a replacement PM.
Thanks again everyone.
@Joseph Jackson There are pros and cons to hiring large or small property management firms. You said that maybe a small company would decide to shut down and go do something else. In most states a broker's license is required and that takes a lot of work. So, it seems that someone would be unlikely to just quit. I'm sure it happens though. Plus, with a small company, you are most likely dealing directly with the owners.
To transition from one property manager to another: Have your current pm send a letter to the tenants explaining who the new contact is and the start date. If they refuse to do this, then get all the tenant info from them and do it yourself.
We too hold student rentals in "universityville". With a single, or small number of properties, a PM fee of 10% and a lease-up of 1-month is quite common.
We manage our own properties, but with the ones rented to students, we plan for annual turnover - that way, when a house of students stay for 2-3 years, you smile.
There are a couple of PMs around here which use term leases with students and only charge 1/2-month for lease-up, but you would likely need a half-dozen units or more to get these rates.
We are having our first search for a property manager in a remote market and are negotiating for a mode which better aligns their motivation with ours. Part of this is we have proposed paying them an incentive for renewals as a tradeoff for a reduction in the lease-up fee and shared pain in the case of an eviction (which we see as a failure of screening). All of this motivated by the simple fact turn-over is expensive.
@Joseph Jackson Welcome from another Cincy native!
Last summer I randomly paired up to play golf with a guy that owns UC rental properties and also does property management for other people. I think he said he had 4 properties and was managing 6 other properties. I can pass his info on to you if you're interested in talking with him.
@Joseph Jackson sent you a message on here.
Join the Largest Real Estate Investing Community
Basic membership is free, forever.