Why Should Property Managers Get a Percentage?

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Why Should Property Managers Get a Percentage?

Jason Rector
Investor · Bella Vista, AR · Member since 2016 · 12 posts · 3 votes

I currently own and manage 7 single family properties. I've thought about getting a property manager in the future, but I really don't understand why they require a percentage as opposed to a fee for the work done. The obvious answer is because that's the way it's always been done and the PMs make more money that way. That only answers the question why DO they get a percentage rather than why they SHOULD.

I have two major problems with this payment structure. 

The first is that I see the value in a PM just as I do a plumber. If my property has a plumbing issue, I will call my plumber and he will fix it. I will then pay him for his services based on the effort of the job. I do not pay my plumber a percentage of gross rent collected. Why shouldn't I be able to pay a PM based on the work done on the property rather than based on a percentage of what I am able to charge rent?

For my next issue with this structure, consider two properties, both of which are in similar, good condition and are 1500 sqft 3 bed 2 baths, but are in different locations. One property is $1000/month while the other is $1600/month. I was able to acquire a property in a great location which allows me to charge a higher rent. The higher rent will also tend to get me a better tenant. What warrants the PM to the additional $60/month for my better location and better tenant? They will likely have to do less work!

I've not come here to rant, but rather inquire to the nature of this pay structure to and to find out if anyone has been able to set up a fee based pay structure as to percentage based. Based on my two scenarios above, why do you think PMs should get a percentage of the gross rent collected?

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
9y

Here's what my PM does for me:

1 - Fills vacancies
2 - Handles the advertising
3 - Does the interviewing including background checks, credit checks, rental histories, income verification, NSF check research, etc...
4 - Does the inspections
5 - Does the walkthru before and after
6 - Guarantees the first 6 months of a tenant they placed, or they refill the property at their cost
7 - Handles all problems, including maintenance...with no markup charges
8 - Handles all incoming calls and emails, so the tenant has no idea who we are
9 - Contacts, and extends lease at no extra charge to us
10 - Knows market, so gets us the highest possible rents
11 - 35 years of experience as a full time PM service
12 - Will garnish wages if needed
13 - Handles entire eviction process (keeping us up to date), from beginning of letters of notice to court....to eviction.  Our cost = $75 one time attorney fee.
14 - Handles everything online with immediate up to date access.
15 - Auto deposits into account of choice
16 - Sets up auto collection of rent online.
17 - Provides our tenants with online access to their account so they can make payments, see repair status, make complaints or reports, etc...
18 - Pays for any overages on maintenance not covered by cash reserve, and allows us to reimburse with cash flow
19 - Handles an Annual property inspection for us at no extra charge.
20 - Gives us a volume discount

...like I said, I won't analyze a property without them, and won't leave home without them.

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  • Rich N.Pro Member
    Investor · Haverhill, MA · Member since 2015 · 761 posts · 328 votes
    9y
    Originally posted by @Phil Earley:

    My Dad tried this with us back in the 70's.   He didn't see the value in paying us $5 a month in allowance and wanted to teach us how the world worked.   He put in a fee structure for all the chores around the house and made us turn in our list at the end of the month.  

    We all made over $20 a piece so he went back to how it was always done.   

     Your dad should of set the fee schedule up to top off at $5 a month ! i.e. trash 50 cents/week = 2 bucks, cut grass every other week $1 x 2 =2...so that's 4 bucks for the month.

    My dad showed us how the world works too....do everything or get the backhand. lol

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  • Marian Smith
    Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes
    9y
    The guy who wrote the Millionaire Next Door wrote a sequel about women millionaires....guess the top profession? Property management. No money down, no risk, and you know the good areas so you can buy from your clients when they want to exit. (last statement me, all I remember fom the book was how the millionaires got there, today it would be hedge funds.)
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  • Mike CumbieBusiness Member
    REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes
    9y

    One way or another a property has to be managed. One of the more common forms is 10% of rent. Pay someone else or spend your time doing it, that is most likely a realistic number if you average it out. It simplifies things and gives a good number to average with when looking to purchase. If you have an $1100 a month property how much of your time can you spend on it for $110 a month?

    - Sending rent payment notices, tracking them, creating reports (you are going to want the reports when you sell or for taxes), making sure it is safe, fielding phone calls for general issues, ensuring compliance with regulations, handling issues from neighbors, about neighbors, sending lease violation notices when the puppy shows up, fielding questions about why we can't have a puppy. Explaining why new BFF Mary can't be there every night and sleep on the couch, sending notices about Mary parking on the street blocking other tenants.

    If the $110 is better spent in time than money then go for it. You can find cheaper PM's but generally they charge more in fees, if you went Ala-carte I would guess it would come out the same on most, less on couple and more on a few. If not there would be a company that would come in and undercut everyone else.... because they could.

    Best of luck in your business!

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  • William Walker
    Investor · Wilmington, NC · Member since 2016 · 211 posts · 262 votes
    9y

    I think a lot of people are missing the point of the original post. 

    The question isn't if a PM is worth it, it's why pay a % instead of a flat fee.  A lot of posts are stating why a PM is so great (and I agree), but that's not the question.

    A property in a D area is most likely going to require a lot more work from a PM who is going to get paid less for it due to the lower rent, versus a property in an A area that brings in more rent (more money to PM), but in general requires less work from the PM.

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  • Rich N.Pro Member
    Investor · Haverhill, MA · Member since 2015 · 761 posts · 328 votes
    9y
    Originally posted by @Marian Smith:

    The guy who wrote the Millionaire Next Door wrote a sequel about women millionaires....guess the top profession? Property management. No money down, no risk, and you know the good areas so you can buy from your clients when they want to exit. (last statement me, all I remember fom the book was how the millionaires got there, today it would be hedge funds.)

     I didn't  read it, but it makes sense.  You do mostly office work and coordinating the workers/vendors/contractors and very little dollars in the game.

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  • Rich N.Pro Member
    Investor · Haverhill, MA · Member since 2015 · 761 posts · 328 votes
    9y

    @Mike Cumbie

    Maybe I am jaded but I really doubt most PM will write a letter about BFF Mary staying over.  I just don't see them that engaged.  As for the 110,  maybe makes sense for lower rental amounts.  One of my triplex would cost me 350 a month and all the additional charges on top would put it over 500 a month....6K a year no way!

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  • Mike CumbieBusiness Member
    REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes
    9y

    @William Walker,

    Not at all, 10% gives you a good number to use for figuring and it gets to be a constant. People who invest like constants. It allows you to know what your numbers are and what is going to be expected. If you were going to figure out monthly cash flow on a property how are you going to guesstimate how many times the tenant calls the property manager to ask what day garbage day is? In a fee per item you would be paying for that phone call. Now run the same thing for every postcard saying your rent is due and you are late and the neighbor called to complain about the kid peeing in her yard.

    The answer to Why is because upon many years of people doing it they found that the lowest they can go and still afford to cover their expenses averages out to about 10% of rent for the area. It's like commission on selling houses. If someone could really cover all of their expenses/advertising/dues/fees/driving around for 2% and still make enough profit to survive wouldn't it make sense that someone would step into the market and undercut?

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  • William Walker
    Investor · Wilmington, NC · Member since 2016 · 211 posts · 262 votes
    9y

    @Mike Cumbie

    Why not a flat fee period.  Not a fee for each thing the PM does, but a flat monthly fee and then a fee for placing tenant/renewal.  I currently pay a monthly % and then separate fee for placing/renewal.  I don't think (hope) no one is advocating for a fee for each petty thing the PM does.

    Maybe the answer is that this would reduce the people that bring their properties to the PM.  They would get higher quality rentals as it benefits the owner, but would reduce the overall number of properties as people with lower rents would rather pay a % than a flat fee.

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  • Patrick LiskaPro Member
    Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
    9y

    @Rich N. as long as you calculate those numbers into the property you are thinking of buying, its all covered by the rent you collect. Yes you can save a few bucks by doing it your self, but what else could you do in that 1 1/2 hrs that can make you money while someone else cuts the lawn ? i also put my family first ( NOT saying you do not ) but would rather spend my time doing other things and let the business run itself as much as possible. Maybe in that 1 1/2 hrs you may find 2 houses that bring you an extra $1000 a month in income.

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  • Rich N.Pro Member
    Investor · Haverhill, MA · Member since 2015 · 761 posts · 328 votes
    9y

    @William Walker

    Unfortunately, I think a lot of PMs already are charging a fee for every thing.  The ones I research charged the 10% for collecting the rent and handle calls during 9 to 5.

    BUT charge extra for - leases, re-up leases, calls after hours, lawn service, snow service, court service, attending when a contractor shows up, percentage of contractor invoice or using family member's services with inflated prices, tenant showings and necessary permit inspections.....all extra fee!

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  • Rich N.Pro Member
    Investor · Haverhill, MA · Member since 2015 · 761 posts · 328 votes
    9y

    Not only that, some PMs do not even carry insurance or know the city ordinances and laws.

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  • Christine Kankowski
    Real Estate Broker · Temecula, CA · Member since 2014 · 994 posts · 783 votes
    9y

    Hey there, There are plenty of property managers who charge a flat fee per month and not a percentage.  There are a ton of phone calls that come in, especially when the tenant first moves in , or is planing on moving out.  It would be so difficult to charge according to each item done by the property manager.  Would you pay more when the emergency plumbing call comes in at 4am? Would you pay more when the tenant is very needy and calls every time a light bulb burns out and the manager neesds to explain that that is the tenant responsibility? Would you pay when they call about adding a pet, a roommate, a roommate is moving out, they want to leave their lease early, the gardener didn't show up, etc  The list goes on an on.  Some homes are less work than others, for sure, but it is impossible to know know this up front, so a flat fee , or a percentage of the rent seems like a fair practice.   That being said, if it's not worth it to you, all you need to do is get up to speed on the laws and make sure you are doing it right on your own!  (I managed my own for a while until I got into the business full time, so it can be done, but you've got to know the laws!)  :) 

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  • Rich N.Pro Member
    Investor · Haverhill, MA · Member since 2015 · 761 posts · 328 votes
    9y

    @Patrick Liska

    good points you make. I think that is why so many of us have different opinions on this subject.  Personally, I am a workaholic and was raised to work 7 days a week with long days (so I could spend time with the family during the daylight.) 

    oh, yes, I do included the 10% PM cost into the spreadsheets, so this is just extra gravy as I head towards semi-retirement and the eventual PM I do hire when I finally decided to chill.

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y

    The easy answer to this question: start your own PM company and charge a flat fee. 

    I'm not in the habit of defending PMs (I think a good many of them are, frankly, worthless), but the reality is that a good PM is likely not charging a fixed percentage regardless of whether it's a $500 hovel or a $5k mansion. A good PM has solved this dilemma by refusing the business of the former, because it's too much work to be profitable at a percentage OR flat fee that the property owner would find acceptable. Example: let's say you find a PM that charges a flat $200 monthly fee, maybe with a few add-ons. How many $600 rent properties are they going to be managing? Probably zero, because there's no profit when they are done. If, let's say, all of the properties they manage run between $1000 and $1500, there's probably no more work to do in either case, yet the flat fee would then be unfair to the lower-priced rent by being regressive. In short, the only "good" pricing structure that's going to be able to satisfy the original poster is an a la carte situation, which will put the property manager out of business in short order. By operating in a specified range, the fee is essentially the same across the board. 

    Why? Because as mentioned earlier, people like price certainty. The original example of paying the plumber based on his/her effort is not really that accurate. For example, if you take your car to the dealership to get new brakes put on, they charge you $200. On the first car, everything is clean, oiled, and the calipers and pads come out no problem and they are done in 30 minutes. On the second car, everything's rusty and the guy spends 2 hours beating on stuff with a hammer. Both jobs are going to be charged $200, despite the greater effort on the latter, because if you went in to the dealership and they told you "it depends", you would go somewhere else, and if they told you "$30 to pull the tire, $25 to unbolt the caliper, $50 to change the pads, $50 to clean everything up" you'd also go somewhere else. 

    The percentage fee is a way of providing cushion at one end for costs on the other end and still providing cost certainty. The marketplace has determined that it's a suitable method for pricing - otherwise, all PMs would be out of business. When the market determines that there's a better, cheaper method, that will be the new method. 

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  • Rich N.Pro Member
    Investor · Haverhill, MA · Member since 2015 · 761 posts · 328 votes
    9y

    @JD Martin

    LOL. I do agree with your assumption of PMs.

    Although, I see the brake/dealership slightly different angle.  They can charge the 200 or pad it a bit to 250 or 300 to all customers....but at least we know the set price.  Any additional things they find, I can say no thanks to it.  While a PM that charges 10% and then additional fee for everything and you do not have the option to say no...I hate the fact that I do not know or can control the cost.  Yes, we can terminate the PM but that is a different story.

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  • Patrick LiskaPro Member
    Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
    9y
    Originally posted by @Rich N.:

    @JD Martin

    LOL. I do agree with your assumption of PMs.

    Although, I see the brake/dealership slightly different angle.  They can charge the 200 or pad it a bit to 250 or 300 to all customers....but at least we know the set price.  Any additional things they find, I can say no thanks to it.  While a PM that charges 10% and then additional fee for everything and you do not have the option to say no...I hate the fact that I do not know or can control the cost.  Yes, we can terminate the PM but that is a different story.

     Rich, 

    You do know ( for the most part ) what it will cost you every month, it's all in your contract that you negotiate with them. the only thing that will be unforeseen is an emergency repair ( but you have allowed for that in your numbers, and have that in reserves). I have a board across from my desk that has all my properties and their expenses/ income on it ( Quartet dry erase planner) i can tell you right now that the " average" cost per bedroom for a house where i invest, will cost me $175 / month. so a 4 bedroom house will run me $700 to run that house ( not including mortgage) but that's taxes, insurance, water/ sewer, utilities if i pay some, garbage, maintenance ( snow and lawn), leasing fee, and PM %. so when i look at a house to buy, i can do a quick analysis of it based on the amount of bedrooms and what my mortgage would be if i would make money, those are my standard " hard costs". yes if someone has to go there and do work, if its a contractor or one of their handyman, you will get charged for it, and that would come out of the money you allowed for such maintenance.

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  • Rich N.Pro Member
    Investor · Haverhill, MA · Member since 2015 · 761 posts · 328 votes
    9y

    @Patrick Liska

    True that we all (at least I hope all) have those numbers down somewhere.  We should be looking into operating, capital, and taxes (yes, its tax time). But this is not about the actual funding of any of the costs but why PMs get percentages versus flat fees.  In some instances, percentages with a long list of add-on fees. This is based on the PMs that I find around here.  If there were more PMs that did more things for the 10%, it would make sense.

    For the out of state investors, the big investors and others it make sense to hire a PM, but for the smaller local folks, the cost is just too prohibitive. 

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  • Patrick LiskaPro Member
    Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
    9y

    @Rich N., I can understand where you are coming from, I am a contractor going on 30 years now, so i know about doing things yourself. I can understand what the OP of this thread is getting at, yes a flat fee may be nice if it can be worked out in a contract with a PM , maybe they only handle certain parts of the business. but as it has been mentioned, and pretty good by @Christine Kankowski at what point do you cover those costs, because everyone likes to get paid for what they do. when running the business, ask your self ( and this goes to everyone reading this) how much is my time worth ? do you do all the things that have been mentioned by Christine and @Joe Villeneuve ? how much time have you spent doing those tasks ? ___ If anyone takes the time to figure that out and multiply that time by what your time is worth, i think you will see that the fees that a PM charges are well worth it. If any house was just find a tenant they pay you and you make money, that would be great but unfortunately there is a lot more that goes on that's beyond anyone's control that needs to be handled.

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  • Rich N.Pro Member
    Investor · Haverhill, MA · Member since 2015 · 761 posts · 328 votes
    9y

    @Patrick Liska

    Very true.  I have asked that question several times over the years and if I could find someone like @Joe Villeneuve 's PM, I might jump on it.  Unfortunately, here in MA, most PMs know there is money here so they charge the 8-10% and additional fees.  In my case, to payout $1K a month and the added fees, it doesn't make sense as I have little work (average of 5 hours a month) and just the occasional departures or evictions every couple of years.

    Besides, with the kids out of school and basically out of the house, Bigger Pockets would be less one Pro member if I just stayed home all day long with the wife !  lol

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  • Jason Rector
    OP
    Investor · Bella Vista, AR · Member since 2016 · 12 posts · 3 votes
    9y

    @William Walker The conversation has definitely deterred a bit, but that's okay as I'm learning why people see the value in their PMs so much.

    Ultimately, I would be much happier to pay a $500 tenant placement fee than I would pay half months rent when the rent is $1000. As other people have pointed out, they need to make enough money to be worth it to them. However, taking a percentage feels like they are taking percentage of my company.

    I would also like to add to add that many of the activities people are saying their PMs take care of simply to not apply in my situation. I screen the tenants hard and look for people that I feel will be the least trouble and take care of the property the best. I know not everyone is in a position to get tenants like that, but when you have great tenants there is very little PM work to be done.

    On the very rare occasion that something does come up, I would like to pay a fee for taking care of it rather than a percentage. Maybe I need to network some more to find the right company/person that can do this for me.

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  • Robert GilstrapPro Member
    Residential Real Estate Broker · Cartersville, GA · Member since 2015 · 575 posts · 581 votes
    9y

    @Jason Rector  @William Walker there are plenty of companies who charge a flat fee but this is just a work around to unbundling the services a fee based manager charges. Great; they only charge you $99mo. flat BUT they charge extra for everything else.

    The % based model was born out of keeping it simple. If PM's charged for everything they did you would never be able to afford one. The #1 reason behind % based pricing is human nature and self interest.  If they charge you 10% of rent as the mgmt. fee then they're incentivized to get you the highest rent possible right? If they get a flat fee then what do they care what it rents for? That alone could mean a huge difference in yearly return. Think about you getting an extra $75-$100/mo X 12 mos just because someone is motivated to make themselves more $$.

    Fast forward to lease renewals; everybody complains about paying a fee for this when it should be the exact opposite!   Flat fee for renewal or no fee = they could care less if the tenant moves out and in fact they want them too!  How motivated is a PM to get you a 5% rent increase each year if they get nothing or some tiny fee? Answer: they're not.

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  • Jason V.
    Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes
    9y
    Originally posted by @Joe Villeneuve:

    Here's what my PM does for me:

    1 - Fills vacancies
    2 - Handles the advertising
    3 - Does the interviewing including background checks, credit checks, rental histories, income verification, NSF check research, etc...
    4 - Does the inspections
    5 - Does the walkthru before and after
    6 - Guarantees the first 6 months of a tenant they placed, or they refill the property at their cost
    7 - Handles all problems, including maintenance...with no markup charges
    8 - Handles all incoming calls and emails, so the tenant has no idea who we are
    9 - Contacts, and extends lease at no extra charge to us
    10 - Knows market, so gets us the highest possible rents
    11 - 35 years of experience as a full time PM service
    12 - Will garnish wages if needed
    13 - Handles entire eviction process (keeping us up to date), from beginning of letters of notice to court....to eviction.  Our cost = $75 one time attorney fee.
    14 - Handles everything online with immediate up to date access.
    15 - Auto deposits into account of choice
    16 - Sets up auto collection of rent online.
    17 - Provides our tenants with online access to their account so they can make payments, see repair status, make complaints or reports, etc...
    18 - Pays for any overages on maintenance not covered by cash reserve, and allows us to reimburse with cash flow
    19 - Handles an Annual property inspection for us at no extra charge.
    20 - Gives us a volume discount

    ...like I said, I won't analyze a property without them, and won't leave home without them.

     Are you just in the Plymouth market Joe? I feel like I remember you being all over the place. 

    What percentage of rent are you paying? Are you doing percent of monthly rent, or collected rent?

    Sounds like you have a great PM, but a lot of folks have had nothing but negative experiences.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    9y

    You get what you pay for, which works both ways...you should expect to pay for what you get.

    No, I'm in a number of areas.  Plymouth isn't a rental area, but it's where I live.

    I'm paying 8% because of volume, but we didn't need to get a lot of volume to get the 8%...normally 10%

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    9y
    Originally posted by @Jason Rector:

    @William Walker The conversation has definitely deterred a bit, but that's okay as I'm learning why people see the value in their PMs so much.

    Ultimately, I would be much happier to pay a $500 tenant placement fee than I would pay half months rent when the rent is $1000. As other people have pointed out, they need to make enough money to be worth it to them. However, taking a percentage feels like they are taking percentage of my company.

    I would also like to add to add that many of the activities people are saying their PMs take care of simply to not apply in my situation. I screen the tenants hard and look for people that I feel will be the least trouble and take care of the property the best. I know not everyone is in a position to get tenants like that, but when you have great tenants there is very little PM work to be done.

    On the very rare occasion that something does come up, I would like to pay a fee for taking care of it rather than a percentage. Maybe I need to network some more to find the right company/person that can do this for me.

     Your missing the point.  How much time does it take to "screen your tenants hard"...and no matter how "great a tenant" you have, the PM still does a lot more than you think.

    This decision falls under the category of "just because you can, doesn't mean you should".

    What you should be doing, is finding the next deal, analyzing deals continuously, finding more funding, finding more buyers ready for your flips, finding more (better & moving) markets to invest in, expanding your Power Team, etc...  In other words, you should be spending your time (every minute you physically spend you can't get back) as a Real Estate Investor...not a babysitter. 

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  • Patrick LiskaPro Member
    Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
    9y

    @Joe Villeneuve Babysitters make some good money now a days, I'm glad my kids are past that age for needing one, Haha.  Jason, how many tenants do you pay for background checks and how many hours does it take you to screen all those tenants to find the right one ? All done by my PM while i sit home and have a nice cold one or two or more. You may find someone willing to do on a fee base, but they will be hard to find and will not give you the service as Joe said

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