Would you pay a property manager 12%?

Question

We have been doing a lot of research on local property managers and the fees they charge here in Seattle. For the most part we are seeing an 8% to 10%, with lease up fees, renewal fees, minimum fees, etc. I'm assuming this is pretty standard in many markets.

Would you consider a property manager who is charging a 12% management fee? They promote that they charge the higher fee because they will not be "nickel and diming" with any other fees; no lease up fees, no renewals, no minimums. They are very professional and we are confident they would be at least as good as other managers.

I find it a little refreshing to not have the multitude of different fees. I would also think this encourages my manager to find the right tenant and keep them in the property with little turnover.

Which manager would you choose and why?

Thanks,

Tim

Marco Carrillo · Answer

Tim -  I own a couple of investment properties, and I paid a professional manager for the first year of my first property since I didn't have that much experience then and I was learning.  I paid them 10% for the first property but they charge 8% if I had more than 2 of them.

Having the right property manager is key.  As with anything, the service you will receive will vary depending on the individual property manager.  I would argue that if they provide a superb service, paying 12% would make sense.  But if you don't know exactly what they will do better in exchange of the standard fee of 10%, you are just overpaying.  My guess is that you are undecided because you don't see a difference in what they would do better than the other managers.  Whenever I get quotes to do work from 2 contractors, and I call the one that didn't get the job because he was overcharging, and the contractor always claims he is more professional and will give me a better quality work than the cheaper contractor.  While it might be true, when I ask him to tell me exactly how the quality would differ they can't give me the examples.  Quality or professionalism is so abstract that unless you know for sure what you are getting in exchange, I wouldn't pay the extra fees.

Because of the service I got during that first year, today, I manage my properties by myself and I think I am doing it better than the property manager did.  I have a vested interest, in finding the right tenant and I spend a lot of time screening and talking to potential tenants when I have a vacancy.  I also have the right to inspect the property 4 times per year (written in the contract) which I do, and I do make repairs immediately even if the tenant is not requesting them since it will become a worse problem later on.  Property managers (no matter how good they are) won't take that level of interest in managing the property.

However, if you don't have the time to manage the property, here is a list of questions that you need to ask them to see exactly what you are getting

1.  Will you have a property manager assigned.  If yes, how many years have he/she been doing it and how long have they been in the management company.  Having an experienced property manager will justify the incremental cost.

2.  How many other properties will the property manager will handle (both current and what is the cap per manager).  the fewer the properties the better service they will give you and so the higher cost would be justified.

3.  What is the fee in acquiring a new tenant.  Some will have the fee as incremental while others would quote half of a month rent, or some other fees.  If this is a one-fee, then it is justfieid in paying the 2% additional.  Think about it, if the average lease is 12 months for a $2,000 a month property, you pay them $1,000 to source the tenant.  If you pay them 2% more (12% versus 10%) you are paying them only $480 extra.  You come ahead on that one.

4.  Are the eviction fees included or is this a different fee?  Some will include and some other will charge again for it.

5.  How many times per year will they go out to the property and make an inspection?  The more times they go the better they will be taking care of the property and they justify charging more.

6.  Finally, when are you getting paid?  Some will remit the rent within 2 days of them getting the payment from the tenant while others will get it to you towards the end of the month.  The sooner they give you the money, the less "float" (or interest earned in their account while holding the money they collected at the beginning of the month and paying you at the end of the month) they will make, and thus a higher interest would be warranted.

I can't stress enough that it would be better if you do it yourself.  Even if you don't do it yourself, please be involved in the management of the property.  Ultimately it is your property and you will be holding the risk of damages and the depreciation if a tenant fails to upkeep the property.

Steve Babiak · Answer

For a class A property, you really could manage yourself; those tend to be the easiest to manage especially after a thorough rehab was completed - the rehab cuts down on repair calls due to system failures.

Account Closed · Answer

You could make some assumptions on how frequently the other company's other fees would be charged and see how it worked out on an annual basis.  And if it's about the same, trust your gut instinct!

If you like whoever you settle on I'd love a recommendation - I plan to buy a 4-plex next year and use a property management company.

Good luck!

Lane Kawaoka · Answer

I did an analysis of 15-20 PMs in 2013 and found that 6-10% of months rents are typical (with 1/2 first months rent as a fee).  I suspect the 12% is the monthly fee plus the rent up fee annualized over the year.

A PM is also good 3rd party between yourself and a lawsuit.

Dawn Brenengen · Answer

lease up fees can be pretty substantial, so if they are to charging that, 12% seems reasonable. Do the math based on paying a lease up fee every other year and see what is the better deal.

Justin Case · Answer

I do not pay PMs. They are a rip off.   Find a good tenant and never get calls.

In Seattle area places usually rent in first hour.

Rafael Norat · Answer

Hey Tim,

I would say it depends on how honest of a product the are selling. If they don't nickel and dime, keep in good tenants, and you hit your numbers, then great. Rather spend the money on a good product than cut costs and get hammered elsewhere. Trial and error.

Tim M. · Answer

They are type A properties. Vacancy rates are similar to other managers. We have seen the contract and it is a very legitimate "no other fees" situation.

Elizabeth Colegrove · Answer

What class of rentals are these? Have you asked about their vacancy rates, and other charges? I know they "say" they don't hit you with other fees but have you checked?  We looked for a property manager who did what you are describing above and had absolutely NO luck! That is how we got started self managing and have honestly done amazing in our class A property network.

Would you pay a property manager 12%?

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