Why Should Property Managers Get a Percentage?

General Landlording & Rental Properties
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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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  • Max Householder
    Rental Property Investor · Saint Louis, MO · Member since 2014 · 313 posts · 326 votes
    9y

    Find a PM with whom you can align goals, i.e. they make money when you make money, they make more when you make more. If you don't like leasing fees or a percentage of rent, work out a bonus structure for keeping vacancy under a certain threshold across your portfolio or escalating bonuses for tenants that renew multiple times. A good business owner is going to work with you to find a payment structure that you're comfortable with and it still fair to them. If their fee structure is set in stone, just find someone more flexible.

    I'm with @Joe Villeneuve. Worrying over a percentage point or two of PM fees is a dime holding up a dollar. If you do your numbers right, the tenants are paying for the PM to take all of that hassle off your plate so you can focus on activities that pay far more per hour than you're paying your PM. 

    1Reply
  • Brandon Ingegneri
    Rental Property Investor · Providence, RI · Member since 2015 · 1k+ posts · 594 votes
    9y

    I certainly understand both perspectives.  I wear 2 hats in this conversation.  I am an active investor who manages his own portfolio, and I am a contractor and property manager who performs work and manages portfolios for other owners.  

    While many property managers and contractors earn their poor reputation, there are a number of us that do work diligently on behalf of our customers.  We charge reasonable rates for work performed, and we do not nickel and dime the owners with miscellaneous fees.  We try to perform an effective service at a reasonable price with an up front and transparent fee structure.  We don't do the re-up fee, we don't go looking for maintenance if it isn't needed.  

    However, we do charge a monthly management fee, and here is the reason why.    3am, my phone will ring, not yours.  I will answer that call and mitigate the situation.  When you are at your kid's football practice, I am too, sometimes but I am on that phone so that the owner is not.  There are times when I can't make everything with my family because property management is a 24-7 on call job.  Sometimes you make out, and other times that fee ends up paying you pennies for your time.  

    It is a lot like insurance, you don't really like paying the premium until there is a claim.  On a sunny day in June with all of the rents up to date it may seem like a futile expense, but at 4am 2 days before Christmas when the pipe breaks, it is the best money you could spend.

    Just look for a reputable and responsible company and you will change your tune. 

    0Reply
  • Keri Middaugh
    Rental Property Investor · Ypsilanti, MI · Member since 2016 · 230 posts · 86 votes
    9y

    I really appreciated this discussion because I am in the process of handing over a property to PM for the first time.  Reason: it's more than a 15 minute drive from my house.  But I have a hunch I'm going to love it and will hand my nearby properties over to them in a year or so.  Thanks, especially, for listing all that a PM does.  It informed how I interviewed the companies that I was considering.

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

    @Keri Middaugh this may help you with everything a PM takes care of for you:

    https://www.biggerpockets.com/blogs/8121/51415-pro...

    0Reply
  • Kayla V.
    Rental Property Investor · Denver, CO · Member since 2016 · 66 posts · 44 votes
    9y

    I use a property manager for my two properties in Denver and she charges a flat fee. I interviewed several when we first started and all others used the percentage system, but her standard is a flat rate with no leasing fee. 

    We've used her for 4 years now and she's been great. The rate is less than 10% of what our properties rent for, so we're saving money and she still provides excellent service. 

    0Reply
  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    9y

    @Jason Rector,

    My answer would be that you can rail against the system or make it work to your advantage.

    Depending on your skills as a negotiator, your portfolio may eventually reach the size where you can negotiate a fee based structure rather than percentages. Until then, play the game by the rules and you'll do well.

    My $0.02 ...

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