I know that it is common to have PM charge a % of rents. However, I don't quite get that logic. If I have a duplex with $3500 per month rent in high end 'hood and one at $2000 per month someplace else...well, what's the difference to the manager. In some ways, the higher end property is easier to manage.
Do you all pay your property managers a flat fee? Pros and cons?
I've struggled with this myself, even as a property manager. You're right that higher-end properties tend to be easier to manage, and it makes frankly more sense to charge a higher management fee for small properties in D-C neighborhoods. The thing is people won't pay more for management in those neighborhoods. The flat fee might be the result of companies trying to make up for their losses or break-even properties they have under management and it just became the standard from that.
I know that I'm personally fine with the idea of capping (even my own) income instead of strictly following the percent-based fee standard. I have heard of other managers agree to cut their pay, for example in a condo association that took care of the exterior of the property. They halved their management fee simply because they had half the amount to manage.
If you're really curious I wouldn't be afraid to mention it to your PM and just see what they say. So much of this industry is based on disclosure and transparency, so if they have a reason for not considering the difference I'd hope they'll explain the why to you.
@Julie Groth Try looking at it in these terms. The amount of overhead for the company is going to be higher in the areas where the rents are $3500, and lower in the areas where the rents are $2000. The same thing goes for Realtors. Their cost of living in the areas where there are million dollar homes is higher than the cost of living where there are $100k homes. The proportionality of it evens things out across markets.
And even when the different price points are in the same market, the profit margin may be higher on the more expensive properties, and lower on the cheaper properties (This is for property management and Realtors), but like all businesses you make a higher profit margin on some products and less on others and possibly even losses. The property management company likely has properties that they actually lose money on, while making up for that with the more expensive properties.
@ Russell: what are some of the cases where a PM would lose money? (my greenness is showing here!) - my understanding is that pretty much all costs are still passed back to the landlord. I can't imagine just having to field the calls should eat up too much. I'm sure I am missing something basic here.
@Joe Ruder - I have often wondered the same. I've NEVER heard a property manager say it was a lucrative business. But we manage our own 48 units (11 buildings) and frankly, we'd be making a huge hourly rate if we were managing these for others. And we are as "anal and controlling" as it gets! I'm guessing however, that lower income properties get a lot of service calls and generate a lot of unprofitable "tail chasing". Also, because we own our own properties, we've been anticipating future repairs and doing them a little early, to the extend that our repairs and capex was 40% of gross income some a couple of years. (vs. 10-15% typcial) so we probably have less headaches and unexpected leaks, breakdowns, etc.
@Julie Groth I agree that it probably doesn't take more work to manage a $3500 property vs. a $2000 property, but there is more work involved in managing a $500 property. That's why I always tell people who are interested in investing in low income housing out of state that they need to find management first because they may not be able to find anyone willing to manage low end homes.
Yes, I'm much happier taking on clients with expensive rentals. I get paid more for less work. It's really a strange system, but that's how most people do it, so it's just what's accepted.
Everything is negotiable, including PM fees. I've seen good investors negotiate PM fees down in order to make the numbers work. You're right that a great property requires less work than a low end property. Just spitballing here, but 10% sounds reasonable for lower end while 7% sounds better for high end (or for more units).
Also, those 50% placement fees are something I've always found to be a head scratcher. Why incentivize turnover? I'd negotiate 50% placement only if the property turns over less than 1 time a year, at minimum.